Alabama Insurance Adjuster Practice Exam

If an insurance applicant is provided with short-term coverage while awaiting a policy, what is this temporary policy usually called?

1. Binder

2. Policyholder agreement

3. Temporary guideline

4. Short-term insurance

The correct answer is: Binder

The temporary coverage provided to an insurance applicant while they are awaiting the finalization of an insurance policy is known as a binder. A binder serves as a written or oral agreement that outlines the basic terms of coverage and offers immediate protection. This agreement does not constitute a formal policy, but it gives the applicant peace of mind knowing they are temporarily insured while the full policy is in the process of being issued. Binds are crucial in situations where immediate coverage is needed, such as during a closing on a home or when a vehicle is in transit. They often include key policy details, such as the amount of coverage and effective dates, ensuring that the applicant is covered until the actual policy is ratified. The other terms referenced do not accurately describe the nature of the temporary coverage provided during this interim period. A policyholder agreement typically refers to the formal understanding between the insurer and insured once a policy is issued, while temporary guideline and short-term insurance do not specifically denote the binding agreement that provides immediate coverage.