What Does Pro Rata Clause Mean?
A pro rata clause is a clause in an insurance policy which states that each insurer providing coverage for an asset will pay out claims for that asset in proportion to the coverage percentage for the asset that it is providing. Pro rata clauses keep claims payouts fair in cases where multiple insurers cover the same asset.
Insuranceopedia Explains Pro Rata Clause
To understand how a pro rata clause works, image that two insurers cover a single asset and that one insurer provides 60 percent of the coverage, while the other provides the remaining 40 percent. If a loss occurs and there is a pro rata clause in the contract, the insurer who provides 60 percent of the coverage will pay out 60 percent of the claim, and the insurer who provided 40 percent of the coverage will pay out 40 percent of the claim.
Pro rata clauses, in essence, prevent one insurer from getting stuck with the entire bill when other insurers are providing coverage for the same asset.