Often, a car lender or dealer will require proof that your car is insured before funding the loan or allowing you to drive the vehicle away from the lot. Securing the vehicle’s value started the moment a bank lent you money to buy it. The lender wants something in writing with a guarantee that they will be paid should the vehicle being borrowed against suffer a catastrophic loss. A binder fulfills that purpose.The binder will clearly state the name of the insurance company, the policy number, the party responsible for paying the insurance premium, list the collateral, and a promise that the coverage will be in effect for at least 30 days.
Binder Extension
It is rare for an insurance company to delay longer than 30 days in issuing a policy now that information travels near the speed of light over the internet. Much of the decision-making on whether a car or truck is acceptable is done through artificial intelligence, and the entire binding process can be avoided altogether. The insurer can issue a policy instantly that a lender or borrower can download from the website.
A Policy Replaces a Binder
Getting a borrower to continue making monthly payments after a car is totaled or stolen is nearly impossible. The insurance company, instead of the borrower, will issue a contract or policy that promises to pay the loan balance in full if it determines that the vehicle used as collateral, on which the lender had a security interest, is wrecked or stolen. An exception to paying off the balance occurs when the insurer determines that the amount of the loan exceeds the value of the property being covered. The difference between what is owed and the actual settlement falls back on the borrower. That's where gap insurance comes into play. Note: Just because a borrower agrees to pay a certain price for an automobile doesn't mean the insurer must pay that amount if a loss occurs.