Property & Casualty Insurance Exam (National Portion)Casualty InsuranceMedium
A client has two homeowner's policies, Policy A with a liability limit of $300,000 and Policy B with a liability limit of $200,000. Both policies have an 'Other Insurance' clause stating they pay on a pro-rata basis. The client is found legally liable for $100,000 in damages. How much will Policy A pay?
- A$100,000
- B$60,000
- C$40,000
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: B. $60,000
The pro-rata share is determined by the proportion of each policy's limit to the total limits available. Total limits = $300,000 (A) + $200,000 (B) = $500,000. Policy A's share is ($300,000 / $500,000) = 0.60 or 60%. Policy A pays 60% of the $100,000 claim, which is $60,000.
Why the other options are wrong
- A. This would be the full claim, which would only happen if Policy A was primary and Policy B was excess, or if Policy A was the only policy.
- C. This would be Policy B's share ($200k/$500k = 40% of $100k).
- D. This might be if the policies paid equally, which is not pro-rata.
Pro-Rata Other Insurance Clause
An 'Other Insurance' clause that specifies 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 limit of liability of all valid and collectible insurance.
- Divides loss proportionally by policy limits.
- Prevents stacking of coverage to exceed loss.
- Common in property and liability policies.
Memory trick: Sharing the burden, but only what's fair.