74. Tom has two commercial property policies covering his warehouse. Policy A is the primary policy and has a $200,000 limit, and Policy B is an excess policy with a $100,000 limit. After a fire causes $140,000 in damage to his warehouse, how will each of Tom's policies respond (ignoring any deductible)?
Answer: D
Policy A will pay $140,000 and Policy B will pay $0.
In this scenario, Policy A, being the primary policy with a limit of $200,000, will cover the full amount of the damage, which is $140,000. Since the entire damage is covered by the primary policy, the excess policy (Policy B) does not come into play.
A) Policy A will pay $70,000 and Policy B will pay $70,000.
This option is incorrect because it suggests that both policies would share the cost of the damage. However, since Policy A is the primary policy and covers the entire $140,000 loss, there is no need for Policy B to contribute anything.
B) Policy A will pay $93,333 and Policy B will pay $46,667.
This option is also incorrect as it implies a division of the loss between the two policies. Policy A covers the total damage amount, thus there is no apportionment of costs between the policies.
C) Policy A will pay $40,000 and Policy B will pay $100,000.
This choice is incorrect because it inaccurately allocates the loss between the two policies. Policy A will pay the full $140,000, and Policy B, being an excess policy, will not pay anything since the primary policy has already covered the entire damage.
D) Policy A will pay $140,000 and Policy B will pay $0.
This option is correct as it accurately reflects the coverage structure of the two policies. Policy A, as the primary policy, pays the total damage amount of $140,000, leaving nothing for Policy B to cover.
Conclusion
The correct response clearly delineates the roles of the primary and excess policies in coverage scenarios. Policy A fully covers the loss within its limit, while Policy B remains inactive in this instance, confirming that all other options incorrectly distribute the loss between the policies. Thus, Option D is the only accurate representation of how the policies respond to the damage.