Hard copy of insurance policy avoids confusion, problems

Insurers issue binders as evidence of the sale of an insurance policy and its most basic terms, filling the gap between the time at which a policy is sold and when it is issued. The existence of binders can create major problems because a claim may be made before a binder is replaced by a policy, leaving the terms of coverage in doubt. Binders also can lead to confusion regarding whether a given draft policy properly reflects the coverage bound.

The World Trade Center litigation is a prominent, but not uncommon, example of the first problem with binders. That litigation is largely the result of insurers' failure to issue policies in a timely fashion, thus leaving doubt about the coverage actually sold.

Risk managers who wish to avoid a similar fate should demand policies in lieu of binders and should urge their insurers to computerize their forms and endorsements so policies can be issued no later than their effective date. With the sophisticated software available today, there is no excuse for insurers not to have easily compiled policy forms. Indeed, with computers, there seems little need for there even to be endorsements, as any given change in a standard policy form can be instantly incorporated. This would also avoid cumbersome sorting through forms and multiple endorsements just to decipher the actual words of the policy.

The second problem with binders usually comes to light when occurrence-based policies are called upon to respond to claims years after the policies were issued. When it comes to a claim, everyone discovers that the insurer, broker and policyholder each have differing copies of the same policy. Why? Because the policy was issued weeks or months after a binder was sent out, the policyholder rejected the policy as not properly reflecting the coverage it purchased, and negotiations and the exchange of drafts ensued. The end result? No one ever received clear evidence as to which language constituted the final policy. Generating the policy at the point of sale will eliminate such confusion.

Doing so is easy in our era of nearly instant communication and computer efficiency. That is all the more true as most policyholders renew their coverage annually and, therefore, are not rushing to purchase insurance, a situation in which the issuance of a binder may sometimes be necessary. The issuance of binders in the normal course should be abolished. And endorsements should be abolished as well--any wording change should be made to the form itself.

That the insurance industry has not adopted this obvious course of action reflects the desire of many insurers to disguise coverage limitations and provide a policyholder less than it believes it is purchasing. It is unlikely insurers will make this change of their own volition. Risk managers, however, should recognize this major problem and insist on the receipt of policies--not binders.

Until insurers recognize that their policyholders require policies, not binders, responsible risk managers should record their demands for policies in writing. Risk managers also should keep as detailed records as possible regarding their efforts to obtain policies instead of binders, and the terms the policy should reflect. Doing so will help protect a risk manager's company should litigation ensue regarding the meaning of the binder. And when the actual policy arrives, with different or buried terms, a corrected policy should be requested in writing. The policyholder also should reserve in writing the right to view coverage in accordance with its understanding at the time of placement, not necessarily restricted by the form sent after the fact by the insurer.

For a risk manager to accept a binder in lieu of a policy is like a buyer of a to-be-built home accepting a limited specification sheet that says only the house will have four walls, a roof and cost $500,000. That is insufficient, but it is exactly what insurers ask policyholders to accept when they issue binders that list little more than the premium, policy type, policy limits and its effective date.

Long term, the industry should do away with binders and endorsements and issue one clean policy form, thereby making coverage clearer--a result that would benefit both policyholders and insurers. Until that happens, risk managers should protect their companies by fighting for policies in lieu of binders.

Michael Raibman

is of counsel in the Washington office of law firm Reed Smith L.L.P. and may be reached at mraibman@ reedsmith.com. The opinions reflected in this article are not necessarily those of Reed Smith L.L.P.