Primary coverage: Overview, definition, and example
What is primary coverage?
Primary coverage refers to the first insurance policy that pays out in the event of a claim. If multiple insurance policies cover the same risk, the primary coverage policy is responsible for paying first, up to its coverage limits. Any remaining costs may then be covered by secondary or excess insurance policies.
For example, in auto insurance, if a driver has both personal and business auto insurance, the primary coverage policy is the one that pays first when an accident occurs.
Why is primary coverage important?
Understanding primary coverage is important because it determines which insurer is responsible for handling a claim first. This can impact how quickly claims are processed and whether additional coverage is needed to cover remaining costs.
For businesses, primary coverage ensures that claims are directed to the correct policy, reducing disputes between insurers. It also helps policyholders avoid unexpected out-of-pocket expenses by clarifying which insurance will respond first in a claim situation.
Understanding primary coverage through an example
Imagine a company leases office space and carries both general liability insurance and a landlord’s policy also covering the property. If a visitor slips and falls in the office, the company’s general liability policy would likely serve as the primary coverage, paying out first before any secondary policies apply.
In another scenario, a contractor working on a construction project has their own liability insurance, but the client also includes them under the project’s general liability policy. If a claim arises, the contractor’s policy might be considered the primary coverage, while the client’s policy serves as excess insurance, covering additional costs if necessary.
An example of a primary coverage clause
Here’s how a primary coverage clause might appear in a contract:
“The insurance policy provided by [Party A] shall be deemed primary coverage for any claims arising under this Agreement. Any other insurance maintained by [Party B] shall apply only as excess coverage and shall not contribute to primary insurance obligations.”
Conclusion
Primary coverage is the first line of insurance that responds to a claim, ensuring that financial responsibilities are clear when multiple policies apply. It plays a crucial role in managing risk, streamlining claims, and avoiding coverage disputes. Businesses and individuals should carefully review insurance policies to understand which coverage is primary and how secondary policies may apply.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.