A contractor's workers' compensation policy has a $2,500 deductible per claim. An employee injury results in $18,750 in medical costs and lost wages. How much will the insurance company pay?
Correct Answer
A) $16,250
Insurance payment = Total costs - Deductible = $18,750 - $2,500 = $16,250. The contractor is responsible for the deductible amount, while insurance covers the remainder.
Why This Is the Correct Answer
With a deductible-based workers' compensation policy, the contractor pays the deductible amount out of pocket, and the insurance company covers the remaining costs. In this case, the total claim is $18,750 with a $2,500 deductible, so the insurance company pays $18,750 - $2,500 = $16,250. This is the standard calculation for any insurance claim with a deductible.
Why the Other Options Are Wrong
Option B: $2,500
This represents the total claim amount ($18,750) without subtracting the deductible. The insurance company never pays the full claim amount when there's a deductible - the contractor must pay the deductible portion first.
Option C: $21,250
This is only the deductible amount ($2,500) that the contractor pays, not what the insurance company pays. The insurance company pays the majority of the claim after the deductible is satisfied.
Memory Technique
Think 'Deductible = Contractor's Debt' - the contractor must pay the deductible amount, and insurance picks up the remaining tab.
Reference Hint
Florida Building Code - Chapter on Construction Safety and Workers' Compensation Requirements, or Business and Finance Law section covering insurance obligations
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?