The principle of contribution is implemented when multiple insurance policies are covering the same property or loss, the total payment for actual loss is proportionally divided among all insurance companies during a claim settlement. To avoid any confusion later, it is important to know the role of Contribution Clause in claim settlement process.
Key Takeaways
-
No Double Recovery: You are legally prohibited from collecting more than 100% of your loss. If you intentionally recover full amounts from two different companies for the same event, you are legally required to refund the excess.
-
The “Four Pillars” of Contribution: For this clause to trigger, four things must be identical: the Subject Matter (the specific asset), the Peril (the cause of loss, like fire), the Insurable Interest, and the Policyholder. If you and your bank both insure your car, you each have a different interest, so contribution may not apply.
-
Proportionate Liability: Insurers don’t just split the bill equally. A company that provided a ₹3 Crore cover will pay three times more than a company that provided a ₹1 Crore cover for the same asset.
-
The Lead Insurer’s Role: Often, one insurer (usually the one with the highest stake) will settle the full claim first to provide immediate relief to the policyholder and then seek reimbursement from the other participating insurers later.
-
Active Policy Status: A policy that has lapsed or been canceled cannot be called upon to contribute. The “Total Sum Insured” for calculation only includes policies that were in force at the exact moment the damage occurred.
The principle of contribution only applies to those insurance contracts which are contracts of indemnity. In fact, however, there would be some possibilities of getting more than the actual loss had the principle of contribution unestablished with legal force. For example, the insured would have received a claim in full, a number of times, by affecting a number of policies with different insurers thereby defeating entirely the principle of indemnity. Hence the sole intent of the contribution clause is to preserve the principle of indemnity during claim settlement.
Insurer:
Contribution is a right that an insurer has, who has paid under a policy, of calling other interested insurers in the loss to pay or contribute rate-able to the payment. This means that if found at the time of loss that there is more than one policy covering the same loss then all policies should pay the loss proportionately to the extent of their respective liabilities so that the insured does not get more than one whole loss from all these sources.
If a particular insurer pays the full loss then that insurer shall have the right to call all the interested insurers to pay him back to the extent of their individual liabilities, whether equally or otherwise. The insured, under no circumstances, should allow to take the advantage of all the policies individually. So, as to get the full claim number of times. Even if the insured recovers from all the policies, he shall have to refund all such payments in excess of the actual loss sustained.
It is virtually from the perspective of claims settlement that this doctrine is of vital importance.
Considerations to be noted carefully with regards to Contribution Clause in claim settlement process;
- There must be more than one policy involved and all the policies covering the loss must be in force. If involved only one policy, there is nothing that can contribute. And similarly if one finds out at the time of loss that a particular policy in the lot is not in force because of some reason that policy will not be upon to contribute.
- All the policies must cover the same subject matter. If all the policies cover the same insured but different subject matters altogether then the question of contribution would not arise.
- All the policies must cover the same peril causing the loss. If the policies cover different perils, some common and some uncommon, and if the loss is not caused by a common peril, the question of contribution would not arise.
- All the policies must cover the same interest of the same insured. For example – let us assume that “A” is the owner of a car and who obtained a loan from “B” on the security of the car. Here both A and B have got insurable interests and can, therefore, affect policies individually. In the case of damage to a car, both A & B will get claims independently and no contribution will apply between the policies. The reason is that the interests are different and also the insureds. Should remember that if any of the above four factors do not fulfilled, the contribution will not apply.
Summary: The Principle of Contribution
Conclusion:
Once, established that the above factors may be satisfying and the contribution is to apply. then the next course is to find out the liability under each policy during a claim settlement. Usually, this is on a sum-insured basis under each policy. And commonly known as the proportionate liability or respective liability of each policy. The formula applied is (Sum insured under each policy / Total sum insured under all policies ) X Loss Amount. For example let us consider that the same asset is covered under 3 separate insurance policies, namely
Policy A with sum insured Rs. 1 Cr.
Policy B with sum insured Rs. 2 Cr.
Policy C with sum insured Rs. 3 Cr.
Total sum insured under all policies is Rs. 1 Cr. + Rs. 2 Cr. + Rs. 3 Cr. = Rs. 6 Cr.
In an event of a loss of Rs. 1 Cr., respective policies will contribute as follows –
Policy A = 1/6 X Rs. 1 Cr. = 0.167 Cr.
Policy B = 2/6 X Rs. 1 Cr. = 0.333 Cr.
Policy C = 3/6 X Rs. 1 Cr. = 0.500 Cr.
Frequently Asked Questions (FAQs)
Q1: If I have two health insurance policies, does the Principle of Contribution apply?
A) Yes. Since most health insurance plans are “Indemnity” contracts (they reimburse actual hospital bills), they follow the contribution principle. However, if you have a “Fixed Benefit” plan (like a Critical Illness plan that pays a lump sum on diagnosis), you can claim from multiple policies because those are not indemnity contracts.
Q2: Can I choose which insurer pays my claim first?
Technically, yes. You can approach any one of your insurers to pay the full loss (up to their policy limit). That insurer is then legally entitled to “subrogate” or reach out to your other insurers to collect their respective proportionate shares.
Q3: What happens if one of my two policies has an “Excess” or “Deductible”?
The calculation becomes slightly more complex. Usually, the proportionate share is calculated on the “rateable” amount. However, the basic rule remains that your total out-of-pocket recovery across all policies will be capped at your actual loss.
Q4: Does the Principle of Contribution apply to Life Insurance?
No. Life insurance is a “Valued” contract, not an indemnity contract. Human life cannot be “valued” in the same way as a car or building. Therefore, if a person has five life insurance policies, the nominees can claim the full sum assured from all five companies.
Q5: Why would someone buy two policies for the same property if they can’t get double money?
Often, this happens accidentally (e.g., a landlord and a tenant both insuring the same shop) or when a risk is so large that a single insurer isn’t willing to take the full amount. In large industrial risks, “Co-insurance” (a form of planned contribution) is very common to spread the risk.
About The Author
Shivani
MBA Insurance and Risk
She has a passion for property insurance and a wealth of experience in the field, Shivani has been a valuable contributor to SecureNow for the past six years. As a seasoned writer, they specialize in crafting insightful articles and engaging blogs that educate and inform readers about the intricacies of property insurance. She brings a unique blend of expertise and practical knowledge to their writing, drawing from her extensive background in the insurance industry. Having worked in various capacities within the sector, she deeply understands the challenges and opportunities facing property owners and insurers alike.
