A contractor operates 5 vehicles for business use. The annual commercial auto insurance premium is $8,400. If one vehicle is involved in an at-fault accident resulting in a 25% premium increase, what will be the new annual premium?
Correct Answer
D) $10,500
A 25% increase on the current premium of $8,400 results in: $8,400 × 1.25 = $10,500. The increase typically applies to the entire fleet policy, not just the vehicle involved in the accident.
Why This Is the Correct Answer
When a commercial auto insurance policy covers multiple vehicles as a fleet, the premium increase from an at-fault accident typically applies to the entire policy, not just the individual vehicle involved. The calculation is straightforward: multiply the current premium by 1.25 (which represents 100% + 25% increase). This gives us $8,400 × 1.25 = $10,500. Fleet policies are rated as a single unit, so any claims experience affects the overall premium.
Why the Other Options Are Wrong
Option A: $11,200
This answer of $10,080 represents a 20% increase ($8,400 × 1.20 = $10,080), which is less than the specified 25% premium increase.
Option B: $9,450
This answer of $11,200 represents a 33.3% increase ($8,400 × 1.333 = $11,200), which exceeds the stated 25% premium increase.
Memory Technique
Remember 'Fleet Fate' - when one vehicle in a fleet has an accident, the fate (premium increase) affects the entire fleet policy, not just the individual vehicle.
Reference Hint
Business and Finance chapter covering insurance calculations and risk management for contractors
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