A contractor's general liability insurance policy has a $2 million per occurrence limit and a $4 million aggregate limit. If they have already paid $1.5 million in claims this year, what is the maximum coverage remaining for a new claim?
Correct Answer
A) $2 million
The per occurrence limit of $2 million applies to each individual claim, regardless of previous claims paid. However, the total available under the aggregate limit is now $2.5 million ($4M - $1.5M), so the effective coverage for a new claim is the lesser of these amounts, which is $2 million.
Why This Is the Correct Answer
The per occurrence limit of $2 million applies to each individual claim regardless of previous claims paid during the policy period. While the aggregate limit has been reduced to $2.5 million remaining ($4M - $1.5M paid), the maximum coverage for any single new claim is still governed by the per occurrence limit of $2 million, which is the lesser of the two available amounts.
Why the Other Options Are Wrong
Option B: $1.5 million
This incorrectly assumes the remaining coverage equals the amount already paid in claims. The $1.5 million represents claims already settled, not the available coverage for new claims. Per occurrence limits reset for each new claim regardless of previous payouts.
Option C: $500,000
This incorrectly calculates the difference between aggregate remaining ($2.5M) and per occurrence limit ($2M). The correct approach is to take the lesser of per occurrence limit or aggregate remaining, not subtract one from the other.
Option D: $2.5 million
This represents the remaining aggregate limit ($4M - $1.5M = $2.5M) but ignores the per occurrence limit constraint. Coverage for any single claim cannot exceed the per occurrence limit of $2 million, even if more aggregate coverage remains available.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?