40. An insured has a $500 deductible and 80/20 coinsurance. A $4,500 covered loss occurs. How much will the insurer pay?
Answer: A
The insurer will pay $3,200.
After applying the deductible of $500 to the $4,500 covered loss, the remaining amount is $4,000. With an 80/20 coinsurance arrangement, the insurer pays 80% of the remaining $4,000, which totals $3,200.
A) $3,200
This option is correct because it accurately reflects the insurer's payment after the deductible and coinsurance are applied. The calculation involves deducting the $500 from the $4,500 loss, resulting in $4,000, and then the insurer pays 80% of that amount, which is $3,200.
B) $3,600
This option is incorrect. If the insurer were to pay $3,600, it would imply that either the deductible or coinsurance was calculated incorrectly. Specifically, $3,600 does not align with the 80% payment of the remaining amount after the deductible is applied.
C) $4,000
This option is incorrect as it represents the amount remaining after the deductible but does not account for the coinsurance. The insurer's payment is based on the 80% coinsurance of the remaining amount, which results in a lower figure than $4,000.
D) $4,500
This option is incorrect because it suggests that the insurer would cover the entire loss without considering the deductible and coinsurance. The insured must first pay the deductible, and therefore, the insurer's payment is limited to 80% of the remaining loss, which is significantly less than $4,500.
Conclusion
The correct answer, $3,200, is derived from properly applying both the deductible and the coinsurance percentage to the covered loss. All other options fail to accurately reflect the calculations necessary to determine the insurer's payment, thereby confirming that $3,200 is the definitive answer.