Question

An insured has four separate but identical policies written by different insurers to cover her $100,000 building. Each policy is written for $100,000, and each has the pro rata liability other insurance clause. In the event of a total loss to the building, what would each insurer pay?

1) Each policy will pay $25,000 of the loss
2) Each policy will pay the total policy limits of $100,000
3) The first policy written will pay $75,000 and the other three will contribute proportionately to pay for the remaining $25,000
4) The policy with the earliest effective date will pay the entire loss, and the other policies will pay nothing

Answer 1

Each of the four insurers with identically valued policies covering the same building would pay $25,000 in the event of a total loss to the building, as per the pro rata liability other insurance clause. This ensures that the loss is equally distributed among the insurers and prevents the insured from profiting from the loss.

Step-by-step explanation:

When multiple insurance policies with pro rata liability clauses are in place, they stipulate that each insurer's contribution to a claim will be proportionate to its share of the total coverage. In this case, the insured has four identical policies, each for $100,000, covering the same $100,000 building. With the pro rata clause, each insurer is responsible for a portion of the loss in direct proportion to the amount of insurance it provides relative to the total insurance on the risk.

Therefore, if there is a total loss of the building, the loss amount would be $100,000. Since each policy provides an equal amount of coverage, each insurer would contribute an equal share of the total loss. There are four policies, so each insurer would pay $25,000 ($100,000 loss divided by 4).

This arrangement prevents over-insurance and the insured making a profit from the loss, which aligns with the principle of indemnity in insurance policies. It's also a good example of how coinsurance works; even though in this particular situation, the insured does not pay a percentage of the loss, the principle of sharing the loss among multiple insurers is applied.