Concepts Pertaining to Legal Liability and Commercial Liability 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. 6.3-6.11.

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

Problem S5-58-1. Myhr and Markham, p. 6.5, discuss the difference between an invitee, a licensee, and a trespasser. Classify each of the following persons into one of these three categories:
(a) A contractor doing work on a person's house;
(b) A guest to a party at a person's house;
(c) A home robber;
(d) A customer who enters a store;
(e) A police officer who enters a home because of a possible threat to the owner;
(f) A visitor to an open exhibition at a museum.
(g) A person who enters a store just to look around, without the intention of buying anything.

Solution S5-58-1.

An invitee is "a person who enters the premises for the owner's or the occupant's financial benefit" (Myhr and Markham, p. 6.5). This is the case even if no transaction ultimately occurs (as in the case of a customer who does not buy anything). Any member of the public who enters premises open to the public is also an invitee. A licensee is "any other person who enters the premises with permission" (Myhr and Markham, p. 6.5), where the premises would not be legitimately accessible without such permission. A trespasser is someone who enters the premises without permission. Accordingly, the following are the answers:

Person (a) is an invitee;
Person (b) is a licensee;
Person (c) is a trespasser;
Person (d) is an invitee;
Person (e) is a licensee;
Person (f) is an invitee;
Person (g) is an invitee.

Problem S5-58-2. Give three examples of relationships where one party might assume vicarious liability for the actions of another party.

Solution S5-58-2. The following five examples of relationships exhibiting vicarious liability are given by Myhr and Markham, p. 6.5:

1. A principal-agent relationship;
2. An employer-employee relationship;
3. A parent-child relationship;
4. A contractual relationship;
5. A partnership.
Any three of the above answers would suffice.

Problem S5-58-3. Name the five liability coverages that are encompassed under commercial general liability insurance.

Solution S5-58-3. This question is based on the discussion in Myhr and Markham, p. 6.7. The following are the five coverages that are included in commercial general liability insurance policy:

1. Premises and operations liability;
2. Personal and advertising injury liability;
3. Premises medical payments liability;
4. Contractual liability;
5. Products and completed operations liability.

Problem S5-58-4. Myhr and Markham, p. 6.9, discuss three kinds of physical hazards pertaining to premises and operations liability loss exposures:

1. Common hazards;
2. Special hazards of the class;
3. Special hazards of the risk.

Classify each of the following hazards as one of the above types.

(a) Explosion risk at a dynamite factory;
(b) Poor lighting;
(c) Defective electrical equipment;
(d) Toxic chemicals involved in the manufacture of a kind of pesticide;
(f) Congested aisles;
(g) Uneven stairs;
(h) The presence of an experimental water slide inside an amusement park;
(j) An angry pit bull whom the owner keeps on the premises of a department store as a mascot.

Solution S5-58-4. Common hazards can occur at any premises, irrespective of the type of business involved. The following are examples of common hazards:

(b) Poor lighting;
(c) Defective electrical equipment;
(f) Congested aisles;
(g) Uneven stairs.

Special hazards of the class occur because of a type of activity common to an entire class of businesses. The following are examples of special hazards of the class:

(a) Explosion risk at a dynamite factory;
(d) Toxic chemicals involved in the manufacture of a kind of pesticide.

Special hazards of the risk are not commonly encountered in businesses of a similar sort; they are, rather, particular to the operation in question. The following are examples of special hazards of the risk:

(h) The presence of an experimental water slide inside an amusement park;
(j) An angry pit bull whom the owner keeps on the premises of a department store as a mascot.

Problem S5-58-5. Which of the following statements about the loss exposures of contractors are true? More than one answer may be correct.

(a) Contractors typically have large premises loss exposures, but small operations loss exposures.
(b) Contractors typically have small premises loss exposures, but large operations loss exposures.
(c) Contractors typically have both large premises loss exposures and large operations loss exposures.
(d) Under common law, a person who hires an independent contractor to do work is liable for that contractor's acts.
(e) Courts have ruled in some cases that independent contractors are de facto employees.
(f) With proper delegation of responsibility, a business can exempt itself from vicarious liability arising out of the selection of independent contractors.
(g) Commercial general liability insurance typically provides coverage for an insured's liability for the actions of contractors and subcontractors.
(h) If a contractor which hires subcontractors is being insured, and the subcontractors fail to provide proof of their own insurance, then the insurer will typically refuse to continue to insure the contractor and will cancel that contractor's policy.

Solution S5-58-5. This question is based on the discussion in Myhr and Markham, pp. 6.9-6.11. The following answers are correct:

(b) Contractors typically have small premises loss exposures, but large operations loss exposures.
(e) Courts have ruled in some cases that independent contractors are de facto employees.
(g) Commercial general liability insurance typically provides coverage for an insured's liability for the actions of contractors and subcontractors.

Choices (a) and (c) cannot be correct if choice (b) is correct.

Choice (d) is not correct; under common law, individuals typically have immunity for the actions of independent contractors.

Choice (f) is not correct; some vicarious liability, particularly arising from the selection of independent contractors, cannot be readily delegated away.

Choice (h) is not correct; in the situation described, the insurer will typically charge the contractor a premium equivalent to what would have been charged if the subcontractors were the contractor's employees.

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