Alabama Property and Casualty Practice Exam

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Cal's commercial liability policy has an occurrence limit of $100,000 and an aggregate limit of $500,000. If claims of $420,000 have been paid, how much will his policy pay for a $90,000 claim?

$100,000
$90,000
$80,000
$70,000

The correct answer is: $80,000

In determining how much Cal's commercial liability policy will pay for the new claim of $90,000, it's important to consider both the occurrence and aggregate limits of the policy, as well as the claims that have already been paid. The occurrence limit refers to the maximum amount the policy will pay for a single claim, which in this case is $100,000. Since the new claim of $90,000 is below this limit, it would normally be covered fully. However, the aggregate limit is crucial here as it represents the total amount the insurer will pay for all claims within a policy year. With $420,000 already paid in claims, this amount has been deducted from the aggregate limit of $500,000. This means Cal’s remaining aggregate limit is $80,000 ($500,000 - $420,000). Therefore, even though the occurrence limit would technically allow for the full payment of $90,000, the aggregate limit restricts the coverage to the remaining amount of $80,000. Hence, for the $90,000 claim, the policy will cover $80,000, which is the remaining balance available under the aggregate limit. This intricately illustrates how both limits interact in determining the actual payout for claims.