Legal Definitions - apportionment clause

Apportionment Clause

An apportionment clause is a specific provision found within an insurance policy. Its purpose is to determine how a financial loss will be divided and paid out when the same property or risk is covered by more than one insurance policy. Essentially, if a single event causes damage or loss that triggers coverage under multiple policies, this clause ensures that each insurer contributes to the payout in proportion to the amount of coverage it provides, relative to the total coverage available from all applicable policies combined.

• Example 1: Homeowner's Insurance

  Imagine Sarah owns a house and, perhaps due to refinancing or simply forgetting to cancel an old policy, she accidentally has two separate homeowner's insurance policies covering the exact same property. Policy A, from "Reliable Insurers," provides coverage up to $300,000, and Policy B, from "Secure Shield," provides coverage up to $200,000. If a kitchen fire causes $100,000 in damage to her home, the apportionment clause in each policy would activate. The total coverage across both policies is $500,000 ($300,000 + $200,000). Reliable Insurers provided 60% of the total coverage ($300,000 divided by $500,000), and Secure Shield provided 40% ($200,000 divided by $500,000). Therefore, Reliable Insurers would pay 60% of the $100,000 loss ($60,000), and Secure Shield would pay 40% ($40,000).

  This example illustrates the apportionment clause because the $100,000 loss is distributed proportionally between the two insurers based on their respective coverage amounts relative to the combined total coverage for Sarah's home.

• Example 2: Commercial Property Insurance

  Consider "Tech Solutions Inc.," a business that has insured its office building with two different commercial property policies. Policy X, from "Global Guard," offers coverage up to $1,000,000, while Policy Y, from "Local Protector," covers up to $500,000. A severe storm causes $300,000 in damage to the building's roof and interior. The total insurance coverage for the building is $1,500,000 ($1,000,000 + $500,000). Under an apportionment clause, Global Guard, having provided two-thirds of the total coverage ($1,000,000 divided by $1,500,000), would be responsible for paying approximately two-thirds of the loss, or about $200,000. Local Protector, having provided one-third of the total coverage ($500,000 divided by $1,500,000), would pay approximately one-third of the loss, or about $100,000.

  This scenario demonstrates an apportionment clause by showing how the $300,000 storm damage payout is divided between the two commercial insurers, with each contributing a share that is proportional to their individual policy's coverage limit compared to the overall insurance amount for the building.