When two policies share a loss under pro-rata terms, which statement is true?

• A. Payments are proportional to each policy's limit and do not exceed the loss
• B. The higher-limit policy pays the entire loss
• C. Each policy pays its own limit regardless of the loss
• D. Only the policy with the earliest policy date pays

Answer: (A)

Under pro-rata terms, when two policies cover the same loss, each policy pays a portion of the loss proportional to its limit. The share is calculated by taking each policy’s limit divided by the total of all applicable limits, then multiplying by the loss. The total payments add up to the loss, and no policy pays more than its own limit. So the statement that payments are proportional to each policy’s limit and do not exceed the loss is correct. For example, with limits of 50,000 and 100,000 and a 60,000 loss, the 50,000 policy covers 20,000 and the 100,000 policy covers 40,000. The higher-limit policy doesn’t automatically pay the entire loss; both share it according to their limits.