Property and Casualty Insurance Practice Exam

What does primary insurance refer to?

1. Insurance that only covers the insured's losses

2. Insurance that pays first up to its limit or the loss amount

3. Insurance that is used to supplement primary coverage

4. Insurance that covers third-party losses

The correct answer is: Insurance that pays first up to its limit or the loss amount

Primary insurance refers to the type of insurance that pays first in the event of a loss, up to its limit or the amount of the loss. This means that when a covered event occurs, the primary insurance policy will respond and provide financial coverage before any secondary or excess insurance policies come into play. This concept is crucial in insurance because it establishes the order in which multiple insurance policies respond to a loss. Primary insurance serves as the first line of defense for the policyholder, addressing their loss directly and ensuring they receive the compensation necessary to cover damages or losses incurred up to the policy's limit. In contrast, other options describe different functions of insurance. Insurance that only covers the insured's losses is a more limited definition and does not capture the role of primary coverage in the context of multiple policies. The choice referring to insurance that supplements primary coverage indicates an excess policy or secondary insurance, which activates only after the primary coverage limits have been exhausted. Lastly, insurance covering third-party losses relates to liability coverage, which is distinct from the primary insurance concept that focuses on the insured's own losses.