The average pro rata condition refers to the proportion of an asset that is covered by an insurance policy. The claim of an asset will only be paid based on the insurable interest covered by the policy, so an asset covered at 50% will only be paid up to 50% of its value under the insurance policy. In insurance, the pro rata is used to determine the amount of the premium due for a policy that only covers a partial term. Allocating the appropriate portion of an annual interest rate to a shorter period of time can also be done on a pro rata basis.
To understand how a pro-rated clause works, imagine 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. Prorated clauses, in essence, prevent an insurer from keeping the entire bill when other insurers offer coverage for the same asset. If a loss occurs and there is a pro-rated clause in the contract, the insurer that provides 60 percent of the coverage will pay 60 percent of the claim and the insurer that provided 40 percent of the coverage will pay 40 percent of the claim. A pro rata clause is a clause in an insurance policy that states that each insurer that offers coverage for an asset will pay claims for that asset in proportion to the percentage of coverage of the asset it provides.
Most insurance policies are based on a 12-month period, so if a policy is needed for a shorter term, the insurance company must pre-rate the annual premium to determine what is due.
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