South Carolina Personal Lines Practice Exam

What insurance principle does pro rata liability protect?

1. Subrogation

2. Indemnity

3. Insurable Interest

4. Utmost Good Faith

The correct answer is: Indemnity

Pro rata liability is a principle that involves sharing the financial burden of a loss among multiple insurance policies that cover the same risk. This principle is closely aligned with the concept of indemnity, which is designed to ensure that an insured party is compensated for their loss without profiting from the situation. Indemnity aims to restore the insured to the same financial position they were in prior to the loss, preventing them from receiving a windfall by collecting from multiple insurers for the same claim. In a pro rata situation, when a loss occurs, each insurer pays a proportionate amount based on the limits of their respective policies. This not only provides a fair distribution of the insured amount but also ensures that the total claim payment does not exceed the actual loss suffered. This helps maintain the integrity of the indemnity principle, ensuring that the policyholder is compensated adequately but not excessively, thereby upholding the fundamental purpose of insurance. The other concepts, while important in insurance, do not specifically relate to how pro rata liability functions. Subrogation deals with the right of an insurer to pursue a third party for reimbursement after they've paid a claim, insurable interest focuses on the financial stake a policyholder must have in the insured item, and utmost good faith mandates honest