CONTRIBUTION

Equitable Doctrine of Contribution

This is a claims-related doctrine of equity which applies as between insurers in the event of a double insurance, a situation where two or more policies have been effected by or on behalf of the insured on the same interest or any part thereof, and the aggregate of the sums insured exceeds the indemnity legally allowed.

[Example: Suppose a husband and wife each insure their home and contents, each thinking that the other will forget to do it. If a fire occurs and $200,000 damage is sustained, they will not receive $400,000 compensation. The respective insurers will share the $200,000 loss.]

Apart from any policy provisions, any one insurer is bound to pay to the insured the full amount for which he would be liable had other policies not existed. After making an indemnity in this manner, the insurer is entitled to call upon other insurers similarly (but not necessarily equally) liable to the same insured to share (or to contribute to) the cost of the payment.

Rateable Proportions

Where contribution applies, the ultimate proportion of the insured’s loss that any one particular insurer is responsible for is called the ‘rateable proportion’ of that insurer. It is not difficult to understand that the sum of all the insurers’ rateable proportions equals one, that is to say, 100% of the insured’s loss. A few methods are available for calculating rateable proportions. But as an insurance intermediary, it is not essential that you should know them well, bearing in mind that how much your clients will ultimately get paid for a loss will not depend on the basis of contribution to be employed.

How Arising

The criteria (or essentials) that need to be satisfied before contribution applies are:

(a) the respective policies must each be providing an indemnity (rather than benefit) to the loss in question (this is the reason why it is said that contribution is a corollary (i.e. a natural consequence of an established principle) of indemnity);

(b) they must each cover the interest (which term does not mean property, liability, etc.) affected (see counter-example below);

(c) they must each cover the peril (cause of loss) that has given rise to the loss;

(d) they must each cover the subject matter of insurance (property, liability, etc.) that has been affected; and

(e) each policy must be liable to the loss (i.e. not be subject to a policy exclusion or limitation preventing contribution).

[Counter-example of criterion (b): A merchant has some stock-in-trade kept in a public warehouse, and insured under a fire policy. Separately and at the same time, the warehouse operator buys fire insurance on the same property. When a fire occurs damaging the stock-in-trade, both the merchant and the warehouse operator claim under their own policies for the same damage. Immediately two basic questions come to mind. First, is the warehouse operator, not being an owner of the damaged property, entitled to claim under his own fire policy? Second, if both policyholders are entitled to claim, will there be contribution between the insurers? The answer to the first question is: the warehouse operator, being a bailee of the stock-in-trade, has insurable interest in it at the time of loss, and is thus entitled to claim under his own policy. Turning to the merchant, you probably will not conclude or argue that he cannot expect to be indemnified. Now we have to wrestle with the second question. The answer to this question hinges on that to the question of whether the two policies cover the same nterest (criterion (b)). For whose benefit has the merchant bought his fire insurance? And what about the warehouse operator? In fact, each of them has bought insurance for their own benefit. In other words, the first mentioned policy covers the merchant’s ‘interest as owner’, and the second one covers the warehouse operator’s ‘interest as bailee’. Is it apparent to you now that the two policies cover different interests, so that contribution will not apply as between them?

At this point, we have completely resolved the issue of contribution arising in the case. But there remains an issue of the cogency of indemnifying for the same loss with twice its amount. Now it is time for another principle of insurance – subrogation (see 3.6 below) – to play its part. The insurer of the merchant, upon indemnification, is entitled to claim, for his own benefit albeit in the name of the merchant, against the warehouse operator (bailee) for the indemnity provided by the other insurer.]

How Applicable

Contribution will only apply if indemnity applies. Thus, if a person dies whilst insured by two or more separate life insurance policies, each has to pay in full, because the insurances are not subject to indemnity.

How Amended by Policy Conditions

The position between insurers as governed by the equitable doctrine of contribution is of little or no concern to the insured, unless that has been modified by one of the following policy provisions:

(a) Rateable Proportion Clause (or Contribution Condition), restricting the insurer’s liability to its rateable share of the loss. The effect is that, where there is double insurance and each of the relevant policies contains such a clause, the insured could no longer claim all of his loss from one insurer alone.

[Example: Using the example in 3.5.1 again, the standard fire policy contains a clause restricting its contribution to its ‘rateable share’ in the event of double insurance. In the given circumstances, if Insurer A is approached first and his rateable share is, say, $50,000 (25%), he cannot be made to pay the full loss. He is liable only for $50,000 and the insured must himself go to Insurer B for B’s rateable share ($150,000 or 75%).]

(b) Non-contribution Clause, to the effect that it is the other policies that will have to pay the loss.

[Example: Household policies on contents may exclude items ‘more specifically insured’. If a camera is separately insured under an ‘All Risks’ policy, that policy may be regarded as more specific than the household policy, so that the latter policy, if it contains such a clause, will not be liable for a, say, theft loss of the camera from the insured premises.]

(c) Partial Contribution Condition

[Example: The so-called ‘Marine Clause’ in the standard fire policy provides that in the event of potential contribution between a marine policy and the fire policy, the fire policy will not share the loss, except for that part of the loss which is above the marine compensation. (This may happen where, for example, some cargo, while being left in a container depot awaiting the carrying vessel, catches fire. The usual marine policy will cover the damage so caused. It is also possible that there is in place a fire policy whose cover has been extended to cover a fire occurring in such circumstances.)]