What is meant by 'Pro Rata' in the context of multiple insurance policies?

The term 'Pro Rata' refers to a method of distributing loss or liability among multiple insurance policies based on the amount of coverage each policy provides. When multiple insurance policies are in place covering the same risk, 'Pro Rata' ensures that each policy contributes to a claim in proportion to its coverage limit. This means that if there is a loss, instead of one policy covering the entire amount, the responsibility is shared proportionally among all applicable policies.

For instance, if one policy covers 60% of the total coverage and another covers 40%, in the event of a claim, the first policy would cover 60% of the loss while the second would cover the remaining 40%. This method helps prevent the insured from receiving a larger payout than what would normally be justified based on the total coverage amounts.

Understanding 'Pro Rata' is critical since it directly affects how claims are handled when multiple policies are involved, ensuring fairness and preventing overcompensation.