Question

An insured has primary coverage with two companies. Company ABC has policy limits of $35,000, and company XYZ's limits are $40,000. Both policies permit contribution by equal shares. If a $60,000 covered loss occurred, how much would company ABC pay?

A) $30,000
B) $35,000
C) $40,000
D) $60,000

Answer 1

Company ABC would pay A)$30,000 towards the $60,000 covered loss. This is derived from equally dividing the loss between two insurers, giving $30,000 per insurer, which is within ABC's policy limit of $35,000.

Step-by-step explanation:

If an insured has primary coverage with two companies, namely Company ABC with policy limits of $35,000 and Company XYZ with limits of $40,000, and both policies allow for contribution by equal shares, we can calculate the payment of each company for a $60,000 covered loss.

Contribution by equal shares means each company contributes equally up to the limit of their policy until the loss is fully compensated.

In this scenario, we would divide the loss between the two companies.

Since the total coverage available from both companies is $75,000 ($35,000 from ABC + $40,000 from XYZ), which is more than the $60,000 loss, both insurers can fully satisfy the claim within their limits.

Each insurer would cover a proportion based on the claim amount and the combined coverage.

For equal contribution, we divide the total loss by the number of insurers, which gives us $60,000 / 2 = $30,000 per insurer.

However, Company ABC's policy limit is $35,000, which is greater than this amount, so it would indeed pay A)$30,000 towards the loss.