Claims

Binders and Coverholders: Claims Authority Explained

ClaimsGateway

22 Oct 26

•

min read

A binder is an insurer's written authority for another party to write insurance, settle claims, or both, on its behalf. In Australia it is defined in the Corporations Act. A coverholder is the Lloyd's term for a business holding that authority from Lloyd's syndicates. Claims authority is a separate grant from underwriting authority, with its own limits.

This article is general information, not legal or compliance advice. Check the current text of the code, standard or legislation, and take advice for your situation.

Key takeaways

The Corporations Act defines a binder as an authorisation to enter into insurance contracts, deal with and settle claims, or both, on an insurer's behalf.
A Lloyd's coverholder holds delegated authority from Lloyd's syndicates, and in Australia must hold a suitable AFS licence to write retail business.
According to APRA, section 93 of the Insurance Act 1973 authorises Lloyd's underwriters to write Australian insurance business.
According to the Underwriting Agencies Council, its more than 130 member agencies are responsible for over $10.5 billion of premium a year.
Claims authority comes with settlement limits and referral rules, and the insurer stays accountable for every claim settled in its name.

What is a binder?

A binder is an insurer's authority for another party to enter into insurance contracts for it, settle claims for it, or both. In Australia, the term is defined in section 761A of the Corporations Act. The party holding it is usually an underwriting agency or a broker.

The definition matters because it covers claims as well as underwriting. A binder can grant only underwriting power, only claims power, or the two together. As a result, two agencies both "on a binder" may have very different authority when a claim arrives.

The insurer that gives the binder stays responsible. It carries the risk, and it remains accountable to regulators and policyholders for what is done in its name. The delegated authority explainer covers that relationship in depth.

What is a coverholder?

A coverholder is a business authorised by one or more Lloyd's syndicates to enter into insurance contracts, and sometimes to handle claims, on their behalf. It is the Lloyd's name for a binder holder. In Australia, many underwriting agencies are Lloyd's coverholders as well as holding binders from Australian insurers.

Lloyd's operates in Australia under its own statutory basis. According to APRA, section 93 of the Insurance Act 1973 authorises Lloyd's underwriters to write Australian business. Sections 65 to 73 add special protections for Australian policyholders.

Lloyd's sets its own rules for coverholders too. In a 2013 market bulletin, Lloyd's required Australian consumer business to go through "an appropriately licensed Australian coverholder". That means one with a suitable AFS licence. It also expected coverholders writing that business to meet the General Insurance Code of Practice.

What is the difference between binding authority and claims authority?

Binding authority lets a party accept risks and issue policies on the insurer's behalf. Claims authority lets it decide and pay claims on the insurer's behalf. They are separate grants with separate limits. A party can hold full binding authority but little or no claims authority, or the reverse.

Claims authority usually has three parts. First, a settlement limit caps what can be paid on one claim. Second, referral triggers send certain claims to the insurer, such as suspected fraud, disputed liability or a claim likely to exceed the limit. Third, an approval rule names who decides above the limit.

Lloyd's describes the same structure. Its guidance says delegated claims agreements set the coverholder's authority to determine claims, including when a claim must be referred to the managing agent. Some coverholders hand all claims to a separate delegated claims administrator instead.

Who regulates binders in Australia?

In Australia, ASIC regulates the financial services provided under a binder, and APRA regulates the insurers that give binders. A binder holder usually needs an AFS licence, or must be authorised by a licensee, to deal in insurance and to handle claims. The insurer remains accountable for business written and claims settled in its name.

Claims handling has its own licensing. According to ASIC, handling and settling insurance claims has been a financial service needing an AFS licence since 1 January 2022. ASIC's guidance explains when claims managers acting for insurers need that licence.

Industry codes add to the law. Insurers that subscribe to the General Insurance Code of Practice must make sure the parties acting for them, including binder holders, follow it. The guide to underwriting agencies explains how agencies sit within this framework.

How do claims work under a binder in practice?

Under a binder with claims authority, the agency receives and assesses the claim. It settles the claim if it is within its limit and no referral trigger applies. Otherwise, it prepares the file and refers it to the insurer. Either way, the claim is reported to the insurer, usually through a monthly bordereau.

The agency works to two sets of rules. The binder sets the authority, and the insurer's own claims standards and the Code of Practice set how claims must be handled. So a well-run agency builds both into its process.

Records are what prove compliance. The insurer, its auditors and, for Lloyd's business, Lloyd's itself expect to see each decision and who made it. The bordereau explainer covers how claims are reported.

Agencies often run claims for several insurers on several binders at once. That makes keeping each binder's limits and rules apart the main operational challenge. ClaimsGateway (claimsgateway.com) builds cloud claims software for underwriting agencies, and the ClaimsGateway underwriting agencies page describes its approach.

Frequently asked questions

What is a binder in insurance?

A binder is an authority from an insurer that lets another party enter into insurance contracts on its behalf, settle claims on its behalf, or both. In Australia, it is defined in section 761A of the Corporations Act. Binders are usually held by underwriting agencies, and sometimes by brokers.

What is a Lloyd's coverholder?

A Lloyd's coverholder is a business authorised by one or more Lloyd's syndicates to write insurance, and sometimes to handle claims, on their behalf. Many Australian underwriting agencies are coverholders. Lloyd's requires coverholders writing Australian consumer business to hold a suitable AFS licence and meet local rules.

Can a broker hold a binder?

Yes. Some brokers hold binders for particular products, letting them issue policies or settle claims on an insurer's behalf within agreed limits. A broker holding a binder acts for the insurer under it, which is different from its usual role acting for the client, so conflicts need managing.

What is binding authority?

Binding authority is the power to accept risks and issue insurance policies on an insurer's behalf, without referring each one to the insurer. It is granted in a binder, within limits on the classes, sums insured and risks covered. It is separate from claims authority, which is the power to decide and pay claims.

Who handles claims under a binder?

It depends on the binder. If it grants claims authority, the binder holder handles claims within its limits and refers larger or sensitive claims to the insurer. If not, the insurer handles claims, or appoints a third-party administrator. The insurer remains accountable for claims settled in its name.

About the author

ClaimsGateway builds cloud claims management software for insurers, underwriting agencies, brokers, TPAs and self-insured organisations in Australia and New Zealand. Every regulator figure in this article links to its source, and every vendor fact was checked on the vendor's own site on the date shown.