Rhode Island Insurance Adjuster Exam

In an "other insurance" clause, what does it determine?

1. How much premium is refunded

2. How much each policy pays for a loss

3. Who receives the first payment

4. Which insurer will cancel the policy first

The correct answer is: How much each policy pays for a loss

The "other insurance" clause in an insurance policy is designed to determine how much each policy contributes toward a loss when multiple insurance policies cover the same risk. This clause is critical in situations where an insured property or liability is covered by more than one policy, as it helps to prevent double recovery and settles the question of how the claims should be handled. When a loss occurs, the "other insurance" clause outlines the method for sharing the loss among the insurers involved. This could be on the basis of pro-rata, where each policy pays a proportionate share based on its coverage amount, or it could be through an excess insurance provision, where one policy serves as primary and others as excess. Understanding this mechanism is essential for both insurers and policyholders to ensure equitable distribution of the claim payments without exceeding the actual loss incurred. Thus, the determination of how much each policy pays for a loss is a fundamental aspect of the insurance process, especially in scenarios involving multiple coverages.