Illinois Casualty Insurance State Practice Exam

In insurance terms, what does compensatory payment mean?

1. Payment for preventative measures

2. Payment to cover loss from a claim

3. Costs associated with policy management

4. Acts of negligence

The correct answer is: Payment to cover loss from a claim

Compensatory payment refers to the financial remuneration provided to a policyholder or claimant to cover the loss, damage, or injury incurred as a result of an insured event. This type of payment underscores the purpose of insurance, which is to restore the insured party to their pre-loss condition, as much as possible, in the face of unexpected events. When an individual files a claim, the insurer assesses the situation and determines that the claimant has suffered a loss that qualifies under the terms of the policy. Subsequently, the insurer disburses a compensatory payment to address the direct costs associated with that loss. This can include property damage, medical expenses, or other financial repercussions stemming from the incident covered by the policy. In the context of the other options, payment for preventative measures refers to costs incurred to avoid potential losses but does not fit the defined scope of compensatory payments. Similarly, costs associated with policy management pertain to administrative expenses rather than compensating for losses. Lastly, acts of negligence are actions that lead to damages or losses but are themselves not a form of payment. The essence of compensatory payment is its role in providing financial recovery to the insured for their specific losses.