Understanding Deductibles in Insurance: The Case of the Cigarette and the Car

A cigarette sets the automobile seat on fire and causes $450 damage. The policy shows a $300 deductible under Specified Perils. The insurer would pay:

• A. $0
• B. $150
• C. $300
• D. $450

Answer: (B)

In this scenario, the total damage caused by the fire is $450, while the deductible on the insurance policy is $300. The deductible represents the amount that the policyholder must pay out of pocket before the insurance company covers any remaining losses. To determine the amount the insurer will pay, the deductible is subtracted from the total damage. Specifically, when the $300 deductible is applied to the $450 damage, the calculation is as follows: $450 (total damage) - $300 (deductible) = $150 Therefore, the insurer would cover the remaining $150 after the deductible has been taken into account. This is why the correct answer is that the insurer would pay $150.

When it comes to insurance, there’s an important concept that can often leave many scratching their heads—deductibles. Picture this: a cigarette inadvertently sets your car seat on fire, resulting in a hefty damage bill of $450. Now, let’s see how this all plays out under your insurance policy, specifically with a $300 deductible under Specified Perils. It might sound complicated, but bear with me; it’s all about understanding how deductibles work!

So, here's the juicy part. You’re likely asking yourself, “How much will my insurer actually pay out?” It’s a valid question that ties directly to your policy details. Based on the scenario given, the first step is to calculate the payout by subtracting the deductible from the total damage. That means we’ve got $450 in damage and a $300 deductible to tackle. Now, simple math leads us to think that the payout would be $150, right? Hold that thought.

Here’s the kicker: your insurer won’t pay a dime! Yes, that’s right—$0! Once you subtract the $300 deductible from the $450 damage, you’re left with $150, but since that payout doesn’t exceed your deductible, you essentially end up with nothing. It’s like thinking you’re winning a game but realizing you didn’t score high enough for the prize. This knowledge is important because, in insurance terms, the insurer’s obligation to pay only kicks in when the loss surpasses the deductible amount. In this case, it simply hasn’t!

Why does this matter? Well, understanding how deductibles operate is key to managing your expectations. You might think that because damage occurred, there should be compensation. But insurance isn’t always about payouts for every minor inconvenience. Instead, these structures are designed to have policyholders shoulder some of the costs before coverage kicks in.

Now, you might wonder how this applies to the Registered Insurance Brokers of Ontario (RIBO) exam. If you’re gearing up to tackle this test, grasping the details about deductibles and claims is crucial. It’s one thing to skim through the concepts and another to understand the practical implications in real life. This scenario isn’t just textbook knowledge; it’s applicable, and figuring it out can make a world of difference not only for your exam but also in your future career as an insurance broker.

In summary, next time you think about your insurance policy and the frightening prospect of a loss, remember this—it’s essential to grasp the implications of your deductible. And always keep in mind that, like in our $450 damage incident, understanding how these numbers interact is what will keep you informed and prepared! Remember to approach your studies with that same inquisitive spirit. You never know when these lessons might pop up in real life or on an exam!