Insurance 101: Key Principles and Components

Insurance is an important asset protection tool for individuals and businesses. By transferring risk to an insurance company, policyholders gain peace of mind knowing they are financially protected if an unexpected event causes loss or damage. To make the most of your insurance coverage, it’s important to understand some key principles and components of insurance policies.

A policy is a contract between the insurer and the insured that specifies what perils or risks are covered. In exchange for premium payments from the policyholder, the insurer agrees to pay claims for covered losses, up to the policy limits. Policies also spell out the obligations or duties of the insured, such as providing prompt notice of a claim.

Insurance comes in layers of coverage. Many policyholders have primary insurance that provides the first layer of coverage when a claim is made. They may also purchase excess or umbrella insurance to provide additional limits above the primary coverage. Primary policies define the basic terms of coverage while excess and umbrella policies provide additional protection.

Policies also cover either first-party or third-party losses. First-party coverage applies to losses suffered directly by the policyholder, such as damage to their own property. Third-party coverage protects the policyholder against liability claims brought by other injured parties. Commercial general liability and errors and omissions policies are common third-party coverages.

By understanding these insurance basics, you can make informed choices when purchasing coverage and maximize the protection available under your policies. If you have questions, don’t hesitate to consult your insurance agent or broker.