CCNP Risk Allocation 5

Question 1

A 'cap on liability' negotiated at 100% of the contract value means that:

Accepted Answer

The contractor's maximum liability for all claims equals the total contract price

Answer

A liability cap at 100% of contract value limits the contractor's total exposure for all claims to an amount equal to the full contract price, regardless of the magnitude of losses caused.

Question 2

Risk 'retention' as a deliberate strategy in contract negotiation is most appropriate when:

Accepted Answer

Insurance premiums would exceed the expected cost of the risk

Answer

Retaining risk is economically rational when the cost of transferring it (through insurance or contract provisions) exceeds the expected value of the losses that retention would expose the party to.

Question 3

A 'parent company guarantee' in a contract serves to allocate credit risk by:

Accepted Answer

Making the parent corporation a backstop obligor if the subsidiary fails to perform

Answer

A parent company guarantee backstops the subsidiary's financial obligations with the parent's creditworthiness, giving the counterparty recourse against a stronger entity if the subsidiary defaults.

Question 4

The 'first dollar coverage' concept in insurance allocation means:

Accepted Answer

Coverage applies from the first dollar of loss with no deductible or self-insured retention

Answer

First dollar coverage means the insurer covers losses from the first dollar, with no deductible or self-insured retention required from the policyholder.

Question 5

In technology contracts, a 'service level agreement' (SLA) with financial credits for downtime primarily functions as:

Accepted Answer

A pre-negotiated, capped form of liquidated damages for service failures

Answer

SLA credits are a form of pre-agreed liquidated damages, providing the customer automatic, formula-based compensation for service failures without requiring proof of actual loss.

(CCNP) Certified Contract Negotiation Professional Practice Test

(CCNP) Certified Contract Negotiation Professional Practice Test

CCNP Risk Allocation 5