What does Pro Rata Liability entail for multiple policies covering the same risk?

Pro Rata Liability is a principle applied when multiple insurance policies provide coverage for the same risk or loss. Under this principle, when a loss occurs, each insurer involved contributes to the claim proportional to the coverage limits of their respective policies compared to the total coverage available.

This means that if one policy has a higher limit than another, the insurer with the larger limit will pay a greater share of the loss, while the insurer with the smaller limit will pay a lesser share. This method is designed to ensure that no single insurer bears the entire burden of the claim, effectively distributing the financial responsibility among all applicable policies.

The context of how Pro Rata Liability functions emphasizes the collaborative nature of insurance coverage, aiming to balance the payouts according to each policy's terms rather than any single insurer taking on the full liability. This approach helps prevent over-insurance or double-dipping, where the insured might unfairly benefit from multiple policies covering the same risk beyond the actual loss incurred.