Elements of Umbrella 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 13, pp. 13.7-13.12.

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

The following conditions apply to Problems S5-135-1 through S5-135-3:

Company ○ is insured for commercial general liability (CGL) under two policies.

Insurer □ provides a primary CGL policy with an each-occurrence limit of $500,000 and an aggregate limit of $750,000. This policy only covers occurrences in the United States and Canada.

Insurer ◊ provides an umbrella policy that covers the same occurrences as the primary CGL policy, except that the coverage territory includes the entire world. This policy has an each-occurrence limit of $2,000,000 and an aggregate limit of $10,000,000. The umbrella policy also has a self-insured retention of $30,000 for claims not covered by the primary policy.

During the policy period in question, Company ○ experienced three occurrences involving commercial general liability losses:

Occurrence 1: A loss of $1,310,000 in Canada

Occurrence 2: A loss of $680,000 in Madagascar

Occurrence 3: A loss of $4,000,000 in the United States

Assume that, aside from territorial issues, there is no dispute that coverage for these losses would apply.

Problem S5-135-1. For Occurrence 1, how much would be paid by (a) Insurer □, (b) Insurer ◊, and (c) Company ○?

Solution S5-135-1.

(a) The loss in Canada would be covered under the primary policy of Insurer □, but would be subject to the each-occurrence limit of $500,000. Since $500,000 < $1,310,000, Insurer □ would pay $500,000.

This reduces the aggregate limit of the primary policy to 750000 - 500000 = $250,000.

(b) After a payment of $500,000 by the primary insurer, there remains 1310000 - 500000 = $810,000 to be paid by the umbrella insurer. This is within Insurer ◊'s each-occurrence limit of $2,000,000, so Insurer ◊ would pay $810,000. No self-insured retention applies, since the loss is also covered under the primary policy.

This reduces the aggregate limit of the umbrella policy to 10000000 - 810000 = $9,190,000.

(c) Company ○ would pay nothing, since the primary and umbrella insurer will have paid the entire loss amount.

Problem S5-135-2. For Occurrence 2, how much would be paid by (a) Insurer □, (b) Insurer ◊, and (c) Company ○?

Solution S5-135-2.

(a) The loss in Madagascar did not occur within the territory covered under the primary policy, which only extends to the United States and Canada. Thus, because the primary policy affords no coverage for this loss, Insurer □ would pay nothing.

(b) The loss in Madagascar did not occur within the territory covered under the primary policy, but the loss is covered by the umbrella policy. Because the loss is not covered under the primary policy, the insured is subject to the self-insured retention of $30,000. Insurer ◊ will pay the remaining $650,000, which is less than the per-occurrence limit of $2,000,000 and the remaining aggregate limit of $9,190,000.

This reduces the aggregate limit of the umbrella policy to 9190000 - 650000 = $8,540,000.

(c) Company ○ will pay the self-insured retention of $30,000.

Problem S5-135-3. For Occurrence 3, how much would be paid by (a) Insurer □, (b) Insurer ◊, and (c) Company ○?

Solution S5-135-3.

(a) The loss would be covered by the primary insurer, but the remaining aggregate limit of the primary policy would apply. This remaining limit is $250,000. Thus, Insurer □ will pay $250,000.

(b) After the primary insurer pays $250,000, the amount remaining to be paid is $3,750,000. The umbrella policy's per-occurrence limit, however, is $2,000,000, which is less than its remaining aggregate limit of $8,540,000. Thus, Insurer ◊ will pay $2,000,000. No self-insured retention applies, since the loss is also covered under the primary policy.

(c) After both insurers have made their payments, the amount that remains to be paid is 4000000 - 250000 - 2000000 = $1,750,000. Thus, Company ○ will pay $1,750,000.

Problem S5-135-4. Do most umbrella insurance policies have an occurrence-based or a claims-made coverage trigger? Why might this sometimes create difficulties? What remedies exist for such difficulties?

Solution S5-135-4. This question is based on the discussion in Commercial Insurance, p. 13.10.

Most umbrella insurance policies have an occurrence-based coverage trigger. If the underlying policy has a claims-made coverage trigger, then this can create gaps in coverage under the umbrella policy. For instance, if the underlying policy covers a claim that was made because of an occurrence that happened prior to the policy period of the umbrella policy, then the umbrella policy would not provide coverage. The remedy for such difficulties is for an umbrella policy to include both occurrence-based and claims-made coverage triggers. This can be done by specifying that the umbrella policy will be subject to the same trigger as the underlying policy.

Problem S5-135-5.

(a) A primary liability insurance policy contains the following exclusion:

"No coverage shall be provided for bodily injury or property damage arising out of the use of metal balls with three or more spikes."

An umbrella liability insurance has language modeled after that of the primary policy. However, the insurer providing the umbrella policy wishes to provide drop-down coverage for bodily injury and property damage arising out of the use of metal balls with three or four spikes. How might this most easily be accomplished without adding a new clause or section to the umbrella policy?

(b) If an insured fails to maintain underlying liability insurance, how would coverage be affected under a typical umbrella liability insurance applying to the same loss exposures?

Solution S5-135-5. This question is based on the discussion in Commercial Insurance, p. 13.11.

(a) The easiest way to create drop-down coverage for bodily injury and property damage arising out of the use of metal balls with three or four spikes is to adjust the exclusion clause from the primary policy to read as follows within the umbrella policy:

"No coverage shall be provided for bodily injury or property damage arising out of the use of metal balls with five or more spikes."

The exclusion is thereby narrowed, which, by implication, broadens the coverage available.

(b) If an insured fails to maintain underlying liability insurance, the application of the umbrella policy will not change. The umbrella policy will only pay what it would have paid if the underlying policy had been in effect. It would not provide any drop-down coverage for losses that the primary policy would have covered if it continued to be in force.

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