A client has two Personal Auto Policies (PAPs). Policy A has a bodily injury liability limit of $100,000 per person / $300,000 per accident. Policy B has a bodily injury liability limit of $50,000 per person / $150,000 per accident. The client causes an accident resulting in $75,000 in bodily injury to a single third party. Both policies contain a 'pro-rata' other insurance clause. How much will Policy A pay?
- A$75,000
- B$25,000
- C$50,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: C. $50,000
A pro-rata clause dictates that each policy pays a proportion of the loss equal to the ratio of its limit to the total limits of all applicable policies. Total available coverage for one person is $100,000 (Policy A) + $50,000 (Policy B) = $150,000. Policy A's share is $100,000 / $150,000 = 2/3. Policy B's share is $50,000 / $150,000 = 1/3. The total loss is $75,000. Policy A pays 2/3 of $75,000 = $50,000. Policy B pays 1/3 of $75,000 = $25,000.
Why the other options are wrong
- A. This is the full amount of the loss, which would not be paid by a single policy under a pro-rata clause when multiple policies exist.
- B. This is what Policy B would pay, not Policy A.
- D. This is Policy A's per-person limit, but the payout is prorated due to the presence of Policy B.
Pro-Rata Other Insurance Clause
A 'pro-rata' other insurance clause specifies that when multiple insurance policies cover the same loss, each policy will pay a share of the loss in proportion to the ratio of its limit to the total limits of all applicable policies.
- Prevents over-recovery by the insured.
- Distributes the loss among multiple insurers.
- Calculation based on the ratio of each policy's limit to the combined limits.
- Common in property and liability insurance.
Memory trick: PRO-RATA: Proportionate Responsibility, dividing by the TOTAL limits.