What does pro-rata mean in insurance terms?

In insurance terms, pro-rata refers to the method by which a loss is shared by the insurer and the insured based on their respective contributions to the risk. When a claim is settled on a pro-rata basis, the insurance company pays its portion of the loss in proportion to the coverage it provided compared to the total amount of coverage available.

This concept is particularly relevant when multiple insurers are involved in covering the same risk. In such cases, each insurer will contribute to the loss based on the ratio of its coverage limit relative to the total coverage available. This method ensures fairness and equity in the allocation of losses and expenses.

The other choices illustrate less accurate interpretations of how loss settlements are handled in insurance. While one option suggests the company pays the entire loss amount, this does not reflect the principles of proportional sharing that underlie pro-rata agreements. Another option states that the company does not cover the loss at all, which misconstrues the intent of risk-sharing in insurance. Lastly, while equal sharing of losses among insurers can happen, pro-rata specifically denotes proportionality based on coverage rather than an equal division.