How does pro rata loss settlement work?

Pro rata loss settlement is a method used in insurance where multiple policies are involved in covering a loss. Under this approach, the insurance companies settle the loss based on the percentage of coverage that each policy provides relative to the total coverage for that particular risk. Essentially, each policy contributes to the settlement of the loss proportionally to its coverage limit compared to the total coverage available.

For instance, if two policies are in place, one with a coverage limit of $100,000 and another with a limit of $200,000, and a loss occurs amounting to $300,000, the first policy would cover one-third of the loss, amounting to $100,000, while the second policy would handle two-thirds, or $200,000 of the loss. This ensures that all parties are equitably contributing to the loss based on the policies in force, respecting each insurer's liability.

This method enhances fairness and accuracy in loss settlements, as it prevents any single policy from bearing disproportionate responsibility while ensuring that policyholders receive compensation in line with their coverage levels. Consequently, it provides a systematic way to handle losses when multiple policies apply.