AIC Insurance Policies & Coverage Analysis 2 — Questions and Answers
Question 1: A building valued at $400,000 is insured for $240,000 under a commercial property policy with an 80% coinsurance clause and a $1,000 deductible. What does the insurer pay on a $40,000 loss?
- $24,000
- $29,000 (Correct answer)
- $30,000
- $39,000
Correct answer: $29,000
Required insurance is $320,000, so $240,000/$320,000 × $40,000 = $30,000, minus the $1,000 deductible = $29,000.
Question 2: Policy A ($100,000 limit) and Policy B ($300,000 limit) both cover the same property with pro rata other-insurance clauses. How much does Policy A pay on an $80,000 loss?
- $20,000 (Correct answer)
- $26,667
- $40,000
- $80,000
Correct answer: $20,000
Policy A carries 1/4 of the total $400,000 coverage, so it pays 1/4 of $80,000, or $20,000.
Question 3: Two liability policies use contribution by equal shares: Policy A has a $50,000 limit and Policy B a $150,000 limit. How is a $120,000 loss split?
- A $30,000; B $90,000
- A $60,000; B $60,000
- A $50,000; B $70,000 (Correct answer)
- A $40,000; B $80,000
Correct answer: A $50,000; B $70,000
Each pays equally until A's $50,000 limit runs out, then B pays the remaining $20,000, for $70,000 total.
Question 4: Under an open perils (special form) policy, who generally has the burden of proving that an exclusion applies?
- The insured
- The insurer (Correct answer)
- The producer
- The independent appraiser
Correct answer: The insurer
Under open perils coverage, any direct physical loss is covered unless excluded, so the insurer must prove an exclusion applies.
Question 5: A policy exclusion says it applies to a loss 'regardless of any other cause or event contributing concurrently or in any sequence to the loss.' What is this wording designed to do?
- Create an ensuing-loss exception
- Override the concurrent causation doctrine (Correct answer)
- Apply the efficient proximate cause rule
- Expand coverage for weather-related losses
Correct answer: Override the concurrent causation doctrine
Anti-concurrent causation language excludes the loss whenever an excluded peril contributes, even if a covered peril was also involved.
Question 6: Under a standard mortgage clause, what happens to the mortgagee's right to recover if the insured intentionally sets fire to the property?
- The mortgagee's recovery is voided too
- The mortgagee recovers only the ACV of the building
- The mortgagee can still recover if it meets its own policy obligations (Correct answer)
- The mortgagee recovers only if it pays a separate premium
Correct answer: The mortgagee can still recover if it meets its own policy obligations
The standard mortgage clause creates a separate contract, so the insured's acts do not defeat the mortgagee's recovery.
Question 7: In most jurisdictions, what does the 'eight corners' rule use to decide whether a liability insurer owes a duty to defend?
- Only the insured's sworn statement
- The policy and the claimant's complaint (Correct answer)
- The adjuster's report and the police report
- The declarations page and the application
Correct answer: The policy and the claimant's complaint
The duty to defend is decided by comparing the four corners of the complaint with the four corners of the policy.
