When you purchase insurance, you often need to wait for the insurance company to issue a policy that outlines the details of the contract, such as what’s covered, what’s excluded, how long the coverage lasts. This often happens because the insurer’s underwriting department still has to review your application.
Unfortunately, you sometimes need evidence that you’ve purchased a policy, so your insurance company sends you an insurance binder. That way, you can show that you paid for a policy and an insurance company has agreed to cover your risk.
Binders are not fully written insurance contracts. In fact, not all details about the policy are provided in a binder. Much of the policy terms and conditions are presumed. However, insurance binders are enforceable contracts.
For an insurance binder to be valid, it must contain certain information. Usually, they list only the most pertinent details about the coverage. Most binders include the following seven key elements.
The risk is the insured asset, or basically whatever is at risk of being lost. In the case of homeowners insurance, the risk is the home that is being insured. This is often identified by the address of the home. For a risk such as a car, the year, make, and model would be listed.
The binder should list the amount of liability coverage the policy has. This often starts at $100,000 but can go as high as $1 million or more on some policies. Liability insurance covers your legal costs if a third party claims you’re responsible for their property damage or injuries.
Coverage limits are often listed in the binder along, as are deductibles. On a home insurance binder you should see limits listed for your dwelling coverage, personal property coverage, and any medical payments or loss of use limits purchased.
As an enforceable contract, the binder must state who gets the benefits of the policy. The most obvious example is the named insured, which simply means a person explicitly mentioned in the policy. But policies can also have additional insureds, or people who are added to your coverage. Homeowners often add their mortgage company to their coverage as an additional insured.
This may seem obvious, but a binder must name the insurance company offering coverage. Along with the insurance company name, the binder lists the type of coverage purchased.
Binders often include the policy’s effective date and its expiration date. Because binders are temporary, some also include their own expiration dates.
Agents have the authority to bind coverage, which means they can confirm coverage is in place. Because they can do this, agents are usually listed on the binder. That way, the insurance carrier knows who’s representing the policyholders and who submitted the initial application.
Insurance binders are important because other parties often have an interest in the risk that a policy covers. Anyone who loans money for a major purchase is an example of someone who has an interest in a risk.
Your mortgage lender probably required you to get home insurance before they’d approve your loan. This is because your lender wants to know that the house is protected from day one. When it receives a copy of the binder, the mortgage company knows that you have a legally binding insurance policy so any losses are covered.
Request an insurance binder from your insurance company after you have made your initial premium payment. You can usually download and forward it to the mortgage company as proof of insurance.