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.
The principle of contribution only applies to those insurance contracts which are contracts of indemnity. In fact, however, there would have been possibilities of getting more than the actual loss had the principle of contribution not been established with legal force. For example, the insured would have received a claim in full, 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.
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 at the time of loss it is found 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, shall be allowed 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 in the perspective of claims settlement that this doctrine is of vital importance. In this regard, the following considerations must be noted carefully;
- There must be more than one policy involved and all the policies covering the loss must be in force. If there is only one policy involved there is nothing that can contribute and similarly if at the time of loss it is found that a particular policy in the lot is not in force because of some reason that that policy cannot be called 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 has 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 in between the policies. The reason is that the interests are different and also the insureds. It should be remembered that if any of the above four factors are not fulfilled, the contribution will not apply
Once it is established that the above factors are satisfied and 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 the sum-insured basis under each policy and is 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 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.