Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsHard
A policyholder has two property policies covering the same building. Policy A has a limit of $400,000, and Policy B has a limit of $600,000. Both policies contain an 'Other Insurance' clause that states they will pay losses on a pro-rata basis. If a covered loss of $100,000 occurs, how much will Policy A pay?
- A$60,000
- B$30,000
- C$40,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: C. $40,000
The pro-rata share is calculated based on each policy's limit relative to the total coverage. Total coverage = $400,000 (Policy A) + $600,000 (Policy B) = $1,000,000. Policy A's share = ($400,000 / $1,000,000) = 0.40. Policy A will pay 0.40 * $100,000 (loss) = $40,000.
Why the other options are wrong
- A. This would be Policy B's share (0.60 * $100,000), not Policy A's.
- B. This would be Policy B's share if the total was $1M (0.6 * $100k = $60k), and this option is incorrect for Policy A.
- D. This is the total loss, which would only be paid by Policy A if it were the sole policy or if it was primary with no other insurance clause.
Pro Rata (Other Insurance)
An 'Other Insurance' clause that specifies how multiple policies covering the same loss will share the payment, based on the proportion of each policy's limit to the total insurance carried.
- Prevents insured from collecting more than actual loss
- Calculated as (Policy Limit / Total Insurance) * Loss
- Common way for multiple policies to contribute
Memory trick: Pro Rata: Share Proportionally by Ratio.