Question

The ABC Corporation has $100,000 of coverage on its building through insurance Company A, and $50,000 of identical coverage on the same building through insurance Company B. Assuming coinsurance is not an issue, when a $24,000 loss occurs and the pro rata method is used, how much will the insurer pay?

1) Company A will pay $24,000, Company B will pay $0
2) Company A will pay $16,000; Company B will pay $8,000
3) Company A will pay $20,000; Company B will pay $4,000
4) Company A will pay $12,000; Company B will pay $12,000

Answer 1

The insurance policy of ABC Corporation, with coverage from two companies, will pay $20,000 and $4,000 using the pro rata method for a $24,000 loss.

Step-by-step explanation:

The insurance policy of ABC Corporation has coverage of $100,000 with Company A and $50,000 with Company B for the same building. In the case of a $24,000 loss using the pro rata method, the insurers will pay in proportion to their coverage amount. Therefore, Company A will pay $20,000 ($24,000 x $100,000 / ($100,000 + $50,000)) and Company B will pay $4,000 ($24,000 x $50,000 / ($100,000 + $50,000)). Hence, the correct answer is option 3) Company A will pay $20,000; Company B will pay $4,000.