In terms of liability, how does coverage under multiple policies work?

In the context of liability coverage under multiple insurance policies, the correct answer highlights the principle of "pro rata" liability. This means that when more than one policy covers the same liability, each policy contributes to the payout in proportion to its coverage limits.

For instance, if an individual has two liability policies—one with a $100,000 limit and another with a $300,000 limit—the total available coverage is $400,000. If a liability claim arises for $400,000, the policies would contribute proportionally. The first policy would cover one-fourth of the claim (based on its $100,000 limit), while the second policy would cover three-fourths of the claim (according to its $300,000 limit). This method ensures fairness and prevents one policy from bearing the entire cost, allowing equitable distribution based on the extent of coverage provided by each.

This principle is essential for insured individuals because it allows them to maximize the total benefits of all the policies in which they are covered, ensuring they are adequately protected against potential claims. Other methods of coverage application, such as equal sharing or limiting payouts to just the policy with the highest coverage, would not fairly represent the intent behind obtaining multiple policies.