What is an insurance binder?

As an insurance policyholder, there are all sorts of insurance terms that are important to understand. One such term is insurance binder. The experts at BrokerLink explain the definition of insurance binders and provide critical information about how they work and when they expire below.

Insurance binder definition

First, let’s answer the question “what is an insurance binder?” In essence, an insurance binder is a temporary contract that says your insurance provider has agreed to insure you (whether it be for car insurance, home insurance, etc.). An insurance binder is useful in any situation where you may need to show proof of insurance before the policy is finalized, such as to your mortgage lender or in the event of an auto accident. Insurance binders cover the policyholder during this period.

Where can I obtain an insurance binder?

The only place to obtain an insurance binder is directly through your insurance company. For example, when you purchase home insurance, your provider should give you an insurance binder once your premium has been paid. It is common for insurance companies to provide customers with insurance binders within 24 to 48 hours of their policies being purchased.

Who needs an insurance binder?

Many policyholders need insurance binders in order to show proof of coverage. For example, when someone buys a new home and has a mortgage, you may need to show your mortgage lender a binder to prove you have purchased adequate coverage. Similarly, you may need to provide an insurance binder when you purchase a new car or when you buy expensive equipment for your business. We provide a few examples of who might need the three common types of insurance binders: home insurance binders, auto insurance binders, and business insurance binders below:

Home insurance binders

If you are planning on buying a home, you may need a binder to provide that you have sufficient insurance coverage for it. To purchase a policy, you can contact an insurance broker for home insurance to help you determine the right policy for your home. Keep in mind that if you purchase home insurance before the home sale closes, it is recommended that you request an insurance binder while you wait for the full policy to come into effect. This way, you will have something to show your mortgage lenders and even the seller.

Car insurance binders

Car insurance binders work a little differently than home insurance binders, mainly because auto insurance is a legal requirement throughout Canada. No matter which Canadian province or territory you reside in, you will need to show proof of insurance before obtaining a vehicle. For example, if you were interested in buying a used vehicle from a dealership in Ontario, you would need to prove that you already have auto insurance coverage, and a car insurance binder is a way to do this. After shopping around with a broker and settling on a policy, obtaining an insurance binder before the vehicle is in your possession proves that the car is insured. The insurance binder you receive will act as a temporary form of proof that you are covered until the car is in your possession and the actual policy is active.

Business insurance binders

Finally, another instance when an insurance binder might be required is if you are a customer who runs their own business and is looking for business insurance. Many businesses are required to provide proof of business insurance when purchasing a commercial property, such as a building or office space. An insurance binder shows your lender that you will have the necessary coverage when the deal is done and you take possession of the property.

When should homeowners get insurance binders in Canada?

Since home insurance binders are one of the most common types in Canada, we are going to dive into this topic more specifically. As outlined above, obtaining a home insurance binder is a smart decision for all kinds of homeowners. However, it may be more important for certain types of Canadian homeowners, such as those with mortgages or those who need to submit a claim before their policy comes into effect, than others. We outline a few types of homeowners who should take care to get a home insurance binder:

Homeowners with mortgages

The first type of homeowner who should get a home insurance binder in Canada is one with a mortgage. Unless you purchased your home in cash, chances are that you need to obtain a mortgage loan in order to fund your home purchase. In Canada, most mortgage lenders require borrowers to show proof of home insurance before they agree to the mortgage loan. In fact, it is often written as a stipulation of the mortgage agreement. That said, being issued a policy can take time, especially given how complex insurance policies are. That is where an insurance binder comes in. If a borrower needs to show proof of insurance to their mortgage lender before the policy is finalized, they can obtain an insurance binder. Since a binder acts as temporary proof of your home insurance policy, this allows you to use it to put your mortgage lender at ease.

Homeowners who need to submit claims before their home insurance policies are finalized

The second type of homeowner who should get an insurance binder is the one who needs to file a claim with their insurer before the policy is finalized. For example, if a fire damaged your home before you received the final insurance policy from your provider, you might need to file a claim - but you would need your insurance binder to do so. Please note that your insurance binder would only cover you if the damage was caused by a peril that your finalized policy also covers (e.g. fire, water damage, hurricanes, tornadoes, etc.). Assuming you purchased coverage that protects against the type of damage your home suffered, you can show your insurance binder, and your insurer should hold up their end of the agreement by providing you with the necessary coverage for the repairs.

What does an insurance binder include?

Now that you know a little bit more about what insurance binders are and how they work, let’s delve into what they consist of, e break down the types of information that most insurance binders consist of below:

1. The named insured and the loss payee

First, your insurance binder will include the “named insured,” otherwise known as the person who owns the policy, or the policyholder. This could be one single person or multiple people, for example a couple.. Further, if your insurance policy has a loss payee, then the loss payee’s name will also be included. Please note that a loss payee can be an individual or a business. In the case of home insurance, your mortgage lender might act as the loss payee, which means the name of the financial institution you obtained your mortgage from would be written on the insurance binder. As your loss payee, if the home was lost due to an insured peril, they would still receive the remaining mortgage costs.

2. The name and contact information of your insurance company

Your insurance binder will also include the name and contact information of your insurance company. This includes the full name of the company, as well as the name of the specific agent who you purchased insurance coverage through. Other information provided may include the mailing address of the insurance company, as well as their email and phone number as well as that of the insurance agent you used.

3. Information on the type of insurance policy purchased

An insurance binder will outline the specific type of insurance coverage you purchased. In the case of home insurance, it may include a detailed description of your dwelling coverage, personal liability coverage, and contents/personal property coverage, among others. The following is a reminder of what these types of standard home insurance coverage entail:

• Dwelling coverage: Dwelling insurance covers your physical home, the building and structure. If your property is damaged by an insured peril (like those listed below), you may be covered under the dwelling portion of your home insurance policy. A few examples of perils commonly covered by dwelling insurance include:
  • Fire
  • Lightning
  • Smoke
  • Theft
  • Wind
  • Car / aircraft impact
  • Explosion
  • Falling objects
• Contents coverage: Where dwelling insurance aims to protect the physical structure of your home, contents coverage is designed to protect the contents of your home (e.g. your personal belongings). Items that insurance may cover in the event of loss or damage include furniture, clothing, electronics, jewellery, sporting equipment, and more.
• Personal liability coverage: Personal liability coverage comes into play if a third party injures themselves while on your property. In such an instance, you could be held liable, which means you might be responsible for paying all sorts of expenses, including legal and medical fees. But if you have home insurance, the personal liability portion of your policy might help cover these fees. It may also cover you if your home or property causes damage to a neighbour’s property.

4. The perils your policy insures against

Next, your insurance binder will list the specific perils that your policy protects against. It should outline both the open perils and the named perils. Ideally, your insurance binder should have plenty of detailed information on these perils.

5. The coverage limits and deductibles of your policy

Two final pieces of information typically included on insurance binders are the coverage limits and deductibles of your policy. Please note that each portion of your policy will have its own policy limit. For example, in the case of home insurance, your dwelling coverage limit will be different from your personal liability limit. This information is crucial as it will show a lender that the limits on your policy are sufficient for your home. Further, your insurance binder should include your policy deductibles, how much money you are required to pay out of pocket in the event of a claim before the insurance company steps in.

How to get an insurance binder

Obtaining an insurance binder is not as difficult as you might think. Once you make your first payment on your insurance policy, the insurance company will usually issue an insurance binder. The binder will then act as temporary proof of your coverage until the underwriting process is complete and your insurance policy is finalized. Generally speaking, you can contact your insurance company or broker if you ever need a copy of your insurance binder.

It is worth noting that the process for a home insurance binder might be slightly different since a mortgage lender is involved. In the case of a home insurance binder, the process might begin with your mortgage lender requesting a binder. From there, the borrower must contact their insurance company or broker for the binder. The insurance specialist then provides them with a copy of the binder, noting that the policy is in binder status meaning the final policy is in the underwriting process. Finally, once the underwriting process is complete, the borrower’s insurance policy will be approved and its status will change from “binder” to “active.” If necessary, the borrower can provide a copy of their finalized home insurance policy to their mortgage lender.

Contact BrokerLink to learn more about insurance binders in Canada

Still, have questions about insurance binders in Canada? Whether you are curious about how they work, why you need one, or how to obtain one, contact BrokerLink today. We consist of a team of insurance experts, eager and willing to assist you.

Whether you need a home, auto, or business insurance binder, or even have questions about finding your next policy, get in touch with BrokerLink today. We can be reached by phone, email, or in person at one of our many locations across Canada. You can also request a free insurance quote in minutes using our online tool. Contact us today and start your insurance journey with BrokerLink.

1-866-724-2372