Insureds and Limits of Commercial General Liability Insurance Policies: 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. 9.3-9.10.

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

Problem S5-128-1.

(a) For a typical commercial general liability (CGL) insurance policy, if the named insured is an individual, then the named insured's spouse is considered an insured. However, there are two important types of situations in which coverage does not apply. What are these situations?

(b) Name two situations in which the named insured's employees and volunteer workers would not be considered insureds under a typical commercial general liability (CGL) insurance policy.

Solution S5-128-1. This problem is based on the discussion in Commercial Insurance, pp. 9.3-9.4.

(a) Coverage under a typical CGL policy does not apply (1) to the non-business activities of the named insured and spouse, and (2) to any business owned by an unnamed spouse, unless that business is specified as an insured within the policy (Commercial Insurance, p. 9.3).

(b) The following are situations in which the named insured's employees and volunteer workers would not be considered insureds under a typical commercial general liability (CGL) insurance policy (Commercial Insurance, p. 9.4):

1. The employees/volunteer workers commit bodily injury or personal and advertising injury to the named insured or the named insured's other employees, volunteer workers, partners or members;

2. There is bodily injury or personal and advertising injury as a result of the provision or failure by the employees/volunteer workers to provide professional health care services;

3. The employees/volunteer workers commit property damage to the named insured or the named insured's other employees, volunteer workers, partners or members.

Any two of the above suffice as an answer.

Problem S5-128-2. Name and describe three kinds of "other persons and organizations" that are considered insureds and afforded coverage under a typical commercial general liability (CGL) insurance policy.

Solution S5-128-2. This problem is based on the discussion in Commercial Insurance, pp. 9.5.

The following three kinds of "other persons and organizations" are considered insureds and afforded coverage under a typical commercial general liability (CGL) insurance policy:

1. Real Estate Managers: Persons or organizations who are not employees or volunteer workers of the named insured and who are acting as real estate managers for the named insured are considered insureds, only insofar as they act in this capacity.

2. Legal Representatives: Persons who are temporary custodians of the named insured's property, only with respect to their duties as legal representatives. The coverage afforded to such persons only exists for liability due to the use or maintenance of the property.

3. Newly Acquired Organizations: Organizations acquired or formed by the named insured, other than partnerships, limited liability companies (LLCs), and joint ventures. Coverage is only provided for the first X days (e.g., 90 days) after the organization's formation, or until the end of the policy period, whichever is earliest. Thereafter, the organization must be named in the policy in order to be an insured.

Problems S5-128-3 through S5-128-5 apply to the following scenario:

An occurrence-based commercial general liability (CGL) insurance policy issued by Insurance Company Ψ lists Snoitulos Solutions as the named insured. The following are the limits pertaining to the policy per policy term of one year:

General aggregate limit: $2,000,000
Products/completed operations aggregate limit: $4,000,000
Personal and advertising injury limit: $500,000
Each occurrence limit: $1,000,000
"Damage to premises rented to you" limit: $300,000
Medical expense per-person limit: $20,000

The following occurrences involved Snoitulos Solutions during the year 2055. All claims were submitted and settled shortly after the occurrences. The policy is so interpreted that each of the scenarios below is considered a single occurrence.

Occurrence 1. Snoitulos Solutions used another company's logo in its advertisements in an unauthorized fashion. It was found to be liable for $650,000. An irate representative of the other company also traveled to the headquarters of Snoitulos Solutions, went into a mad rage, and beat up two guests who just happened to be there, resulting in medical expenses of $25,000 for one guest and $12,000 for the other.

Occurrence 2. A salt solution manufactured by Snoitulos Solutions is found to actually contain trace amounts of poison. Customers who have consumed the solution are awarded damages of $3,000,000.

Occurrence 3. Employees of Snoitulos Solutions are found to have negligently mishandled an expensive piece of property that a client wanted repaired. As a result, the property had to be abandoned before being returned to the client and could not be restored to working condition. The client is entitled to recover damages of $4,500,000.

Problem S5-128-3. How much will Insurance Company Ψ pay for Occurrence 1?

Solution S5-128-3. The unauthorized use of the other company's logo was a personal and advertising injury, so the personal and advertising injury limit of $500,000 applies to the $650,000 damages for such unauthorized use. The medical expenses to the two guests, who were beaten up by the representative of the other company, are not the fault of Snoitulos Solutions but would be covered under Coverage C: Medical Payment, which provides coverage regardless of fault. Each person would be covered up to the per-person limit of $20,000. For the first injured guest, $20,000 of the $25,000 of medical costs would be paid. For the second injured guest, the entire $12,000 of medical costs would be paid. These combined medical costs are less than the per-occurrence limit of $1,000,000. Thus, the total that would be paid by the insurer is 500000 + 20000 + 12000 = $532,000.

This means that the general aggregate limit for the year is reduced to 2000000 - 532000 = $1,468,000.

Problem S5-128-4. How much will Insurance Company Ψ pay for Occurrence 2?

Solution S5-128-4. The $3,000,000 damages are encompassed within the policy's $4,000,000 products/completed operations aggregate limit, but are subject to the each occurrence limit of $1,000,000. Thus, the insurer will only pay $1,000,000.

This does not reduce the general aggregate limit, because the products/completed operations aggregate limit is separate from the general aggregate limit.

Problem S5-128-5. How much will Insurance Company Ψ pay for Occurrence 3?

Solution S5-128-5. The property damage of $4,500,000 is subject to the per-occurrence limit of $1,000,000 and also to the remaining general aggregate limit of $1,468,000. The insurer will pay the lesser of the two, i.e., $1,000,000.

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