Insurance Case Studies & Practical Application 4 — Questions and Answers
Question 1: A company's director approves an acquisition that leads to significant shareholder losses. Shareholders sue the director personally for $2 million. Which policy is designed to cover this exposure?
- Commercial general liability
- Directors and Officers (D&O) liability insurance (Correct answer)
- Errors and Omissions (E&O) insurance
- Employment practices liability insurance
Correct answer: Directors and Officers (D&O) liability insurance
Directors and Officers (D&O) liability insurance protects corporate directors and officers from personal liability arising from decisions made in their corporate roles.
Question 2: An insured has both a primary auto liability policy ($100,000 limit) and a personal umbrella policy ($1,000,000 limit). A judgment of $800,000 is entered against the insured. How are the policies applied?
- The umbrella pays the full $800,000
- The primary pays $100,000 and the umbrella pays the remaining $700,000 (Correct answer)
- The umbrella pays first and the primary acts as excess
- Each policy pays $400,000
Correct answer: The primary pays $100,000 and the umbrella pays the remaining $700,000
The primary policy pays up to its limit first ($100,000), then the umbrella policy pays the excess over the primary limit ($700,000).
Question 3: A homeowner is away on vacation when a pipe bursts and water damages the home for 10 days before discovery. The insurer denies the claim citing 'continuous or repeated seepage.' What principle supports the denial?
- The vacancy clause
- The wear and tear exclusion
- The gradual damage or seepage exclusion (Correct answer)
- The intentional acts exclusion
Correct answer: The gradual damage or seepage exclusion
Most homeowners policies exclude damage from continuous or repeated seepage or leakage of water that occurs over a period of time, which applies here since damage accumulated over 10 days.
Question 4: A business is robbed and loses $50,000 in cash from the safe. The commercial property policy covers building and contents but excludes money. What coverage should the business have purchased?
- Inland marine insurance
- Commercial crime (money and securities) coverage (Correct answer)
- Business income insurance
- Commercial umbrella policy
Correct answer: Commercial crime (money and securities) coverage
Commercial crime coverage, specifically the money and securities insuring agreement, covers theft of money and securities from the premises or safe.
Question 5: A physician retires and cancels her claims-made malpractice policy. Six months later, a patient files a claim for treatment provided during the policy period. Is the claim covered?
- Yes, because treatment occurred during the active policy period
- No, because the policy was cancelled before the claim was filed (Correct answer)
- Yes, automatically by the prior policy's extended reporting period
- No, but only if the insurer was not notified of potential claims
Correct answer: No, because the policy was cancelled before the claim was filed
Claims-made policies only cover claims filed while the policy is active; without purchasing an extended reporting period (tail coverage) endorsement, claims filed after cancellation are not covered.
Question 6: Two insurance policies cover the same loss. Policy A has a $500,000 limit and Policy B has a $250,000 limit. The loss is $300,000. Policy A has a pro-rata 'other insurance' clause. How much does Policy A pay?
- $300,000
- $200,000 (Correct answer)
- $150,000
- $250,000
Correct answer: $200,000
Under pro-rata other insurance, each insurer pays its proportionate share: Policy A pays $500K / ($500K + $250K) × $300K = $200,000.
Question 7: An employer does not carry workers' compensation insurance as required by state law, and an employee is injured on the job. What is the most likely consequence for the employer?
- The employee cannot recover any damages
- The employer faces statutory fines and personal liability for the employee's medical costs and lost wages (Correct answer)
- The state covers the employee's claim at no cost to the employer
- The employee must use their personal health insurance
Correct answer: The employer faces statutory fines and personal liability for the employee's medical costs and lost wages
Employers who fail to maintain mandatory workers' compensation coverage face significant penalties including fines, stop-work orders, and direct personal liability for injured workers' claims.
Insurance Case Studies & Practical Application 4
A company's director approves an acquisition that leads to significant shareholder losses.
Shareholders sue the director personally for $2 million.
Which policy is designed to cover this exposure?