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Simple English definitions for legal terms
pro rata clause
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A quick definition of pro rata clause:
A pro rata clause is a part of an insurance policy that limits the amount an insurer will pay for a loss. It works by calculating the proportion of the policy's face amount to the total insurance available on the risk. This means that if there are other insurance policies covering the same risk, the insurer will only pay a portion of the loss based on the policy's share of the total coverage. It is also known as a pro rata distribution clause and is different from an escape clause or excess clause.
A more thorough explanation:
A pro rata clause is a provision in an insurance policy that limits the insurer's liability to pay only a portion of the loss. This portion is determined by the face amount of the policy in relation to the total insurance available on the risk. The pro rata clause is usually found in the "other insurance" section of the policy.
For example, if a policy has a face amount of $100,000 and there is a total of $500,000 in insurance available on the risk, the insurer would only be liable to pay 20% of the loss. If the total loss was $50,000, the insurer would only pay $10,000.
The pro rata clause is often used in situations where there are multiple insurance policies covering the same risk. In these cases, each insurer is only responsible for paying their portion of the loss based on the pro rata clause.