Illinois Casualty Insurance State Practice Exam

In which scenario would a Pro Rata Return apply?

1. When an insurer artificially inflates premiums

2. When an insurance policy is transferred to another person

3. When an insurance policy is canceled by the insurer

4. When the insured fails to pay premiums

The correct answer is: When an insurance policy is canceled by the insurer

A Pro Rata Return applies specifically in situations where an insurer cancels an insurance policy, allowing the insured to receive a refund for the unused portion of their premium. In the event of cancellation by the insurer, the insurer must return a portion of the premium that corresponds to the time the policy was not in effect. This refund is calculated on a pro-rata basis, meaning the refund is determined by the length of time the policy was active compared to the entire policy period. By contrast, scenarios such as the one where premiums are artificially inflated do not involve a cancellation; therefore, a pro rata return wouldn't be applicable. Similarly, when a policy is transferred to another person, the original policy’s terms and the associated premiums would simply continue under the new insured without necessitating a pro rata return. Finally, if the insured fails to pay premiums, the policy may lapse, but this does not entail a pro rata return since the policy remained in force until the premiums were deemed unpaid.