Final answer:
A deductible clause in an auto insurance policy is the amount the policyholder must pay out-of-pocket before insurance starts covering the costs. It serves to prevent moral hazard by making sure the policyholder assumes some financial risk. Option C is correct.
Step-by-step explanation:
The deductible clause on an automobile insurance policy refers to the initial amount a policyholder must pay out-of-pocket before the insurance company's coverage begins to pay for any damages or losses. Specifically, it's the maximum amount that needs to be paid by the insured party as part of cost-sharing when a claim is made. This upfront cost is designed to prevent moral hazard, which occurs when there is less incentive to protect against risk because someone else bears the cost of those risks.
For instance, if an auto insurance policy has a $500 deductible, the policyholder would need to pay the first $500 of any claim before the insurance coverage kicks in and pays the remaining balance. This concept is similar to other insurance policy terms such as copayments and coinsurance, where the policyholder shares some of the financial responsibility with the insurer, thereby reducing the likelihood of frivolous claims.