BA agreements

The contract that frames the responsibilities, entitlements and obligations of the parties is the contract of delegation and is referred to as the binding authority agreement. It is the document that the parties use to make sure all contracting parties are clear about their roles and responsibilities.

The binding authority agreement (contract of delegation) is not the contract of insurance.

More about the contract of insurance

• Who are the contracting parties?

  The two contracting parties are:

  • The coverholder
  • The managing agent (on behalf of the Lloyd’s syndicate)

  
  

• Why is a contract needed?

  An important part of Lloyd’s rules relates to the contents of every binding authority contract. Establishing the exact terms and conditions of the binding authority will make sure that as a coverholder you understand exactly what you can do and how you must act as an approved coverholder. What this means is: 

  • There must always be a contract between the parties setting out how the binding authority will work (i.e. the binding authority agreement).
  • There are also a number of sub requirements that must always be clear between the parties and must be included in the agreement.

  The managing agent must set out the parameters within which the coverholder is allowed to act. Agreeing these terms at the outset reduces the possibility of misunderstandings or disputes at a later stage. It is for this reason that the Lloyd’s broker (or managing agent) cannot register a binding authority at Lloyd’s until the coverholder has agreed in writing to its terms and conditions.
  

• What are model contracts and non-model contracts?

  There are requirements that need to be addressed in any contract of delegation. To make life easier there are model contracts available which are issued by the Lloyd's Market Association (LMA) and meet all these requirements. Equally, the parties may enter into non-model contracts provided they address the requirements of the key areas that must be included in a binding authority agreement.

• What binding authority model agreements are there and where can I find them?

  Type of model agreement	Reference number	Document used
  USA	LMA 3018	United States of America non-marine model binding authority agreement
  Canada	LMA 3020	Canadian non-marine binding authority agreement
  Rest of world	LMA 3019	Non-Marine binding authority agreement (excluding USA and Canada domiciled coverholders)
  Marine	LMA 3021	Marine binding authority agreement
  Where the Lloyd's broker also acting as coverholder	LMA 3024	Lloyd’s brokers non-marine binding authority agreement

  Binding authority agreement templates and guidance 

   

   

• What are the key areas covered by the binding authority agreement?

  Prudent underwriting: This states that the coverholder is expected to act always in a prudent and professional way with due care and skill.
   
  Authorised people: This identifies which of the coverholder's staff have the authority to enter into contracts of insurance and who has responsibility for overall control of the binding authority.
   
  Duration: This identifies the duration of the contract of delegation will usually last for no more than 12 months and must never exceed 18 months in total.
    
  Contracts of insurance: This identifies which types and classes of insurance can be entered into by the coverholder under the binding authority.
   
  Selling arrangements: This identifies the local requirement for how the insurance should be sold by a coverholder.
   
  Renewing contracts of insurance: This identifies the local requirements for a coverholder when handling non-renewable contracts of insurance.
   
  Limits on premium income: This identifies the limit applied to the gross premium income allowable for the coverholder.
   
  Collecting premiums: This sets out the coverholders responsibilities and the appropriate service standards required for the collecting of premiums.
   
  Insurance monies: This sets out the requirements for the coverholder to ensure that any insurance monies are held in a separate insurance monies account.
   
  Insurance documents: This sets out the coverholders responsibilities and the service standards required, including format and content, when producing and issuing insurance documents.
   
  Handling claims: This sets out the coverholders responsibilities and the appropriate service standards required for the handling of claims.

  Agreeing claims: This identifies if the coverholder has been given authority to agree claims from contracts of insurance entered into under the binding authority agreement.
   
  Claim funds: If a coverholder has been allocated a claims fund ,this sets out the requirements for holding these funds and defines the circumstances in which they can be used. 
   
  Reporting responsibilities: This sets out the requirements for the coverholder to report by type or class, all premiums, paid claims, outstanding claims and expenses in respect of contracts of insurance it has entered into.
   
  Sub-contracted claims handling: This sets out the requirements of a coverholder who is allowed to sub-contract responsibility for handling claims and performing certain administrative functions.
   
  Complaints: This sets out the requirements for the coverholder to have appropriate procedures in place for the handling of policyholder complaints.
   
  Lawful instructions: This sets out the requirements of the coverholder in respect of the operation of risks bound under or claims arising from the binding authority agreement.
   
  Cancellation: This sets out the provisions for cancellation of the binding authority agreement.
   
  Using Lloyd’s name: This sets out the requirements for the coverholder to follow the Lloyd’s guidelines when using the Lloyd’s name.
   
  Inspection and ownership of records: This sets out the requirements for the coverholder to keep complete records of all business carried out under the binding authority agreement.
   
  Jurisdiction and choice of law: This informs the coverholder that English law and English jurisdiction will apply, whenever possible, to the binding authority agreement.

• What does the binding authority look like?

  The model binding authority agreement document is structured as two parts:

  • The Standard Wording* contains all the Lloyd's required content and standard clauses for the binding authority agreement.
  • The Schedule contains all the variable information (e.g. inception date, expiry dates, who has authority to do what, etc)  which is completed by the Broker and changes each year, It also contains a section for completion if any of the standard wording is replaced with non-standard wording. It is the schedule that is signed off by the two contracting parties.

  * the parties can use their own non-standard wording provided it covers the Lloyd's requirements for the binding authority agreement.

• What is contract certainty?

  Contract certainty, which is an expectation of the FSA, provides that there shall be complete and final agreement of all terms between the parties, before the binding authority incepts.

• How does contract certainty apply to binding authority agreements?

  Before a coverholder is authorised to act on behalf of a managing agent, whether on new binding authorities or renewed ones, the managing agent must have received written confirmation from the coverholder agreeing to the terms and conditions of the binding authority.

  The binding authority cannot be registered at Lloyd’s until this confirmation has been received and as a coverholder, you must not operate the binding authority until the Lloyd’s broker (or managing agent) has confirmed that the binding authority has been registered with Lloyd’s. This applies to both new and renewal business.
   
  In order for contract certainty to be achieved, everyone contracted in the document must be clear about their roles and responsibilities and there must be complete and final agreement of all binding authority terms between the coverholder and the managing agent, before the inception of the binding authority agreement. This ensures that there can be no misunderstanding between the parties before the binding authority agreement starts.

  As part of the binding authority agreement sign off there must be complete and final agreement of the format and scope of terms to be used in insurance documentation, issued under the binding authority and the coverholder must hold or have access to all the insurance documents that are used for the evidence of cover by the time the binding authority agreement starts.
  

• What do I need to know and do?

  How does the process of arranging a binding authority agreement work?

  • Whilst the binding authority agreement is between the coverholder and the managing agent, the Lloyd’s broker is normally responsible for liaising with the coverholder and the managing agent for the binding authority agreement.
  • The coverholder will be advised of any wording changes to the binding authority agreement via the Lloyd’s broker.
  • The contracting parties show their agreement to the binding authority agreement by signing the schedule.
    

  How long does a binding authority agreement last and why is that?
  
  The binding authority agreement lasts for 12 months. The reason is that Lloyd’s is not a fixed capital market. Its members change and the syndicates are reconstituted each year. This means that the binding authority agreement will always be for a 12 month period. They can be extended for up to an additional 6 months to a maximum of 18 months.