What Is an Insurance Binder?

If you've ever bought a home, drove a new car off the dealer's lot or purchased life insurance, chances are good you were covered by an insurance binder. These binders make many different types of commercial transactions possible without placing an undue risk on the insurer, or an excessive burden upon the insured.

An insurance binder contractually binds an insurer and a client until the insurer decides whether a longer-term policy is in its best interest. In this context, “binds” means “commits.” Insurance binders are necessary when an insurance agent lacks the authority to issue a policy on the spot. Under these circumstances, the insurance company agrees to provide insurance for a short period of time. The state of New York recognizes insurance binders as the equivalent of temporary insurance. This is typical in other jurisdictions as well.

Often insurance is needed to expedite a particular type of transaction, or to relieve one party of liability. For example, a car dealer may require that a buyer have insurance before driving a car off the lot. A title company may require a prospective buyer to have an an insurance binder before they will handle the closing of the sale of property. Insurance binders are also used in pet insurance, healthcare, dental insurance and renter's insurance.

An insurance binder is not a guarantee that the insurer will honor the full term of the policy. For example, Florida allows insurers to cancel an insurance binder with as little as five days' notice. Washington state provides that insurance binders for common carriers, such as buses and trains, may be canceled on ten days' written notice.

Insurance binders are governed by state law. Since insurance agents are licensed by the state, you can check with your state's Department of Insurance to see if your agent is properly licensed. If you believe your insurance binder was fraudulent, many states, including California, allow you to find a complaint against insurers online.