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 situation, Policy A, being the primary policy, will cover the entire damages of $140,000 since it is within its limit of $200,000. Consequently, Policy B, as the excess policy, will not respond because the loss does not exceed the limits of Policy A.
A) Policy A will pay $70,000 and Policy B will pay $70,000.
This option is incorrect because it incorrectly splits the total damage between the two policies. Since Policy A is the primary and covers up to $200,000, it would pay the full amount of the damages before any involvement of Policy B.
B) Policy A will pay $93,333 and Policy B will pay $46,667.
This choice is also incorrect as it miscalculates the distribution of the payments between the two policies. Given the total damage of $140,000, Policy A would cover the entire amount, leaving no need for Policy B to contribute.
C) Policy A will pay $40,000 and Policy B will pay $100,000.
This option is incorrect because it suggests that Policy A would only pay a fraction of the damage, which contradicts its limit and role as the primary policy. Policy B cannot pay anything as it only serves as an excess policy when damages exceed the primary policy's coverage.
D) Policy A will pay $140,000 and Policy B will pay $0.
This option is correct as it accurately reflects the primary coverage provided by Policy A. With damages totaling $140,000, Policy A pays the full amount, and since this does not exceed its limit, Policy B does not need to respond.
Conclusion
Option D is definitively correct because it correctly identifies the primary policy's responsibility to cover the full amount of damages incurred. All other options fail to recognize the primary-excess relationship and the limits set by the policies, leading to incorrect distributions of payment responsibility.