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Jim has two policies that cover the same risk, but they respond differently: Policy X is primary and Policy Z is excess. Policy X has a limit of $50,000 and Policy Z has a limit of $25,000. When Jim suffers an insured loss totaling $62,000, how will each policy respond?

  1. Policy X will pay $50,000 and Policy Z will pay $12,000

  2. Policy X will pay $37,000 and Policy Z will pay $25,000

  3. Policy X will pay $62,000 in full

  4. Policy Z will pay $62,000 in full

The correct answer is: Policy X will pay $50,000 and Policy Z will pay $12,000

Explanation When Jim suffers a loss of $62,000, Policy X as the primary policy will respond first and pay its limit of $50,000. The remaining amount of $12,000 will then be paid by Policy Z as the excess policy. It is important to note that excess policies only pay for losses that exceed the limit of the primary policy, so in this case, Policy Z will not pay its limit of $25,000. This is why the correct answer is A, with Policy X paying $50,000 and Policy Z paying $12,000. Choices B, C, and D are incorrect because they do not take into account the different limits of the two policies. Choice B assumes that Policy X will pay its limit in full before Policy Z responds, which is not the case. Choice C assumes that Policy X will pay for the full loss, which is not possible since it only has a limit of $50,000. Choice D assumes that Policy Z will pay in full, which is also not possible since it only has a limit of $25,000.