Binding Authority Wordings
A binding authority is an agreement between a managing agent and a coverholder.
Under this agreement, the Managing Agent delegates its authority to enter into a contract of insurance to be underwritten by the members of a syndicate managed by it to the Coverholder in accordance with the terms of the agreement.
A binding authority agreement can also be used to give a Coverholder the authority to issue insurance documents on behalf of Lloyd’s syndicates. Insurance documents include certificates of insurance, temporary cover notes and other documents acting as evidence of contracts of insurance. It also set out the Coverholder’s other responsibilities, such as handling premiums or agreeing claims.
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.
Binding authorities need to comply with the requirements Lloyd’s sets. Details can be found in the Code for Delegated Underwriting. The LMA produces model binding authority agreements that the market may use and which are designed to meet those requirements.
Removal of Underwriting Authority from a Coverholder on Short Notice
Typically, binding authorities provide for notice periods of three months, or longer, if the parties wish to bring the binding authority to an early close. This notice period is important as it allows the coverholder to continue to offer cover to policyholders and maintain continuity while it seeks replacement capacity.
In exceptional circumstances a managing agent may need to require that a coverholder ceases underwriting immediately or on short notice either by removing their underwriting authority or terminating the binder entirely. Any circumstance where underwriting authority is withdrawn without use of the full notice period set out in the binder is considered to be a removal of underwriting authority on short notice. This includes changing the level of authority granted to the coverholder to ‘prior submit’.
Short notice removal of underwriting authority can negatively impact both policyholders who may not be able to obtain renewal terms or have their existing policy serviced and coverholders who may not have the opportunity to find replacement capacity. If not properly justified it can also have a negative reputational impact on Lloyd’s and may draw regulatory investigation. Managing agents should therefore only take steps to remove a coverholder’s authority on short notice where it is able to demonstrate good reason for taking such action.
To monitor the use of short notice removal of underwriting authority the following requirement is in place:
Prior to a managing agent taking any steps that would have the effect of substantially terminating the underwriting authority of a coverholder at a date earlier than provided for in the binding authority (either the natural expiry of the binding authority or the end of a notice period) then the managing agent must first refer the proposal to Lloyd’s. This includes any proposal to terminate for breach or to reduce underwriting authority to ‘prior submit’.
The referral process is as follows:
1. The managing agent should complete the referral form which can be found here.
2. The managing agent should submit the form by email to Coverholders@lloyds.com. If an urgent or immediate decision is required the managing agent should additionally contact by email or telephone their Customer Oversight Manager and/or a member of the delegated authorities team.
3. Lloyd’s will seek to engage with the managing agent promptly and provide an early decision. If the managing agent does not receive any response from Lloyd’s within five working days the managing agent may proceed as it sees appropriate.
This approach also applies to coverholder appointment agreements on behalf of Lloyd’s Europe.
This requirement does not apply to the non-renewal of a binding authority but Lloyd’s does expect managing agents to carefully consider the impact of such a decision on coverholders and policyholders and provide as much advance notice as possible. It is also does not apply to circumstances giving rise to the automatic termination of a binding authority.
This referral requirement is intended to ensure that removal of underwriting authority is achieved properly with adequate consideration of the customer and relevant regulations to prevent the issues that have arisen in the past where this has not happened. This will be Lloyd’s focus when reviewing referrals.
If managing agents have any questions regarding the above requirement they should contact their Customer Oversight Manager.