Chapter 5 Exercises

Work these the way you would read a real policy: never from the gist, always from the words. For every coverage question, ask where in the contract does the answer live — declarations, insuring agreement, conditions, exclusions, or an endorsement — and read the whole clause, exceptions and all, before you decide. Items marked with a dagger (†) have worked solutions in Appendix: Answers to Selected Exercises; the rest are for discussion or self-test. Section references like (§5.5) point you back to the chapter.

A. Recall and definitions

  1. † Name the four parts of the DICE structure and state, in one phrase each, what each part does. (§5.1–§5.5)
  2. Define the declarations page and list five things it states. Which item on it is the "table of contents" for the rest of the policy? (§5.2)
  3. Distinguish a named-perils insuring agreement from an open-perils one. Under each, who bears the burden of proof on an unexplained loss? (§5.3)
  4. † Give the three reasons exclusions exist, with one example of each. (§5.5)
  5. Define endorsement. When an endorsement and the base form conflict, which one controls, and why? (§5.6)
  6. Distinguish a bureau (ISO) form from a manuscript form. Give one advantage and one disadvantage of each. (§5.7)
  7. What is the "duty to defend," and why is it said to be broader than the "duty to indemnify"? (§5.3)
  8. List four conditions commonly found in a policy and say, for each, what the insured must do (or not do). (§5.4)

B. Reading the contract precisely

  1. † A liability policy's insuring agreement grants coverage for "bodily injury." An exclusion removes "bodily injury expected or intended from the standpoint of the insured." A sub-clause states: "This exclusion does not apply to bodily injury resulting from the use of reasonable force to protect persons or property." An insured is sued for injuring an intruder while defending their family. Walk through grant → exclusion → exception and state the coverage result. (§5.3, §5.5)
  2. Explain the doctrine that grants of coverage are read broadly and exclusions narrowly, and name the interpretive rule (from Chapter 4's adhesion-contract idea) that construes ambiguity against the drafter. Why does this mean "coverage you forgot to exclude is coverage you granted"? (§5.3, Ch. 4)
  3. † You pick up a policy mid-term and read the declarations on file today. Why might these not be the declarations that govern a loss that happened three months ago, and what should you ask for instead? (§5.2)
  4. A property form excludes "loss caused by water" but contains an exception preserving coverage for "water damage caused by the accidental discharge of water from a plumbing system." A pipe bursts inside the insured's wall and ruins a floor. Is it covered? What general reading skill does this exercise test? (§5.5)

C. Underwrite this submission

  1. † A broker sends you a commercial property quote request and attaches the expiring carrier's declarations page only. The decs show a \$5M building limit, a \$10,000 deductible, the form CP 00 10, and a schedule of six endorsements you have not been sent. The broker wants your number "today, to match the expiring." State what you will and will not do, and why quoting from the dec page alone is a mistake. (§5.1, §5.2)
  2. You are offered a risk with a genuinely novel manufacturing process that no standard ISO form was built for. You can (a) force it onto the closest bureau form, (b) write it on a carefully drafted manuscript form, or (c) place it in the surplus-lines market. Discuss the trade-offs of each, including case law, speed, regulatory filing, and the risk of drafting error. (§5.7)
  3. † A standard CGL comes to you with three endorsements: an additional-insured endorsement naming a customer, a designated-operations exclusion removing one process, and a protective-safeguards warranty requiring a hot-work permit program. Describe how each changes coverage (broaden / restrict / condition), and what you must do about the warranty before you rely on it. (§5.6)

D. Price this risk

  1. † Your pricing model prices the base ISO commercial property form for the class at an indicated \$18,000. To win the account, you delete a coverage-restricting exclusion by endorsement, materially broadening coverage. The model never ingested the endorsement. Qualitatively, what does deleting the exclusion do to your expected loss, and therefore to the adequate premium relative to the \$18,000 the model produced? Why is "the model approved \$18,000" not a defense if losses come in high? (§5.6, Ch. 3)
  2. Two carriers quote "the same" CGL at the same premium. Carrier A's policy is the clean base form; Carrier B has attached two coverage-restricting endorsements. Explain why these are not the same risk to the insurer, and which carrier is, in effect, charging more for less. Which one is more likely to run an adequate combined ratio on the account, all else equal? (§5.6, Ch. 3)
  3. † An open-perils property form costs more than a named-perils form on the identical building. Explain, in terms of what is being promised and who bears the burden of proof, why the open-perils grant is worth more and should cost more. (§5.3)

E. Find the red flag

  1. † Review this (constructed) policy summary and name the coverage problem: "Insured operates a small welding and fabrication shop. Policy is a standard CGL, occurrence form, no endorsements. The insured's largest customer requires that the insured 'name the customer as an additional insured and provide primary, non-contributory coverage.' The certificate of insurance on file says additional-insured status is provided." Where is the gap between the certificate and the policy, and why is that dangerous? (§5.6)
  2. A homeowner's open-perils policy is silent about "cyber" or "fraudulent electronic transfer" losses — neither granting nor excluding them. A loss occurs from a social-engineering scam. Identify the underwriting hazard this "silence" creates and state the disciplined drafting response. (§5.5)
  3. † An underwriter granted a protective-safeguards condition requiring a maintained sprinkler system but built no process to verify it and never asked about it at renewal. A fire occurs after the sprinklers had been shut off for months. Name the trap, and explain why an unverified condition is "theater." (§5.4)
  4. A commercial property policy is bound on an ISO special (open-perils) form, but the building sits in a coastal storm-surge zone. The producer assures the insured "you're covered for the hurricane." Identify which standard exclusion makes that assurance dangerously misleading, and what the insured actually needs. (§5.5, Ch. 1)

F. Memo and communication

  1. † Write a short (150–250 word) coverage-summary memo to a broker explaining, in plain English, what a newly attached designated-operations exclusion does to their client's CGL and why the carrier required it to accept the risk. Be honest about what is and isn't covered; do not oversell. (§5.5, §5.6)
  2. Draft a three-sentence note to a junior underwriter explaining your personal "reading order" for a policy and the single most common mistake that order prevents. (§5.1)

G. Ethics and the social function

  1. † The flood exclusion in a standard homeowners policy is, at once, sound insurance design (it walls off an uninsurable, correlated catastrophe) and the reason uninsured families are devastated after a storm (the protection gap of Chapter 1). Argue both sides honestly in a paragraph, then state what an ethical underwriter or producer does about the gap, given that the exclusion itself is defensible. (§5.5, Ch. 1)
  2. An insurer discovers that a long-standing manuscript endorsement it drafted is ambiguous and, read against the insurer under contra proferentem, would grant coverage the insurer never intended and never charged for — but only a handful of insureds would ever benefit, and fixing it at renewal will surprise them with a coverage cut. Discuss the competing obligations (to the pool's solvency, to the affected insureds, to honest dealing) and what you would recommend. (§5.6, §5.7)

H. The Underwriting File

  1. † Using the DICE table from this chapter's Underwriting File, explain why the Harbor Steel property coverage being written open-perils means the exclusions — not a list of covered perils — are what define the cat treatment. Which two exclusions on that form are doing the most work, and which Harbor Steel facts do they bear on? (The Underwriting File, §5.3, §5.5)
  2. The Harbor Steel GL carries the broad duty to defend. Explain why the single pending products-liability claim (the allegedly failed bracket) is therefore two exposures, not one, and why an underwriter must weigh both when pricing the line. (The Underwriting File, §5.3)
  3. List three endorsements the chapter says the Harbor Steel package "will be heavily endorsed" with, and for each, say whether it broadens, restricts, or conditions coverage — and therefore whether it should add to, subtract from, or gate the price. (The Underwriting File, §5.6)
  4. † The chapter says this checkpoint "maps the coverage architecture" but explicitly does not settle whether the risk is good or what it costs. List the four later chapters the Underwriting File names as the place each of those open questions gets answered, and state in one sentence what each will add. (The Underwriting File)