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.
