If two policies with different limits apply pro rata to a loss, the payment from each is proportional to its limit relative to total limits.

If two policies with different limits apply pro rata to a loss, the payment from each is proportional to its limit relative to total limits.

• A. The payment is proportional to policy limits
• B. The higher the premium, the higher the payout
• C. The policy with the higher limit pays first
• D. The insurer pays only up to its own limit regardless of loss

Answer: (A)

When multiple policies share the same loss, the amount each policy pays is determined by how much total coverage exists and each policy’s portion of that total. The idea is to allocate the loss in proportion to the limits each policy provides relative to the combined limits. For example, if one policy has a 100,000 limit and another has a 50,000 limit, the total coverage is 150,000. If a loss of 60,000 occurs, the first policy would pay 60,000 × (100,000/150,000) = 40,000 and the second would pay 60,000 × (50,000/150,000) = 20,000. The payments add up to the loss and reflect how much each policy covers of the total available limits. Premiums don’t determine how a loss is split, and there’s no “first payer” by higher limit in pro rata sharing. Also, while each policy covers up to its own limit, the distribution is driven by the relative size of the limits across all applicable policies.

When multiple policies share the same loss, the amount each policy pays is determined by how much total coverage exists and each policy’s portion of that total. The idea is to allocate the loss in proportion to the limits each policy provides relative to the combined limits.

For example, if one policy has a 100,000 limit and another has a 50,000 limit, the total coverage is 150,000. If a loss of 60,000 occurs, the first policy would pay 60,000 × (100,000/150,000) = 40,000 and the second would pay 60,000 × (50,000/150,000) = 20,000. The payments add up to the loss and reflect how much each policy covers of the total available limits.

Premiums don’t determine how a loss is split, and there’s no “first payer” by higher limit in pro rata sharing. Also, while each policy covers up to its own limit, the distribution is driven by the relative size of the limits across all applicable policies.