Georgia Property & Casualty Practice Exam

What is the coverage amount our umbrella policy will pay if the underlying policy has lapsed before a liability claim?

1. A.) $1,500,000

2. B.) $1,000,000

3. C.) $500,000, the difference between the PAP limit and the total claim

4. D.) $0, because Zahra allowed her PAP to lapse

The correct answer is: C.) $500,000, the difference between the PAP limit and the total claim

The correct understanding is that an umbrella policy provides additional coverage beyond the limits of underlying policies, such as personal auto policies (PAP). However, an important condition of umbrella insurance is that it requires the underlying policies to be active and in force. If the underlying policy has lapsed, typically the umbrella policy will not provide coverage for any claims arising during that lapse period. In this context, if there were indeed an underlying policy in place before it lapsed, the umbrella policy might pay up to its limits, but not if there's no active underlying coverage at the time of the claim. If Zahra allowed her PAP to lapse, the umbrella policy would not provide coverage since the condition for its activation (the existence of an active underlying policy) is not satisfied. Therefore, the total amount paid by the umbrella policy for a liability claim, given that the underlying policy has lapsed, would be zero. This understanding clarifies why it is essential for policyholders to maintain their underlying coverage so that any umbrella policy they hold remains effective during a claim.