1.14 Oral Contracts and Binders

• Jurisdiction: Arizona

Arizona law allows binders or other contracts for temporary insurance to be orally or in writing.^[185] Binders or other contracts for temporary insurance "shall be deemed to include all the usual terms of the policy as to which the binder was given together with such applicable endorsements as are designated in the binder" unless the terms and endorsements are specifically "superseded by the clear and expressed terms of the binder."^[186] Although a binder typically incorporates the terms of a prospective formal insurance contract into it, there must be a meeting of the minds between the parties in order to effect it.^[187] A "meeting of the minds" occurs when there is agreement on the subject matter being insured, the risk, the duration and amount of coverage, the premium amount, and the identity of the parties.^[188] The burden of proving the existence of an oral or written binder is upon the temporary insured.^[189] Any ambiguity in a written binder will be construed against the insurance company.^[190]

Consideration for the binder is the insured's promise to purchase a permanent policy and no other or independent consideration is required to support the binder or temporary insurance contract.^[191] The parties are free to agree upon conditions for the issuance of the binder.^[192] As a matter of public policy, however, the insurance carrier is not permitted to make the binder effective only upon the condition that the policy is subsequently issued.^[193] Making a binder effective only upon the condition that the policy is subsequently issued would unfairly place the insurance company in a position to eviscerate the utility of the binder by refusing to issue the formal policy in situations where the insurance carrier discovers that a loss has occurred while the binder was apparently in affect.^[194]

In Rutherford v. John O'Lexey's Boat & Yacht Insurance Ltd.,^[195] the court considered whether a condition subsequent to the issue of a binder was enforceable. In that case, Rutherford sought liability insurance for a homemade boat he had constructed. No standard insurance company would insure the boat. During the insurance purchase process Rutherford went to the Cummings and Kelless Insurance Agency and purchased liability insurance because he intended to use the boat for the first time on the weekend of July 7-8, 1993. During the initial interview, the insurance agent discovered that no standard insurance company would insure the boat. Therefore, the insurance agent attempted to place the insurance coverage with an insurance company insuring substandard risks, John O'Lexey's Boat & Yacht Insurance, Ltd. The insurance company advised the agent that it would issue a temporary policy to Rutherford on the condition that the premium and completed application be submitted immediately bearing a July 6, 1993 postmark. When the agent began filling out the application it was discovered that Rutherford did not have all the necessary information to complete the application on or before July 6. Therefore, the insurance agent called the insurance company and asked whether the company would bind weekend coverage even though the application could not be completed and mailed until Monday, July 9, 1993. The insurance company advised the agent that coverage would be bound through July 9, 1993, provided a completed application was mailed on that date. Rutherford was present when this series of telephone calls was made. The evidence at trial was vigorously contested. The insurance agent testified she had told Rutherford the binder was conditioned upon his completing the application and making arrangements for premium payments no later than July 9, 1993. Rutherford, on the other hand, testified he was told unconditionally that he was insured. It was undisputed that Rutherford did not return to the insurance agency on July 9 and the insurance agent was unable to get the necessary information when she attempted to contact Mr. Rutherford by telephone. The insurance agent tried unsuccessfully to reach Rutherford by telephone for several more days. In the meantime, the insurance company notified the insurance...