Page 83 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes 5.5 Principle of Contribution

You must remember that contribution is the second corollary of Indemnity. An individual may
have more than one policy on the same property and in case there was a loss and he were to
claim from all the Insurers then he would be obviously making a profit out of the loss which is
against the principle of Indemnity. To prevent such a situation the principle of contribution has
been evolved under common law.
Contribution may be defined as the “right of Insurers who have paid a loss to recover a
proportionate amount from other Insurers who are also liable for the same loss”. The common
law allows the insured to recover his full loss within the sum insured from any of the insurers.
Condition of Contribution will only arise if all the following conditions are met:

1. Two or more policies of Indemnity should exist
2. The policies must cover a common interest
3. The policies must cover a common peril which is the cause of loss

4. The policies must cover a common subject matter
5. The policies must be in operation at the time of loss
It is not necessary that the policies be identical to one another. What is important is that there
should be an overlap between policies, i.e. the subject matter should be common and the peril
causing loss should be common and covered by both.
As said earlier common law gives the right to the insured to recover the loss from any one
insurer who will then have to affect proportionate recoveries from other insurers, who were
also liable to pay the loss. To avoid this, the insurers modify the common law condition of
contribution by inserting a clause in the policy that in the event of a loss they shall be liable to
pay only their “Rate-able proportion” of the loss. It means that they will pay only their share
and if the Insured wants full indemnity he should lodge a claim with the other Insurers also.

Rateable Proportion

The accepted way to interpret the term Rate-able Proportion is exhibited. First being that the
Insurers should pay in the proportion to the sum insured.

Example:
Sum Insured Policy A = 10,000/-
Sum Insured Policy B = 20,000/-

Sum Insured Policy C = 30,000/-
Total = 60,000/-
In case of a claim of ` .6000/- the three insurers would be liable to pay in the proportion 1:2:3
i.e. ‘A’ pays ` .1000/- ‘B’ pays ` .2000/- and ‘C’ pays ` . 3000/-.
However, the drawback of this simplistic method is that the terms and conditions of the policies
may be different and it would not be prudent to ignore these terms and conditions.

Example: The condition of average may apply to one or more policies or there may be
an excess clause in one policy which may affect their share of contribution to the loss.

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