A Binder is an Insurance Contract

Once Coverage is Bound Cancellation Requires Compliance with Statutory Requirements

Insurance agents and brokers like to write insurance business. They will often bend over backwards to collect a premium and place a policy. When an insured is offered coverage, accepts the coverage, even without payment, a binder (evidence of insurance to be issued in the future) is evidence that a contract of insurance has been formed. The agent might try to say there is no coverage until the premium is paid but to do so it must make sure the binder issued says it is not effective until the premium is collected.

In James Allen Insurance Brokers And Certain Underwriters At Lloyd’s, London, Subscribing To Certificate No. Fro-100944 v. First Financial Bank, NO. 2018-IA-00307-SCT, Supreme Court of Mississippi (April 18, 2019) James Allen Insurance Brokers (JAIB) and Certain Underwriters at Lloyd’s, London, Subscribing to Certificate No. FRO-100944 (Lloyd’s) petitioned the Supreme Court of Mississippi for review of the trial court order granting partial summary judgment in favor of First Financial Bank (FFB). The trial court held that FFB is entitled to insurance proceeds from a fire loss that occurred at Luther and Freda Feazell’s poultry farm, because JAIB and Lloyd’s failed to comply with Mississippi law requiring notice of cancellation of property insurance.

FACTS

The Feazells borrowed money from FFB secured by, among other things, four poultry houses on the Feazells’ farm, valued at $231,750, $231,750, $150,000, and $150,000 that became the subject of insurance with Lloyd’s.

The Underwriters advised the Feazells that they required before they would issue the policy they must provide the premium, among other things, within 10 days. Feazells were advised that if all items are not received they will cancel the policy flat with no coverage afforded at anytime and all premium, less the policy fee will be returned. In so saying the Underwriters did not believe the statutory requirements of 30 days notice for cancellation of an insurance policy.

On January 5, 2014, three days after the final premium payment deadline, the Feazells’ poultry farm caught fire. All four of the chicken houses used to secure FFB’s loan to the Feazells were either destroyed or rendered inoperable. According to FFB, due to the extensive fire damage, the Feazells’ poultry operation came to a halt, effectively resulting in complete casualty loss.

The actual binder that was issued with effective dates of coverage from December 13, 2013 through December 13, 2014 contained no deadline for the payment of the premium and did not contain any terms regarding automatic cancellation or withdrawal of coverage.

DISCUSSION

JAIB and Lloyd’s claimed that the trial court misinterpreted those facts and the applicable law when it granted partial summary judgment in favor of FFB. They contend that the sole issue is a legal one—whether FFB was owed a statutory notice of cancellation when the policy never was cancelled because the binding terms never were satisfied. They maintain no coverage was in place at the time of the fire loss; without effective coverage, the notice requirements of the Mississippi Code were not triggered.

Mississippi statutes require all fire policies include a standard mortgage clause that provides that “This company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the mortgagee (or trustee) for thirty (30) days after notice to the mortgagee (or trustee) of such cancellation and shall then cease, and this company shall have the right on like notice to cancel this agreement.”

The evidence in the record showed that an insurance binder was issued by JAIB and Lloyd’s with an effective date of coverage for the Feazells’ chicken farm beginning on December 13, 2013, through December 13, 2014. The binder listed FFB as a mortgagee/loss payee and included FFB’s mailing address. Although temporary, a binder is nonetheless a contract of insurance and it is sufficient to trigger statutory notification requirements.

First, the claim asserted by JAIB and Lloyd’s that coverage never went into effect because JAIB did not receive the premium timely has no merit.  It is not essential that the premiums on the policies be paid, or that the policies be actually delivered to the insured, before the contract becomes effective. This includes insurance binders.

Here, while JAIB and Lloyd’s certainly could have contracted to require that the premium be paid before the binder went into effect, they did not do so. Instead, they agreed to issue a binder with an effective date of coverage from December 13, 2013, through December 13, 2014, with the full premium due within ten days of the binding effective date.

Coverage having gone into effect on December 13, 2013, under the terms of the binder, and FFB having been listed in the binder as a mortgagee/loss payee triggered the statute’s notification requirements for purposes of FFB. JAIB and Lloyd’s failed to comply with those notification requirements; therefore, they are liable to FFB for its loss.

Accordingly, the trial court correctly granted partial summary judgment in favor of FFB.

ZALMA OPINION

Insurers like the Underwriters at Lloyd’s and brokers who place insurance with them should know what a contract is and that a binder is an insurance contract with all the terms and conditions to be provided later. If they wanted to limit what they did to come into effect only after the premium is actually received all the Underwriters needed to do was to make a conditional offer and not issue a binder including effective dates without stating the conditions it intended. Hopefully the Underwriters and the broker have learned a hard lesson when it pays the bank its losses.