Question

Jim has two policies that cover the same risk, but they respond differently: Policy X is primary and Policy Z is excess. Policy X has a limit of $50,000 and Policy Z has a limit of $25,000. When Jim suffers an insured loss totaling $62,000, how will each policy respond?

A. Policy X will pay $37,000 and Policy Z will pay $25,000
B. Policy X will pay $41,335 and Policy Z will pay $20,665
C. Policy X will pay $31,000 and Policy Z will pay $31,000
D. Policy X will pay $50,000 and Policy Z will pay $12,000

Answer 1

Primary Policy X pays its limit of $50,000, and excess Policy Z covers the remaining $12,000, for Jim's total insured loss of $62,000. This structure ensures adequate coverage and risk spreading across multiple policies.

Step-by-step explanation:

When Jim suffers an insured loss totaling $62,000, Policy X, which is the primary policy with a limit of $50,000, will pay up to its limit, which is the maximum amount the insurer has agreed to pay for a single event or claim. Policy Z, being an excess policy with a limit of $25,000, comes into play only after the primary policy's limits are exhausted. Therefore, Policy Z will contribute the remaining balance of the loss, which is $12,000, after Policy X has paid its limit.

The use of primary and excess coverage is a common arrangement in insurance policies to provide additional protection beyond the primary policy's limits. It is a way to spread the risk and ensure that the claimant has sufficient coverage for a loss. This structured order of how policies respond to a claim is a key concept in insurance underwriting, and it helps prevent any single insurer from bearing the full brunt of a large claim.