Alabama Property and Casualty Practice Exam

What is a binder in insurance?

1. Application

2. Interim insuring agreement

3. Counteroffer

4. Endorsement

The correct answer is: Interim insuring agreement

A binder in insurance serves as an interim insuring agreement, which provides coverage to the insured while the formal policy is being prepared or underwritten. It effectively acts as a temporary contract between the insurer and the insured, confirming that coverage is in place for a specified period or until the actual policy is issued. This allows the insured to begin protection without delay, ensuring that they have insurance coverage in case of a claim during this waiting period. The binder typically includes the essential details of the insurance coverage, such as the types of coverage, limits, and any specific conditions that apply. Importantly, the binder is legally binding, meaning that both parties must adhere to its terms until the actual policy is issued or the coverage is terminated. In contrast, an application is simply the document submitted by the potential insured to request insurance. A counteroffer involves a situation where the terms proposed by one party are not accepted by the other, resulting in a new set of terms being offered. An endorsement, on the other hand, is a change or addition to a pre-existing insurance policy, modifying its terms or coverage, rather than serving as an initial agreement for coverage.