General Lines Property and Casualty Insurance Practice Exam

In a pro rata liability situation, an insurer's payment is based on the percentage of coverage provided relative to the total amount of coverage available among all policies that cover the same loss. This approach ensures that each insurer pays a proportionate share of the claim corresponding to their respective policy limits.

When multiple insurance policies cover the same risk and a loss occurs, each insurer contributes to the loss in accordance with the limits of their coverage compared to the total coverage limits available. For example, if one policy covers up to $100,000 and another covers up to $200,000, and a loss of $300,000 occurs, the payments would be made proportionately based on these limits. Thus, the insurer with the lesser coverage does not bear the entire loss amount but pays a share that corresponds to its limit.

Using the percentage calculation ensures fairness and aligns with the principle of indemnity in insurance, which aims to restore the insured to their financial position prior to the loss without providing a profit from insurance.