Student Question from Natalie P
Course: Insurance Planning
I am looking at question #2 that discusses the “contribution by equal shares” rule. However, I do not understand how they are getting the answer. 10% of $120,000 is $12,000 (not $25,000). Can you please explain? Thanks!
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?
Great to hear from you. So, in contribution by equal shares, each insurer pays an equal amount, but only up to their limit of liability. In this case, if there was no limit, each would pay $40,000 of the $120,000 loss. However, insurer A has a limit of $25,000, based on 10% of $250,000. So A is limited to $25,000, and B and C share the remaining $95,000 of the loss, or $47,500 each. I hope that clarifies this for you. Please let me know if not!