Property & Casualty Insurance Exam (National Portion)Casualty InsuranceHard
An insured has two auto policies: Policy A with a bodily injury liability limit of $50,000 and Policy B with a bodily injury liability limit of $100,000. Both policies cover the same vehicle involved in an accident where the insured is at fault, causing $75,000 in bodily injury to a third party. If both policies have a 'pro-rata' Other Insurance clause, how much would Policy A pay?
- A$75,000
- B$50,000
- C$37,500
- D$25,000
Show answer & explanationAnswer & explanation
Correct answer: D. $25,000
With pro-rata clauses, each policy pays a proportion of the loss based on its share of the total available coverage. Total coverage is $50,000 (Policy A) + $100,000 (Policy B) = $150,000. Policy A's share is $50,000 / $150,000 = 1/3. Therefore, Policy A pays 1/3 of the $75,000 loss, which is $25,000.
Why the other options are wrong
- A. This is the total loss, which would not be paid by Policy A alone given the 'other insurance' clause.
- B. This would be the case if Policy A's limit was the only factor considered, or if it was primary and the loss didn't exceed its limit.
- C. This would be if the policies split it evenly, which is not what 'pro-rata' means in this context.
Pro-Rata Other Insurance Clause
A clause in an insurance policy that states when multiple policies cover the same loss, each policy will pay a proportion of the loss equal to the ratio of its limit to the total limits of all applicable policies.
- Applies when two or more policies cover the same loss.
- Prevents an insured from collecting more than 100% of the loss.
- Calculated by (Policy A Limit / Total Limits) * Loss Amount.
- Commonly found in property and liability policies.
Memory trick: Pro-Rata: Proportional Payouts for Shared Risk.