Texas Property and Casualty License Practice Exam

How does "Pro Rata" coverage work among multiple insurance policies?

1. Allocates total loss to one insurer only

2. Pays each insurer their share of the loss based on their policy limit

3. Applies a deductive method to split costs

4. Requires prior insurance payments be settled before claims

The correct answer is: Pays each insurer their share of the loss based on their policy limit

"Pro Rata" coverage refers to the method of dividing the responsibility for a loss among multiple insurance policies that cover the same risk. In this context, if you have more than one insurance policy in force that applies to a specific loss, pro rata distribution means that each insurer will pay a portion of the loss in proportion to the amount of coverage provided by their individual policy limits. For example, if one policy has a limit of $50,000 and another has a limit of $100,000, respectively, and a loss occurs, the insurance payout would be split between them based on these limits. This ensures fairness among insurers and prevents any single insurer from bearing the total cost of the claim. Each insurer contributes according to the ratio of their coverage to the total coverage available from all policies involved. This system maintains that losses are shared, encouraging all insurers to fulfill their part of the coverage promise based on their individual agreements. It also helps policyholders receive a fair settlement that reflects the multiple layers of coverage they have purchased.