Final answer:
An umbrella insurance policy can provide additional liability coverage beyond the basic amount, covering excess claims that surpass standard policy limits. It steps in when the basic liability coverage is insufficient, offering broader protection.
Step-by-step explanation:
If a liability claim is greater than the amount of basic liability coverage, an umbrella insurance policy might cover the excess. This type of policy provides additional liability coverage over and above what is offered by a policyholder's standard policies, such as auto or homeowner's insurance. Umbrella policies not only cover larger liability claims but also offer protection against claims that may not be covered by other liability policies.
Insurance policies typically involve various methods of cost sharing to reduce moral hazard. For example, deductibles are the amount a policyholder pays before the insurance coverage kicks in. Copayments require the policyholder to pay a specified sum for certain services, e.g., $20 per doctor's visit. Coinsurance is where the insurance company pays a certain percentage, such as 80%, and the policyholder pays the remaining 20%.
It is essential to understand that the average person's payments into their insurance over time must cover the average person's claims, the costs of running the insurance company, and allow for a profit margin. Hence, insurers design their policy structures, like high copays or premiums, to balance these needs and manage the various risks involved.