When a policy is issued, it contains exclusionary or limiting forms and endorsements not listed on the quote or binder. A loss occurs. The carrier denies based on one of those exclusionary or limiting forms or endorsements. What do you do? What are your insured’s rights? This is something we see happening more and more. In this issue of The E&O Report, we discuss this topic and offer some guidelines to help you avoid potential errors and omissions risks if you are faced with this situation.

We are seeing an increasingly disturbing practice by carriers. The issuance of a full policy that contains exclusionary or limiting forms and endorsements not listed on the quote or binder. Of course, that form (or forms) becomes the basis for the denial when a loss occurs: the carrier taking the position that “the policy as issued controls!” Sadly, there are cases supporting that position. However, there are an equal number of cases in opposition, and some sections of New York Insurance Law support the policyholder. It is our hope that this issue of The E&O Report will give you a foundation for understanding the competing factors and nuances of this issue, all to support coverage for your insured. Simply and obviously, in this scenario you are aligned with your insured as your best E&O defense is coverage for your insured.

Here is the hypothetical: Superior Building Supply owns buildings (commercial and rental residential), in addition to its retail/wholesale building supply operations. As part of those operations, it delivers to jobsites with a small mobile truck boom that hoists material up to a fourth floor height. Thus, SBS needs coverage that extends to the deliveries and off-premises liability under its general liability coverage.

ABC Brokerage, Inc. obtains a quote for SBS from the insurance carrier. It is a two-page quote that lists all the forms and endorsements to which the policy will be subject. The quote is accepted by the insured and a binder is issued that mirrors the quote. The premium is paid based on the binder. When the policy is ultimately issued more than two months later, it contains a form not listed on either the quote or the binder: a CG 21 44 (07 98) “Limitation of Coverage to Designated Premises or Project” (“Designated Premises”).

While hoisting pallets of bricks to the third-story roof of a jobsite, the roof collapses injuring several workers. The inevitable personal injury lawsuit is filed. SBS tenders to its GL carrier, which denies coverage relying on the “Designated Premises” limitation. The carrier’s position is that due to the CG 21 44, coverage does not extend away from the insured locations and therefore not to jobsites where deliveries or hoisting is conducted. When confronted with the quote and binder, the insurance carrier, citing the New York Court of Appeals, states: A binder is only temporary or interim insurance and terminates when an insurance policy is issued. Springer v. Allstate Life Ins. Co. of N.Y., 731 N.E.2d 1106 (2000). Carriers have used that case and its progeny to support this unscrupulous practice for a long time.

What should the agent or broker do in this situation?

First, the obvious. Upon receipt of the policy, check all the forms attached against those listed in the quote / binder. Immediately, bring to the insurance carrier’s attention any discrepancies that exist.

Second. Have a basic understanding of the law: “Forewarned is Forearmed.” This is not as straightforward as you would think as opposing forces are at work. This brings us to a threshold point. The law is not as clear and as organized as many think. The law is more, much more, Art than Science. Thus, at any given time, there may be decisions by different courts that make diametrically opposed rulings on the same issue. Attorneys fatalistically joke that you can find a case that says whatever you want to say on any given point. While an exaggeration, it is somewhat true as our scenario is a case-in point.

Under basic principles of contract law – Offer and Acceptance – a binding contract was created between SBS and the GL Carrier with the acceptance of the quote. The binder is the memorialization of the contract of insurance and the forms listed the terms. Further, support for this position is found in the fact that the premium, (consideration for the contract of insurance), was paid on the binder before the physical policy with the CG 21 44 was issued.[1] Thus, we argue that the CG 21 44 is not part of the contract of insurance to which the insured/broker agreed and thus cannot be used to deny coverage.

We also have to consider NYIL §3426, which for purposes of Notice of Cancellation and Notice of Conditional renewal, treats a binder as no different as a fully issued policy. “Covered policy means * * * any * * * other evidence of such insurance.” This last part means a binder. Our position is that once an insurance policy is issued, despite the decision in Springer v. Allstate Life Ins. Co. of N.Y that a binder terminates when an insurance policy is issued, New York Insurance Law states otherwise. That unless that binder is cancelled or conditionally renewed in accordance with §3426, the binder still acts as the policy without the CG 21 44.

The elephant in the room is how can the law allowing the binder to be superseded by the policy be valid. As an insurance practitioner of more than three decades, let me suggest the following. Like the game of telephone we played as kids, the message whispered in the ear of the first child and repeated to the next and so on, often bares no resemblance when the last child recites what he or she  last heard. So goes the law on this issue.

Court decisions on this issue go back to at least 1928 when every form and record was on paper and handled manually, tedious underwriting included. Thus, this issue should be understood in the context of that world. What the courts have always meant is that the carrier is entitled to issue a full policy that contains the accepted standard, customary terms and conditions precedent that were not and did not have to be mentioned in the binder, (like “Definitions”, “Notice” etc...), to which the material-substantive coverage terms, already agreed upon in the quote and binder, would be subject.[2] But the carrier was never allowed to materially change coverage terms from what it offered in the quote and agreed to in the binder. That original holding and rationale has been lost over the years to an inappropriate shorthand used by carriers for an unfair advantage in issuing polices not in conformity with quotes and binders.

Conclusion
There is no greater uphill battle for an attorney than to argue the court has been getting something consistently wrong for years. The decisions on binder vs. policy are a pertinent point. Our firm, Keidel, Weldon & Cunningham, LLP is currently litigating the very hypothetical situation mentioned in this article. From that matter and similar cases, we have learned one valuable lesson that will help you avoid an E&O claim on facts like those presented here. The prudent insurance agent or broker should always check the listing of policy forms and endorsements in the quote against the binder and then the binder against the policy and bring any discrepancies to the attention of the wholesaler and/or carrier at once. By doing so, the agent or broker will be protecting the insured while at the same time protecting itself from a potential E&O claim or lawsuit.

Submitted by
Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham, LLP