Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated March 27, 2022A conditional binding receipt is involved in life, health, and certain property insurance contracts; if the insured is deemed to be covered by the insurer, the coverage begins on the date the insured receives the conditional binding receipt.
Typically, a premium payment must be received by the insurer along with a completed acceptable application in order for the insured to obtain the receipt. This may also be called a "conditional receipt" or a "binding receipt," depending on the type of insurance.
If a premium accompanies an application, a conditional binding receipt provides that coverage will be in force from the date of application or medical examination, so long as the insurer would have issued the coverage on the basis of the facts revealed on the application, medical examination, and other usual sources of underwriting information. A life and health insurance policy without a conditional binding receipt is not effective until it is delivered to the insured and the premium is paid.
So long as the insured is going to receive the policy anyway, the insurer is obliged to cover a claim should one occur between the time the application is received and the time the policy is officially in place. If, however, the insured is denied coverage as the typical underwriting process progresses, the insurer could nullify the conditional binding receipt, even if a premium was collected.
The function of a conditional binding receipt can actually be divided into two separate receipts: a conditional receipt and a binding receipt.
The conditional receipt is most common. Under a conditional receipt, the applicant and the insurance company form a "conditional" contract that is contingent upon the conditions that existed when an application or medication exam is completed. It provides that the applicant is covered immediately as long as they pass the insurer's underwriting requirements. It is the insurance agent's responsibility to tell the applicant they are covered on the condition they prove to be insurable and pass a medical exam if one is required.
A conditional receipt gives an insurance company a window of time in which they can ultimately issue or refuse to approve the policy. If during this time, the applicant for a life insurance contract dies, the company will pay a death benefit if the policy would have been issued.
A binding receipt states an insurance policy is effective upon receipt of initial premium payment. However, should the insured die before the application is processed, benefits are fully payable, subject to limitations.
The binding receipt binds an insurer to the agreement unconditionally when benefits are due up to the limits of the policy.