Conditions of a Typical Commercial General Liability Insurance Policy: 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 9, pp. 9.10-9.15.

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

Problem S5-129-1.

(a) In a typical commercial general liability (CGL) insurance policy, how would bankruptcy or insolvency of the insured affect the coverage available?

(b) If an insured under a typical commercial general liability (CGL) insurance policy believes that the insurer has not paid for losses covered by the policy and wishes to sue the insurer, what must happen first in order for the very existence of such a lawsuit to be legitimate?

Solution S5-129-1. This problem is based on the discussion in Commercial Insurance, pp. 9.10-9.11.

(a) In a typical commercial general liability (CGL) insurance policy, bankruptcy or insolvency of the insured would not affect the coverage available. A specific Bankruptcy condition will often state that, if the insured becomes bankrupt or insolvent, the insurer's obligations would not be diminished by this (Commercial Insurance, p. 9.10).

(b) If an insured under a typical commercial general liability (CGL) insurance policy believes that the insurer has not paid for losses covered by the policy and wishes to sue the insurer, the insured must first have fully complied with all of the conditions of the CGL policy. This includes, for instance, cooperating with the insurer in the defense of the liability claim against the insured and forwarding to the insurer all documents relevant to the claim (Commercial Insurance, p. 9.11).

Problem S5-129-2.

(a) If the insured under a typical commercial general liability (CGL) insurance policy becomes aware of a situation that may lead to a claim, the insured is required under the policy to submit a notice to the insurer. What three elements must this notice contain?

(b) If a claim or lawsuit is brought against the insured under a typical commercial general liability (CGL) insurance policy, what are the duties of the named insured? Name four such duties.

Solution S5-129-2. This problem is based on the discussion in Commercial Insurance, pp. 9.10-9.11.

(a) If the insured under a typical commercial general liability (CGL) insurance policy becomes aware of a situation that may lead to a claim, the insured is required under the policy to submit a notice to the insurer containing the following three elements (Commercial Insurance, p. 9.10):

1. Description of the time and location of the occurrence, as well as how it occurred;
2. The names and addresses of (i) any persons injured and (ii) any witnesses;
3. Description of the injury or damage that resulted from the occurrence, as well as the location of the injury/damage.

(b) If a claim or lawsuit is brought against the insured under a typical commercial general liability (CGL) insurance policy, the following are duties of the named insured (Commercial Insurance, pp. 9.10-9.11):

1. Immediate recording of the date the claim/suit was received and the details of said claim/suit;
2. Written notification of the insurer as soon as is feasible;
3. If legal papers are received in connection with the claim/suit, immediate forwarding of such papers to the insurer;
4. Cooperation with the insurer in investigating, settling, and/or defending the claim/suit;
5. Authorization given to the insurer for obtaining any relevant legal records and other relevant documentation;
6. If requested, assistance given to the insurer for action against third parties that may be liable to the insured as a result of injuries/damage pertaining to the claim.

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

Problem S5-129-3.

(a)Describe three circumstances under which a typical commercial general liability (CGL) insurance policy would be considered excess over other applicable insurance.

(b) If a typical commercial general liability (CGL) insurance policy is considered excess over other applicable insurance, how would the insurer's duty to defend the insured be affected?

Solution S5-129-3. This problem is based on the discussion in Commercial Insurance, pp. 9.11-9.12.

(a) A typical commercial general liability (CGL) insurance policy would be considered excess over other applicable insurance in the following circumstances:

1. If the other insurance offers coverage for fire, extended coverage, builders' risk coverage, installation risk coverage, "or similar coverage on the named insured's work";
2. If the other insurance is fire insurance on premises that the insured occupies, either through a rental or otherwise with the owner's permission;
3. If the other insurance is purchased by the named insured to cover the named insured's liability as a tenant with regard to premises that the named insured rents or otherwise occupies with the owner's permission;
4. If the other insurance offers auto, aircraft, or watercraft coverage;
5. If the other insurance is primary insurance to which the named insured has been added via endorsement and which covers liability for damages due to (i) premises, (ii) operations, (iii) products, and (iv) completed operations.

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

(b) If a typical commercial general liability (CGL) insurance policy is considered excess over other applicable insurance, the CGL insurer no longer has an obligation to defend a claim which any other insurer has the duty to defend. However, the duty to defend will apply if no other insurer provides a defense to the insured (Commercial Insurance, p. 9.12).

Problem S5-129-4. Commercial general liability (CGL) insurers X, Y, and Z insure Policyholder A for the same peril, which occurs and causes a loss of $2,300,000.

The following are the limits of coverage offered by each insurer:

Limit of Insurer X: $500,000
Limit of Insurer Y: $1,200,000
Limit of Insurer Z: $2,000,000

(a) Under the method of contribution by equal shares, how much would each insurer contribute to payment of the loss?

(b) Under the method of contribution by limits, how much would each insurer contribute to payment of the loss?

Solution S5-129-4. This problem is based on the discussion in Commercial Insurance, pp. 9.12-9.13.

(a) Under the method of contribution by equal shares, each insurer pays an equal amount of the loss until one insurer's limit is exhausted. Each of the three insurers will pay at least $500,000, whereafter Insurer X's limit will be exhausted. A total of $1,500,000 will have been paid at that point, after which Insurers Y and Z must share the remaining $800,000. If Insurers Y and Z each contribute half of this amount ($400,000), their respective limits will still not be exhausted. Thus, each insurer will contribute the following:

Insurer X will contribute $500,000;
Insurer Y will contribute $900,000;
Insurer Z will contribute $900,000.

(b) Under the method of contribution by limits, each insurer will pay that fraction of the loss which corresponds to its limit divided by the sum of all the limits. Thus, Insurer X will pay 500000/(500000 + 1200000 + 2000000) = 5/37 of the loss amount, i.e., (5/37)*2300000 = $310,810.81.

Insurer Y will pay 1200000/(500000 + 1200000 + 2000000) = 12/37 of the loss amount, i.e., (12/37)*2300000 = $745,945.95.

Insurer Z will pay 2000000/(500000 + 1200000 + 2000000) = 12/37 of the loss amount, i.e., (20/37)*2300000 = $1,243,243.24.

Problem S5-129-5.

(a) What other name might be considered synonymous with the "Transfer of Rights of Recovery Against Others to Us" condition in a typical commercial general liability (CGL) insurance policy?

(b) What is the purpose of the "Transfer of Rights of Recovery Against Others to Us" condition in a typical commercial general liability (CGL) insurance policy?

Solution S5-129-5. This problem is based on the discussion in Commercial Insurance, p. 9.14.

(a) The "Transfer of Rights of Recovery Against Others to Us" condition might also be referred to as the subrogation condition.

(b) The purpose of the "Transfer of Rights of Recovery Against Others to Us" condition is to prohibit the insured from impairing any rights the insurer might have to any part of a claim that it previously paid to the insured. For instance, if the insurer paid $X on behalf of the insured for a claim, and the insured subsequently obtains a payment of $K ≤ X from a third party which was actually responsible for the claim, the insured must give the $K to the insurer. Also, at the insurer's request, the insured is required to assist the insurer, through reasonable means, in enforcing the insurer's subrogation rights.

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