Which type of insurance coverage protects a contractor when their general liability limits are exceeded due to a major claim?
Correct Answer
A) Umbrella insurance
Umbrella insurance provides additional liability coverage above and beyond the limits of general liability, auto, and other primary insurance policies. It kicks in when primary policy limits are exhausted.
Why This Is the Correct Answer
Umbrella insurance is specifically designed to provide excess liability coverage that kicks in when the limits of primary insurance policies (like general liability) are exceeded. It acts as a secondary layer of protection, providing additional coverage amounts above and beyond what the primary policies cover. This type of insurance is essential for contractors who face potential for large claims that could exceed their standard general liability policy limits. The umbrella policy only activates after the underlying primary insurance limits have been exhausted.
Why the Other Options Are Wrong
Option C: Professional liability insurance
Professional liability insurance covers errors, omissions, and negligent acts in the performance of professional services, but it does not provide additional coverage when general liability limits are exceeded - it covers different types of risks entirely.
Option D: Workers' compensation insurance
Workers' compensation insurance covers employee injuries and illnesses arising from work-related activities, but it does not provide additional coverage when general liability limits are exceeded - it serves a completely different purpose.
Memory Technique
Think 'UMBRELLA = UNDER + MORE' - it goes under your existing policies but provides MORE coverage when limits are exceeded
Reference Hint
Business and Finance chapter covering insurance requirements and types of coverage for contractors
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?