- Category: Insurance Binder
- Published: Monday, 28 November 2011 20:04
- Written by Doug Hartley
- Hits: 3959
An insurance binder is a temporary contract between you and the insurance company. You may need temporary proof of coverage right after you buy an insurance policy to give to some third party who requires you provide them evidence you have insurance.
It may take a while for the insurance company to issue a policy. The policy is the permanent contract that gets issued to you and the third party who requires you prove insurance.
What is a third party and why would they need proof of coverage?
A third party is anyone who you have an obligation to by contract requiring you have insurance. The most common is a lender or mortgage company. When you buy a house, car or other major purchase and it is financed, the lender wants to be sure their interest in the purchased item is fully protected.
A binder can be sent immediately after you apply for insurance to the lender. A binder usually has a 30 day limit on it. That gives the insurance company, the first party, time enough to issue the permanent contract. Part of issuing the contract or policy includes a Loss Payee or Mortgagee clause. That is a separate page in the contract that names the lender and what interest in the property being insured they have. If for some reason the policy gets cancelled, the insurance company is then obligated to notify the lender or mortgage company about the cancellation.
Why would a lender care if a policy gets cancelled after they received the binder?
You, the insured second party to the contract, made a promise to the lender to keep insurance in-force on the property you financed until the loan is paid off. So, if you let the insurance cancel for non-payment, you cancel the policy at your request or the insurance company cancels the policy at their request, then the lender wants to know. That means the property you have purchased and financed is not insured and if something happens to it, then you and the lender are out the value of the property to the extent of the damage.
Lenders want the property they have lent money on to maintain its value until the loan is paid off. That way, if you stop paying for the property, they will still have something left to foreclose on or repossess. If the property is destroyed then they are out the value or security of the property (collateral) you put up to get the loan.
What happens after the binder expires and I cancel the policy?
The third party can force you to buy another policy and have the new insurance company issue another binder and policy. If you fail to purchase another policy, the lender has two options:
1. Force place a policy on the property that covers just their interest, not yours, and at your expense. They call this insurance Vendors Single Interest (VSI).
2. They may repossess or foreclose on the property you borrowed against. This is usually a measure of last resort.
Can a binder be extended?
Usually yes. Rarely will you need to have a binder extended. The insurance company will probably be able to issue a policy within the binding period. But, if for some reason the insurer is not able to complete the underwriting or deciding and rating process during the 30 days, the agent may issue another 30 day binder and continue to do so until the insurance company issues the policy.
Do I have to pay for a binder?
Yes, the agent will do his or her best to calculate the correct premium for the term of the policy and collect the down payment premium set forth by the insurance company's guidelines. That down payment should be enough to cover the binder period. If a second binder is required, the agent will have to collect from you an additional month's worth of coverage until the policy is in the insurance company's system and automated billing can commence.