What is a 'pro-rata' clause in an insurance policy designed to do?

A 'pro-rata' clause in an insurance policy is designed to limit the insurer's liability based on the coverage amount. This clause comes into play when a policyholder has multiple insurance policies covering the same risk. In such instances, the pro-rata clause specifies that the insurer will only pay its proportionate share of the loss relative to the coverage provided by the policy in question compared to the total coverage across all applicable policies.

This ensures that the insured is compensated fairly without the insurer being liable for more than its fair share of the loss. By doing so, it prevents the policyholder from receiving a windfall, which could happen if they were to recover more than their actual loss after having multiple policies covering the same risk. Thus, the pro-rata clause serves as a protective measure for insurers while also ensuring equitable treatment of claims.