What is the key distinction between primary and excess insurance?

The key distinction between primary and excess insurance lies in the order in which they provide coverage in the event of a claim. Primary insurance is designed to respond first when a loss occurs or a claim is made. This means that it is the first line of defense in terms of coverage and financial responsibility. Once the primary insurance has been exhausted or has reached its limits, any additional losses would then be covered by excess insurance.

Excess insurance acts as a supplementary layer of protection, which kicks in after the limits of the primary policy have been reached. It typically provides higher limits of coverage beyond what the primary policy offers, but it will not respond until the primary insurance has been completely utilized. The function of each type of insurance is crucial to understand for effective risk management and financial planning in insurance transactions.

Understanding this distinction helps in determining how to structure an insurance program, especially for businesses or individuals who may need higher limits or additional coverage.