Whenever you apply for auto insurance, the insurance company will not issue a new policy immediately. Instead, your application must undergo a process called underwriting to determine whether you meet the company's eligibility requirements. However, situations will occur where you need immediate coverage. Agents usually have the authority to issue a temporary binder for this purpose.
A binder is an insurance contract that provides temporary coverage while your application for permanent coverage goes through the underwriting process and your policy is issued. Depending on your state's insurance laws and the rules of your insurance company, a binder may be issued verbally or in writing. A binder may go into effect as soon as your agent issues it, or you may have to wait until 12:01 a.m. on the following day.
Auto insurance binders are often necessary because of the nature of the vehicle acquisition process. When you purchase a new car, the dealer and lending institution (if you are financing the vehicle) require proof of insurance before you can drive the car off the lot. A binder can provide the proof you need until your vehicle can be added to your policy. In a situation where you are changing insurance companies and your old policy is about to expire, a binder from your new company will prevent a lapse in coverage.
A binder is designed to last for a relatively short period of time, usually 10 days. Insurance companies are required by law to make a decision whether to accept or reject your application for coverage within a specific time period, such as 60 days in Pennsylvania. Although your binder will expire before this initial underwriting period, you are still covered by the insurance company until it makes its final determination. If the company rejects your application, it must give you written notice in advance to provide you time to seek new coverage.
Be sure you understand the terms of your binder. If you have no current coverage and the binder for your new coverage does not go into effect until the next day, you could be on the hook for any claim that occurs in the interim. If the agent provides a verbal binder, see if you can also get it in writing to protect yourself if a dispute arises. This eliminates the possibility of a "he said, she said" situation that could end up working against you.
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