Common Types of Commercial Insurance: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Commercial Insurance, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Arthur L. Flitner, Jerome Trupin, and Martin J. Frappoli. Commercial Insurance. (Second Edition). 2007. Chapter 1, pp. 1.3-1.10.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-122-1. The following types of organizations eligible for commercial insurance are discussed in Commercial Insurance, pp. 1.5-1.6:
1. Corporations;

2. Partnerships;

3. Joint Ventures;

4. Limited Liability Companies;

5. Unincorporated Associations.

Each of the following features apply to one of the types of organizations above. For each feature, identify the type of organization to which it applies.

(a) Organizations that have a small number of active investors use this form of organization to achieve limited liability while the owners remain taxed at their individual income tax rates.
(b) This type of organization can be formed quickly so that multiple entities can work together in a single undertaking and share profits and losses. Once the undertaking is completed, the organization is dissolved.
(c) This entity can sue, be sued, enter into contracts in its own name, own property, and hire employees. Its owners also have limited liability.
(d) The individual owners of this kind of organization are legally responsible for that organization's torts and contracts. The also share in the organization's profits and losses, although not necessarily on equal terms.

(e) This form of organization is not a legal entity, and its members can be held individually liable for the organization's activities. However, this form of organization is also exempt from most commonly levied taxes on business entities.

Solution S5-122-1.

Feature (a) applies to 4. Limited Liability Companies.

Feature (b) applies to 3. Joint Ventures.

Feature (c) applies to 1. Corporations.

Feature (d) applies to 2. Partnerships.

Feature (e) applies to 5. Unincorporated Associations.

Problem S5-122-2. The term "commercial property insurance" can be used in both a broad sense and in a narrow sense.

(a) When used in a narrow sense, what kinds of loss exposures is "commercial property insurance" intended to cover?

(b) When used in a narrow sense, what kinds of coverage does "commercial property insurance" typically exclude?

Solution S5-122-2. This problem is based on the discussion in Commercial Insurance, p. 1.8.

(a) When used in a narrow sense, "commercial property insurance" is intended to cover commercial buildings and their contents against losses due to fire, windstorm, and numerous other perils.

(b) When used in a narrow sense, "commercial property insurance" typically excludes coverage for property in transit or away from the insured location. It also excludes coverage for perils related to crime, steam boiler explosions, and mechanical or electrical breakdowns.

Problem S5-122-3.

(a) What is the traditional name for equipment breakdown insurance?

(b) Name three perils typically covered by equipment breakdown insurance. What two kinds of losses due to those perils are typically covered?

Solution S5-122-3. This problem is based on the discussion in Commercial Insurance, pp. 1.8-1.9.

(a) Equipment breakdown insurance was traditionally known as boiler and machinery insurance.

(b) Equipment breakdown insurance typically covers the following perils:

1. Mechanical breakdown;

2. Electrical injury, except injury due to lightning;

3. Steam boiler explosion.

Both property losses and business income losses due to these perils are typically covered.

Problem S5-122-4. "Inland marine insurance" is a rather counterintuitive name. List four kinds of risks that "inland marine insurance" would typically cover today.

Solution S5-122-4. This problem is based on the discussion in Commercial Insurance, p. 1.9.

The following are some risks that "inland marine insurance" would typically cover:

1. Property in domestic transit;

2. Mobile equipment;

3. Buildings in the course of construction;

4. Property essential to transportation or communication;

5. Other types of property that involve some manner of transportation.

Any four of the above suffice as an answer. Other valid answers may also be possible.

Problem S5-122-5.

(a) Fill in the blanks: Commercial general liability (CGL) insurance protects an organization against liability for _______ and ________ (two types of losses), arising out of its ______, _______, and ________ (three sources of losses).

(b) Aside from the items in part (a), what other kind of coverage does CGL insurance typically provide? Give two examples of this category of loss exposure.

(c) What kinds of loss exposures are excluded under both "commercial property insurance", narrowly defined, and CGL insurance? What common type of commercial insurance covers such loss exposures?

(d) Mr. ♫ owns a business that consists of a music store and services by traveling musicians who transport themselves using the business's vehicles. Mr. ♫ does not wish to spend much time contemplating the provisions of insurance that would protect his business and making complex insurance arrangements. He would prefer to have all the coverage he would require, as a typical businessowner, under no more than three insurance policies. What three kinds of insurance policies would probably suffice to fulfill his business's coverage needs?

Solution S5-122-5. This problem is based on the discussion in Commercial Insurance, pp. 1.9-1.10.

(a) Commercial general liability (CGL) insurance protects an organization against liability for bodily injury and operations, arising out of its premises, operations, and completed work.

(b) CGL insurance also typically covers liability due to "personal and advertising injury". Examples (any two will suffice) include the following: (1) slander, (2) libel, (3) invasion of privacy, and (4) false arrest.

(c) Physical damage and liability to automobiles are excluded under both "commercial property" and CGL insurance policies. However, commercial auto insurance covers such loss exposures.

(d) If Mr. ♫ gets the following three insurance policies, his business's coverage needs will probably be fulfilled:

1. A businessowner's policy (This policy combines most of the common commercial property and liability coverages);

2. A workers' compensation policy (for the musicians and any store employees working for Mr. ♫);

3. A commercial auto policy (for loss exposures arising out of the vehicles owned by the business).

See other sections of The Actuary's Free Study Guide for Exam 5.