An insured has a $500 deductible and 80/20 coinsurance. A $4,500 covered loss occurs. How much will the insurer pay?

Rationale

The insurer will pay $3,200.

To determine the insurer's payment, we first subtract the deductible from the total covered loss, leading to a coinsurance calculation on the remaining amount. After applying the deductible and coinsurance percentage, the final amount paid by the insurer is $3,200.

A ($3,200) CORRECT

This amount is calculated by first applying the $500 deductible to the $4,500 loss, reducing the amount to $4,000. With an 80/20 coinsurance, the insurer covers 80% of the remaining $4,000, which equals $3,200. This is the correct solution based on the given terms.

B ($3,600) YOUR ANSWER

This figure would suggest that the insurer covered a higher percentage of the covered loss. However, after applying the deductible, the insurer only pays 80% of the remaining amount, which does not support this total. Therefore, $3,600 is not correctly derived from the deductible and coinsurance calculations.

C ($4,000) YOUR ANSWER

This amount represents the total remaining after the deductible is applied but does not account for the coinsurance factor. The insurer does not pay the full remaining amount; instead, they only cover 80% of it, making this choice incorrect.

D ($4,500) YOUR ANSWER

This choice implies that the insurer would pay the full amount of the covered loss without any deductions for the deductible or coinsurance. However, the presence of a deductible and the 80/20 coinsurance clearly indicate that the insurer's payment will be less than the total loss amount.

Conclusion

The insurer's payment for the covered loss is determined by first applying the $500 deductible and then calculating the coinsurance on the remaining amount. Following this process, the insurer pays $3,200, demonstrating how deductibles and coinsurance structures affect the final reimbursement in insurance policies. Understanding these calculations is crucial for policyholders to grasp their financial responsibilities during a loss event.

An insured has a $500 deductible and 80/20 coinsurance. A $4,500 covered loss occurs. How much will the insurer pay?

The insurer will pay $3,200.

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