What Is an Insurance Binder?
An insurance binder is a brief document that serves as a temporary insurance policy. It remains in effect for a short time, typically 30 to 90 days. A binder dissolves once the policy is issued.
Often Requested by Lenders
Many businesses purchase commercial buildings by obtaining financing from a lender. Because the building serves as collateral for the loan, the lender requires the buyer to insure the building against physical damage under a commercial property policy. Typically, the lender demands evidence of insurance as a condition of closing the loan. If the policy has not yet been issued, the buyer obtains a binder from the insurer or insurance agent. Many states require lenders to accept binders as evidence of insurance coverage if the policy is not yet available.
Binder Versus Certificate of Insurance
It is important to distinguish a binder from a certificate of insurance. A certificate is simply evidence of insurance. It is not an insurance policy. A certificate is usually issued at the request of someone other than the policyholder, such as a landlord. It summarizes the coverages and limits afforded by the policy but the document itself does not provide any coverage. A certificate is usually produced after the policy has been issued.
An insurance binder, on the other hand, is produced before the policy is issued. While it may consist of only a page or two, it is a legal insurance contract. If an insurer cancels a binder, it must notify the insured in advance as required by state law.
Who Issues Binders?
A binder may be issued by an insurance company or by an insurance agent on the insurer's behalf. An agent can issue a binder only if he or she has been afforded binding authority (the authority to initiate insurance coverage) by the insurer. The scope of an agency's binding authority is spelled out in a contract between the agency and the insurer. The contract may permit the agency to bind coverage for some types of policies but not others. An agent who does not have the authority to issue a binder may request one from the insurer.
Insurance brokers don't have binding authority because they don't serve as representatives of insurers. An insurance broker may issue a binder but the document will not be valid until it is signed by an underwriter or other authorized representative of the insurer.
Many insurers issue binders on a standard ACORD form. ACORD is a non-profit organization that publishes standardized forms utilized by insurers, agents, and brokers. Other insurers use their own binder form. Because it is a temporary document, a binder provides only a brief summary of the policy it represents. A typical binder contains the type of information outlined below.
A binder provides general information about your company, your insurer, and your agent. This includes:
- Your agent's name, address and contact information
- Your company's name and address
- Name of your insurer
- Binder number
- Binder effective dates
- Policy number
- Description of your operations, vehicles or property to be covered
The binder number is a series of numbers (often combined with letters) that is used for identification purposes. It is not the same as your policy number. Your binder will list a policy number only if the binder has been issued to extend the term of a policy that has expired.
For example, suppose that you have purchased workers compensation insurance. Sixty days before your policy expires you receive a letter from your insurer stating it will cease writing workers compensation policies in your state in six months. You need more than 60 days to shop for coverage so your insurer issues a binder extending your coverage for 60 days after your policy expiration date. You now have 120 days to obtain another workers compensation policy.
A binder is typically divided into sections, each applicable to a specific type of coverage such as General Liability or Workers Compensation. For each coverage you have purchased, the binder should list the limits provided, the coverage forms that will be included, and key endorsements that will be attached to your policy. It may also include the following:
- Property. Perils covered (all-risk or specified perils), the deductible and the coinsurance percentage
- General Liability. Basis of coverage (claims-made or occurrence). If coverage is claims-made, the retroactive date should be listed if one is applicable.
- Commercial Auto Liability. Categories of autos that are covered. Examples are any auto, hired autos, and non-owned autos.
- Commercial Auto Physical Damage. Coverages included (comprehensive and/or collision) and the applicable deductible
- Excess Liability. Type of policy (umbrella or excess policy).
If your policy covers a building or vehicle that is secured by a loan, your lender's name should appear on the binder.
Many binders include conditions. For instance, the standard ACORD binder states that the insurance described in the binder is subject to the terms and limitations of the policies currently used by the insurer. For instance, if the insurer is using the 2013 edition of the ISO Business Auto Policy, the binder will include the conditions found in that policy.
Like full-term insurance policies, binders may contain cancellation provisions. Generally, an insurer may cancel your binder if it determines that your business does not meet its underwriting standards. However, your insurer must give you written notice within the time period required by law. Cancellation requirements vary from state to state. Fortunately, binder cancellations are relatively rare. Most binders are replaced by insurance policies.
Finally, a binder may contain conditions that apply only in certain states. These conditions will apply to you only if your business operates in one of the states specified.