Question

The City of Seagoville has two primary government crime discovery forms in place which have the same terms and conditions, but Policy A's coverage is set at a $500,000 limit, and Policy B's limit is $100,000. If a large loss occurs, how will the policies go about paying for damages?

Option 1: Policy A pays the full $500,000
Option 2: Policy B pays the full $100,000
Option 3: Policies share proportionally up to their limits
Option 4: Policies share equally, regardless of limits

Answer 1

Policies A and B would share the cost of a large loss proportionally up to their limits, with 1)Policy A contributing up to $500,000 and Policy B up to $100,000.

Step-by-step explanation:

When a large loss occurs in the City of Seagoville and there are two primary government crime discovery forms (insurance policies) with different limits of coverage, Option 3 is the general way these policies would go about paying for damages.

This means that both Policy A and Policy B would share the cost proportionally up to their respective limits. Policy A with a limit of $500,000 and Policy B with a $100,000 limit would contribute to the total damage costs in proportion to the coverage they each provide.

Using a simplified example of automobile insurance to illustrate how insurance works, let's consider 100 drivers where the total damage incurred by car accidents is $186,000. If each driver pays a premium of $1,860 annually, this would cover the cost of the accidents for that year.

The insurance company would use the collected premiums to pay out claims according to the terms and conditions of each policy, including deductibles, copayments, and coinsurance, which are methods of cost sharing designed to reduce moral hazard.