Pro rata is a way of spreading liability in an insurance policy. Although pro rata can apply in a variety of situations, the focus is always on equalizing legal and financial responsibilities. As it applies to insurance, pro rata calculations apply in dual insurance, insurance cancellations and policy assumption situations.
Dual Insurance Pro Rata
Most health, home and auto insurance contracts include clauses written specifically to prevent fraud or unintentional overpayments when you have more than one policy. To calculate dual insurance pro rata responsibility, determine the percentage each policy contributes to the total amount of insurance. For example, if you have two homeowner policies totaling $700,000 -- one for $500,000 and one for $200,000 -- the first policy will cover 71 percent of an actual paid loss and the second policy will cover 29 percent.
Pro Rata for Policy Cancellations
Pro rata also applies when you cancel an insurance policy before the contract expires. In this case, the calculation determines the unearned portion of premium prepayments. For example, if you paid for a six-month policy, and cancel the policy after two months, you are entitled to a refund for the four months of coverage you didn't receive. Suppose you prepay $700 for six months of insurance. This equals $116.67 per month. If you cancel the policy after two months, you'll receive a refund for the four months of coverage you didn't receive, or a total of $466.67.
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Pro Rata for Policy Assumptions
Policy assumptions are common in real estate transactions, such as when a buyer assumes an existing owner's flood insurance policy. Prior to March 2014, the formula for calculating pro rata often included a substantial rate increase for any home built before the city or town created flood rate maps. However, the Homeowner Flood Insurance Affordability Act, signed into law March 21, 2014, encourages insurers to increase rates by no more than 18 percent. If rates increase by 10 percent and you assume six months of a 12-month, $650 flood policy, you'll pay $325 -- 650 divided by 12, then multiplied by 6 -- to assume the policy. You'll also pay another $32.50, or 10 percent, for the rate increase.
Contribution of Equal Shares
Although less common and not proportional, the contribution of equal shares method is another way to spread liability in a dual insurance situation. With this method, each insurance company pays an equal amount up to the liability limit of each policy until the loss claim is covered. For example, if you have two homeowner policies totaling $700,000 -- one for $500,000 and one for $200,000 -- and a claim for $200,000, each company would pay $100,000, or 50 percent of the total claim.