Understanding Insurance Policies: Pro Rata Basis

How do insurance policies respond on a pro rata basis?

When Tina suffers a loss totaling $75,000, how will the two policies respond?

Answer:

Both Policy X and Policy Y will respond to Tina's loss, with Policy X covering 75% of the loss and Policy Y covering more than the full loss.

When an individual has two insurance policies that cover the same risk on a pro rata basis, each policy will respond proportionately based on their limits. In the case of Tina's loss totaling $75,000, both Policy X and Policy Y will come into play.

To determine how much each policy will pay, we can calculate the percentage of the loss covered by each policy:

1. Policy X: $75,000 (loss) / $100,000 (Policy X limit) = 0.75 (or 75%)
2. Policy Y: $75,000 (loss) / $25,000 (Policy Y limit) = 3 (or 300% - Policy Y limit is smaller than the loss, so it needs to be multiplied by 3 to make it proportionate)

Based on these calculations, Policy X will cover 75% of the loss and Policy Y will cover 300% of the loss. In practical terms, this means Policy X will pay $56,250 ($75,000 * 0.75) and Policy Y will pay $75,000 (since it covers more than the full loss).