Page 271 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes If the insurance is placed through an agent, the agent has similar duty to disclose all material
facts known to him in the agents report.

Subrogation

"Subrogation is the right which an insurer gets, after he has indemnified the loss, to step into the
shoes of the insured and avail himself all the rights and remedies which the insured may have
in respect of the loss indemnified".
Subrogation is the principle, which is applied to all contracts of indemnity. It means that after
indemnifying the loss, the insurer gets the right of taking all steps to recover any money in
compensation from the third party or by the sale of the asset against which claim has been paid.

Contribution

If a property has been insured with more than one insurer and the loss occurs the insured will
get a proportionate part of the loss from each insurer. This principle of contribution is in support
to the principle of indemnity which states that insurance must make good only the actual loss
suffered by the insured. If a person insures his property with many insurers it does not mean
that he can recover the claim from all the insurers. Insurance does not allow an insured to make
a profit out of the loss. All the insurers will contribute the insured's loss in proportion of the sum
assured with each of them.

Maybe the insured is able to recover the whole amount from one insurer, then as per the
principle of contribution the insurer will attempt proportionate recoveries from other insurers
concerned.
In order to avoid this inconvenience to the first insurer, fire policies and a majority of accident
policies contain a contribution condition, which says, whenever contribution applies, the insured
is obliged to raise claims against all the insurers, each of whom pays only his proportion of the
loss.

This can be illustrated with an example.

Example:

X has insured his property with three insurers Aay, Bee and Cee. He incurs a loss of Rs. 12000
He will get claim from insurers as follows:
Sum insured with insurer Aay Rs. 10000/- Aay pays Rs. 2000/-

Sum insured with insurer Bee Rs. 20000/- Bee pays Rs. 4000/-
Sum insured with insurer Cee Rs. 30000/- Cee pays Rs. 6000/-
Total Sum insured Rs. 60000/- Loss Rs. 12000/-
The principle of contribution does not apply to personal accident policies as these are not
contracts of indemnity.
Prerequisites to the application of the principle of contribution:
1. The subject matter of all policies must be common.
2. The peril insured for, must be common to all policies.

3. The policies must be affected in favour of a common insured.

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