Sometimes property insurance are sold to provide blanket coverage over multiple locations. Blanket insurance is ideal for businesses that have moving inventory between several locations. Instead of taking out several policies at different locations, a business owner can purchase one blanket policy to insure multiple locations.
Insurance companies are also keen on blanket policies. From their point of view, blanket insurance does not increase their liability limits. They are only being applied over multiple locations. Floating value property owners are required to report values at each location periodically. Value reporting keeps the insurance companies informed of what the exposure is. Thus, insurers are not taking on more risk by insuring more locations.
A Pro Rata Distribution clause is often used to allocate values with such blanket policies. The clause stipulates that the insurance amount at each location is in the proportion that the values at the location bear to those in all locations covered. The Pro Rata Distribution clause thus limits the company’s liability at each individual location, with only a specific portion of insurance applying to each location.
Pro Rata Distribution clause is usually not applicable if the policy carries a 90% or higher coinsurance clause.
EXAMPLE:
Values at Location A = $100,000
Values at Location B = $200,000
Values at Location C = $300,000
Total Value at All Locations = $600,000
A blanket policy of $480,000 (80% of $600,000 to avoid triggering co-insurance) with a Pro Rata Distribution clause can be purchased to cover all three locations. The Pro Rata Distribution clause distributes the coverage amounts as follows:
Amount of Insurance Applicable to Location A
Values at Location A = $100,000 = 1/6 of $480,000 = $80,000
Values at All Locations $600,000
Amount of Insurance Applicable to Location B
Values at Location B = $200,000 = 1/3 of $480,000 = $160,000
Values at All Locations $600,000
Amount of Insurance Applicable to Location C
Values at Location C = $300,000 = ½ of $480,000 = $240,000
Values at All Locations $600,000
Under the language used in the Pro Rata Distribution clause, if property values fluctuate between locations, then the coverage amount will adjust accordingly. Therefore, in the example above, suppose the entire inventory value of $600,000 was to shift to Location A, all insurance would automatically move to Location A. If coverage is carried to the full value of the property, then any loss will be covered 100%. On the other hand, if the inventory is underinsured, then under Pro Rata Distribution clause it is equally underinsured at every building. If the owner carries only 50% insurance to value, he is 50% underinsured at each building that the policy covers, regardless of how the total value is distributed among the different locations.