Alabama Property and Casualty Practice Exam

Andy has two property policies covering his property with identical power. If the first has a limit of $75,000 and the second has a limit of $25,000, how will the policies pay?

1. The first will pay $3,000 and the second will pay $1,000

2. The first will pay $4,000 and the second will pay nothing

3. The two policies will each pay $2,000

4. The first will pay nothing and the second one will pay $4,000

The correct answer is: The first will pay $3,000 and the second will pay $1,000

In the scenario where Andy has two property policies covering the same property, the concept of "pro rata" applies when determining how much each policy will pay in the event of a loss. This approach ensures that each policy contributes to the loss based on its coverage limit relative to the total coverage available. To understand why the first choice is the correct response, consider the total coverage from both policies combined: $75,000 (first policy) + $25,000 (second policy) = $100,000. If a loss occurs, the amount paid by each policy is based on how much coverage each provides compared to the total coverage. If we assume there’s a loss amount, let's say $4,000, we would determine each policy's contribution. For the first policy, which has a limit of $75,000, its share of the total coverage is $75,000 / $100,000 = 75%. Therefore, it would pay 75% of the loss, which in a $4,000 claim means it would cover $3,000. For the second policy with a limit of $25,000, its share of the total coverage is $25,000 / $100,000 = 25%. This