What does the term "binder" refer to in insurance?

The term "binder" in insurance refers specifically to a temporary agreement that provides immediate coverage until a formal policy is issued. This temporary insurance policy allows the insured to have coverage in place for a brief period, ensuring that there is no gap in protection while the finalization of the policy details occurs.

This option typically entitles the insured to the same coverage that would be provided by the finalized policy and confirms the insurer's acceptance of the risk. A binder can be particularly important in scenarios where immediate coverage is necessary, such as in real estate transactions or during the purchase of a new asset.

Understanding that a binder is not related to the authority to settle claims, nor does it pertain to selling policies or covering multiple parties helps to clarify its specific use in the insurance process. Distinguishing these terms is essential in insurance practice, as each plays a different role in the overall management and administration of policies and claims.