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I sometimes hear that someone has "$300,000 of primary coverage and $1,000,000 of excess coverage." Why do they not just purchase $1,000,000 of primary coverage? What is being gained by splitting the coverage into primary and excess?

I am in Pennsylvania, USA. I'm not sure of all the kinds of insurance where I've seen this split, but I know it at least includes home and auto.

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    United States? Auto insurance/homeowners/business? Insurance laws vary significantly by country, state, and type. – user71659 Mar 12 '18 at 17:08
  • If i were more cynical, i'd suggest that two insurance policies == two claims processes == twice as much work getting a payout.... – cHao Mar 12 '18 at 17:15
  • @cHao that's just silly. – quid Mar 12 '18 at 17:35
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    You may also want to look into umbrella policies, where the kinds of things being covered may differ between the two types. – chrylis Mar 12 '18 at 19:05
  • @cHao That's not halfway cynical enough. What happens when you have two (or more) policies is that each policy will say "well no, you have to claim against the other policy first, and then claim with us" when you go to claim. It's more like ten times as much work to get a payout, not two! – aroth Mar 13 '18 at 2:25
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The reason why primary and excess coverage is split across two policies is generally insurance regulation.

Primary insurance coverage is heavily regulated on a state level. Companies carrying primary coverage must be licensed and regulated at each state they sell policies in. Additionally, depending on the state and type of insurance, there are further regulations because regulators see this as a public necessity.

For example, some states have auto insurance on a no-fault basis. Some states cap the maximum cost of an auto policy. Features like "accident forgiveness" may be banned. Some states even tax insurance. This can cause the cost and details of insurance to vary widely.

As you have noticed, most states put a $300,000 or $1 Million liability limit on automobile primary coverage. Excess insurance is regulated differently.

This is for various reasons: A main reason is that people or companies who need excess coverage have the resources to know what they're buying, they don't need state governments to be setting rules.

When excess insurance is regulated, regulators don't see it as such a necessity and take a more hands-off approach. For example, excess coverage may exclude some risks that primary coverage can't. The carrier may have a greater ability to drop somebody or exclude a particular driver.

Sometimes the carrier is licensed in one state but sells in many others. This is because that the market is much smaller for this type of insurance and a nationwide market is necessary for efficiency. For some lines of insurance like what an airline buys, the coverage might be so large that you need international resources. Finally, at the large amounts where excess kicks in, loss rates tend to be more similar across states.

If you really want to know more, here's 100 pages on excess insurance regulation.

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    Also worth mentioning is that some primary insurers may just not want to quote $3M on a Auto, Homeowners, etc. policy for various reasons aside from regulation. Especially as the recent CAT ("Catastrophe") claims in the US hit a bunch of insurers hard, they may dial back their appetite for limits. – BruceWayne Mar 12 '18 at 21:31
  • @Owen - you may be the First Person in History™ to say "makes a lot of sense" and be referring to an answer that dumps you out to 100 pages of insurance regulations =D – warren Mar 12 '18 at 21:44

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