North Carolina Adjuster Practice Exam

What does the term "deductible" refer to in a homeowner's policy?

1. The initial amount paid in premiums

2. The amount policyholder pays before insurance covers a claim

3. The maximum amount insurable under a policy

4. The total value of covered property

The correct answer is: The amount policyholder pays before insurance covers a claim

The term "deductible" in a homeowner's policy specifically refers to the amount that the policyholder must pay out-of-pocket before the insurance company begins to cover any claims. This means that if a loss occurs and a claim is filed, the deductible is subtracted from the claim amount, and the insurer will then pay for the remaining expenses according to the terms of the policy. For example, if a policy has a $1,000 deductible and a covered loss amounts to $5,000, the policyholder would be responsible for the first $1,000, and the insurance would cover the remaining $4,000. This mechanism not only protects the insurer from small or frequent claims but also encourages policyholders to take precautions against losses, as they share some of the financial responsibility. In contrast, the initial amount paid in premiums is related to how much the policyholder pays for coverage and does not influence claim payouts. The maximum amount insurable refers to the limit of coverage that can be provided under the policy, and the total value of covered property pertains to the overall worth of items insured, none of which directly involve the concept of a deductible.