What is an insurance binder?

Insurance Q&A: “What is an insurance binder?” Spoiler alert: It’s not a Trapper Keeper!

Insurance is a business of promises and paperwork. Usually, it’s in that order. The insured promises to pay an insurance premium, and the insurer promises to pay for covered insurance claims during the policy period.

Each party’s promises are secured by an insurance policy, which is ultimately a binding contract (the paperwork).

But we don’t ever simply walk into an insurance agency, answer some questions and then walk straight out 30 minutes to an hour later with a policy in our hands and an absolute guarantee of coverage for the entire policy period.

What goes into the process of writing an insurance policy?

You may have a guarantee of coverage “for the time being.” You see, insurance companies can issue a policy, and then go back and check the “facts” we provided. This could result in an increase in your insurance premium or even in your insurance company cancelling the policy in extreme cases. If something happens before they make a final decision, though, it would be covered as outlined in the insurance binder.

Most states allow a 60-day window for an insurer to underwrite a policy and verify they are interested in maintaining coverage. This temporary proof of coverage is still based on payment. Coverage limits apply. So if your claim during this period was bigger or fell into written exclusions, coverage would be executed accordingly.

Tip: Don’t panic here. As long as you didn’t misrepresent yourself during the application process, you’re likely okay. Mortgage lenders treat homeowners insurance binders the same as a fully executed policy. Unless something changes, up to the point of the change, the proof of insurance is the same for their purposes.

The insurers must give you a specified period of time to find new coverage if they decide not to continue your policy. They can’t just cancel your policy at will with no notice. The exact timelines for cancellation and even the underwriting process vary based on state law.

For this reason, insurance policies are typically delivered to us as many as 1-4 weeks after they became effective. This is the time frame in which they “underwrite” the policy.

That lapse in time between purchasing the policy and when it’s actually delivered is where the insurance binder comes into play.

What else should you know about an insurance binder?

An insurance binder is a temporary oral or written contract that provides proof of insurance at any given time.

It can be a prepared document that demonstrates the basics of coverage, or even a verbal, “You’re covered” from an insurance agent with the authority to do so (this is very rare). Not surprisingly, this is referred to as binding authority.

Temporary auto liability ID cards are a great example of a binder. Your auto insurance agent may have issued you ID cards right off of his or her printer and instructed you to put them in the glove box until the permanent cards arrive in the mail with your policy (instant proof of insurance).

The agent and insurer will “take your word for it” for the time being. They are willing to risk the chance that you have forgotten about, or even lied about, your health or driving history.

They’re not fools though, and will likely review your application using various reports to ensure your answers are accurate.

A binder needs to have a few key pieces of information in order to be valid. Here are the basics:

Name of the insured – you or your company must be listed
Limits of coverage – how much coverage you purchased
Type of insurance – homeowners, auto, health, commercial, etc.
What is being covered – exactly which car (by VIN) or house (by property address)
Name of the insurer – no explanation needed
Effective date – when does the policy start and end
Additional interests – this may be your loss payee or lien holder

Again, just the bare bones basics here. You will certainly need to read your entire policy when you receive it to make sure all of the coverage details are accurate. A binder (or a policy for that matter) is not a note from the insurer promising to pay any possible claims that arise.

How long is a binder good for?

There is no set number for the length of time you can get by on a binder. Many of them simply state they are “temporary,” until the policy is delivered and accepted. In short, they’re good until underwriting has time to properly review and verify the information you submitted or adjust your policy for discovered discrepancies.

It is common to hear a 10-day binder limit for many types of policies however.

That seems to be an industry-wide acceptable length of time to review a new business application and decide whether or not to continue coverage.