Binding Authority

Definition

Binding authority is the contract between the agent or broker and the insurance company gives the terms and conditions of the agent or broker's power to act on behalf of the company and provide the necessary insurance coverage.

When a binder may not be valid

it is important to provide all the information requested on an insurance application including cancellations requested by the underwriter, non-payment issues, frequency of claims, number of families living in the home or use of the property. These items can limit the binding authority of the agent or broker and must be disclosed.

Insurance companies may set limits on the value of a home they will insure in an unprotected area or for homes valued at $1 million or over. The company may set a limit to the amount of scheduled items such as jewelery, fine arts and sporting equipment that they will allow on a policy. If you have special needs there might not be as many companies in the marketplace for your insurance.

In automobile insurance there are also restrictions as to what an insurance company will accept. If you do not meet the requirements of the regular market then you would have to go to the higher-risk market and pay a much higher premium.

If an agent or broker exceeds their authority then special consideration must be given by the insurance company. If not then the agency or brokerage would be held responsible for any claims paid out. Since agents and brokers are required to carry Errors and Omissions insurance, most claims would be paid from this fund.

Insurance Answer

Not only do you have to show utmost honesty when placing your initial insurance but you are required to keep the information up-to-date. If things change then you have a responsibility to get this information to your broker or agent. You do not want to end up with something that will only be "paper insurance" - you will pay for it but because of misrepresentation it will not cover your financial needs if and when something goes wrong.

Turners Tips advises that you take control of your insurance. If you have any questions in this area, ask your agent or broker for clarification.