Chapter 7

Question 1

1-1-a Identify the persons who are automatically included as insureds if the named insured in the CGL declarations is an individual.

Answer 1

The spouse is also an insured.

Question 2

1-1-b Identify the persons who are automatically included as insureds if the named insured in the CGL declarations is a partnership or joint venture.

Answer 2

All partners or members and their spouses.

Question 3

1-1-c Identify the persons who are automatically included as insureds if the named insured in the CGL declarations is an LLC

Answer 3

Controlling members and managers of the company are also insureds.

Question 4

1-1-d Identify the persons who are automatically included as insureds if the named insured in the CGL declarations is a corporation, municipality, or school district.

Answer 4

All executive officers, directors, and stockholders of the organization are also insureds.

Question 5

1-1-e Identify the persons who are automatically included as insureds if the named insured in the CGL declarations is a trust.

Answer 5

The named trust is an insured. The named insured’s trustees are also insureds, but only with respect to their duties as trustees.

Question 6

1-2 Identify persons or organizations, other than the named insured, who are named insureds under the CGL.

Answer 6

Employees and volunteer workers of the named insured; real estate managers; legal representatives; newly acquired organizations (max. of 90 days)

Question 7

1-3 Explain how the CGL applies to the conduct of partnerships, joint ventures, and LLCs not show as named insureds in the policy declarations and why is this potentially problematic?

Answer 7

Such entities are covered only if they are specifically declared and named in the policy. The insurer will usually charge and additional premium for covering the added loss exposure.

Question 8

2-1 Explain how the each occurrence limit in the CGL form determines the amount an insurer will pay.

Answer 8

It is the most the insurer will pay for any one occurrence, regardless of the number of persons insured, the number of claims or lawsuits brought, or the number of persons or organizations making claims, and including all damages under Coverage A and all medical payments under Coverage C. Defense costs do not apply to the each occurrence limit.

Question 9

2-2 Explain the two sublimits that are subject to the CGL each occurrence limit.

Answer 9

The damage to premises rented to you limit and the medical expense limit are sublimits that are subject to the Coverage A each occurrence limit. The damage to premises rented to you limit is the most the insurer will pay under Coverage A for damage to any one premises while rented to the named insured or, in the case of fire damage, while rented to or temporarily occupied by the named insured. The medical expense limit is the most the insurer will pay under Coverage C to any one person.

Question 10

2-3 Explain the CGL limit for personal and advertising injury.

Answer 10

It is the most the insurer will pay under Coverage B for damages arising out of personal and advertising injury to any one person or organization. It is usually the same as the policy’s each occurrence limit, although a different amount can be used.

Question 11

2-4 Explain the purpose of the CGL aggregate limits.

Answer 11

They cap the total mount of damages that the insurer will pay for the entire policy period, although defense costs do not apply.

Question 12

2-5 Explain the CGL aggregate limit.

Answer 12

The general aggregate limit is the most the insurer will pay for the sum of damages under Coverage A (except those that arise out of the products-completed operations hazard) and Coverage B, and medical expenses under Coverage C.

Question 13

2-6 Explain the CGL products-completed operations aggregate limit

Answer 13

The most the insurer will pay under Coverage A for bodily injury or property damage included in the “products-completed operations hazard) The CGL defines this hazard to include bodily injury and property damage occurring away from premises owned or rented by the named insured and arising out of the named insured’s product or work.

Question 14

Sausage Company is a small business that makes various types of sausage and operates a restaurant. They have a CGL with these limits: General Aggregate $2M, Products-completed operations aggregate limit $2M, Each occurrence limit $1M, Personal and advertising injury limit $1M; Damage to premises rented to you $100k; Medical expense $5k. The company owns the building where the sausage is made but leases the premises for the restaurant in a strip mall. One evening, the cook at the restaurant accidentally caused a fire. There was $110,000 damage to the restaurant building. Two customers were injured while exiting the restaurant, and the injuries resulted in damages of $325k, No prior losses have occurred during the policy period – A) Explain which limits apply to this loss and how much the insurer will pay, B. During the same policy period, the restaurant used a generator to supply electricity during a power outage. Failure to operate the generator properly resulted in a release of CO into the restaurant. Several patrons became ill. The damages for all of the patrons was $1.1M. Explain which limits apply to this loss and how much the insurer will pay. C. The restaurant bottles and sells jars of its famous Louisiana Sausage Jambalaya sauce. Two dozen of the jars, improperly sealed, became contaminated with botulinus toxin. During the same policy period, two customers purchased jars of the sauce and became ill with botulism before the restaurant became aware of the problem. On of these customers died. The damages were $1M. Explain which limits apply to this loss and how much the insurer will pay.

Answer 14

A. The each occurrence limit of $1M applies to this loss, and all the damages are within the limit. The $325k damages for the customer’s injuries will be paid by the insurer. There is a $100k sublimit for damage to premises rented to you. The insurer will pay $100k for the damages to the restaurant building. The $425k paid by the insurer is applied to the general aggregate limit of $2M, reducing it to $1.575M. B. The each occurrence limit of $1M will apply to this loss, and the insurer will pay $1M.. The general aggregate limit will also apply and that limit is now $575k C. The each occurrence limit applies to this loss. Additionally, the products-completed operations aggregate limit also applied to this loss. The damages of $1M are within both of these limits.

Question 15

3-1 What are the insured’s duties in the event of an occurrence, a claim, or a suit under the CGL form

Answer 15

1) Provide notice of how, when, and where the occurrence or offense occurred, 2) Provide the name and addresses of any injured persons and any witnesses, 3) Describe the nature and location of any damage or injury resulting from the occurrence or offense, 4) Immediately record the details of the claim or suit and the date received, 5) Notify the insurer in writing as soon as practicable, 6) Immediately forward the insurer any copies of legal papers related to the suit, 7) Authorize the insurer to obtain any legal records or other documents, 8) Cooperate with the insurer in the investigation or settlement of the claim or in the insurer’s defense of the suit; 9) Assist the insurer in any action against a third party that may be liable to the insured because of the injuries or damage for which claim is made; 10) Refrain from making voluntary payments, assuming obligations, or incurring any expense without the insurer’s consent

Question 16

3-2 According to the CGL conditions, under what circumstances can the insured bring legal action against the insurer?

Answer 16

Can sue the insurer to force the insurer to pay a third-party claim only if the insured has fully complied with all policy conditions.

Question 17

3-3-a Explain how loss payment under two or more CGL policies would be shared using contribution by equal shares.

Answer 17

Each insurer contributes an equal amount to the payment of the claim until the claim is fully paid or one insurer exhausts its limit of insurance, whichever occurs first.

Question 18

3-3-b Explain how loss payment under two or more CGL policies would be shared using contribution by limits

Answer 18

Each insurer pays the proportion of the claim that its limits bears to the total of all applicable insurance. Neither insurer will pay more than its applicable limit of insurance.

Question 19

3-4-a Summarize the premium audit condition.

Answer 19

Requires the named insured to keep adequate records to permit correct calculation of the premium and to make these records available to the insurer.

Question 20

3-4-b Summarize the representations condition.

Answer 20

States that, by accepting the policy, the named insured agrees to the following: The statements in the declarations are accurate and complete; the statements in the declarations are based on representations made by the named insured to the insurer; and the insurer has issued the policy in reliance on the named insured’s representations. This condition encourages the insured to read the policy declarations and make sure the representations made in the policy are accurate.

Question 21

3-4-c Summarize the separation of insureds condition

Answer 21

States the insurance provided by the policy applies separately to each person insured. If one insured sues another insured, coverage is provided for the insured who has been sued.

Question 22

3-4-d Summarize the Transfer of Right of Recovery Against Others condition.

Answer 22

If the insured has any right to recover from a third party all or any part of a claim paid by the insurer, the insured must transfer the right to the insurer. The insurer is subrogated to the rights of the insured to recover the amount paid.

Question 23

3-5-a A manufacturing company is insured under two CGL policies. The each occurrence limit under policy A is $500k. Under policy B, the each occurrence limit is $1M. The company was held to be legally liable for $300k in damages arising from one occurrence. A. What dollar limit would be payable under each policy if a loss payment is based on contribution by limits? Show your calculations. B. What dollar amount would be payable under each policy if loss payment is based on contribution by equal shares.

Answer 23

A. Policy A: $500k/$1.5M x $300k = $100k Policy B: $1M/$1.5M x $300k = $200k – B. If loss payment is based on contribution by equal shares, Policy A will pay $150k and Policy B will pay $150k.

Question 24

4-1 What is the formula used to determine the premium for CGL coverage?

Answer 24

Rate X Exposure

Question 25

4-2 Differentiate between rate and exposure.

Answer 25

The rate depends on the nature of the insured and the insured organization and its susceptibility to liability losses. The exposure reflects the size of business operations insured, not the type of losses to which the business is exposed.

Question 26

4-3 Explain why two rates are used for most businesses when determining the premium for CGL coverage.

Answer 26

Determined through the use of two rates because one rate applies to the exposure for premises operations, but another rate applies to the exposure for products completed operations.

Question 27

4-4-a Indicate an example of a premium base that may be used in rating CGL coverage for a mercantile business.

Answer 27

gross sales

Question 28

4-4-b Indicate an example of a premium base that may be used in rating CGL coverage for a contracting business.

Answer 28

payroll

Question 29

4-4-c Indicate an example of a premium base that may be used in rating CGL coverage for special events.

Answer 29

number of admissions

Question 30

5-1 A construction company is insured under a CGL policy with a $1M general aggregate limit, a $1M products-completed aggregate limit, and a $500k each occurrence limit. The company was sued separately by two bystanders who were injured in the same accident at one of the company’s construction sites. The court awarded $200k to the first bystander and $250k to the second bystander. The total cost of defending the company in these two lawsuits was $80k. To what extent, if any, will these amounts be paid by the company’s CGL insurer? Explain.

Answer 30

The insurer will pay all the damages awarded to both bystanders because the total ($450k) is less than the each occurrence limit. The insurer will also pay the $80k in defense costs in full because defense costs are payable in addition to the policy limits.

Question 31

5-2 A manufacturer of small home appliances is insured under a CGL policy written on an occurrence basis with a $1M personal and advertising injury limit of insurance. The manufacturer placed an advertisement in a national magazine that made inaccurate and unfavorable statements about a competitor’s product. The competitor sued the manufacturer for libel and was awarded $1.5M in court. What dollar amount, if any, will the manufacturer’s CGL insurer pay for the loss? (assume the loss occurred during the policy period)

Answer 31

$1M