A contractor's workers compensation policy has a $125,000 annual premium with a $2,500 deductible per claim. If they have 3 claims totaling $18,000, $7,500, and $12,200, what is their total out-of-pocket cost for the year?
Correct Answer
B) $132,500
Total cost includes the annual premium ($125,000) plus deductibles for each claim (3 × $2,500 = $7,500). Total out-of-pocket cost: $125,000 + $7,500 = $132,500. The claim amounts don't affect the calculation since they exceed the deductibles.
Why This Is the Correct Answer
The contractor's total out-of-pocket cost includes both the annual premium and all deductibles paid. The annual premium of $125,000 must be paid regardless of claims. Additionally, the contractor pays a $2,500 deductible for each of the 3 claims, totaling $7,500 in deductibles. The actual claim amounts are irrelevant since the insurance covers everything above the deductible amount.
Why the Other Options Are Wrong
Option A: $127,500
This incorrectly includes the total claim amounts ($37,700) plus the premium, but the contractor doesn't pay the full claim amounts - only the deductibles per claim.
Option C: $162,700
This only accounts for the annual premium ($125,000) but fails to include the deductibles paid on the three claims, which are also out-of-pocket expenses for the contractor.
Memory Technique
Think 'PAD': Premium + All Deductibles = total out-of-pocket cost. The actual claim amounts are just distractors.
Reference Hint
Business and Finance for Contractors - Chapter on Insurance and Risk Management, Workers Compensation section
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