Question

When the deductible in a property insurance policy is a percentage deductible that applies to the limit of insurance,

A. the policy typically has no coinsurance requirement.

B. the policyholder has an incentive to insure the property for its full insurable value.

C. the policyholder with a lower limit of insurance has a higher dollar deductible.

D. the policyholder with a lower limit of insurance has a lower dollar deductible.

Answer 1

The correct final answer is that the policyholder is incentivized to insure the property for its full value (Option B) because a percentage deductible based on the limit of insurance means a lower deductible in dollar terms when the property value is fully covered.

Step-by-step explanation:

When a property insurance policy has a percentage deductible that is applied to the limit of insurance, this typically means that the deductible is a percentage of the total coverage amount (limit of insurance). This structure creates an incentive for the policyholder to insure their property for its full insurable value, as selecting lower limits would mean a higher percentage of a smaller number, resulting in a higher out-of-pocket deductible in case of a claim.

The answer is B: the policyholder has an incentive to insure the property for its full insurable value. This is because if the limit of insurance is higher, the percentage deductible will equate to a larger dollar amount but a smaller proportion of the total loss, hence encouraging full coverage to minimize potential out-of-pocket expenses when a loss occurs.