Underlying Policy

Published: | Updated: April 22, 2018

Definition - What does Underlying Policy mean?

An underlying policy is insurance that covers a particular risk first. Other insurance covering the same risk will only pay out once this insurance is exhausted.

Its primary function, and the reason why another insurance cannot pay the same coverage at the same time, is to negate the possibility of a person gaining profit from insurance in violation of the principle that insurance should only help the insured recover from a loss.

Insuranceopedia explains Underlying Policy

The first time a person buys insurance for their car, that becomes their underlying policy for the car. They might then buy additional insurance for the car for extra protection, such as when the cost of damage exceeds that of what his first insurance can provide. If the car figures in an accident and the cost for repair is $13,000 and his first insurance is worth $15,000, then only the first insurance (the underlying policy) will provide insurance money. But, when the cost of the damage is $16,000, then his extra insurance will pay for the excess of $1,000.

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