Legal Definitions - coverage

The term "coverage" generally refers to the extent or scope of protection or inclusion provided by an agreement, policy, or financial metric.

It is most commonly understood in two distinct contexts:

• 1. In the context of insurance:

  This refers to the specific risks, events, or losses that an insurance policy agrees to protect against or provide financial compensation for. It defines what the insurer will pay for under the terms of the policy.

  • Dependent Coverage: An insurance provision that extends protection and benefits to an insured person's eligible family members, such as a spouse or children.
  • Full Coverage: A colloquial term often used to describe an insurance policy that provides comprehensive protection, aiming to cover the entire cost of a loss with minimal out-of-pocket expenses for the insured, beyond any applicable deductible.

  Examples in the context of insurance:

  • Example 1 (Auto Insurance): Sarah's auto insurance policy includes "collision coverage" and "comprehensive coverage." If she accidentally hits a tree, her collision coverage will pay for the repairs to her car. If her car is stolen from her driveway, her comprehensive coverage will help pay to replace it.

    Explanation: In this scenario, collision and comprehensive are specific types of coverage, meaning they are the particular risks (accidents, theft) that her insurance policy agrees to protect her against financially.

  • Example 2 (Health Insurance - Dependent Coverage): David works for a company that offers health insurance. He enrolls himself and also adds his wife and two children to his plan.

    Explanation: This is an example of dependent coverage. David's health insurance policy extends its benefits, such as paying for doctor visits, hospital stays, and prescription medications, to his family members, meaning they are also protected under his plan.

  • Example 3 (Homeowner's Insurance - Full Coverage concept): A homeowner purchases an insurance policy for their house that promises to pay the full replacement cost of the structure and its contents in the event of a fire, flood, or severe storm, after a small deductible.

    Explanation: This illustrates the concept of full coverage. The policy is designed to ensure that the homeowner can rebuild their home and replace their belongings without significant personal financial burden, as the insurance will cover the entire cost up to the policy limits.

• 2. In a financial context (e.g., for bonds):

  This refers to a company's ability to meet its financial obligations, particularly its interest payments on bonds or other debts, using its earnings. It is often expressed as a ratio, indicating how many times a company's earnings can cover its interest expenses.

  Example in a financial context:

  • Example 1 (Corporate Finance): A large manufacturing company, IndustrialCorp, has issued bonds to investors, which require regular interest payments. Financial analysts review IndustrialCorp's earnings before interest and taxes (EBIT) and compare it to its annual interest expenses. If IndustrialCorp's EBIT is five times greater than its interest payments, its "interest coverage ratio" is 5x.

    Explanation: This 5x ratio indicates strong coverage. It means IndustrialCorp's current earnings are more than sufficient to cover its interest payment obligations, suggesting a lower risk of the company defaulting on its debt to bondholders.