Completed Operations Loss Exposures, Professional Liability Insurance, Personal Liability Insurance, and Laws Pertaining to Automobile Insurance: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, 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:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 6, pp. 6.14-6.21.

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

Problem S5-60-1. The following questions pertain to completed operations loss exposures:

(a) Give three examples of activities that involve completed operations loss exposures.

(b) Are businesses with premises loss exposures or businesses with operations loss exposures more likely to have completed operations loss exposures?

(c) Give three examples of considerations underwriters use when evaluating completed operations loss exposures.

Solution S5-60-1. This question is based on the discussion in Myhr and Markham, pp. 6.14-6.15.

(a) The following examples of activities that involve completed operations loss exposures are mentioned by Myhr and Markham, p. 6.14:

1. Construction;
2. Service;
3. Repair;
4. Manufacturing.

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

(b) Businesses with operations loss exposures more likely to have completedoperations loss exposures. What is known as "operations" loss exposures can also be referred to as loss exposures for work in progress. When this work is completed, the business can continue to have completed operations loss exposures - for instance, arising from a house that was built by a construction contractor or a product made by a manufacturer.

(c) The following examples of considerations underwriters use when evaluating completed operations loss exposures are mentioned by Myhr and Markham, p. 6.15:

1. Quality of workmanship;
2. Quality of equipment;
3. Supervision of employees;
4. Technical skill found within the business;
5. Reputation of the business;
6. Experience found within the business;
7. Type of business performed;
8. Frequency of potential losses;
9. Severity of potential losses.

Any three of the above answers suffice. Other valid answers may be possible.

Problem S5-60-2. The following questions pertain to professional liability insurance:

(a) Give three examples of different kinds of professional liability insurance.

(b) Give two examples of loss exposures typically covered by professional liability insurance.

Solution S5-60-2. This question is based on the discussion in Myhr and Markham, p. 6.16.

(a) The following kinds of professional liability insurance are mentioned by Myhr and Markham, p. 6.16:

1. Medical professional liability (medical malpractice) insurance;
2. Errors and omissions insurance for accountants, attorneys, insurance agents, brokers, and other professionals;
3. Directors' and officers' liability insurance;
4. Fiduciary liability insurance;
5. Employment practices liability insurance.

Any three of the above answers suffice. Other valid answers may be possible.

(b) The following examples of loss exposures typically covered by professional liability insurance are mentioned by Myhr and Markham, p. 6.16:

1. Mistakes;
2. Errors or omissions in rendering professional service;
3. Wrongful acts.

Any two of the above answers suffice. Other valid answers may be possible.

Problem S5-60-3. You are aware of two policies of professional liability insurance. Each covers the same perils. Policy A is written on an occurrence basis and has a term from January 1, 2302, to January 1, 2304. Policy B is written on a claims-made basis and has the same term: from January 1, 2302, to January 1, 2304, with a retroactive date of January 1, 2301. Suppose that the following losses from covered perils occurred:
(a) A loss occurs on March 3, 2300. A claim on the loss is submitted on June 5, 2303.
(b) A loss occurs on October 30, 2303. A claim on the loss is submitted on May 4, 2305.
(c) A loss occurs on November 1, 2302. A claim on the loss is submitted on January 3, 2303.
(d) A loss occurs on January 11, 2301. A claim on the loss is submitted on October 15, 2302.

Under which policies would each loss be covered, if these insurance policies applied to the insured?

Solution S5-60-3. Myhr and Markham, p. 6.16, discuss the difference between occurrence coverage and claims-made coverage. Under a policy that offers occurrence coverage, a loss must have taken place within the policy term in order to be covered. Under claims-made coverage, a claim must have been made within the policy term, and the loss must have occurred after the retroactive date of the policy.

Loss (a) would not be covered under Policy A, because the loss occurred prior to the term of the policy. It would also not be covered under Policy B, because the loss occurred prior to the retroactive date of the policy. Thus, Loss (a) would not be covered by either policy.

Loss (b) would be covered by Policy A, because the loss occurred within the term of the policy. However, the loss would not be covered by Policy B, because the claim was submitted after the policy term had ended. Thus, Loss (b) would be covered by Policy A, but not by Policy B.

Loss (c) would be covered by Policy A, because the loss occurred within the term of the policy. The loss would also be covered by Policy B, because the claim was submitted within the policy term. Thus, Loss (c) would be covered by both Policy A and Policy B.

Loss (d) would not be covered by Policy A, because the loss occurred prior to the term of the policy. However, it would be covered by Policy B, because the loss occurred after the retroactive date, and the claim was submitted within the policy term. Thus, Loss (d) would be covered by Policy B, but not by Policy A.

Problem S5-60-4. The following questions pertain to personal liability loss exposures:

(a) What is an attractive nuisance?

(b) Give three examples of common hazards on the premises of a personal residence.

(c) How is personal liability insurance typically provided?

Solution S5-60-4.

(a) An attractive nuisance is a "potentially harmful object or structure so inviting or interesting to children that it would lure them onto someone's premises" (Myhr and Markham, p. 6.19).

(b) The following examples of common hazards on the premises of a personal residence are mentioned by Myhr and Markham, p. 6.19:

1. Uneven sidewalks;
2. Icy sidewalks;
3. Poorly maintained steps;
4. Poorly maintained porches;
5. Poorly lighted hallways;
6. Large sliding glass doors without a way to call attention to the glass.

Any three of the above answers suffice. Other valid answers may be possible.

(c) Personal liability insurance is typically provided as part of a homeowner's insurance policy or another package that includes property insurance. It is seldom sold alone; when it is, it is sold for a relatively low premium (Myhr and Markham, pp. 6.18-6.19).

Problem S5-60-5. List four kinds of laws that some regulatory jurisdictions have developed in an attempt to ensure that financial resources are available to compensate auto accident victims.

Solution S5-60-5. The following examples of such laws are provided by Myhr and Markham, p. 6.21:

1. Financial responsibility laws;
2. Compulsory auto liability insurance laws;
3. Laws providing for shared market mechanisms (e.g., residual markets, state funds, etc.);
4. Mandatory uninsured motorists' coverage;
5. No-fault automobile laws;
6. Restrictions on cancellations and nonrenewals.

Any four of the above answers suffice. Many states do not have one or more of the above types of laws. Other valid answers may be possible.

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