Property & Casualty Insurance Exam (National Portion)Property InsuranceMedium
A homeowner has two policies covering their dwelling. Policy A has a limit of $200,000, and Policy B has a limit of $300,000. If a covered loss of $100,000 occurs, and both policies have a pro-rata 'Other Insurance' clause, how much will Policy A pay?
- A$50,000
- B$20,000
- C$40,000
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: C. $40,000
With a pro-rata clause, each policy pays its proportion of the loss based on its share of the total insurance. Total insurance = $200,000 (Policy A) + $300,000 (Policy B) = $500,000. Policy A's share is $200,000 / $500,000 = 2/5. So, Policy A pays 2/5 of the $100,000 loss = $40,000.
Why the other options are wrong
- A. This would be if both policies had equal limits or were 50/50, which they are not.
- B. Incorrect calculation; this would be 20% of the loss, not the pro-rata share.
- D. Incorrect calculation; this would be 60% of the loss, which would be Policy B's share if the total was $500,000.
Other Insurance Clause (Pro-Rata)
A provision in property insurance policies that specifies how losses will be divided when more than one policy covers the same property.
- Prevents overinsurance and double recovery.
- Pro-rata: Each policy pays its proportionate share based on its limit relative to the total limits.
- Other types include excess and primary/excess clauses.
Memory trick: Pro-Rata is like 'sharing the pie' – each policy gets a slice proportional to its size.