Elements of Employers' 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 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 12, pp. 12.19-12.25.

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

Problem S5-133-1.

(a) Is an employee permitted to pursue direct legal action against the workers' compensation insurer of his/her employer? Briefly explain the rationale behind the answer.

(b) How would the benefits paid to injured employees under a workers' compensation policy be affected if the employer fails to comply with policy requirements?

Solution S5-133-1. This problem is based on the discussion in Commercial Insurance, p. 12.19.

(a) An employee is permitted to pursue direct legal action against the workers' compensation insurer of his/her employer. The reason for this is that workers' compensation insurance policies are obtained primarily for the benefit of employees, and so it would make sense for an employee with a grievance against the workers' compensation insurer to be able to pursue direct legal action against that insurer.

(b) The benefits paid to injured employees under a workers' compensation policy would notbe affected if the employer fails to comply with policy requirements. The workers' compensation policy is intended to provide certain statutorily prescribed benefits to employees who experience occupational injury or occupational disease. The employer's failure to fully adhere to the policy's conditions does not prejudice the benefits to which the employees are entitled by law.

Problem S5-133-2.

(a) Name and briefly describe two kinds of claims that might arise against an employer, that are related to occupational injury or occupational disease, but that would be likely to be handled via the common-law system and not via workers' compensation statutes.

(b) Employer X purchased workers' compensation policies A, B, and C in sequence. Each policy also provides employers' liability coverage. The following are the terms of the policies:

Policy A: in force from October 1, 2034 to September 30, 2036

Policy B: in force from October 1, 2036 to September 30, 2037

Policy C: in force from October 1, 2037 to September 30, 2041

An employee of Employer X was exposed to hazardous working conditions and began to develop an occupational disease on December 30, 2035. On July 13, 2037, Employer X discovered the hazardous conditions and eliminated them. However, the effects of previous exposure to these conditions resulted in continuing adverse effects on the employee's health. The employee was only finally cured of the condition on April 24, 2041. The occupational disease was a rare condition that was not encompassed by the workers' compensation statutes of the state in question, because of a loophole in the wording of said statutes. Thus, the employee sued Employer X in common-law court, and Employer X's employer's liability coverage would apply.

Which policy would provide coverage for this claim?

Solution S5-133-2. This problem is based on the discussion in Commercial Insurance, p. 12.20.

(a) The following are two kinds of claims that might arise against an employer that are related to occupational injury or occupational disease but that would be likely to be handled via the common-law system and not via workers' compensation statutes:

1. Third-party-over claims: An employee injured at work might sue a third party (such as a product manufacturer) alleging that third party's responsibility for the injury. That third party, in turn, sues the employer in order to recover some of the damages the third party paid to the employee. The suit by the third party would probably be covered under employers' liability coverage, but not under workers' compensation coverage.

2. Claims for care and loss of services: A family member of the injured employee might sue for loss of services, loss of companionship, or other kinds of loss to the family member because of the injury.

(b) Occupational disease claims, both for workers' compensation and for employers' liability, are covered by the policy that was in effect on the last day of the employee's exposure to conditions that caused the disease. Since the employee was no longer subject the these hazardous conditions after July 13, 2037, the policy that was in effect at that time would provide coverage. This policy is Policy B.

Problem S5-133-3. List ten exclusions that employers' liability policies typically contain.

Solution S5-133-3. This problem is based on the discussion in Commercial Insurance, pp. 12.20-12.21.

Employers' liability policies typically exclude coverage for the following:

1. Claims covered under workers' compensation laws;

2. Claims covered under occupational disease laws;

3. Claims covered under unemployment compensation laws;

4. Claims covered under disability benefits laws;

5. Claims covered under the Longshore and Harbor Workers' Compensation Act;

6. Claims covered under the Federal Employers' Liability Act;

7. Damages that must be paid pursuant to the Migrant and Seasonal Agricultural Worker Protection Act;

8. Bodily injury to a captain or crew member of any vessel;

9. Injury outside the United States or Canada;

10. Contractually assumed liability;

11. Punitive damages owed because of the death or injury of an illegally employed individual;

12. Bodily injury to persons who were illegally and knowingly employed;

13. Bodily injury that the insured employer intentionally caused;

14. Damages resulting from employment practices such as discrimination, demotion, and termination;

15. Penalties or fines arising from violations of state or federal laws.

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

Problem S5-133-4. An incident at Company Y resulted in the following occupational injury and disease costs:

Employee A incurred accidental injury costs of $35,000 and disease costs of $10,000.

Employee B incurred accidental injury costs of $40,000 and disease costs of $50,000.

Employee C incurred only disease costs of $20,000.

The incident was not covered under any workers' compensation law, but it did result in a lawsuit against Company Y that was covered under the company's employer's liability policy. The following are the limits applicable to that policy:

Bodily injury by accident limit: $60,000

Bodily injury by disease - policy limit: $76,000

Bodily injury by disease - each employee limit: $25,000

Company Y was found to be liable for all of the damages resulting from the incident, and the insurer incurred $30,000 in costs in defending the lawsuit. How much will the insurer pay as a result of this incident?

Solution S5-133-4. This question is based on the discussion in Commercial Insurance, pp. 12.21-12.22.

The bodily injury by accident limit applies only to the accidental injury costs arising out of a single incident. Because the total costs due to this incident are 40000 + 35000 = $75,000, the insurer will only pay its bodily injury by accident limit of $60,000 for these costs. The disease costs are subject to a per-employee limit of $25,000. The only employee whose costs are affected by the limit is Employee B, for whose disease the insurer will only pay $25,000 instead of the full $50,000. The total the insurer will pay for disease costs is thus 10000 + 25000 + 20000 = $55,000, which is less than the policy limit for disease of $76,000. The insurer will also pay defense costs in addition to the policy limits, so the full $30,000 of defense costs will be paid by the insurer.

The total paid by the insurer is therefore 60000 + 55000 + 30000 = $145,000.

Problem S5-133-5.

(a) What is stopgap coverage for employers' liability?

(b) Name four topics that would be addressed in the conditions of a typical workers' compensation insurance or employer's liability insurance policy.

Solution S5-133-5.

(a) Stopgap coverage for employers' liability is "coverage for employers' liability that private insurers provide to employers operating in a monopolistic fund state that does not include such insurance in its workers' compensation policies" (Commercial Insurance, p. 12.22).

(b) The following topics are likely to be addressed in the conditions of a typical workers' compensation insurance or employer's liability insurance policy (Commercial Insurance, pp. 12.24-12.25):

1. Inspections

2. Conditions for policies whose terms are longer than one year

3. Transfer of the duties and rights of the insured

4. Cancellation

5. Named insured's status as a representative of other insureds under the policy

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

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