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Insurance Law

When is a Policy of Insurance Made? Acceptance of Offer Effects Insurance

Insurance, like every other contract, is formed when there is an offer made, that offer is accepted, and consideration (payment or a promise to pay premium) is given.

In a diversity action, a federal court must apply the choice-of-law rules of the forum state. The parties agree that Florida’s rule of lex loci contractus governs the Court’s choice-of-law determination in this contract dispute. This rule provides that the law of the jurisdiction where the contract was executed governs the rights and liabilities of the parties in determining an issue of insurance coverage. In Sun Capital Partners, Inc. v. Twin City Fire Insurance Company, Inc., Slip Copy, 2015 U.S. Dist. LEXIS 102445 (S.D.Fla., 8/5/15), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the District Court for the Southern District of Florida was asked to apply Florida law while the insurers concluded the contracts were effected in New York and its law should apply.

THE ISSUE

The determination of where a contract was effected is fact-intensive, and requires a determination of where the last act necessary to complete the contract was done. The parties take differing views on where the “last act” necessary to complete Plaintiff’s insurance contracts occurred. Stressing the Eleventh Circuit’s reliance on “communication of the acceptance,” Defendant argued that the last act necessary to create a contract was the insurers’ agents’ communication of acceptance of Plaintiff’s agent’s order to bind coverage. Because acceptance was communicated from New York (to one of Plaintiff’s agents who was also in New York), Defendant argues that New York law applies. On the other hand, Plaintiff argues that the last act was the delivery of the subject policies to Plaintiff at its place of business in Florida.

FACTS: COMMUNICATION OF ACCEPTANCE

Plaintiff Sun Capital assigned the duty of purchasing its insurance policies to its national insurance broker, Marsh Inc. Underwriting for the excess policy (Twin City) was handled by the Hartford. Underwriting for the primary policy (Houston Casualty Company) was handed by Professional Indemnity Agency, Inc.

The circumstances surrounding the excess policy (Twin City) appear in the record first. On December 28, 2007, Raymond Ash, a Marsh agent located in New York, emailed Ho–Tay Ma, a Hartford agent located in New York, as follows: “Thanks for all your help with this account. Please consider this e-mail as the formal order to bind coverage for Sun Capital’s renewal GPL coverage as follows: [discussing applicable limits, period, and terms]…. Please forward the formal binders or confirmation of binding as soon as possible.” From his New York office, Mr. Ma responded to Mr. Ash’s email as follows: “Based upon the information provided regarding the above captioned account, we are pleased to provide you with the following Binder for Insurance on behalf of Twin City Fire Insurance Company.” Apparently, Mr. Ma emailed a copy of the binder to Mr. Ash in New York, as well as to two Marsh agents located in Florida.

The binding of the primary policy (Houston Casualty Company) was handled the same manner. On December 28, 2007, Jennifer Hickox, a Professional Indemnity agent, emailed Mr. Ash as follows: “In accordance with your instructions, we are binding Private Equity Professional Insurance as follows [listing applicable limits, period, and terms].”

Ms. Hickox was a Vice President for Professional Indemnity, and her business address was listed in her email as in Mount Kisco, New York. Ms. Hickox’s email does not indicate that it was sent to anyone other than Mr. Ash in New York.

These documents show that both Plaintiff’s primary and excess insurance policies were executed in materially similar ways.

Plaintiff’s agent, March Inc., emailed the insurer’s agent an offer to purchase insurance by submitting a “formal order to bind coverage.” Next, the insurer’s agent accepted that offer and issued a binder for coverage from an office in New York. This acceptance was effective at the time—and at the place—where it was dispatched, i.e., New York.

The insurer’s agent’s acceptance of Plaintiff’s agent’s offer to purchase insurance was the last act necessary to complete the insurance contract. The fact that only binders were initially exchanged, and not the actual policies, does not alter the conclusion that Plaintiff’s agent offered to purchase insurance coverage, specifying the terms of the policy, and the insurer’s agent issued an acceptance based on those terms.

CONCLUSION

Based on the foregoing, the Court concluded that the last act necessary to create an insurance contract occurred in New York when the insurers’ agents accepted Plaintiff’s agent formal offer to bind coverage.

Whatever merit might exist for the adoption of a rule in Florida that the locus contractus of an insurance policy always be the place where it is delivered, as it stands now, the determination of where a contract was executed is fact-intensive, and requires a determination of where the last act necessary to complete the contract was done.

Where the facts indicate that a fully consummated contract existed prior to delivery of the policy, the last act for contract formation may be found prior to delivery and the court concluded that the contract was formed when the offer was accepted and a binder ordered.

ZALMA OPINION

A binder is evidence of an insurance policy to be delivered at a later date. The issuance of a binder means there is a contract and that is why the court chose New York law for the case. In Trade Center Properties, L.L.C. v. Hartford Fire Insurance Company, 345 F.3d 154 (2d Cir. 09/26/2003), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the Second Circuit concluded that a binder is a common and necessary practice in the world of insurance, where speed often is of the essence, for the agent to use this quick and informal device to record the giving of protection pending the execution and delivery of a more conventionally detailed policy of insurance.

Thus, a binder is a short method of issuing a temporary policy for the convenience of all parties, to continue until the execution of the formal one. A binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused. While not all of the terms of the insurance contract will be set forth in the binder, a binder is nevertheless a fully enforceable present contract of insurance.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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