Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What defines a binder in the context of insurance?

1. A preliminary contract of insurance

2. Permitted for all risks

3. Binds the insured to certain terms specified by the insurer

4. Binds the insured to certain terms specified by the brokerage

The correct answer is: A preliminary contract of insurance

A binder in the context of insurance is a preliminary contract of insurance. This means that it serves as a temporary agreement between the insured and the insurer, confirming that coverage is in place while the final insurance policy is being prepared. Binders can often be issued very quickly and provide immediate coverage, reflecting an extension of trust until a formal policy is issued. The significance of a binder lies in its ability to provide the insured with protection from the moment they agree to bind the coverage, even if the precise terms and documentation are not yet finalized. This preliminary contract ensures that both parties are aware that they have entered into an agreement, which includes the general conditions under which coverage will operate. While binders do permit certain risks to be covered temporarily, they are not universally permitted for all risks, as specific conditions may apply depending on the type of insurance and risk factors involved. Also, while a binder does outline certain terms specified by the insurer, it does not bind the insured to terms specified by the brokerage; the binding authority comes directly from the insurer. Thus, the focus remains on the binder as a preliminary contract that sets the stage for the insurance coverage that will ultimately be formalized in the policy.