The Types & Layers of Insurance Coverage

It’s important to understand the type of insurance you have—and need. Insurance comes in many shapes and forms. With this post, I hope to give you a primer on the general structure of insurance.

Policyholders need to know the difference between the types of coverage and the layers of coverage they have. The types of coverage companies typically have include general liability, property, automotive, and workmen’s compensation.  Other coverages are (but aren’t limited to) products liability, foreign liability, director’s and officer’s liability, and errors and omissions. 

As the phrase suggests, the “type of coverage” describes the things your policy will cover. For example, property coverage generally covers damage to your property. Liability coverage provides a defense and an indemnification for liabilities to third parties (think slip and fall). An automotive policy, not surprisingly, covers your vehicles.

While policyholders often have different types of coverage, they also likely have different layers of coverage. Policyholders commonly purchase layers of coverage.  By doing so, policyholders can often lower the total premium they would pay for the same amount of coverage under a single, high limit policy.

The layers of policies are often termed “primary,” “excess,” or “umbrella.” The primary policy is the first policy to respond. Once the primary policy’s limits are exhausted, the excess (or possibly the umbrella) policy will step in and continue to cover the claim. Umbrella policies are designed to serve as both a primary policy and an excess policy. The umbrella policy functions as high excess policy above the primary policies, while at the same time serving as a primary policy in those areas of coverage without a specific primary policy.

Really, the best way to explain the “types” and “layers” of coverage is to illustrate it.

This chart is an example of a company’s potential coverage in a single year. The types of coverage run along the x-axis, while the layers of coverage (and their amounts) are on the y-axis. Primary policies sit first, with the excess policies above them. The umbrella policy sits as the high excess policy for most types of coverage, but fills in the gap of coverage for the Foreign Liability.

If you have questions about any of this, feel free to contact me.