Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What type of contract is created when an insurer issues a binder to the insured?

1. A legal contract

2. An informal contract

3. A guaranteed contract

4. A temporary contract

The correct answer is: A temporary contract

When an insurer issues a binder to the insured, it creates a temporary contract. A binder serves as provisional coverage until the formal policy is issued. This temporary nature means that the binder provides immediate insurance protection but does not establish a permanent contractual relationship. It is a way to ensure that the insured has coverage while the details of the policy are finalized. The binder typically contains essential terms, such as the type of coverage and limits, but it is not the final, legally binding insurance policy. Therefore, while it does function as a contract in that it outlines the coverage and terms, it is specifically recognized as temporary. The formal contract will be established once the full policy is issued, at which point the conditions may change. This understanding highlights the unique characteristics of binders as they relate to insurance contracts, thereby clarifying their role in the insurance process.