Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsHard
A client's property is insured under two policies for overlapping coverage. Policy A has a limit of $100,000, and Policy B has a limit of $200,000. If a covered loss of $60,000 occurs, how much will Policy A pay under a Pro Rata liability clause?
- A$40,000
- B$20,000
- C$30,000
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: B. $20,000
Under Pro Rata, each policy pays its proportion of the loss based on its share of the total insurance. Total insurance = $100,000 (A) + $200,000 (B) = $300,000. Policy A's share = $100,000 / $300,000 = 1/3. Policy A pays 1/3 of the $60,000 loss = $20,000.
Why the other options are wrong
- A. This calculation is incorrect, potentially miscalculating the total insurance or the ratio.
- C. This would be the amount Policy B pays if Policy A's share was $100,000 / $200,000.
- D. This would be the full loss, which is incorrect as multiple policies are involved.
Pro Rata (Other Insurance)
An 'other insurance' clause that specifies that when multiple policies cover the same loss, each policy pays a share of the loss proportionate to its limit compared to the total insurance.
- Prevents over-indemnification.
- Calculated as (Policy Limit / Total Insurance) * Loss.
- Common in property insurance.
Memory trick: Ratio of Limit to Total, then Multiply by Loss.