20. Which one of the following terms refers to a policy that pays first in the event of a covered loss
Answer: B
Primary
The term that refers to a policy that pays first in the event of a covered loss is "primary." A primary policy is the first line of coverage that responds to a claim before any other insurance policies come into play.
A) Principal
"Principal" refers to the main party involved in a contract or the amount of money on which interest is calculated, and it does not pertain to the order of payment in insurance policies. Therefore, it is not relevant to the question regarding which policy pays first during a covered loss.
B) Primary
"Primary" is the correct term as it specifically denotes a policy that is first in line to pay for a loss. When a claim arises, the primary insurance will cover the costs up to its limits before any secondary or excess policies are considered.
C) Reinsurance
"Reinsurance" is a process where an insurance company purchases insurance from another insurer to manage risk. It does not directly relate to the payment order of primary and excess policies, thus making it an incorrect choice for this question.
D) Excess
"Excess" insurance refers to a policy that provides coverage after the limits of a primary policy have been exhausted. It pays only after the primary policy has responded, making it not applicable to the question about which policy pays first.
Conclusion
The term "primary" is definitively the correct answer as it accurately describes the insurance policy that pays first in the event of a covered loss. In contrast, the other options either pertain to different concepts or define the roles of policies that follow the primary coverage, which does not align with the question's requirement.