Casualty Actuarial Society (CAS) Practice Exam

Which types of operations are most applicable for umbrella or excess liability coverage?

1. Operations with limited risk exposure

2. Operations with the potential for severe losses

3. Operations that rely on a single physical location

4. Operations involving minimal liability risks

The correct answer is: Operations with the potential for severe losses

Umbrella or excess liability coverage is specifically designed to provide an additional layer of protection beyond the limits of primary liability policies. This type of coverage is particularly beneficial for operations where there is a potential for severe losses due to the nature of their activities, assets, or the environments in which they operate. Operations with severe loss potential often engage in activities that could lead to significant claims or damages, whether because of factors like high public interaction, large asset values, or hazardous operations. For example, businesses in construction, manufacturing, or those that operate in high-risk environments would benefit from excess coverage, as they could face large legal judgments or settlements that exceed their primary liability limits. Operations that have limited risk exposure or minimal liability risks typically do not require extensive excess liability coverage, as their likelihood of facing substantial claims is comparatively low. Similarly, operations that rely heavily on a single location or those that are not exposed to high-risk scenarios may not need such robust coverage, making it less applicable in these contexts. Thus, the key applicability of umbrella or excess liability coverage is in operations where the potential for severe losses exists.