Insurance binders issued before a policy is sent to the policyholder can be major sources of disagreement regarding coverage. Most of these coverage controversies involve situations where the binder is issued shortly before a loss occurs. A recent Mississippi case, Coastal Hardware & Rental Co., LLC v. Certain Underwriters at Lloyds, London, 2011-CA-00765-COA, 2013 WL 1197883 (Miss. Ct. App. Mar. 26, 2013), is an example of a situation where a binder can provide insurance coverage when the insurer claims the loss would have been excluded under the policy.
The facts surrounding this Hurricane Katrina loss are as follows:
In July 2005, Coastal worked with its insurance agent, McManus…to renew its insurance that was to expire at the end of the month. For the previous policy year (July 2004–July 2005), Coastal had obtained through Lloyds, London a named-risk policy in which flood, earthquake, and wind were not named risks. Coastal had a separate wind policy with XL Specialty Insurance. Coastal had renewed its wind policy with XL Specialty Insurance for the July 2005–July 2006 policy year but let it lapse through nonpayment after it negotiated a new contract with the Underwriters.
Instead of offering another named-perils policy, the Underwriters had quoted an “all-risk” policy that expressly excluded flood, earthquake, and mold. Wind was not expressly listed as an excluded risk. However, in several places, when deductibles were addressed, the quote either stated wind was “excluded” or “not required.” McManus called the Underwriters’ American agent, John Hulen, and asked if wind was covered under the offered all-risk policy. Hulen refused to state a position but instead advised McManus to read the quote himself. On July 14, McManus sent XL Specialty a fax informing the insurer that, after renewing the wind policy, Statewide had “obtain[ed] a renewal quote on [Coastal’s] fire policy [in which] we were able to include wind and hail.” McManus asked for advise on the best way to cancel the separate wind policy and, prior to Katrina, intentionally allowed the wind policy to lapse due to nonpayment of the premium.
Coastal accepted the Underwriters’ quote and paid the $9,800 premium. The Underwriters agreed to bind coverage beginning July 23, 2005. On July 29, the Underwriters’ agent issued a two-page written binder for an “all perils” policy, listing “mold” as the only notable exclusion. But the binder did state that Coastal should “READ THIS CONFIRMATION CAREFULLY AND COMPARE IT WITH ANY QUOTE AND SUBMISSION DOCUMENTS AND REVIEW THE POLICY FORMS FOR THE ACTUAL COVERAGE PROVIDED.” The binder also stated: “THIS INSURANCE BINDER WILL BE TERMINATED AND SUPERSEDED UPON DELIVERY OF THE FORMAL POLICY(IES) ISSUED TO REPLACE IT.” (Emphasis added).
According to Hulen’s records…Hulen received an electronic copy of the formal policy—which contained a wind exclusion—from the Underwriters. Hulen purportedly printed a hard copy and mailed the policy to Statewide. But a representative of Statewide3 claimed Statewide neither received the policy nor delivered it to Coastal. By Friday, August 26, the Mississippi Gulf Coast was bracing for Hurricane Katrina. Statewide closed its office early that day, having never checked the mail. When the storm struck Monday, August 29, both Statewide’s office and the U.S. post office in Kiln were destroyed. The mailed policy was never recovered.
The storm also destroyed Coastal’s 22,000 square foot building, forcing the hardware store to operate out of a much smaller building during hurricane recovery. Several weeks after the storm, Coastal contacted Hulen to make a claim. In a brief phone conversation, Hulen told Coastal that the policy did not cover wind damage and that Coastal should make a claim with its wind carrier.
The Court explained the binder acted as the contract:
We must first clarify that the undelivered policy was not the insurance contract in force at the time of Hurricane Katrina-the binder was.
“[A] binder is a contract for temporary insurance, until either a permanent policy can be written or its issuance approved or disapproved by the insuror.” Miss. Farm Bureau Mut. Ins. v. Todd, 492 So.2d 919, 929 (Miss.1986) (citations omitted). “A binder is not an insurance policy but is generally taken to be a contract providing for interim insurance effective as of the date of the application and terminating at either completion or rejection of the principal policy.” 1A Stephen Plitt, Daniel Maldonado, & Joshua D. Rogers, Couch on Insurance § 13:1 (Rev. ed.2010). Mississippi recognizes binders as enforceable insurance contracts. See Todd, 492 So.2d at 929. “Although a binder may be sketchy and informal in comparison with the policy contemplated for issuance and delivery in the future, it is a contract of insurance [at present], subject only to the conditions that it imposes.” 1A Couch on Insurance § 13:1.
The Underwriters argue the trial judge erred by finding the written binder, which incorporated the quote, was “the final insurance contract.” We do agree that the binder anticipated a future formal policy. But the binder expressly stated it did not terminate “until delivery” of that policy. Since it is undisputed that the Underwriters’ 2005–2006 policy was never delivered, the binder never terminated. So the trial court was correct that the binder was the temporary insurance contract effective at the time of Coastal’s loss. (emphasis added)
The Court then interpreted the language of the binder and found coverage for the policyholder, noting:
And the rule that ambiguity is construed in favor of the insured and a finding of coverage applies to binder language just as it would to formal policy language. 1A Couch on Insurance § 13:6 (Rev. ed. 2010) (“In accordance with the general rule of construction, a binding receipt that is ambiguous is to be construed in favor of the insured.”); see also Sparks v. Shelter Life Ins., 838 F.2d 987, 989 (8th Cir.1988) (“Binding or conditional receipts are subject to the rules of construction generally utilized in interpreting insurance policies; if the provisions are ambiguous, making them susceptible to two reasonable constructions, one favorable to the insurer and one favorable to the insured, the latter will be adopted.”); Alea London Ltd., 186 S.W.3d at 412 (“With respect to the construction of binders in particular, a binder which is ambiguous should be construed in favor of the insured.”); DeFoure v. MFA Life Ins., 596 S.W.2d 7, 9 (Ark.Ct.App.1980) (“It is settled law that ambiguities in insurance contracts will be construed against the insurer who prepared it. Binding or conditional receipts are subject to this rule of construction.”).
Thus, we find nothing radical in the trial judge’s approach where she resolved the ambiguity in favor of the insured and applied the same principles to find in favor of Coastal on the issue of coverage. While the Underwriters argue this approach unfairly penalizes insurers for not listing in the temporary contract every exclusion that will appear in the later formal policy, we find no such penalty arising under these circumstances. When Hulen was given the opportunity to explain to Coastal’s agent whether the Underwriters intended to exclude wind, Hulen did not discuss the future policy but instead relied on the language of the binder and quote, without any further comment. According to the Underwriters’ own representative, the answer about wind coverage could be found in the binder and quote. And because the language of the binder and quote did not plainly and unambiguously specify wind as an excluded risk, we, like the trial judge, construe the binder in favor of the insured and find wind was a covered risk.
Accordingly, when insurers fail to issue a policy at the time of the loss and only a binder exists, policyholders should carefully review the binder if the insurer attempts to deny insurance coverage.