General Liability and Negligence Practice Test (Part 2 of 2)

Correct answer: A. The recall exclusion eliminates coverage for the withdrawal costs

Exclusion n. removes any loss, cost, or expense for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal, or disposal of 'your product', 'your work', or 'impaired property' withdrawn from the market because of a known or suspected defect. Also, the bottler's own expense is not damages it is legally obligated to pay to a third party. Product recall coverage must be bought separately.

Reference: ISO CG 00 01 04 13, Section I Coverage A, Exclusion 2.n. Recall Of Products, Work Or Impaired Property

Correct answer: B. Malicious prosecution

The listed offenses are false arrest, detention, or imprisonment; malicious prosecution; wrongful eviction, wrongful entry, or invasion of the right of private occupancy; libel, slander, or disparagement; publication violating a right of privacy; use of another's advertising idea in your advertisement; and infringing copyright, trade dress, or slogan in your advertisement. Patent infringement and breach of contract are excluded, and accidental bodily injury falls under Coverage A.

Reference: ISO CG 00 01 04 13, Section V Definitions, 14. Personal And Advertising Injury

Correct answer: D. Only the slogan infringement allegation

Coverage B includes infringing another's copyright, trade dress, or slogan in your advertisement. The intellectual property exclusion removes infringement of copyright, patent, trademark, or trade secret, but it carves back infringement of copyright, trade dress, or slogan in your advertisement. Trademark infringement gets no carve-back, so only the slogan claim is potentially covered. Because one allegation is potentially covered, the insurer generally must defend the suit.

Reference: ISO CG 00 01 04 13, Section I Coverage B, Exclusion 2.i.; Section V Definitions, 14.g.

Correct answer: A. Expenses must be incurred and reported within one year of the accident

Coverage C pays reasonable medical expenses for bodily injury caused by an accident on premises the insured owns or rents, on ways next to them, or because of the insured's operations, regardless of fault. The expenses must be incurred and reported to the insurer within one year of the accident date. Injury to any insured (other than volunteer workers) and injury covered by workers compensation are excluded, so employees injured at work are not covered.

Reference: ISO CG 00 01 04 13, Section I Coverage C, Insuring Agreement and Exclusions

Correct answer: C. $5,000

Coverage C pays regardless of fault and without a lawsuit, but the Medical Expense Limit is the most it pays for all medical expenses because of bodily injury to any one person. The expenses total $3,200 + $2,600 = $5,800, so Coverage C pays its $5,000 limit. The customer could still pursue the remaining $800 and other damages as a liability claim under Coverage A, which would require proving the insured was legally liable.

Reference: ISO CG 00 01 04 13, Section I Coverage C; Section III Limits Of Insurance, 7.

Correct answer: D. $1,149,000

Supplementary Payments include all expenses the insurer incurs, such as defense costs, and all interest on the full judgment that accrues after entry of judgment and before the insurer pays, offers, or deposits its share. These payments do not reduce the limits. The $1,000,000 limit pays the judgment, and the $140,000 defense cost and $9,000 interest are paid in addition: $1,149,000. The duty to defend ends once the limit is used up paying judgments or settlements.

Reference: ISO CG 00 01 04 13, Supplementary Payments - Coverages A And B, 1.a. and 1.g.

Correct answer: B. Chen and Mei are insureds, but only for the conduct of Chen's business

When the named insured is designated as an individual, the CGL makes that person and his or her spouse insureds, but only with respect to the conduct of a business of which the named insured is the sole owner. The CGL does not cover personal, non-business activities; those exposures belong under a homeowners policy or a personal umbrella. No additional insured endorsement is needed for the spouse.

Reference: ISO CG 00 01 04 13, Section II Who Is An Insured, 1.a.

Correct answer: A. $1,100,000

The General Aggregate caps Coverage A damages (other than those in the products-completed operations hazard), Coverage B damages, and Coverage C medical expenses. Product injury claims erode the separate Products-Completed Operations Aggregate instead. Only the $900,000 premises settlement reduces the General Aggregate: $2,000,000 - $900,000 = $1,100,000. The products aggregate has $400,000 left after $1,600,000 in product settlements.

Reference: ISO CG 00 01 04 13, Section III Limits Of Insurance, 2., 3., and 5.

Correct answer: C. The Damage To Premises Rented To You Limit

Exclusion j. normally removes damage to property the insured rents. However, exclusions c. through n. do not apply to damage by fire to premises while rented to the insured, and a separate Damage To Premises Rented To You Limit applies, subject to the Each Occurrence Limit. Non-fire damage to these premises would remain excluded, because the exception for non-fire damage applies only to premises rented for seven or fewer consecutive days.

Reference: ISO CG 00 01 04 13, Section I Coverage A, Exclusion 2.j. and final paragraph of 2.; Section III, 6.

Correct answer: D. First aid provided at the time of the injury

The condition states that no insured will, except at its own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without the insurer's consent. This protects the insurer's right to investigate and control settlement. The insured must also give notice as soon as practicable, immediately send copies of demands and suit papers, and cooperate in the investigation and defense.

Reference: ISO CG 00 01 04 13, Section IV Conditions, 2. Duties In The Event Of Occurrence, Offense, Claim Or Suit

Correct answer: B. $150,000

When all the other insurance permits contribution by equal shares, each insurer pays equal amounts until it has paid its limit or the loss is fully paid. Each pays $100,000, which exhausts Insurer B. Insurer A then pays the remaining $50,000, for a total of $150,000. Contribution by limits applies only if another policy does not permit equal shares; that method would give Insurer A about $227,273.

Reference: ISO CG 00 01 04 13, Section IV Conditions, 4.c. Method Of Sharing

Correct answer: C. It does not apply, because the damage arose from smoke or fumes from a hostile fire

The pollution exclusion removes injury or damage from the discharge or release of pollutants at or from premises the insured owns or occupies, and pollutants include smoke and fumes. However, it contains an exception for bodily injury or property damage arising out of heat, smoke, or fumes from a hostile fire, meaning one that becomes uncontrollable or breaks out from where it was intended to be. So the pollution exclusion does not bar the neighbor's claim.

Reference: ISO CG 00 01 04 13, Section I Coverage A, Exclusion 2.f.(1)(a)(iii); Definitions 7. Hostile Fire and 15. Pollutants

Correct answer: A. It is not covered, because the injury occurred before the retroactive date

A claims-made form covers a claim first made during the policy period (or an extended reporting period) only if the injury or damage did not occur before the retroactive date or after the end of the policy period. The June 2023 injury predates the January 1, 2024 retroactive date, so the claim is not covered even though it was made in 2026. An injury in 2024 or 2025 would qualify, so claims-made forms are not limited to injuries during the current term.

Reference: ISO CG 00 02 04 13 (Claims-Made Form), Coverage A Insuring Agreement and Retroactive Date

Correct answer: D. Coverage, because the occurrence was reported within 60 days after the policy ended

The basic extended reporting period is automatic and free. It has a 60-day tail for claims from occurrences not reported to the insurer, and a five-year tail for claims arising out of occurrences reported no later than 60 days after the policy ends. Jamal reported on August 10, within 60 days of June 30, so a claim first made by June 30, 2031 is covered. The basic tail does not reinstate or increase the limits of insurance.

Reference: ISO CG 00 02 04 13, Section V Extended Reporting Periods (Basic Extended Reporting Period)

Correct answer: B. By written request within 60 days after the policy ends, plus an additional premium

The basic extended reporting period is automatic and free. The supplemental extended reporting period, which has unlimited duration and begins when the basic period ends, is available by endorsement. The insured must request it in writing within 60 days after the end of the policy period, and it takes effect only when the additional premium is promptly paid. That premium may not exceed 200% of the annual premium for the coverage part.

Reference: ISO CG 00 02 04 13, Section V Extended Reporting Periods (Supplemental Extended Reporting Period)

Correct answer: A. An umbrella may also cover some claims the underlying policies do not, subject to a retention

A follow-form excess policy adds limits above the underlying policies and generally follows their terms, so it pays only for losses those policies cover, after their limits are exhausted. A true umbrella also provides excess limits but may additionally cover some risks the underlying policies do not cover at all, usually subject to a self-insured retention. Umbrellas typically require the insured to maintain specified underlying insurance.

Reference: STRUCTURE magazine, A Look at Insurance Options: Excess versus Umbrella Insurance

Correct answer: C. $50,000

When a claim is covered by the umbrella but not by any underlying policy, the umbrella drops down to act as primary coverage, but only after the insured pays the self-insured retention: $60,000 - $10,000 = $50,000. Unlike a deductible, which the insurer typically pays and then recovers, a retention is funded by the insured before the insurer pays. Umbrellas also drop down when an underlying aggregate limit is reduced or exhausted.

Reference: STRUCTURE magazine, Excess versus Umbrella Insurance; Insureon, Self-Insured Retention

Correct answer: B. Professional liability (E&O)

Professional liability, often called errors and omissions (E&O) insurance, covers claims that a professional's negligent act, error, or omission in rendering services caused a client financial loss. The CGL responds to bodily injury, property damage, and listed personal and advertising injury offenses, none of which is present here. D&O covers claims over the management decisions of directors and officers, and EPL covers employee claims such as discrimination or wrongful termination.

Reference: Professional liability insurance overview (Wikipedia); Triple-I, Commercial General Liability Insurance

Correct answer: D. Side A (individual coverage)

D&O policies commonly contain three insuring agreements. Side A pays on behalf of individual directors and officers when the organization does not indemnify them, for example because state law prohibits it or the company is insolvent. Side B reimburses the organization when it indemnifies its directors and officers. Side C covers the organization itself, commonly for securities claims against a public company.

Reference: Directors and officers liability insurance overview (Wikipedia), Side A, B, and C coverage

Correct answer: A. The personal umbrella, which commonly covers personal injury such as libel

The unendorsed HO-3 Section II covers only bodily injury and property damage caused by an occurrence, and libel is neither; adding personal injury coverage requires an endorsement such as HO 24 82. Personal umbrella policies commonly cover risks such as libel and slander, typically subject to a self-insured retention when no underlying policy applies. Insurers also usually require specified underlying homeowners and auto limits before issuing an umbrella.

Reference: Triple-I, Should I purchase an umbrella liability policy?; ISO HO 24 82 Personal Injury endorsement

Correct answer: C. Extends to the entire suit, often under a reservation of rights

The duty to defend is broader than the duty to indemnify. It is generally determined by comparing the complaint's allegations with the policy, and if any allegation is potentially covered, most courts require the insurer to defend the entire suit, even if the allegations are groundless. The duty to indemnify is decided later, based on the actual facts and the judgment or settlement, and applies only to covered damages.

Reference: McKenna Law, Distinction Between the Duty to Defend and the Duty to Indemnify

Correct answer: D. A reservation of rights letter

A reservation of rights letter tells the insured that the insurer is defending or investigating while reserving the right to deny coverage later. It should cite the policy language and coverage issues and be sent as soon as the insurer learns of them, because delay can support waiver or estoppel arguments. A non-waiver agreement serves a similar purpose but is signed by both insurer and insured, while a reservation of rights letter is unilateral.

Reference: ALFA International, Reservation of Rights 101

Correct answer: B. The full $400,000 judgment

Under Texas's Stowers doctrine, when a claim is within coverage and the claimant demands a settlement within policy limits, with a full release, on terms an ordinarily prudent insurer would accept given the insured's likely exposure to an excess judgment, an insurer that rejects it can be liable for the entire resulting judgment, even beyond its limits. Other states impose similar duties. This excess exposure is why within-limits demands must be evaluated promptly.

Reference: Texas Stowers doctrine (G.A. Stowers Furniture Co. v. American Indemnity Co.), Chartwell Law, Texas bad faith claims summary

Correct answer: A. Court approval of the minor's settlement

A release is the document in which a claimant gives up the right to pursue a claim in exchange for payment. Because minors generally cannot make binding contracts, a release signed only by a parent or by the child may be voidable when the child reaches adulthood. Most states require court approval of a minor's settlement, often with conditions on how the money is held, so that the release is final.

Reference: Settling personal injury claims for minors (court approval requirement), Gislaw firm article

Correct answer: C. A structured settlement

A structured settlement resolves a claim with a stream of periodic payments, commonly funded by an annuity issued by a licensed insurance company, instead of a single lump sum. It can provide long-term income for an injured person's future needs. Under federal tax law, damages for personal physical injuries, including qualifying periodic payments, are generally excluded from the claimant's income. An advance payment is a partial payment made before final settlement.

Reference: 26 U.S.C. section 130 (qualified assignments and qualified funding assets) and section 104(a)(2)