Chapter 21 Exercises

Work these with the casualty underwriter's habits of mind: sort every liability exposure into premises/operations, products-completed operations, or personal & advertising injury; ask of every account where the tail is and whether the loss runs can see it; and never price a products risk off its premises record. 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 (§21.4) point you back to the relevant part of the chapter.

A. Recall and definitions

  1. † Define commercial general liability (CGL) in one sentence, and name the two structural features the chapter pulls out of the definition (third-party coverage; the duty to defend). (§21.1)
  2. Name the three insuring agreements of the standard CGL (Coverage A, B, C) and say in a phrase what each covers. (§21.1)
  3. † Distinguish premises/operations from products-completed operations. Which is the short-tail half and which is the long-tail half, and why? (§21.1, §21.4)
  4. State the difference between an occurrence trigger and a claims-made trigger. Which does the standard CGL use? (§21.2)
  5. Define exposure base and list the standard liability bases (payroll, gross sales, area, admissions, units) with one class each. (§21.3)
  6. † What does the products-completed operations aggregate cap, and why is it a separate limit from the general aggregate? (§21.4)
  7. Define additional insured and explain in one sentence why a contract typically demands one. (§21.5)
  8. Distinguish excess liability from umbrella liability. Which one can "drop down"? (§21.6)
  9. Name the four management/professional lines the CGL does not cover (E&O, D&O, EPL, cyber) and, for each, the gap in the CGL it fills. (§21.7)

B. Coverage and the policy

  1. † A fabricated bracket fails. Scenario (a): the only loss is that the bracket itself is now worthless. Scenario (b): the bracket's failure drops a mezzanine and injures a worker. Which loss does the CGL pay, which does it exclude, and what is the name of the exclusion that draws the line? (§21.1)
  2. For each exposure, say which Coverage (A-premises/ops, A-products/completed ops, or B) responds: (a) a customer slips in the showroom; (b) a slogan the insured used in its ads infringes a competitor's; (c) a food product sickens consumers after sale; (d) a sign crew defames a rival while putting up a billboard. (§21.1)
  3. The CGL excludes auto, pollution, professional services, and injury to the insured's own employees. For each, name the other policy or coverage that the excluded risk belongs to. (§21.1; Ch. 22, 23, 24)
  4. † Explain the duty to defend and why it can make a groundless lawsuit an expensive claim even when the insured wins. Why are defense costs usually outside the limits? (§21.1)

C. The trigger and the tail

  1. An injury occurs in 2016; the claim is first filed in 2027. Under an occurrence CGL, which policy year responds? Under a claims-made form? Draw the timeline. (§21.2)
  2. † Explain, in your own words, why the industry moved much long-tail and professional coverage from occurrence to claims-made triggers in the 1980s. What real-world long-tail catastrophes drove the change, and what problem did claims-made solve for the insurer? (§21.2)
  3. "An occurrence liability loss run is a photograph of a parade that is still marching past." Explain what this means for how you should read a three-year loss run on a products account, and how an experienced underwriter mentally adjusts the recent years. (§21.2, §21.4; Ch. 10)
  4. Why is products-completed operations mostly a severity problem while premises/operations is mostly a frequency problem — and how does that change the way you underwrite each half? (§21.4; Ch. 6)

D. Classification and exposure base

  1. † A custom manufacturer both makes products (sold by the dollar) and installs them at customer sites (labor by the payroll dollar). Explain why rating the whole account on sales alone underprices it, and what proper classification does instead. (§21.3)
  2. An insured projects \$25 million in sales for the policy term; the year-end audit finds it actually did \$40 million. (a) What happens to the premium? (b) Why does the auditability of the exposure base make that adjustment possible? (c) Why is a deliberately understated projection a red flag? (§21.3; Ch. 33)
  3. The chapter says to "classify what the insured does, not what it calls itself." Give an example of a single business that is really three or four exposures wearing one name, and explain why misclassification corrupts the loss experience of the whole class. (§21.3)

E. Underwrite this submission

  1. † Underwrite this risk. A 90-employee custom metal fabricator applies for a \$1M/\$2M CGL. Its premises loss runs are clean. It fabricates non-load-bearing decorative railings and panels, ships regionally, and has no pending claims. A second applicant, identical in size and premises record, fabricates load-bearing structural brackets and has one pending bracket-failure claim. You can only write one this quarter at your target loss ratio. Which is the better products risk, what specific questions would you ask each, and how would your pricing and products-aggregate decision differ between them? State your reasoning. (§21.1, §21.4)
  2. Underwrite this risk. A marketing agency with 30 employees and a tiny premises footprint applies for CGL. The premises exposure is trivial. Where is this account's real liability exposure, which coverage part houses it, and what would you want to read or sublimit before quoting? (§21.1)
  3. Find the red flag. A manufacturer's CGL submission shows a products rate roughly 25% below the rates you see on comparable accounts, a three-year-old loss run with "nothing on products," and a revenue projection that is lower than last year's audited figure despite a growing order book. Name three red flags and what each tells you. (§21.3, §21.4; Ch. 8, Ch. 33)

F. Additional insureds and contractual liability

  1. † Harbor Steel signs a contract requiring it to name a general contractor as an additional insured on its CGL and to "indemnify and hold harmless" that contractor. Explain (a) what the additional-insured grant does to the carrier's limit and subrogation rights, and (b) how contractual liability differs from the tort liability the CGL covers by default, including what the "insured contract" exception does. (§21.5)
  2. Why does the edition of an additional-insured endorsement matter so much? Describe the difference between a tightly-worded edition and an early broad one for a fabricator that signs dozens of customer contracts. (§21.5)
  3. An account's business model involves signing many upstream customer contracts. Explain why the chapter says you are "underwriting their contracts as much as their operations," and name one practical step you would take before quoting. (§21.5)

G. Pricing and the tower

  1. † Price the tail (illustrative). A products account is rated on gross sales. Use these constructed figures: base products loss cost of \$3.00 per \$1,000 of sales; the account's schedule/experience modification (Chapter 11) is a 15% debit for the pending claim and thin controls; projected sales \$45,000,000. (a) Compute the modified products loss cost per \$1,000. (b) Compute the indicated products loss contribution (before expense and profit loads). (c) In two sentences, explain why this figure could still be inadequate even if it looks fine against this year's reported losses. (§21.3, §21.4; Ch. 11)
  2. Sketch the Harbor Steel liability tower: a \$1M primary CGL, \$1M auto, \$1M employer's liability, and a \$10M umbrella. Explain what the "schedule of underlying insurance" requires and what happens if the insured lets a primary policy lapse below the required limit. (§21.6; Ch. 16)
  3. Why is umbrella pricing "almost entirely a severity question," and how does the nuclear-verdict trend (Chapter 23) press hardest on the excess layers rather than the primary? (§21.6)

H. Memo, ethics, and the gaps

  1. † Write the memo. In 150–200 words, write a coverage-recommendation note to the broker on a structural-fabricator CGL: state that the premises is routine, identify the products-completed operations exposure as the watch-item, name the pending claim, and recommend the products classification and aggregate handling. Keep it in the practitioner voice — lead with the decision. (§21.1, §21.4, The Underwriting File)
  2. Ethics dilemma. Your manager wants the Harbor Steel account bound this week to hit the middle-market growth target, and suggests "just rate the products like the premises — the claims won't show for years anyway, and we'll re-rate at renewal." Lay out the case against this in terms of rate adequacy and the combined ratio (Chapter 3, Chapter 11), and explain what you owe the future policyholders of the pool. Where is the honest line between competing aggressively and underpricing a tail you know is there? (§21.4; Ch. 3, Ch. 11)
  3. Spot the gap. Harbor Steel buys only the CGL, auto, and workers' comp. It has ~180 employees, a board, and holds customer and employee data. Name the three coverage gaps this leaves (by line), and explain why naming them serves both the insured and the underwriter's long-term book. (§21.7; Ch. 24)

I. The Underwriting File

  1. † Open Harbor Steel's general-liability page. In your own words, sort its exposure into the three CGL buckets, name the single watch-item, and state precisely what this chapter settles about the GL and what it leaves unsettled for later chapters. (§21.1, §21.4, The Underwriting File)
  2. The one pending products-liability claim is "in the file in red ink." List the three things you would request to decide whether it is an isolated event or the leading edge of a pattern, and say why the raw loss run alone can't answer the question. (§21.4, The Underwriting File; Ch. 8, Ch. 10)
  3. Harbor Steel supplies general contractors and will face additional-insured demands. Explain how those demands change the carrier's exposure on this specific account and what you would require of the broker (Chapter 39) before granting them. (§21.5, The Underwriting File)