What Is an Insurance Binder?
A Binder Is Not the Same Thing as an Insurance Certificate
An insurance binder is a temporary insurance policy. It is usually replaced by a policy within 30 to 90 days and dissolves once the policy has been issued. A typical binder consists of only a page or two but it is a valid insurance contract. It incorporates all the terms and limitations in the policy, including the conditions, exclusions, and endorsements.
Evidence of Insurance
A binder is issued when a policyholder wants or needs evidence of insurance coverage. For example, Susan recently acquired a truck to use in her landscaping business and has insured the vehicle under a new business auto policy. The policy hasn't been issued yet so Susan needs a binder so she can register the truck with her state's motor vehicle department. The binder serves as evidence that Susan has insured the truck for commercial auto liability.
Binders are also used as evidence of property insurance. Many businesses purchase commercial buildings by obtaining financing from a lender and using the building as collateral for the loan. The lender usually requires the buyer to insure the building for physical damage by purchasing commercial property insurance. Typically, the lender won't close the loan unless the buyer produces evidence of insurance coverage. If the policy hasn't been issued yet, the buyer can present the lender with a binder.
Many states require lenders to accept binders as evidence of insurance coverage when the policy is not yet available.
A binder is not the same thing as a certificate of insurance. A certificate is usually produced after the policy has been issued. While it is used to provide evidence of insurance, it is not an insurance policy and does not (by itself) provide any coverage. It is simply a summary of the coverages and limits included in the policy.
Who Issues Binders?
A binder may be issued by an insurance company or an insurance agent on the insurer's behalf. Agents can issue binders only if the insurer has afforded them binding authority (authority to initiate insurance coverage). Insurance brokers have no 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 form published by ACORD, a non-profit organization owned by insurers. Some insurers have developed their own binder forms. Regardless of the form used, a binder usually 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 the insured operations, vehicles or property
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 find another insurance carrier so your insurer issues a binder extending your policy for an additional 60 days. You now have 120 days to obtain coverage from another insurer.
A binder is typically divided into sections, each applicable to a specific type of coverage. 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 applies.
- Commercial Auto Liability. Categories of autos 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.
Generally, an insurer may cancel your binder if it determines your business does not meet its underwriting standards. If an insurer cancels your binder, it must provide adequate notice. Because binders are substitutes for policies, they are subject to the same notification requirements that apply to policy cancellations. The requirements vary from state to state. Fortunately, few binders are canceled as most are replaced by insurance policies.