If a business owner insures a commercial vehicle for 60% of its value instead of the required 75%, how much will they pay out of pocket after a $25,000 repair cost and a $15,000 deductible?

To determine how much the business owner will pay out of pocket after a $25,000 repair cost and a $15,000 deductible, we need to first establish the amount covered by the insurance and the implications of not insuring the vehicle for the required percentage of its value.

The vehicle is insured for 60% of its value instead of the required 75%. This underinsurance means that, in the event of a loss, the insurance company will apply a penalty based on the proportion of the actual coverage to the required coverage. Therefore, if the total repair cost is $25,000, and the policyholder has coverage for 60% of the value, the insurance will only cover a portion of the repair costs accordingly.

Let's say the value of the commercial vehicle is represented by 'V.' The required insurance coverage would be 75% of 'V', but the owner has only insured it for 60% of 'V'. Thus, the relationship is:

• Required coverage = 0.75V
• Actual coverage = 0.60V

When a claim is made, the insurance company uses the ratio of coverage to required coverage to determine the payout:

Payout = (Actual Coverage / Required Coverage) x Claim Amount