Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)Casualty InsuranceHard
A Florida independent software developer is hired by a startup to create a new mobile application. Due to a coding error, the application launches with a critical bug that causes financial data corruption for early users, leading to significant financial losses for the startup. The software developer has a Professional Liability (Errors & Omissions) policy with a $500,000 per claim limit and a $1,000,000 aggregate limit, with a $10,000 deductible. The startup sues the developer for $600,000 in damages. How much will the Professional Liability policy pay for this claim?
- A$600,000
- B$500,000
- C$490,000
- D$590,000
Show answer & explanationAnswer & explanation
Correct answer: C. $490,000
The claim amount is $600,000. The Professional Liability policy has a 'per claim' limit of $500,000, meaning it will not pay more than $500,000 for this single claim. Additionally, there is a $10,000 deductible. Therefore, the policy will pay the 'per claim' limit minus the deductible, which is $500,000 - $10,000 = $490,000. The aggregate limit is the total the policy will pay over the policy period, which is not relevant for a single claim calculation unless it had already been reduced by prior claims.
Why the other options are wrong
- A. The policy will not pay the full claim amount because it exceeds the 'per claim' limit and the deductible must be applied.
- B. This is the 'per claim' limit, but it does not account for the deductible.
- D. This incorrectly subtracts the deductible from the total claim amount rather than the policy limit: $600,000 - $10,000 = $590,000. The policy will not pay more than its per claim limit.
E&O Per Claim Limit & Deductible
The maximum amount an E&O policy will pay for a single claim (per claim limit), from which the deductible is subtracted before payment.
- Per claim limit caps individual loss payouts.
- Deductible is the insured's out-of-pocket portion.
- Aggregate limit caps total payouts over the policy period.
Memory trick: E&O pays up to the limit, after your deductible hit.