How does the insurer handle claims when multiple policies exist under the Pro Rata Method?

When multiple insurance policies are in place covering the same risk, the Pro Rata Method is used to determine how claims are handled. This method ensures that each insurer contributes to the claim payment in proportion to the coverage provided by their respective policies.

In this scenario, if a loss occurs, each insurer calculates its share of the payout based on their policy limits relative to the total limits of all policies in force. This prevents the insured from being overcompensated for their loss, as they cannot collect more than the actual loss suffered.

For instance, if there are two policies: one for $50,000 and another for $100,000, and a loss of $90,000 occurs, the first insurer would pay one-third of the claim (since their limit is one-third of the total coverage), while the second insurer would cover two-thirds. This method ensures fairness and adherence to the principle of indemnity in insurance, which is to restore the insured to the financial position they were in before the loss, but not to profit from it.

This approach effectively distributes the financial responsibility among insurers, aligning with the fundamental purpose of insurance, rather than allowing any single insurer to absorb the entire loss or permitting the insured to receive an amount greater