What is a binder in insurance?

A binder in insurance is a temporary insurance agreement that provides immediate coverage to a policyholder before a formal policy is issued. This means that when a binder is provided, the coverage is in effect, often for a specified period of time, allowing the insured to have protection while waiting for the completion of the full policy documentation. This is particularly useful when there is an urgent need for coverage, such as purchasing a new home or vehicle.

The nature of a binder is that it serves as evidence of coverage and may outline the key terms and conditions, but it is not a permanent replacement for the full insurance policy. Once the formal policy is processed and issued by the insurer, the binder is typically superseded by the actual policy document. This arrangement ensures that the insured is not left without coverage during the initial phases of the insurance application process.