How will Tina's policies respond when she suffers a loss totaling $75,000 if she has Policies X and Y covering the same risk?

When considering how multiple insurance policies may respond to the same loss, it's essential to apply the principles of contribution and how losses are shared between insurers. In the scenario presented, Tina has two policies covering the same risk, and the total loss is $75,000.

In cases where two or more policies apply, the concept of contribution applies; that is, each insurer will contribute to the loss proportionate to the limits of their policies. Assume that Policies X and Y have differing limits. The payments made by each insurer will be based on the coverage limits of the policies and will be calculated in such a way that the total payment does not exceed the actual loss amount.

In the correct answer, Policy X is set to pay $60,000 and Policy Y $15,000. This division suggests that Policy X has a higher limit, allowing for a larger payout towards the total loss, while Policy Y contributes to a lesser extent due to its lower limit. When added, the payments from both policies amount to the full total of the $75,000 loss, which reflects the collaborative effort of the policies to cover the entire amount of the loss.

This allocation aligns with the principle of contribution, where both policies are effectively pooling resources to satisfy the insured’s