Property and Casualty Insurance Practice Exam

What is the purpose of a binder in insurance?

1. To deny coverage while awaiting further information

2. To temporarily secure coverage until a policy is issued

3. To provide a permanent insurance solution

4. To increase premiums until a policy is finalized

The correct answer is: To temporarily secure coverage until a policy is issued

The purpose of a binder in insurance is to temporarily secure coverage until a policy is issued. A binder serves as an interim agreement that confirms the insurer's intent to provide coverage, bridging the gap between the initial application and the formal policy issuance process. This is particularly useful in situations where immediate coverage is needed, such as when a property is in escrow or when a new vehicle is purchased. Binders typically contain essential information about the coverage, such as the types of insurance included, the limits of coverage, and the effective dates. This allows policyholders to have peace of mind knowing they are protected even before the official documents are finalized. Once the full policy is issued, the binder typically becomes obsolete as the formal agreement takes its place.