Martin is the owner of a very luxurious hotel. The hotel and its contents are valued at $10 million. Because his hotel is expensive, Martin purchases two insurance policies, each from a different insurer. He purchases an insurance policy from ABC insurance for $7 million, and a $3 million policy from DEF insurance. Since these two policies cover the same loss exposure, there is an other-insurance provision in the contracts.

1- Why should there be other-insurance provisions in the contracts?

2- One day, there was an earthquake that caused major damages to Martins hotel. These damages amounted to a total loss of $7 million.

a. Assuming the other-insurance provision stated a pro-rata liability, how much would each insurance company pay toward the damages?

b. Assuming the other-insurance provision stated an equal-share contribution, how much would each insurance company pay toward the damages?