A contractor purchases liability insurance with a $300,000 limit and a $1,000 deductible. After a $45,000 claim, how much will the insurance company pay?
Correct Answer
D) $44,000
The insurance company pays the claim amount minus the deductible: $45,000 - $1,000 = $44,000.
Why This Is the Correct Answer
The deductible is the amount the insured must pay before the insurance kicks in. The insurer pays the claim amount minus the deductible: $45,000 − $1,000 = $44,000. The $300,000 policy limit is not relevant here because $45,000 is well below it.
Why the Other Options Are Wrong
Option A: $46,000
$46,000 adds the deductible to the claim rather than subtracting it — a conceptual reversal of how deductibles work. The insurer never pays more than the claim amount.
Option B: $45,000
$45,000 ignores the deductible entirely, as if no deductible existed. The insurer always deducts the policy deductible from each claim payment.
Option C: $299,000
$299,000 confuses the policy limit with the claim amount — it subtracts the deductible from the policy limit rather than from the actual claim.
Memory Technique
Deductible = your share first. Insurance pays what's left: Claim − Deductible = Insurer's payment. '$45K claim minus $1K deductible = $44K insurer pays.' The limit ($300K) only matters if the claim exceeds it.
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