In the event of a loss, how do contributing policies operate?

Contributing policies operate on the principle of sharing the burden of a loss among multiple insurance policies that apply to the same risk. When there are several policies in place covering the same type of loss, the policies typically collaborate according to their respective coverage limits and conditions.

In this case, the concept of equal sharing until policy limits are exhausted reflects how insurance coverage works in relation to overlapping policies. For example, if two policies cover the same risk and one becomes active due to a claim, each policy will contribute to the loss up to its limit. The total payout will not exceed the total amount of the loss, and each policy will typically contribute equally up to their respective limits, ensuring that the burden of loss is fairly distributed among the insurers involved.

This sharing mechanism is designed to prevent the insured from receiving more than their loss amount, thereby respecting the principle of indemnity which strives to return the insured to their pre-loss financial position. Thus, the correct answer captures the essence of how contributing policies function in tandem during a loss event.