Q How is "Pro Rata" Calculated with the "Principle of Average?"
"Pro rata" is the term coined with "proportionate distribution." Insurance companies use pro rata to calculate the "principle of average" or "condition of average" for your claim.
What is the "principle of average?"
This is the figure the insurance company gives after using pro rata distribution to compensate you for your damaged property.
How it works:
For example, a homeowner takes out $300,000 worth of flood insurance for their home, and their home is valued at $400,000. A hurricane comes and leaves $60,000 worth of flood damage. If the flood insurance policy uses pro rata to determine the principle of average, the insurance provider is only responsible for covering the proportion the homeowner has insured. Since the homeowner only has insurance covering 3/4 of their home, that means they would only receive 3/4 of the amount that their total damage is worth. The homeowner would receive $45,000.
Insurance companies are constantly trying to find ways to give you less money. Be careful when reading your policy.