As published in Scotsman Guide's Residential Edition, July 2008.
Brokers must know many pieces of the loan-package puzzle that are necessary for closing a mortgage. All fit into the overall package and into finalizing the deal for borrowers. One piece that has proven elusive for many brokers is the insurance binder.
What Does it Look Like? ___________________________
Click here to view a diagram of the insurance binder: PDF
An insurance binder -- or evidence of insurance -- is a document that mortgage brokers request and receive from an insurance company. It covers several specific items relating to the property's insurance. It conveys to lenders and borrowers that those items afford them protection in case of a covered loss.
Insurance agents typically create the document when the broker requests coverage. They also often issue the insurance policy at that point. In other words, once the insurance agent creates the binder, insurance coverage typically is in place.
As such, if there is a covered loss between the time of closing and the time the mortgage company receives the official policy from the insurance company, the loss would be covered and the lender's interest protected.
Many brokers, however, don't understand what goes into creating the insurance binder on the part of the insurance agent and company. Likewise, the agent may have misconceptions about what the broker needs from the document and when. It is therefore important for the parties to have open lines of communication.
The nuts and bolts
In addition to being important to brokers and borrowers as an essential part of the loan package, the insurance binder also is important for the insurance agent and insurance company. But lack of communication between agents, brokers and borrowers can create problems.
In the binder, the insurance company states that it will provide coverage for a property for a certain period. For it to provide coverage, the policy must be issued. And when the policy is issued, the insurance company expects payment in a certain period of time.
As such, when closing is delayed, the insurance company must either cancel the existing policy and then issue another policy with the new date or try to modify the date. Either way, the insurance company must process a change to meet the new date.
To avoid this, the insurance agent may process the binder but wait to issue the policy. This allows the agent to change the effective date as often as the mortgage broker needs.
There is a danger in this, however. If the agent sends an insurance binder to the mortgage broker without notifying the insurance company, and the broker forgets to tell the agent about the closing, there will not be coverage if there is a loss.
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