A commercial building is insured for $600,000 under a policy with a 5 percent deductible that applies to the amount of insurance. A covered loss of $125,000 occurs. The insurer pays:
Explanation
A percentage deductible is figured on the stated base, here 5 percent of the $600,000 amount of insurance, or $30,000, and that comes off the loss: $125,000 - $30,000 = $95,000. Taking 5 percent of the loss instead gives $118,750 and is the classic error, because this deductible grows with the amount of insurance rather than with the size of the claim. The $30,000 figure is the deductible itself, the share the insured absorbs.
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