The operation of binding authorities whether full, limited or prior submit authorities, adds considerably to the roles and responsibilities of the broker or Coverholder.
A broker has a duty to act in the best interests of the client at all times.
A broker or other company may also operate a binding authority (in this case they are known as a Coverholder). The Coverholder acts as agent of the insurer and enters into contracts of insurance, or issues documents as evidence of contracts on behalf of underwriters. Operating under a binding authority, and acting as the agent of the insurer, Coverholders are the local representatives of the insurer and their actions bind the insurer into insurance contracts.
The reason why Coverholders evolved is that the delegated authority is provided to local parties where the insurer (with a general knowledge of the market conditions) wishes to write business in a particular territory or market. They enter into a contract with a third party who has a proven knowledge of the class of insurance or knowledge of a particular market.
The Coverholder normally takes on the traditional roles of the underwriter and collects premiums, chases late payments, pays taxes and duties where applicable and issues policy documents – all on behalf of the underwriters. Sometimes Coverholders are also authorised to settle claims as well.
Under the terms of the binding authority the Coverholder submits regular bordereaux to underwriters so that underwriters know how many risks have been bound, what the risks are, the premiums paid, the inception dates and many other facts about the risks they have insured.
Once the Coverholder has been paid they submit a payment bordereaux to insurers, which details the premiums paid, less the Coverholders’ discount.
The underwriter therefore receives premium income for a class they are looking to write, without having the expense of opening their own office and staffing it etc.
Clearly there is a very close relationship between Coverholders and underwriters.
In some circumstances the agreement between Coverholder and underwriter may be cancelled. For instance if there are sustained losses on a book of business and rate increases or amendments to the terms and conditions have not resulted in an improvement.
Alternatively underwriters may withdraw from a market, which necessitates their Coverholders either closing their authority or seeking alternative underwriting support.
Further Information For further information on how our Coverholders Professional Indemnity insurance solutions can help your organisation, please email:
coverholders@uk.lockton.com