This section of sample problems and solutions is a part of The Actuary’s Free Study Guide for Exam 5, authored by Mr. Stolyarov. This is Section 137 of the Study Guide. See an index of all sections by following the link in this paragraph.
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.
Arthur L. Flitner, Jerome Trupin, and Martin J. Frappoli. Commercial Insurance. (Second Edition). 2007. Chapter 13, pp. 13.21-13.25.
Original Problems and Solutions from The Actuary’s Free Study Guide
Problem S5-137-1. A directors’ and officers’ liability insurance policy has a limit of $600,000, a deductible of $40,000, and a participation percentage of 10%. An occurrence gives rise to a covered claim of $200,000. How much of that amount will the insurer pay?
Solution S5-137-1. This question is based on the discussion in Commercial Insurance, p. 13.21.
The participation percentage of 10% is the percent that the insured would have to pay of the difference between the limit and the deductible. The insurer would have to pay 90% of that difference, or 0.9*(600000 – 40000) = $504,000.
Problem S5-137-2. This question is based on the discussion in Commercial Insurance, pp. 13.21-13.22.
(a) With regard to directors’ and officers’ liability insurance, what is entity coverage?
(b) What possible disadvantage might entity coverage present to the directors and officers of a corporation?
(a) Entity coverage is a “coverage extension of directors’ and officers’ liability policies for claims made directly against a corporation (the ‘entity’) for wrongful acts” (Commercial Insurance, p. 13.21).
(b) Entity coverage might present disadvantages to directors and officers, such as requiring them to share with the corporation in its limits of liability. Moreover, increased defense costs may arise if, as a result of the coverage’s provisions, the corporation is required to maintain separate legal counsel for the corporation. This is particularly adverse if the defense costs are included within the policy limits. In a corporate bankruptcy, the entire limit of insurance may be devoted toward the corporation, leaving the directors and officers with no coverage (Commercial Insurance, pp. 13.21-13.22).
(a) List four kinds of wrongful employment practices for which the ensuing liability is covered under a typical employment practices liability insurance policy.
(b) Name and briefly describe three laws that affect employment practices liability loss exposures in the United States.
(c) Do employment practices liability insurance policies typically have an occurrence-based or a claims-made coverage trigger?
Solution S5-137-3. This problem is based on the discussion in Commercial Insurance, pp. 13.22-13.23.
(a) The following are wrongful employment practices for which the ensuing liability is covered under a typical employment practices liability insurance policy (Commercial Insurance, p. 13.22):
1. Wrongful termination;
2. Wrongful failure to promote, hire, or grant tenure;
3. Wrongful demotion, reassignment, or discipline;
4. Sexual harassment;
5. Unlawful discrimination;
6. Invasion of privacy;
8. Intentional infliction of emotional distress.
Any four of the above suffice as an answer. Other valid answers may also be possible.
(b) The following are laws that affect employment practices liability loss exposures in the United States (Commercial Insurance, p. 13.23):
1. Title VII of the Civil Rights Act of 1964: Forbids discrimination in employment on the basis of race, color, religion, gender, national origin, pregnancy, childbirth, or medical conditions related to pregnancy or childbirth.
2. The Civil Rights Act of 1991: Authorizes a jury trial and damages up to $300,000 for lawsuits related to intentional racial or gender discrimination.
3. The Age Discrimination in Employment Act of 1967: Forbids age-based discrimination against individuals aged 40 or older.
4. The Americans with Disabilities Act: Forbids discrimination against disabled individuals and requires employers to make reasonable accommodations for such individuals.
Any three of the above suffice as an answer. Other valid answers may also be possible.
(c) Employment practices liability insurance policies typically have a claims-made coverage trigger.
(a) What two common-law duties does an employer administrator of an employee benefit plan have?
(b) Give two examples of administrative errors that would be covered by a typical employee benefits liability insurance policy.
Solution S5-137-4. This problem is based on the discussion in Commercial Insurance, p. 13.24.
(a) An employer administrator of an employee benefit plan has the common-law duties of (1) accurately responding to an employee’s request for advice or information and (2) competently administering the employee benefit plan (Commercial Insurance, p. 13.24).
(b) The following are administrative errors that would be covered by a typical employee benefits liability insurance policy (Commercial Insurance, p. 13.24):
1. Negligently advising regarding the selection of employee benefit programs;
2. Causing an employee to be without health care coverage for a condition that would have been covered if the employee were enrolled in the employer’s group health insurance;
3. Miscalculating the pension benefits of a retired employee to that employee’s detriment.
Any two of the above suffice as an answer. Other valid answers may also be possible.
(a) What is a fiduciary?
(b) With respect to employee benefit plans, who is considered a fiduciary under the Employee Retirement Income Security Act (ERISA) of 1974?
(c) Briefly describe the difference between what is covered by employee benefits liability insurance policies and what is covered by fiduciary liability insurance policies.
Solution S5-137-5. This problem is based on the discussion in Commercial Insurance, pp. 13.24-13.25.
(a) A fiduciary is “someone who is bound by an agreement to act primarily for someone else’s benefit” (Commercial Insurance, p. 13.24).
(b) The ERISA treats as a fiduciary anyone who exercises “discretionary control or judgment in the design, administration, funding, or management of a benefit plan” (Commercial Insurance, p. 13.24). This usually includes the key employees and the principal of a company.
(c) Fiduciary liability insurance policies cover breaches of fiduciary duties that involve discretionary judgment with respect to the benefit plan itself, whereas employee benefits liability insurance policies cover administrative errors and omissions with regard to particular employees’ use of the plan (Commercial Insurance, p. 13.25).
See other sections of The Actuary’s Free Study Guide for Exam 5.