What Does Binding Authority Mean?
A binding authority is an agreement in which an insurer gives full authority to an agent (typically an insurance broker) to act on their behalf for the purpose of underwriting. Once the agent has binding authority, they are legally allowed to sell policies on the insurer's behalf.
Binding authority is usually outlined in the agency agreement between the insurance company and the intermediary (the broker). This agency agreement is how insurance companies authorize brokers to represent them in dealing with the public. The agreement is typically exhaustively negotiated because it contains many important terms including how commissions and premiums are handled, contingent profits, information sharing, and binding authority.
In essence, binding authority is the ability for a broker to commit an insurance company to the risk without seeking approval from an underwriter and issue policy documents to that effect. The broker would still need to notify the insurer but being able to approve a policy right then and there saves time.
The binding authority section of the agency agreement outlines the types of business the broker is able to bind and the limitations of their binding authority. For example, the agreement may only allow them to accept home insurance risks but not farm risks or require the broker to refer to an underwriter any risks where the total insured values are over $1 million. Another common restriction is not being able to bind risks that are in a certain geographical area due to concerns around natural disasters like forest fires or floods.
Violating your binding authority can have serious consequences for brokers and can result in a costly and time-consuming errors and omissions claim. If you bound a policy that was outside of your binding authority and a loss occurred, your client may not be covered. Either your client or the insurance company could sue you to recover damages required to pay for the loss.
Insuranceopedia Explains Binding Authority
Without a binding authority, insurance brokers would not be able to make business actions on behalf of their insurance company clients. This would significantly slow down the process of buying and selling insurance through brokers. However, a binding authority gives the brokers the power to act on the company's behalf.
Imagine if your insurance broker did not have binding authority. Any policy changes or new business – even the simplest ones – would take days of back and forth between the underwriter, broker, and client to finalize. This process would be way too much work and way too time consuming to be practical. Nobody would get anything done! To solve this, insurers and brokers came up with the concept of binding authority.
Granting binding authority speeds up the process of selling and managing insurance policies. It also, however, makes it critical that insurance companies hire trustworthy and competent brokers. Otherwise, they may be giving authority to brokers who might make poor decisions on behalf of the company.
After carefully vetting a potential broker partner, the insurer offers an agency agreement outlining, among other things, the limitations and powers of the broker's binding authority with that company. Binding authority is important because it gives brokers the flexibility they need to address any urgent needs that arise. But if you exceed or overstep your binding authority, that could open you up to liability or even losing your contract with that insurer if your mistake causes them to cancel your agency contract.
If a broker has binding authority, they are given limited underwriting powers to accept risks on behalf of the insurer. They issue a “binder” to the customer which serves as a temporary insurance contract and evidence of insurance pending the issuance of a formal policy (or in some cases, rejection of the risk by the underwriter).