Insurance Binder

An insurance binder is a temporary, legally binding agreement that provides insurance cover from a stated date until the formal policy is issued or the binder expires. It is issued by the insurer, or by an agent or broker with authority to commit the insurer, and records the essentials of the cover: who is insured, what property or activity is covered, the types of cover, limits, deductibles and the effective and expiry dates.

Binders are most common in property and casualty insurance, where cover often has to start before an insurer can finish its paperwork: buying a home, taking delivery of a vehicle, starting a construction project or renewing a commercial account. In the United States, many binders use the standard ACORD 75 form. A binder is a contract of cover, unlike a certificate of insurance, which is only evidence that a policy exists, and it should not be confused with a binding authority, which is the power given to an agent to issue binders.

When someone passes a driving test, they may be handed a paper slip that lets them drive legally while the proper licence card is printed and posted. The slip is short and plain, but it is real: if a police officer stops them, the slip counts.

A binder is that paper slip for an insurance policy. The full policy can be dozens of pages and take weeks to produce. The binder says, in a page or two, that cover has started and on what basic terms. If the house burns down or the car is hit the day after the binder is issued, the claim is handled as though the full policy were already in the customer's hands.

• The parties. The insured's name and address, the insurer, and the agent or broker issuing the binder.
• The subject of cover. The property, vehicle, location or business activity insured, with values where relevant.
• The cover. The policy form or types of cover, limits, deductibles and any special conditions or exclusions.
• Interested third parties. Lenders named as mortgagee or loss payee, and others named as additional insureds.
• Dates. The exact time cover begins and the date the binder ends if no policy has replaced it.

Where the binder is silent, the terms of the insurer's usual policy for that kind of risk normally apply.

The right to bind depends on the authority the insurer has granted. A captive or independent agent may be allowed to bind standard personal lines within set limits, while larger or unusual risks need the insurer's underwriting department to approve first. Managing general agents and, in the London market, coverholders operating under binding authority agreements with syndicates at Lloyd's of London can bind cover on the insurer's behalf across whole programmes. Digital distributors and InsurTech platforms often issue binders automatically once an online application passes the insurer's rules.

An agent who binds cover outside its authority may still commit the insurer to the customer, depending on the facts and on the law of agency, but it can then be liable to the insurer. Under common law, binders can even be oral, although written confirmation is standard practice.

A mortgage lender will not release funds until the borrower shows that the property, which is the lender's collateral, is insured from the moment of purchase. The binder names the lender as mortgagee, so that claim payments protect the lender's interest as well as the owner's, much as a lien protects its claim on the property itself. US industry guidance notes that most states' insurance laws require lenders to accept a binder in place of the issued policy. Where premiums are paid through the loan, the servicer then collects them through an escrow account.

Binders are short-lived, commonly 30 to 90 days, and some US states limit how long one may stay in force without being replaced or extended. The insured owes premium for the period the binder was in effect, even if the insurer later declines to issue a policy. Insurers may cancel a binder by giving the notice required by law, for example if an inspection reveals a risk they would not have accepted.

Disputes usually turn on whether a binder existed at the time of the loss, what it covered and whether the eventual policy differs from it. Detailed terms that the insured never saw, such as a coinsurance clause, may be contested if they reduce a claim made during the binder period. Forged or altered binders also appear in vehicle and property fraud, where a fake binder is used to satisfy a lender or a vehicle registry, so lenders and dealers commonly verify binders directly with the issuing agent or insurer.

• National Association of Insurance Commissioners (NAIC)
• ACORD