Situations may arise when an insurance agent needs to issue coverage before a policy is officially written. For example, a prospect's current car policy with another company may be about to expire, but the agent may not have all the information she needs to complete an application. In this instance, the agent may have the authority to issue an insurance binder. A binder is a form of temporary coverage that will last until additional information is received.
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Insurance binders give agents the authority to grant temporary insurance coverage. When the time period for the coverage expires, the insurance company will either issue a permanent policy or decline to extend further coverage. This is determined by additional information received by the insurance company during the binding period.
Depending on the rules of the insurance company, binders may take effect immediately or at some point in the near future. For example, an insurance company may have a rule in place that coverage cannot begin until 12:01 a.m. on the day following when the agent accepts the binder. Rules may also vary as to whether a binder can be verbal or must be in writing.
There are a variety of scenarios in which a binder may be appropriate. For example, an auto insurance agent may be sitting with a prospect when his computer ceases to function and he cannot order the necessary vehicle or accident history reports. In this situation, the agent may be permitted to issue a binder with the understanding that the coverage may not be permanent if adverse information is eventually received.
Because binders are only intended to provide temporary coverage, they typically last for a short period time, usually 10 days. This normally gives the insurance company enough time to gather the necessary information to make a final decision.
Agents need to be aware of the limits of their binding authority to avoid potentially difficult situations. For example, an agent may tell a prospect that he has immediate coverage, when in fact the agent's binding authority indicates that coverage does not go into effect until the next day. If the prospect is involved in an accident later that same day, a dispute will likely arise as to whether coverage exists. Depending on the rules of the insurer, the insurance company may end up having to pay the claim.