A client has two Personal Auto Policies (PAPs). Policy A has a bodily injury liability limit of $50,000 per person / $100,000 per accident. Policy B has a bodily injury liability limit of $25,000 per person / $50,000 per accident. Both policies contain a Pro-Rata Other Insurance clause. If the client causes an accident resulting in $60,000 in bodily injuries to one person, how much will Policy B pay?
- A$0
- B$25,000
- C$40,000
- D$20,000
Show answer & explanationAnswer & explanation
Correct answer: D. $20,000
The total coverage available is $50,000 (Policy A) + $25,000 (Policy B) = $75,000 per person. However, the claim is $60,000, and each policy's pro-rata share is based on its proportion of the total available *applicable* coverage. Policy A pays (50k/75k) * $60,000 = $40,000. Policy B pays (25k/75k) * $60,000 = $20,000. This is within Policy B's per-person limit of $25,000.
Why the other options are wrong
- A. Pro-rata implies both policies will contribute.
- B. This would be Policy B's maximum per-person payout if it were primary, but pro-rata distributes the loss.
- C. This is Policy A's share, not Policy B's.
Pro-Rata Other Insurance Clause
A clause in an insurance policy that stipulates that when multiple policies cover the same loss, each policy will pay a proportion of the loss equal to the ratio of its limit of liability to the total limits of all applicable policies.
- Prevents over-indemnification.
- Each policy contributes proportionally.
- Applies up to each policy's individual limit for the specific loss.
Memory trick: Pro-Rata means 'proportionally shared' – like dividing a pie based on how big each slice was intended to be.