What is a binder in insurance?

A binder in insurance represents a temporary agreement that provides coverage before the formal insurance policy is issued. This means that once a binder is issued, the insured has immediate coverage even though the detailed terms of the policy are not yet finalized. It acts as a provisional insurance contract, ensuring that there is no gap in coverage while the insurer processes the full application and prepares the policy documents.

The use of a binder is crucial in situations where immediate coverage is needed, such as when a person purchases a new vehicle or enters into a real estate transaction. The binder assures the policyholder that they are protected during this interim period.

In contrast, an initial insurance proposal refers to the submission of information to obtain a quote, while a contract that guarantees full coverage does not specifically apply to the nature of a binder, as binders cover temporary agreements. Lastly, a document that nullifies an existing policy does not align with the purpose of a binder, which is to temporarily provide coverage rather than cancel a policy.