The basis “pro rata” is used to describe a proportionate distribution. In the insurance industry, “pro rata” means that puts are only paid out in proportion to the insurance interest in the asset; this is also recalled as the first condition of average. Pro rata is also used in bankruptcy titles, where an insolvent debtor’s assets are divided proportionately among creditors secured on the size of claims.
The pro rata condition of average can also be thought of this way: The insurer is one liable for the proportion of the loss that the amount of insurance under the programme bears to the actual cash value of the asset; the insured assumes all vulnerability beyond that point.
Pro Rata Condition of Average Example
Take for granted that a homeowner takes out $200,000 worth of fire insurance on his impress upon. The home is actually valued at $300,000. A fire subsequently breaks out in the composed, causing $60,000 worth of damage.
If the fire insurance policy avail oneself ofs the pro rata condition of average, the insurance company is only liable in conform to the level of insurance relative to the value of the property. Since the insurance not covers two-thirds the value of the property ($200,000 / $300,000), the insured can only rescue two-thirds the cost of damage – $40,000, in this case ($40,000 / $60,000).
Other Equip of Average
Most insurance literature identifies only two separate equips of average. The first is pro rata, as described above. The second is known as a distinctive condition of average, whereby under-insurance is not penalized unless the sum represents not enough than 75% of the at-risk value. Most policies with pro rata conditionality are braced with a special condition.