Binders: A Short Primer

Understanding the Limits of Oral and Written Binders

Insurance Code Section 382.5(a) defines a binder as a “writing” that “temporarily obligates the insurer to provide … insurance coverage pending issuance of the policy.” It has been described as “an independent contract separate and distinct from the permanent insurance policy.” Ahern v. Dillenback (1991) 1 Cal. App. 4th 36, 48.

The Insurance Code requires the binder be in writing and contain: (1) name and address of the insured and any additional named insureds, mortgagees or the lien holders, (2) description of the property insured if applicable, (3) a description of the nature and amount of insurance, plus any special exclusions not contained in the standard policy, (4) identity of the insurer and the agent executing the binder, (5) effective date of coverage, and (6) binder number (or policy number where an extension or renewal is involved).

The primary purpose of this requirement appears to be to establish that such a writing will constitute satisfactory proof of insurance for an insured’s dealings with third parties. However, as is customary between the insurer and the insured, an oral binder may be effective — even if it does not contain all of the specifics set forth in the Insurance Code.

A written binder, however, is preferable when dealing with third parties because Insurance Code Section 382.5(b) provides that if any party to a contract refuses, without reasonable cause, to accept the written binder as proof of insurance, he or she will be deemed to have breached the contract and the insured will be entitled to appropriate injunctive relief, damages for the breach and reasonable attorney’s fees and costs.

What constitutes “reasonable cause” includes, for example, inadequate or inappropriate coverage; failure of the insured to meet financial standards; failure of the insurance agent to provide written evidence of the agent’s authority to bind coverage; and failure of the binder to comply with the specific formulistic requirements discussed above.

A contract of temporary insurance also may arise from a written application for insurance and the payment of the first premium “if the language of the application would lead an ordinary lay person to conclude that coverage was immediate.” Ahern v. Dillenback, supra. No implied contract of temporary insurance would arise, however, where limitations on an agent’s authority are conspicuously noted on the insurance application.

For example, in Linnastruth v. Mutual Benefit Health & Accident Association (1943) 22 Cal. 2nd 216, the insured signed the application for insurance and paid the initial policy premium. The application stated “I understand and agree that this application shall not be binding upon the [insurer] until the policy is issued to me.” The application also stated that the insurer was “not bound by any statement made by or to any agent until written” in the application. The insurance agent told the insured that coverage commenced on the date of the applications. The application was dated July 20, and on that date was submitted to the insurance company along with the premium. The application was approved on August 2, and the policy was issued, dated August 5. On August 6, the policy was taken to the insured’s home, where the insured was found lying unconscious from an infection contracted from bodily injuries that had occurred on July 26. The insured died on August 6, without regaining consciousness. On August 10, the insurer denied liability for the reason that the injuries that resulted in death occurred prior to the date of issuance of the policies.

The court in Linnastruth concluded that there was no merit in the contention that coverage commenced from the date of the application merely because the agent said that it did. The opinion noted that the agent conceded he had no actual authority to bind the insurer, and that given the language of the agreement, the agent had no apparent authority to do so. Moreover, the application specifically provided that the insurer was not bound by anything not specifically stated in writing in the application. The court thus ruled that “any reader of the applications must be deemed to be placed with certainty on notice that coverage commenced not when the agent said it did, but upon issuance of the policies.”

Although the Insurance Code defines a binder as “a writing,” California courts have recognized that oral agreement to accept a risk are binding and enforceable. As a general rule, agents have the authority to bind insurers orally (Modica v. Hartford Acc. & Idem. Co. (1965) 236 Cal. App. 2nd 588), and can enter into a binding oral agreement to renew a policy (Shade v. Canadian Indemnity Co. (1983) 147 Cal. App. 43).

A significant factor considered by the courts are the past dealings between the agent and the insureds. For example, in Kazentenon v. California-Western States Life Ins. Co. (1955) 137 Cal. App. 2nd 361, the insurance agent orally agreed to a one-year extension of a life insurance policy. The agent had a written agency contract that, standing alone, restricted his activities considerably, but the insured never saw it or knew its contents.

The court noted that the agent had no connection with any other insurance company, for years had handled the insured’s insurance with the insurer, and conducted the company’s correspondence with the insured using insuring company stationery for that purpose. Based upon those facts, the court concluded that the insured “had every reason after years of dealing with [the agent] as the representative of the company, to believe and did believe that the agent had authority to make the agreement [to extend the policy term].”

In dealing with oral binders, insurers frequently argue that they are unenforceable because they are too uncertain. Those arguments have generally been rejected by the court. For example, in Parlier Food Co. v. Fireman’s Fund Ins. Co., (1957) 151 Cal. App. 2nd 6, an action was brought on an use and occupancy insurance binder. The broker represented to the plaintiff that he would bind plaintiff for coverage of $75,000 until a representative of the insurer arrived to determine the best insurance for the type of business. No writing of any kind was given to the insured. The trial court gave judgment for the insurer on the sole ground that the binding coverage was “too uncertain and indefinite as to the amount of insurance, type of insurance to be issued, or the terms thereof, and the premium to be paid, to be enforceable.” The issue before the appellate court was whether it is essential for binding coverage to be enforceable that the terms of the policy to be selected be actually agreed upon when the binder s issued.

The Court of Appeal, in reversing the trial court ruling, noted that insurance companies can enter into binding oral contracts to issue new policies, and that “if the applicant could not be made secure until all of the formal documents were executed and delivered, the beneficial effect on the insurance system would be greatly impaired.” The Court of Appeal held that when there is no specific oral agreement with respect to the precise terms of the insurance policy, the contract is construed as being subject to the terms and conditions of the policy ordinarily used by the insurance company, or, if there is a standard policy in the jurisdiction, according to the terms and conditions of that policy. The court ruled that it is presumed that the parties contemplated such a policy: not the highest form of coverage which could be obtained, but one that was reasonably suited to the plaintiff’s situation.

The controlling consideration was articulated in Eames v. Home Ins. Co., 94 U.S. 621, where the court stated “if parties could not be made secure until all the formal documents were executed and delivered … the beneficial effect of this benign contract of insurance would often be defeated and rendered unavailable … If no preliminary contract would be valid, unless is specified minutely the terms to be contained in the policy to be issued, no such contract could ever be made or ever be of any use.”

Insurance Code Section 382.5 provides that a binder is valid for a period of 90 days from the date of execution, unless the binder provides for a specific period less than 90 days. There are no cases addressing the issue whether the 90-day period applies only to written binders, or whether it extends to oral binders as well. If presented with the issue, it is likely that a court would hold both written and oral binders subject to the same time limitations.

Topics Carriers Agencies