Legal Definitions - pro rata clause

Pro Rata Clause

A pro rata clause is a common provision found in insurance policies, particularly within sections addressing "other insurance." This clause specifies how an insurance company will contribute to a loss when the insured party has multiple insurance policies that all cover the same risk or event.

Essentially, it limits each insurer's responsibility to pay only a proportional share of the total loss. This share is determined by comparing the coverage limit of that specific policy to the total amount of all applicable insurance coverage available for that loss. In simpler terms, if you have multiple policies covering the same thing, each insurer pays a piece of the pie, with the size of their piece depending on how much coverage they provide relative to the total coverage.

Here are some examples illustrating how a pro rata clause works:

• Example 1: Homeowner's Property Damage

  Imagine a homeowner, Sarah, has two separate insurance policies covering her house against fire damage. Policy A has a coverage limit of $300,000, and Policy B has a coverage limit of $200,000. Both policies contain a pro rata clause. If a fire causes $100,000 in damage to Sarah's home:

  • The total available insurance coverage is $300,000 (Policy A) + $200,000 (Policy B) = $500,000.
  • Policy A's share of the total coverage is $300,000 / $500,000 = 60%.
  • Policy B's share of the total coverage is $200,000 / $500,000 = 40%.

  Under the pro rata clauses, Policy A would pay 60% of the $100,000 loss ($60,000), and Policy B would pay 40% of the $100,000 loss ($40,000). This ensures Sarah is fully compensated for her loss without any single insurer bearing the entire burden, and without her receiving more than the actual loss.

• Example 2: Business Liability Claim

  Consider a small manufacturing company, "Widgets Inc.," that holds two general liability insurance policies from different providers, both of which cover claims arising from product defects. Policy X offers $1,000,000 in coverage, and Policy Y offers $500,000 in coverage. A customer sues Widgets Inc. due to a defective product, and the claim is settled for $150,000.

  • The total available liability coverage is $1,000,000 (Policy X) + $500,000 (Policy Y) = $1,500,000.
  • Policy X's share of the total coverage is $1,000,000 / $1,500,000 = approximately 66.67%.
  • Policy Y's share of the total coverage is $500,000 / $1,500,000 = approximately 33.33%.

  Due to the pro rata clauses in both policies, Policy X would be responsible for approximately 66.67% of the $150,000 settlement ($100,005), and Policy Y would cover approximately 33.33% ($49,995). Each insurer contributes proportionally to the settlement based on their respective policy limits.