A Virginia contractor has a workers' compensation policy with a $500,000 limit. An employee suffers a permanent disability requiring $750,000 in benefits. What is the contractor's financial exposure?
Correct Answer
A) $250,000 - the amount exceeding policy limits
The contractor is responsible for $250,000 ($750,000 - $500,000) beyond the policy limits. Virginia law requires adequate coverage, but contractors remain liable for amounts exceeding their policy limits.
Why This Is the Correct Answer
The contractor is exposed to $250,000 — the difference between the $750,000 benefit obligation and the $500,000 policy limit. Virginia law requires adequate coverage, but contractors remain personally liable for benefit amounts exceeding their policy limits.
Why the Other Options Are Wrong
Option B: $500,000 - limited to policy maximum
$500,000 (limited to policy maximum) is incorrect because the contractor's liability does not end at the policy cap. The obligation to pay benefits is statutory; insufficient coverage means the employer covers the gap out of pocket.
Option C: $0 - workers' compensation covers all costs
$0 is wrong. Workers' compensation insurance covers up to the policy limit, but does not automatically cover 100% of unlimited benefits. Inadequate coverage leaves the employer exposed for the excess.
Option D: $750,000 - the full amount if policy is inadequate
$750,000 (the full amount) would only apply if the contractor had no insurance at all. With $500,000 in coverage, the insurer covers that portion, leaving only the $250,000 excess as the contractor's direct exposure.
Memory Technique
Think of workers' comp insurance as a bucket. The policy fills the bucket to $500,000. If the obligation is $750,000, $250,000 spills over — and the contractor pays that overflow. Always subtract: $750K − $500K = $250K exposure.
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