Maine Commercial Lines Insurance Exam

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Maine Commercial Lines Insurance Exam Key Exam Concecpts

Here are 14 in-depth Q&A study notes to help you prepare for the exam.

Explain the concept of “moral hazard” in the context of commercial insurance, and provide a specific example of how it might manifest in a Maine-based business seeking property insurance. How do insurers attempt to mitigate moral hazard?

Moral hazard, in commercial insurance, refers to the risk that the insured party will act differently (typically with less caution or honesty) after obtaining insurance, because they are protected from the financial consequences of their actions. This can lead to increased claims and losses for the insurer. For example, a Maine-based seafood processing plant, after obtaining property insurance, might neglect routine maintenance on its refrigeration equipment, knowing that any resulting spoilage loss would be covered. This neglect increases the likelihood of a claim. Insurers mitigate moral hazard through several methods. Underwriting processes carefully evaluate the applicant’s risk management practices and financial stability. Policy provisions like deductibles and coinsurance require the insured to bear a portion of any loss, incentivizing them to prevent losses. Inspections and audits are conducted to verify compliance with safety standards. Finally, insurers may exclude coverage for losses resulting from intentional acts or gross negligence, as outlined in standard commercial property policy forms. Maine insurance regulations also allow insurers to deny claims if there is evidence of fraud or misrepresentation.

Discuss the implications of the “Maine Unfair Claims Settlement Practices Act” (24-A M.R.S. §§ 2436-A) on commercial insurance claims handling. Specifically, what are some actions that would constitute a violation of this act, and what recourse does a commercial policyholder have if they believe an insurer has acted in bad faith?

The Maine Unfair Claims Settlement Practices Act (24-A M.R.S. §§ 2436-A) outlines specific actions that constitute unfair claims handling in Maine, applicable to commercial insurance policies. Violations can include failing to acknowledge and act reasonably promptly upon communications regarding a claim; failing to adopt and implement reasonable standards for the prompt investigation of claims; refusing to pay claims without conducting a reasonable investigation based upon all available information; failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed; and not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear. If a commercial policyholder believes an insurer has acted in bad faith, they can file a complaint with the Maine Bureau of Insurance. They may also have grounds to pursue a private cause of action against the insurer for breach of contract and potentially for bad faith, seeking damages to compensate for the losses incurred due to the insurer’s improper conduct. The policyholder must demonstrate that the insurer acted unreasonably and with knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.

Explain the purpose and function of a Business Income (and Extra Expense) coverage form in a commercial package policy. Detail the difference between “Business Income with Extra Expense” and “Business Income without Extra Expense” coverage options, and provide a scenario where a Maine business would benefit significantly from including the “Extra Expense” coverage.

Business Income (and Extra Expense) coverage is designed to protect a business from the loss of income sustained due to a suspension of operations caused by a covered cause of loss to insured property. It covers the net profit or loss that would have been earned or incurred, as well as continuing normal operating expenses, including payroll. “Business Income with Extra Expense” covers the loss of business income as well as the extra expenses incurred to reduce the period of restoration or to resume operations. “Business Income without Extra Expense” only covers the loss of business income. Consider a Maine lobster wholesaler whose refrigeration system is damaged by a fire. Without “Extra Expense” coverage, they would simply have to wait for the system to be repaired, losing income during the downtime. With “Extra Expense” coverage, they could rent a temporary refrigeration unit and continue operating, mitigating the loss of income. The extra expense coverage would pay for the rental costs, up to the policy limits, as long as it reduces the overall business income loss.

Describe the key differences between a “claims-made” and an “occurrence” commercial general liability (CGL) policy. What are the implications of these differences for a Maine-based construction company, particularly concerning completed operations coverage?

An “occurrence” CGL policy covers claims arising from incidents that occur during the policy period, regardless of when the claim is reported. A “claims-made” CGL policy covers claims that are first made against the insured during the policy period, provided the incident occurred after the policy’s retroactive date. For a Maine-based construction company, the difference is critical for completed operations coverage. An occurrence policy will cover claims arising from faulty workmanship on projects completed during the policy period, even if the claim is made years later. A claims-made policy, however, would only cover such claims if the policy is still in effect when the claim is made. If the construction company switches to a different insurer or cancels its policy, it would need to purchase an extended reporting period (ERP) or “tail coverage” to cover claims arising from past projects. Without an ERP, the company would have no coverage for claims made after the policy expires, even if the work was performed while the policy was active. This makes occurrence policies generally preferable for construction companies due to the long-tail nature of construction defect claims.

Explain the concept of “subrogation” in the context of commercial property insurance. Provide an example of how subrogation might work in a scenario involving a fire at a Maine-based manufacturing facility, and discuss any limitations or waivers of subrogation that might affect the insurer’s ability to recover damages.

Subrogation is the legal right of an insurer to pursue a third party who caused a loss to the insured, in order to recover the amount of the claim paid to the insured. It prevents the insured from receiving double compensation for the same loss. For example, a fire at a Maine-based manufacturing facility is caused by a faulty electrical panel installed by an independent contractor. The facility’s commercial property insurer pays for the damage. Under subrogation, the insurer can then sue the electrical contractor for negligence, seeking to recover the amount it paid to the manufacturing facility. Limitations or waivers of subrogation can affect the insurer’s ability to recover damages. A waiver of subrogation clause in a contract between the manufacturing facility and the electrical contractor might prevent the insurer from suing the contractor. Similarly, if the insurer fails to properly investigate the cause of the fire or delays in pursuing the claim against the contractor, its subrogation rights may be impaired. Maine law recognizes the validity of contractual waivers of subrogation, provided they are clear and unambiguous.

Describe the purpose and structure of a commercial umbrella liability policy. How does it interact with underlying primary liability policies, and what are the key considerations for a Maine business owner when determining the appropriate limit of liability for their umbrella policy?

A commercial umbrella liability policy provides excess liability coverage above the limits of underlying primary liability policies, such as commercial general liability, auto liability, and employer’s liability. It provides an additional layer of protection against catastrophic losses that exceed the limits of the primary policies. The umbrella policy typically “drops down” to provide coverage if the underlying policy’s aggregate limits are exhausted by prior claims, or if the umbrella policy provides coverage for a risk not covered by the underlying policies (subject to a self-insured retention). When determining the appropriate limit of liability for an umbrella policy, a Maine business owner should consider several factors. These include the nature of their business operations, the potential for large liability claims, the assets they need to protect, and the cost of the umbrella coverage. Businesses with high-risk operations or significant assets should consider higher umbrella limits. They should also consider the potential for punitive damages, which may not be covered by all policies, and the legal environment in Maine, which can be favorable to plaintiffs in liability lawsuits. A qualified insurance professional can help assess these risks and determine the appropriate level of coverage.

Discuss the requirements of the Maine Workers’ Compensation Act (39-A M.R.S.) regarding employer liability for employee injuries. What are the potential consequences for a Maine employer who fails to comply with the Act’s requirements, including failing to secure workers’ compensation insurance?

The Maine Workers’ Compensation Act (39-A M.R.S.) requires most Maine employers to provide workers’ compensation insurance for their employees. This insurance covers medical expenses, lost wages, and rehabilitation costs for employees who are injured or become ill as a result of their employment. The Act establishes a no-fault system, meaning that employees are generally entitled to benefits regardless of who was at fault for the injury. An employer who fails to comply with the Act’s requirements faces significant penalties. They can be subject to fines and civil penalties imposed by the Workers’ Compensation Board. More seriously, if an uninsured employee is injured, the employer becomes directly liable for all workers’ compensation benefits, including medical expenses and lost wages. The employee can also sue the employer in civil court for negligence, and the employer loses the common law defenses that are typically available in such cases, such as contributory negligence and assumption of risk. Furthermore, knowingly failing to secure workers’ compensation insurance can be a criminal offense under Maine law. The Maine Workers’ Compensation Board actively investigates and prosecutes employers who are not in compliance with the Act.

Explain the concept of ‘moral hazard’ in the context of commercial crime insurance and provide an example of how a business might mitigate this risk. Refer to specific sections of the Maine Insurance Code that address fraudulent claims.

Moral hazard, in the context of commercial crime insurance, refers to the risk that an insured party may act dishonestly or recklessly because they are protected by insurance. This can manifest as an increase in the likelihood of a loss event occurring. For example, a business owner, knowing they have employee dishonesty coverage, might relax internal controls over cash handling, creating an opportunity for theft. To mitigate this risk, businesses should implement robust internal controls, conduct thorough background checks on employees, and maintain a strong ethical culture. Maine Insurance Code Title 24-A, specifically sections addressing fraud and misrepresentation in insurance claims, such as Section 2186, outline the penalties for submitting false or misleading information to an insurer. Insurers also investigate claims thoroughly to detect and deter fraudulent activity, further reducing the impact of moral hazard.

Describe the difference between ‘occurrence’ and ‘claims-made’ policy triggers in commercial general liability (CGL) insurance. Explain the implications of each trigger type for a business that switches insurance carriers, and how ‘tail coverage’ addresses potential gaps in coverage.

An ‘occurrence’ policy covers incidents that occur during the policy period, regardless of when the claim is made. A ‘claims-made’ policy covers claims that are made during the policy period, regardless of when the incident occurred. If a business switches from an occurrence policy to a claims-made policy, there is no gap in coverage for incidents that occurred under the occurrence policy. However, if a business switches from a claims-made policy, there could be a gap in coverage for incidents that occurred during the claims-made policy period but for which claims are made after the policy expires. ‘Tail coverage,’ also known as an extended reporting period (ERP), can be purchased to extend the period during which claims can be made under a claims-made policy, thus addressing this potential gap. The Maine Insurance Code does not specifically mandate tail coverage, but it does regulate the terms and conditions of CGL policies, ensuring fair and reasonable coverage provisions.

Explain the concept of ‘business income’ coverage in a commercial property insurance policy. Detail the types of expenses that are typically covered under this provision and how the ‘period of restoration’ impacts the amount of the claim.

Business income coverage in a commercial property insurance policy protects a business against the loss of income sustained due to a covered cause of loss that results in the suspension of operations. This coverage typically includes net profit or loss before income taxes that would have been earned or incurred, and continuing normal operating expenses, including payroll. The ‘period of restoration’ is the timeframe during which the business income loss is covered, typically beginning on the date of the direct physical loss or damage and ending when the property should be repaired or replaced with reasonable speed and similar quality. The longer the period of restoration, the greater the potential business income loss and the larger the claim. Maine insurance regulations require that business income coverage be clearly defined in the policy, including the method for calculating the loss and the duration of the period of restoration.

Discuss the purpose and function of a ‘hold harmless’ agreement in a commercial contract. Explain how contractual liability insurance interacts with these agreements and the limitations that might apply under a standard CGL policy.

A ‘hold harmless’ agreement, also known as an indemnity agreement, is a contractual provision where one party (the indemnitor) agrees to protect another party (the indemnitee) from financial loss or liability. Contractual liability insurance, typically included within a CGL policy, provides coverage for liability the insured assumes under a contract. However, standard CGL policies often contain exclusions for certain types of contractual liability, such as liability assumed under contracts that indemnify an architect, engineer, or surveyor for professional services. Furthermore, coverage is typically limited to liability that would have existed even in the absence of the contract. Maine law recognizes the validity of hold harmless agreements, but courts may scrutinize them closely, especially if they attempt to indemnify a party for its own negligence. The scope of coverage under contractual liability insurance is determined by the specific policy language and applicable state law.

Describe the key differences between a ‘fidelity bond’ and ‘surety bond’ in the context of commercial insurance. Provide examples of situations where each type of bond would be appropriate and explain the roles of the principal, obligee, and surety in each case.

A fidelity bond protects an employer from financial loss due to dishonest acts of its employees, such as theft or embezzlement. A surety bond, on the other hand, guarantees the performance of a contract or obligation. In a fidelity bond, the principal is the employee, the obligee is the employer, and the surety is the insurance company. For example, a fidelity bond would be appropriate for a bank to protect against employee theft. In a surety bond, the principal is the contractor, the obligee is the project owner, and the surety is the insurance company. For example, a surety bond would be appropriate for a construction company to guarantee the completion of a project. Maine law requires certain types of surety bonds for specific industries and professions, ensuring financial protection for consumers and the state. Fidelity bonds are not typically mandated by law but are often purchased by businesses as a risk management tool.

Explain the concept of ‘bailee’s customer’s coverage’ and provide an example of a business that would benefit from this type of insurance. Detail the types of losses that are typically covered and any common exclusions that might apply.

Bailee’s customer’s coverage protects a business (the bailee) against loss or damage to customers’ property while it is in the bailee’s care, custody, or control. A dry cleaner, for example, would benefit from this coverage, as they are responsible for the care of customers’ clothing. Covered losses typically include damage from fire, theft, water, and other covered perils. Common exclusions might include damage caused by faulty workmanship, inherent vice (a defect existing within the property itself), or acts of war. The policy typically pays for the actual cash value of the damaged property or the cost to repair or replace it, subject to policy limits. Maine insurance regulations require that bailee’s customer’s coverage be clearly defined, including the types of property covered, the covered perils, and any exclusions.

Discuss the implications of the ‘fellow servant rule’ and ‘contributory negligence’ in the context of workers’ compensation insurance. How have these common law defenses been modified or eliminated by workers’ compensation laws, and what is the impact on employers and employees in Maine?

The ‘fellow servant rule’ and ‘contributory negligence’ were common law defenses used by employers to avoid liability for employee injuries. The fellow servant rule stated that an employer was not liable for an employee’s injury if it was caused by the negligence of a fellow employee. Contributory negligence stated that an employer was not liable if the employee’s own negligence contributed to the injury. Workers’ compensation laws, including Maine’s Workers’ Compensation Act (Title 39-A), have largely eliminated these defenses. In exchange for providing guaranteed benefits to injured employees, regardless of fault, employers are generally immune from lawsuits by employees for work-related injuries. This system provides a more predictable and efficient means of compensating injured workers, while also protecting employers from potentially large and unpredictable liability claims. The Maine Workers’ Compensation Act outlines the specific benefits available to injured employees, the process for filing claims, and the responsibilities of employers.

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