A contractor purchases commercial auto insurance with $500,000 coverage. A work truck causes $750,000 in damages. What is the contractor's personal exposure?
Correct Answer
B) $250,000 regardless of business structure
The contractor's exposure is $750,000 - $500,000 = $250,000, which represents the amount not covered by insurance, regardless of business structure for this type of liability.
Why This Is the Correct Answer
$750,000 total damages minus $500,000 insurance coverage = $250,000 uncovered gap. The insurance policy pays up to its limit; the remaining $250,000 is the contractor's exposure regardless of business structure. Auto liability judgments that exceed coverage limits create personal exposure even for LLC owners because the insurance gap — not the business entity — determines the uncovered amount.
Why the Other Options Are Wrong
Option A: $750,000 if a sole proprietorship
$750,000 only if a sole proprietorship is incorrect because the total damages figure is not the exposure — the exposure is only the amount above the policy limit ($250,000). Business structure (sole proprietorship vs. LLC) does not change the math of the coverage gap.
Option C: $0 if the business is an LLC
$0 if the business is an LLC is a common misconception. LLC protection shields personal assets from business debts and contract claims, but it does not eliminate liability for tort damages (like vehicle accidents) that exceed insurance coverage. Courts can and do pierce the veil for direct personal negligence in vehicle operation.
Option D: $250,000 unless the business is an LLC
$250,000 unless the business is an LLC incorrectly implies that LLC status changes the exposure. The coverage gap is $250,000 regardless of entity type — the LLC does not absorb the insurance shortfall.
Memory Technique
Insurance gap = Your problem, always. Damages ($750K) – Policy ($500K) = Gap ($250K). The LLC doesn't fill the gap — more insurance does.
More Michigan Questions
A Michigan contractor forms an S-Corporation. What is the maximum number of shareholders allowed?
A contractor's employee is injured on a job site in Michigan. The contractor's workers' compensation insurance has a $500 deductible per claim. The total medical costs are $12,500 and lost wages are $3,200. What is the contractor's out-of-pocket cost for this claim?
What is the minimum general liability insurance coverage amount required for Michigan residential builders?
Under Michigan Act 299, what is the consequence for a contractor who performs work outside the scope of their license classification?
A contractor discovers that a subcontractor has filed a construction lien against their project. The general contractor believes the lien is invalid. What is the primary legal mechanism to challenge the lien in Michigan?
Under Michigan Act 299, what happens if a contractor continues to work without a valid license after it expires?
Which of the following best describes the 'pay when paid' clause limitation under Michigan law?
A project has total costs of $180,000 including $75,000 labor and $105,000 materials. With workers compensation at 7.8% of labor costs and general liability at 0.4% of total costs, what are the combined insurance costs?
A Michigan contractor is forming an LLC. What is the minimum general liability insurance coverage required for residential builders under Michigan law?
Under Michigan Act 299, a contractor's license must be renewed every:
People Also Study
Business & Financial Management
120 questions · 70% to pass
Contract Administration
60 questions · 70% to pass
Project Management
60 questions · 70% to pass
Related Study Resources
Previous Question
An employee earning $800 per week is injured and receives workers' compensation benefits at 80% of their average weekly wage. How much will the employee receive weekly in workers' compensation benefits?
Next Question
A contractor receives a stop payment notice on a project. Under Michigan lien law, how many days does the property owner have to respond with proof of payment or deposit?