A contractor's insurance policy has a $500,000 general liability limit with a $1,000 deductible. A claim is filed for $15,000 in damages. How much will the contractor pay out of pocket?
Correct Answer
D) $1,000
The contractor pays the $1,000 deductible, and insurance covers the remaining $14,000 since the claim is within policy limits.
Why This Is the Correct Answer
The deductible is the contractor's out-of-pocket responsibility on each claim. With a $1,000 deductible and a $15,000 claim that is well within the $500,000 policy limit, the contractor pays $1,000 and the insurance company covers the remaining $14,000. The policy limit is not a factor here since $15,000 is far below $500,000.
Why the Other Options Are Wrong
Option A: $14,000
$14,000 is the amount the insurer pays, not the contractor. This answer reverses the contractor's and insurer's responsibilities.
Option B: $0
$0 would be the contractor's cost only if there were no deductible. A $1,000 deductible means the contractor always pays the first $1,000 of any covered claim.
Option C: $15,000
$15,000 would be the contractor's total exposure only if they had no insurance or if the claim exceeded the policy limit. Neither condition applies here — the policy is active and the claim is well within limits.
Memory Technique
Deductible = 'D for Down payment on the claim.' The contractor always pays the deductible first, then insurance covers the rest up to the limit. Formula: Contractor pays = Deductible (when claim > deductible and < policy limit).
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