Question

Bill owns a building and wants to insure it for $5 million. He places $3.5 million with company A, $1.2 million with company B, and $0.3 million with company C. How much does he receive from each company if a $1.8 million loss occurs and there is a pro-rata liability provision in place? How much does he receive from each company if a $1.8 million loss occurs and there is a contribution by equal shares provision in place? show the work for any calculation

Explain why ACV is determined by replacement cost minus depreciation for property. How does this relate to the principle of indemnity? How does this relate to the principle of subrogation?

Answer 1

Answer-Part -I (Distribution of loss)

Case-1 (Pro rata liability)

Under Pro rata Liability the , the loss will be beared by the Insurance company in proportion of the Insurance covers to the total amount of policy.

	A	B		C	B*C
	Insurance Covers($ Million)	Proportion		Loss($million)	Amount to bear ($million)
Company A	3.5	0.7	(3.5/5.0)	1.8	1.260
Company B	1.2	0.24	(1.20/5.0)	1.8	0.432
Company C	0.3	0.06	(0.06/5.0)	1.8	0.108
Total	5.0	1.0			1.800

Case-2 (Contribution by equal share)

Under this method each company pays an equal amount untill the total loss is recovered. If one insurance cover reashes its limit, then the balance loss will be borne equally by the rest of the companies.

		A	B	A+B
	Insurance Covers($ Million)	First each company will bear $ 0.3 million	Blance loss of $0.90 million to be borne by A & B as the limit of C is reached	Total loss to be borne
Company A	3.5	0.3	0.45	0.75
Company B	1.2	0.3	0.45	0.75
Company C	0.3	0.3	0	0.30
Total	5.0	0.9	0.9	1.80