Property & Casualty Insurance Exam (National Portion)Casualty InsuranceMedium
A client has two Personal Auto Policies (PAPs). Policy A has a liability limit of $100,000, and Policy B has a liability limit of $200,000. Both policies contain a 'pro-rata' other insurance clause. If the client causes an accident resulting in $180,000 in bodily injury damages, how much will Policy A pay?
- A$60,000
- B$120,000
- C$90,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: A. $60,000
A pro-rata 'other insurance' clause states that when two or more policies cover the same loss, each policy will pay its proportionate share of the loss. The proportion is determined by the ratio of each policy's limit to the total limits of all applicable policies. Total limits = $100,000 (Policy A) + $200,000 (Policy B) = $300,000. Policy A's share = ($100,000 / $300,000) * $180,000 = (1/3) * $180,000 = $60,000.
Why the other options are wrong
- B. This would be Policy B's share if the total was $180,000, or Policy A's share if limits were different.
- C. This would be half of the loss, which isn't correct for pro-rata based on these limits.
- D. This is Policy A's full limit, but it shares the loss pro-rata with Policy B.
Pro-Rata Other Insurance
A pro-rata 'other insurance' clause distributes a loss among multiple policies proportionately, based on each policy's liability limit relative to the total limits of all policies.
- Applies when multiple policies cover the same loss.
- Each policy pays its share, not exceeding its limit.
- Share is calculated as (Policy Limit / Total Limits) * Loss.
Memory trick: Proportionate payout: my limit over total limits.