Elements of Workers' Compensation Insurance - Part 2: 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. 12.11-12.19.

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

Problem S5-132-1.

(a) Name two kinds of employees that are allowed to sue their employers under U. S. federal law.

(b) What is the difference between an employers' mutual insurance company and a monopolistic state workers' compensation fund?

Solution S5-132-1. This question is based on the discussion in Commercial Insurance, pp. 12.11-12.13.

(a) Two kinds of employees that are allowed to sue their employers under U. S. federal law are (1) officers and crew members of vessels (per the United States Merchant Marine Act of 1920, a.k.a. the Jones Act) and (2) interstate railroad workers (per the Federal Employers' Liability Act).

(b) An employers' mutual insurance company is not officially a state entity and competes with other providers of workers' compensation. A monopolistic state workers' compensation fund is a state entity, and no competition with it is allowed. Employers must insure with the monopolistic fund in states where such a fund exists. Both types of entities are creations of the state legislatures.

Problem S5-132-2. Company Q is self-insured with regard to workers' compensation but also purchases an excess insurance policy to protect against large losses. The company has suffered the following losses, eligible for workers' compensation, this past policy period:

Occurrence 1: Loss of $500,000

Occurrence 2: Loss of $310,000

Occurrence 3: Loss of $50,000

(a)How much would the insurer pay for these losses if the company had an aggregate excess insurance policy that requires a retention of $760,000?

(b)How much would the insurer pay for these losses if the company had a specific excess insurance policy that requires a retention of $200,000?

Solution S5-132-2. This question is based on the discussion in Commercial Insurance, pp. 12.14.

(a) The retention of the aggregate excess policy applies to the entire policy period, so Company Q self-insures until it has paid out a total of $760,000, and then the aggregate excess policy pays the rest. For this policy period, the total losses are 500000 + 310000 + 50000 = $860,000, so the excess insurer is left to pay the difference: 860000 - 760000 = $100,000.

(b) The retention of a specific excess policy applies to each occurrence. Company Q pays the first $200,000 of each loss, and the excess insurer pays the rest. Here, Company Q will pay for the first $200,000 of Occurrence 1, the first $200,000 of Occurrence 2, and the entirety of Occurrence 3, paying a total of $450,000, leaving the excess insurer to pay the difference: 860000 - 450000 = $410,000.

Problem S5-132-3. Insurance is regulated at the state level. For instance, the holder of a personal automobile insurance policy would, upon moving to a different state, need to obtain a new personal automobile insurance policy specific to that state. Workers' compensation insurance is also regulated at the state level. Suppose that a business is also fully shifting its operations from one state to another. Would that business need to obtain a new workers' compensation policy pertaining to the state to which it moves? Why or why not? (Assume that the insurer of this business operates in both states, is willing to keep insuring the business, and is subscribing to the workers' compensation forms issued by the National Council on Compensation Insurance.)

Solution S5-132-3. This question is based on the discussion in Commercial Insurance, pp. 12.15.

The business would not need to obtain a new workers' compensation policy pertaining to the state to which it moves, because typical workers' compensation policies contain coverage for the obligations imposed under the workers' compensation statutes of the relevant state. Thus, when the insured business moves to a different state, its workers' compensation policy automatically begins to provide the coverage required in that state.

Problem S5-132-4.

(a) In a typical workers' compensation insurance policy, what is the equivalent of the declarations page often called?

(b) Would a typical workers' compensation insurance policy include federal laws such as the Longshore and Harbor Workers' Compensation Act within its definition of workers' compensation laws?

(c) What exclusions does a typical workers' compensation insurance policy list?

Solution S5-132-4. This question is based on the discussion in Commercial Insurance, pp. 12.16-12.18.

(a) In a typical workers' compensation policy, the equivalent of the declarations page is often called the information page.

(b) A typical workers' compensation policy would not include federal laws such as the Longshore and Harbor Workers' Compensation Act within its definition of workers' compensation laws. This definition typically only encompasses the workers' compensation laws of the 50 states, the District of Columbia, and explicitly named U. S. territories.

(c) This is a trick question. A typical workers' compensation insurance policy does not list any exclusions. It is written to cover obligations under the relevant states' workers' compensation laws and to pay any benefits prescribed by those laws. The scope of those laws defines the scope of coverage afforded by the policy, so exclusions are not necessary.

Problem S5-132-5.

(a) What additional costs, besides workers' compensation benefits, would an insurer typically be obligated to pay under a workers' compensation policy?

(b) For what four kinds of costs would an insured employer be required to reimburse the insurer under a typical workers' compensation policy?

Solution S5-132-5. This question is based on the discussion in Commercial Insurance, pp. 12.18-12.19.

(a) The insurer under a workers' compensation policy would typically be obligated to pay the costs of claim investigation and claim litigation, in addition to workers' compensation benefits.

(b) The insured under a typical workers' compensation policy would be required to reimburse the insurer for penalties arising out of the following situations (Commercial Insurance, p. 12.19):

1. The willful misconduct of the insured employer;

2. The insured employer's knowing employment of someone illegally;

3. The insured employer's non-compliance with safety and health statutes and regulations;

4. The insured employer's discrimination against employees who claim benefits under workers' compensation laws.

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