Elements of the "Special" Commercial Property Insurance Causes of Loss Form and Commercial General 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. Chapters 3 and 8, pp. 3.13-3.18, 8.3-8.9.

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

Problem S5-126-1.

(a) How does coverage of theft losses in the "special" causes of loss form used in commercial property insurance differ from coverage of theft losses in the "broad" and "basic" causes of loss forms?

(b) If rain, snow, ice, sleet, dust, or sand damage the interior of a building, and there was no damage to the roof or walls of the building by a covered peril, the "basic" and "broad" causes of loss forms would typically exclude coverage for such losses. How does treatment of such damage in the "special" cause of loss form differ from the above?

Solution S5-126-1. This problem is based on the discussion in Commercial Insurance, p. 3.14.

(a) The "broad" and "basic" forms only cover theft that occurs due to looting in the course of a riot or civil commotion.

By contrast, the "special" form covers theft of covered property under a broad array of circumstances - essentially in all cases not specifically limited or excluded in the form. Because the "special" form covers all risks of direct physical loss not specifically excluded, it provides much broader coverage than the "basic" and "broad" forms, which only cover named perils.

(b) The "special" form treats damage to the interior of a building from rain, snow, ice, sleet, dust, or sand in the same manner as the "broad" and "basic" forms - except that if ice, snow, or sleet melt on the building, the resulting water damage loss is covered.

Problem S5-126-2.

(a) Describe five perils that are specifically excluded under a typical "special" causes of loss form but would not be excluded (or named, or covered) under "basic" or "broad" causes of loss forms.

(b) If a covered peril results from any of the excluded perils in part (a) above, how would the "special" cause of loss treat such a peril?

Solution S5-126-2. This problem is based on the discussion in Commercial Insurance, pp. 3.15-3.16.

(a) Coverage for the following perils are specifically excluded only in the "special" causes of loss form:

1. Wear and tear;

2. "Rust, corrosion, decay, deterioration, or hidden or latent defect";

3. Smog;

4. "Settling, cracking, shrinking, or expansion";

5. "Infestations and waste products of insects, birds, rodents, or other animals";

6. Mechanical breakdown;

7. "Damage to personal property by dampness or dryness of atmosphere, changes or extremes in temperatures, or marring or scratching";

8. "Weather conditions that contribute to other excluded causes of loss";

9. Actions or decisions, or failures thereof, by any person, group of people, or organization;

10. "Faulty or inadequate planning, zoning, surveying, siting, design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction, materials, or maintenance";

11. Any "release, discharge, or dispersal of pollutants".

Any five of the above suffice as an answer.

(b) If a covered peril results from an excluded peril, the "special" form will cover the resulting peril, but not the original excluded peril. For instance, if faulty workmanship resulted in the spread of a building fire, the special form would cover the damage due to the fire, but not any damage due to the faulty workmanship alone.

Problem S5-126-3.

(a) Under a typical "special" causes of loss form, what four kinds of property are covered only if specified causes of loss are responsible for damage to the property?

(b) Name two cases in which theft of covered property would be specifically excluded under a typical "special" causes of loss form.

(c) Name three types of property for which theft coverage under a "special" causes of loss form would be subject to limits.

(d) Name and briefly describe three coverage extensions that are found in a typical "special" causes of loss form.

Solution S5-126-3. This problem is based on the discussion in Commercial Insurance, pp. 3.16-3.18.

(a) Under a typical "special" causes of loss form, the following four kinds of property are covered only if specified causes of loss are responsible for damage to the property (Commercial Insurance, p. 3.16):

1. Valuable papers and records;

2. Animals, only when their death results;

3. Fragile items that are broken;

4. Builders' machinery or equipment that the insured owns and that is more than a certain distance away from the insured premises.

(b) Theft of covered property would be specifically excluded under a typical "special" causes of loss form in the following circumstances (Commercial Insurance, p. 3.16):

1. Theft by the insured or of the insured's employees, partners, directors, officers, managers, or members;

2. Voluntary relinquishment of property due to fraudulent schemes or tricks;

3. Transfer of property "outside the described premises on the basis of unauthorized instructions";

4. Theft of construction materials not attached to the building, unless these materials are being held by the named insured for sale;

5. Property that is missing without explanation.

(c) The following are types of property for which theft coverage under a "special" causes of loss form would be subject to limits (Commercial Insurance, p. 3.17):

1. Furs and fur-trimmed garments;

2. Jewelry, precious metals, and watches - unless these are valued at less than a specified amount;

3. Dies, molds, patterns, and forms;

4. Tickets, stamps, and letters of credit.

Any three of the above suffice as an answer.

(d) The following three coverage extensions are found in a typical "special" causes of loss form (Commercial Insurance, pp. 3.17-3.18):

1. Property in Transit - coverage for property transported in a motor vehicle owned, leased, or operated by the insured and within the coverage territory;

2. Water Damage, Other Liquids, Powder or Molten Material Damage - coverage for the "cost to tear out and replace any part of a building necessary to repair an appliance or a system from which water or another liquid... has escaped";

3. Glass - coverage for the cost of "installing temporary glass plates or boarding up openings when repair or replacement of damaged glass has been delayed".

Problem S5-126-4.

(a) Liability losses can bring about numerous costs to a commercial organization. What two kinds of costs of liability losses are generally not covered by insurance policies?

(b) Name and briefly describe the four principal types of loss exposures insured under commercial general liability (CGL) insurance policies.

Solution S5-126-4. This problem is based on the discussion in Commercial Insurance, pp. 8.3, 8.7-8.8.

(a) The following two kinds of costs of liability losses are generally not covered by insurance policies (Commercial Insurance, p. 8.3):

1. Costs to reduce the future probability of additional, similar, or related losses;

2. Indirect costs, such as adverse publicity from being sued and the time spent in defending against the liability claim.

(b) The following four principal types of loss exposures are insured under commercial general liability (CGL) insurance policies (Commercial Insurance, pp. 8.7-8.8):

1. Premises liability exposures: Exposures arising from the "ownership, occupancy, or use of premises";

2. Operations liability exposures: Exposures arising from "activities in addition to the ownership, occupancy, or use of premises";

3. Products liability exposures: Exposures arising from "products sold or distributed by the exposed party";

4. Completed operations liability exposures: Exposures arising from "work completed by the exposed party".

Problem S5-126-5. A typical commercial general liability (CGL) insurance policy offers three principal coverages: Coverages A, B, and C. Match the following coverage names to their respective letters from memory:

Personal and Advertising Injury Liability

Bodily Injury and Property Damage Liability

Medical Payments

Solution S5-126-5. This problem is based on the discussion in Commercial Insurance, pp. 8.9.

Coverage A is Bodily Injury and Property Damage Liability.

Coverage B is Personal and Advertising Injury Liability.

Coverage C is Medical Payments.

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