Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsHard
A business has two separate property insurance policies covering the same building. Policy A has a limit of $300,000 and Policy B has a limit of $200,000. If a covered loss of $100,000 occurs, and both policies contain a 'pro rata liability' clause, how much will Policy A pay?
- A$60,000
- B$40,000
- C$100,000
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: A. $60,000
With a pro rata liability clause, each policy pays a proportion of the loss equal to the proportion its limit bears to the total insurance. Total insurance = $300,000 (Policy A) + $200,000 (Policy B) = $500,000. Policy A's share = ($300,000 / $500,000) * $100,000 = 0.60 * $100,000 = $60,000.
Why the other options are wrong
- B. Incorrect calculation. This would be Policy B's share if the loss was $100,000: ($200,000/$500,000)*$100,000 = $40,000.
- C. Incorrect. This would be the payment if Policy A was the only policy, or if the 'other insurance' clause was primary/excess.
- D. Incorrect calculation. This would be the payment if both policies had equal limits of $100,000 each.
Pro Rata Liability Clause
A policy provision that specifies how a loss will be apportioned among multiple insurance policies covering the same property, based on their respective limits.
- Prevents over-indemnification (profiting from a loss)
- Each policy pays a share proportional to its limit compared to total coverage
- Commonly found in property insurance policies
Memory trick: PRO RATA means 'SHARE by LIMIT'.