If an insurance policy has a franchise of £500 and the valid claim is £1,200, how much will the insurer pay given that premiums of £300 have been paid?

If an insurance policy has a franchise of £500 and the valid claim is £1,200, how much will the insurer pay given that premiums of £300 have been paid?

• A. The insurer pays £700
• B. The insurer pays £1,200
• C. The insurer pays nothing
• D. The insurer pays £500

Answer: (B)

In this scenario, the concept of a franchise in insurance policies applies. A franchise means that the insurer will only begin to pay claims once a specified threshold has been exceeded. In this case, the franchise is set at £500. When a valid claim of £1,200 is made, it clearly exceeds the £500 franchise limit. Thus, the insurer is obligated to pay the entire amount of the claim once the franchise is surpassed. Therefore, the insurer pays the full amount of £1,200. The premiums paid do not influence the amount the insurer owes in terms of the claim; they are primarily related to the policy's validity and coverage terms. It’s important to note that since the claim amount exceeds the franchise, the insurer’s liability is activated, and they must fulfill their commitment as per the policy terms, which leads to the insurer covering the entire amount of the claim in this instance.

In this scenario, the concept of a franchise in insurance policies applies. A franchise means that the insurer will only begin to pay claims once a specified threshold has been exceeded. In this case, the franchise is set at £500.

When a valid claim of £1,200 is made, it clearly exceeds the £500 franchise limit. Thus, the insurer is obligated to pay the entire amount of the claim once the franchise is surpassed. Therefore, the insurer pays the full amount of £1,200. The premiums paid do not influence the amount the insurer owes in terms of the claim; they are primarily related to the policy's validity and coverage terms.

It’s important to note that since the claim amount exceeds the franchise, the insurer’s liability is activated, and they must fulfill their commitment as per the policy terms, which leads to the insurer covering the entire amount of the claim in this instance.