Course: Insurance Planning
Lesson 2: Fundamentals of Insurance
I’m having difficulty seeing the difference between pro-rata liability, contribution by equal shares, and primary and excess. Could you explain the review exercise?
Three companies insure Josh’s $250,000 house. Insurer A has it insured for 10%, insurer B for 35%, and insurer C for 55% of the replacement value. Using the contribution by equal shares provision for multiple insurance providers, how much will each insurer pay for a loss of $120,000?
- All three pay $40,000
- A pays $25,000 ; B pays $47,500 ; C pays $47,500
- A pays $12,000 ; B pays $42,000 ; C pays $66,000
- A pays $25,000 ; B pays $42,000 ; C pays $53,0
With pro rata liability, the insurers will contribute exactly as they insure. In contribution by equal shares, they would equally share the loss but not to exceed the total coverage of each. And finally, with primary and excess, the primary insures to their maximum amount and then the excess insurer will pick up the rest.
So had this question been asking for pro rata, A would have paid $12,000 (10% of $120,000), B would have paid $42,000, and C would have paid $66,00.
But because the question states we are using contribution by equal shares, we start by assuming all three will split the loss, which would be $40,000 each. However, for Insurer A, because they insure 10% of the $250,000, we can’t exceed their $25,000 maximum coverage. That leaves $15,000 for the other two insurers to split. So, add $7,500 to their share, and our correct answer is choice #2.
Does this help to clarify? Please let me know.