Underlying Policy
What Does Underlying Policy Mean?
An underlying policy is insurance that covers a specific risk first. Other insurance policies covering the same risk will only provide payouts once this policy has been exhausted.
The primary function of an underlying policy, and the reason why another insurance cannot provide the same coverage simultaneously, is to prevent a person from profiting from insurance, which would violate the principle that insurance should solely help the insured recover from a loss.
Insuranceopedia Explains Underlying Policy
The first time a person buys insurance for their car, it becomes their underlying policy. They may then purchase additional insurance for extra protection, such as when the cost of damage exceeds what their primary insurance can cover. For example, if the car is involved in an accident and the repair cost is $13,000, and the primary insurance covers up to $15,000, only the underlying policy will provide the payout. However, if the repair cost is $16,000, the additional insurance will cover the excess amount of $1,000.
