Final answer:
The damages are typically capped at the coverage limit of the contractor's insurance policy, with the incorporation of deductibles, copayments, and coinsurance to share costs between the insured and insurer.
Step-by-step explanation:
The amount of damages is generally limited to the insured coverage held by the contractor. In many insurance policies, cost-sharing mechanisms like deductibles, copayments, and coinsurance are in place to mitigate moral hazard by requiring the insured to pay a portion of the costs. A deductible is an upfront amount the policyholder pays before coverage kicks in. A copayment is a fixed fee paid by the policyholder for certain services, like a doctor visit. With coinsurance, the insurance policy covers a set percentage of the cost, with the policyholder paying the remaining percentage. For instance, the insurance may cover 80% of the cost to repair a home after a fire, while the contractor as the homeowner would need to cover the remaining 20%.