What is the formula for calculating pro-rata liability?

The formula for calculating pro-rata liability is indeed derived from the concept of sharing the loss among multiple insurers in proportion to the limits they provide. When determining an individual insurer's liability in a shared coverage situation, you use the insurer's limit as a fraction of the total limits available from all insurers.

In this case, the correct formula is the company limit divided by the total limit, multiplied by the loss incurred. This means that if multiple companies are covering a loss, each company's contribution to the payout should align with their proportionate share of the total coverage available.

For instance, if Company A has a limit of $100,000 and the total limit from all insurers is $500,000, and if a loss of $50,000 occurs, you would calculate Company A's liability as ($100,000 / $500,000) x $50,000, which reflects their share of the total available coverage.

This method ensures that each insurer effectively pays out in proportion to the coverage they provide, which is essential for maintaining fairness and equity among multiple parties involved in the insurance contract.