Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsMedium
A commercial building sustains $100,000 in damage from a covered peril. The building is insured under two policies: Policy A with a limit of $75,000 and Policy B with a limit of $150,000. Both policies contain a 'pro rata liability' clause. How much will Policy A pay for this loss?
- A$33,333.33
- B$50,000.00
- C$75,000.00
- D$40,000.00
Show answer & explanationAnswer & explanation
Correct answer: A. $33,333.33
The pro rata clause dictates that each policy pays a proportion of the loss equal to its share of the total insurance. Total insurance is $75,000 + $150,000 = $225,000. Policy A's share is $75,000 / $225,000 = 1/3. So, Policy A pays 1/3 of the $100,000 loss, which is $33,333.33.
Why the other options are wrong
- B. This would be if Policy A had a 50% share of the total insurance, which it does not.
- C. Policy A would only pay its full limit if its proportional share exceeded the limit or if it were the only policy.
- D. This calculation is incorrect for the given policy limits.
Pro Rata Liability Clause
A provision in property insurance that specifies how multiple policies covering the same loss will share in payment, typically based on each policy's proportion of the total insurance amount.
- Prevents over-indemnification
- Applies when multiple policies cover same risk
- Calculated based on each policy's limit relative to total limits
Memory trick: PROportions RAtio the LOSS.