Binding authority

What is binding authority?

Binding authority is an agreement between an insurance company and an agent. It allows the agent to commit the company to a new policy without needing approval from the underwriting department.

In insurance, binding is the term for the moment when an insurer officially begins covering something, whether it’s a home or a car or something else. Once the insurer is bound, they’re obligated to pay any claims that arise, provided they’re covered by the policy.

When an agent has binding authority, it means they’re permitted to bind the insurance company to new policies without first seeking the insurance company’s approval. When an agent doesn’t have this authority, they need to have someone else approve the customers’ application on their behalf.

Binding authority is important when a customer needs insurance coverage quickly.

For example, if you buy a new car, you don’t want it sitting on the dealership lot for several days while you wait for auto insurance. Or, if you buy a new house, your mortgage lender probably wants to see a confirmation of insurance before they release any funds.

You may be familiar with the term binder (a.k.a. confirmation of insurance). When you buy an insurance policy from someone with binding authority, they often issue a binder before you get the full policy wordings. A binder is a temporary document that indicates your coverage is in place while you wait for the actual policy. A binder contains the most important information you might need to know in the event of a claim, like your policy number, limits of coverage, deductibles, and policy term.

Who has binding authority?

When you buy an insurance policy, you most often buy it from an agent or a broker. Agents sell policies on behalf of insurance companies, but not all of them have binding authority. Brokers, on the other hand, are not directly affiliated with an insurance company—they represent their customers.

Each insurer can decide for themselves to whom they grant binding authority. If the company employs agents, they may decide that every agent has binding authority. On the other hand, they may decide that only the most senior agents have it.

Or, it may be a case of binding authority being granted depending on the details of the application. An agent may have binding authority only when the total insured value is under a certain amount. Or, they may only need higher approval to bind coverage for homes in high-risk areas.

In cases where an agent does not have binding authority, they would still collect all the application details from a customer. But, instead of issuing a policy right away, they would have to pass that application up the chain so someone else could review it and bind coverage.

Insurance brokers also typically have binding authority. Even though they don’t work directly for an insurer, the insurers they represent often still let them bind coverage. A broker may have different levels of binding authority with each of the companies they work with, but they will generally have at least some.

Even computers can (kind of) have binding authority. When you buy home insurance online, your coverage can often begin right away. As long as your application meets certain requirements, there’s no need to wait for a human to sign off on it.

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