Tom has two commercial property policies covering his warehouse. Policy A is the primary policy and has a $200,000 limit, and Policy B is an excess policy with a $100,000 limit. After a fire causes $140,000 in damage to his warehouse, how will each of Tom's policies respond (ignoring any deductible)?
Policy A will pay $140,000 and Policy B will pay $0.
In this scenario, Policy A is the primary policy that covers the first $200,000 of any damage, while Policy B acts as an excess policy that only pays once Policy A's limit has been reached. Since the total damage of $140,000 is within the limit of Policy A, it will cover the entire amount, leaving Policy B with no amount to pay.
This choice incorrectly divides the damage between the two policies. Since Policy A is the primary insurance and fully covers the loss up to its limit, it will pay the entire $140,000, and Policy B will not contribute at all.
This option miscalculates the distribution of the claim. Policy A is responsible for the full amount of damage up to its limit of $200,000. Therefore, it will not pay a fraction of the claim; it will cover the entire loss of $140,000.
This choice also misrepresents how the policies work. Policy A will not only pay $40,000; it will cover the full amount of damage since it is less than its limit. Policy B will not pay anything since Policy A has already covered the entire loss.
This is the correct choice, as Policy A will fully cover the damage of $140,000, remaining within its limit, and Policy B will not be activated since Policy A has satisfied the claim.
In this case, understanding the function of primary versus excess insurance policies is crucial. Policy A, as the primary policy with a limit of $200,000, fully covers the $140,000 loss, while Policy B remains inactive since the claim falls entirely within the limits of the primary coverage. This highlights the importance of knowing how various insurance policies interact when multiple coverages are in place.
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