A contractor carries general liability insurance with a $2,000 deductible and $500,000 coverage. For a claim totaling $25,000, how much will the insurance company pay?
Correct Answer
C) $23,000
The insurance company pays the claim amount minus the deductible: $25,000 - $2,000 = $23,000.
Why This Is the Correct Answer
The deductible is the portion the insured pays out of pocket before the insurance company contributes. For a $25,000 claim with a $2,000 deductible: $25,000 − $2,000 = $23,000 paid by the insurer. The coverage limit of $500,000 is not reached, so it is not a factor here.
Why the Other Options Are Wrong
Option A: $25,000
$25,000 would be correct only if there were no deductible. The deductible exists precisely to reduce the insurer's payment by the deductible amount, so the insurer never pays the full claim when a deductible applies.
Option B: $500,000
$500,000 is the maximum policy limit, not the payout for this specific claim. The insurer pays the claim amount minus the deductible, not the full coverage limit.
Option D: $27,000
$27,000 adds the deductible to the claim rather than subtracting it. This represents a fundamental misunderstanding of how deductibles work — the deductible reduces what the insurer pays, it does not increase it.
Memory Technique
Deductible = what you 'deduct' from what the insurer owes. Insurer pays = Claim − Deductible. The contractor absorbs the first $2,000, the insurer handles the rest.
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