Binding Authority

What Does Binding Authority Mean?

A binding authority is an agreement in which an insurer grants full authority to an agent, typically an insurance broker, to act on their behalf for underwriting purposes. Once the agent has binding authority, they are legally permitted to sell policies on the insurer’s behalf.

Binding authority is generally outlined in the agency agreement between the insurance company and the intermediary (the broker). This agreement authorizes brokers to represent the insurer in dealings with the public. It is often carefully negotiated as it includes important terms such as the handling of commissions and premiums, contingent profits, information sharing, and the scope of binding authority.

In essence, binding authority allows a broker to commit the insurer to a risk without needing approval from an underwriter and issue policy documents immediately. Although the broker must notify the insurer, the ability to approve policies on the spot saves time.

The binding authority section of the agency agreement specifies the types of business the broker can bind and the limitations of their authority. For example, the agreement might only allow the broker to accept home insurance risks but not farm risks, or require the broker to consult an underwriter for risks with insured values exceeding $1 million. Another common restriction may prevent the broker from binding risks in areas prone to natural disasters, such as forest fires or floods.

Violating binding authority can have serious consequences for brokers, potentially leading to costly and time-consuming errors and omissions claims. If a policy is bound outside of the broker’s authority and a loss occurs, the client may not be covered. Either the client or the insurer could sue the broker to recover damages necessary to cover the loss.

Insuranceopedia Explains Binding Authority

Without binding authority, insurance brokers would be unable to take business actions on behalf of their insurer clients, significantly slowing down the process of buying and selling insurance. Binding authority, however, grants brokers the power to act on behalf of the company, streamlining operations.

Imagine if your insurance broker didn’t have binding authority. Any policy changes or new business—even simple ones—would take days of back-and-forth communication between the underwriter, broker, and client to finalize. This would be inefficient and impractical, leaving little room for progress. To address this issue, insurers and brokers introduced the concept of binding authority.

By granting binding authority, the process of selling and managing insurance policies becomes faster and more efficient. However, it also emphasizes the need for insurers to hire trustworthy and competent brokers. Without careful vetting, insurers could grant authority to brokers who make poor decisions on their behalf.

Once an insurer has vetted a potential broker partner, they offer an agency agreement that outlines, among other things, the broker’s binding authority with the company. Binding authority is crucial because it provides brokers with the flexibility to address urgent needs. However, exceeding or overstepping this authority can lead to liability or the loss of the agency contract if the mistake results in the insurer canceling the agreement.

When a broker has binding authority, they are given limited underwriting powers to accept risks on behalf of the insurer. The broker issues a “binder,” which serves as a temporary insurance contract and proof of insurance while awaiting the issuance of a formal policy—or, in some cases, the rejection of the risk by the underwriter.