June 2022 | Volume 37, Number 6
In our office, we have vintage insurance policies decorating our walls. Referred to “ephemera”, (collectible paper), they are the embodiment of the history of your profession. We have many policies that are beautifully printed with ornate calligraphy and art. But the center of the “Dec. Page” on these policies is often a blank rectangle. Why? The answer leads to a practical and legal problem that can give rise to a serious E&O problem. In this issue of the E&O Report, we will address what controls in a situation where there are quotes, binders and an issued policy that does not conform to either.
Before anything but rudimentary automation, (and many decades pre-digital age), agents/brokers, but mostly insurers, drowned in paper. To deal with this insurers used pre-printed major policy forms printed on heavy paper. This contained their standard terms and conditions. They also had pre-printed smaller forms made out of tissue-like paper. Printed on these were forms and exclusions that, while standardized themselves, would be made part of a particular policy depending on the underwriting of that singular risk. They would often take a dozen or so of those small forms and glue them to that blank on the Dec Page, thereby creating a full policy.
So, it is somewhat understandable that until that actual, physical policy was issued, the Broker/Agent and Insured would not really know what the Insurer intended to issue...in detail. Since the creation of a contract, any contract, requires the “Meeting of the Minds” of the parties on the material, defined terms, one could see that such mutuality could not occur until the insured had received and reviewed the insurance policy. The law, commensurate with those days, held that a binder was only temporary insurance and that the “policy controls.” It means that the physical policy, as issued, controls since the binder was often never a complete document.
Now insurers, either through propriety or ISO forms, all digital and available at the click of a mouse, can create a complete insurance policy in seconds. More importantly, via these same computerized systems insurers can issue quotes and binders with incredible speed and accuracy listing all the exact forms and endorsement that will be part of the insurance policy when issued. Sadly, the glacial pace of the law has not kept up with this reality as the hundred years old holding that the “Policy Controls” still is the law of the land. Springer v. Allstate Life Ins. Co. of N.Y., 731 N.E.2d 1106 (2000). Here is why both factually, (on your end), and legally, (on ours), this is such a serious problem.
“Meeting of the Minds” is simply the fancy way of saying that you and I agree to the same thing. If you think you are buying my World Series vintage baseball and I think that I am selling you my World Series vintage bat, then we do not have a contract because there is no meeting of the minds on the material terms. In reality, an insurance policy is not the proof of the Meeting of the Minds, and the law is wrong. An insurance policy is merely the physical embodiment of what the Insured and Insurer previously agreed to...i.e. the memorialization of the prior Meeting of the Minds via the quote and binder.
The Quote is the Offer to contract by the Insurer. The Insured then accepts and that acceptance is the Binder. These days, the quote almost always lists every form and endorsement that the policy will contain. If the Insured agrees, then a Binder is issued with the identical lists of forms and endorsements. Those listed forms and endorsements are the contract as they are the Meeting of the Minds. But not so says the ancient thinking of the New York Courts. Therein lies the problem.
Several years ago we addressed this issue, but it is still as potent and E&O exposure as it ever was. Here are the facts. Broker gets a quote from INSUCO for its Insured ABC, LLC. The quote is 2 pages and lists all the forms and endorsements. It is carefully read by the Broker and ABC, and they agree it is what ABC wants. Broker tells INSUCO who issues a Binder that also has 2 pages and lists the identical forms and endorsements. A deposit premium is paid by the insured. The actual policy is issued a month later. But, when the insurance policy is issued it contains half a dozen exclusions that were not on the Quote or Binder.
Tragically, the Broker, believing that the insurance carrier would honor its Binder, did not check the policy against it. Nor did the Insured who received the policy. We know what happens next. A loss occurs that is uninsured due to the application of one of those post-Binder added exclusions. We had this fact pattern and the Court ruled in favor of the Insurer based on the Latin doctrine of TUFF LUCK, which is also known as Caveat Emptor or Buyer Beware. In Insurance Law it is called “the policy controls.” More specifically the case holdings say this:
“It has long been settled in this State that an insurance binder is a temporary or interim policy until a formal policy is issued. A binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused. A “binder does not constitute part of an insurance policy, nor does it create any rights for the insured other than during its effective period”. Thus, a binder is limited in time until an assessment of risk is completed by the carrier.” (Springer supra at 1108. Emphasis added)
Note the bold and underline sentence which is fundamentally incorrect. While I am sure there are certain circumstances where a binder is issued while the underwriting is ongoing, based on my experience, (but I defer to you), a binder is usually issued listing the policy forms and endorsements and a premium amount because the underwriting is completed.
Until we can get the courts to see the reality of the insurance business in the digital age, an insurance agent or broker should never assume that the insurance policy as issued, is going to conform to the quote or binder. Comparing the binder to the policy to make sure the latter matches the former is a critical step to help avoid a potential E&O matter where the law is stacked in favor of the Insurer. To underscore how ridiculous this legal holding is, even taken to its illogical extreme, let me leave you with this final thought.
In trying to make my point to the court that the policy cannot control I suggested this scenario to a judge.
“If the Court holds that the policy controls and does not have to match the quote and binder that means that I can apply for Homeowner’s insurance, get a binder for HO coverage, pay the premium and then have the Insurer issue a Motorcycle policy and I am stuck with it?” The judge said “Yes.”
Submitted by:
Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham, LLP.
Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker's errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island, Philadelphia, Pennsylvania, Williston, Vermont and Naples, Florida.