The Principle of Contribution was developed under common law to deal with the sharing of the cost of liability where two or more persons are jointly liable to another for the same loss.
In the context of insurance practice, contribution can be defined as the right of an insurer to call upon others who are similarly but not necessarily equally liable to the same insured for his loss to share the cost of indemnity. Business Training in Kenya has more information.
Rules Governing The Principle of Contribution in Insurance
There must exist two or more policies of indemnity. This means that the insurances covering the property or the subject matter must be contracts of indemnity. Contribution does not apply to contracts of life assurance and permanent health assurance which are clearly not contracts of indemnity.
Each of the policies must be insuring the same subject matter of insurance which was lost or damaged. The property which has been affected by the loss must be common to all policies. The extent of amount of property need not necessarily be the same, for instance it may be only one item which is lost which is covered by both policies which also cover other property. One policy could be covering buildings and stock while the other is more specific to stock only. Any loss on stock would be addressed by both policies for purposes of contribution.
Each policy must insure the peril that has operated to cause the loss. Again the range of perils covered by each policy needs not to be the same. One policy could be insuring several perils whilst the other covers only one which however common to both policies and which causes the loss.
The same insured interest must be covered by both policies. It is possible that people other than the actual owners can effect insurance on property which they do not own but are exposed to liability by virtue of their being in control or possession of it. Bailees, like dry cleaner agents to whom we often take our clothes for laundry are exposed to liability, if they failed to exercise reasonable care and our clothes are lost. On the subject of insurable interest, such a bailee has insurable interest on such goods in view of the existence o potential liability. The owner of such property might have also insured his property and the bailee too insured them too for purposes of safeguarding himself from liability. In such a situation there would exist two separate insurances for the same property. In such a case the insurable interest is different for the two.
Each of the two or more policies must be liable to pay compensation for the loss in question
Common Law Operation in The Principle of Contribution
Common law provides that, an insured who has insured his property with more than one can make his pick of the insurers and confine his claim to such an insurer. The insurer to whom the claim has been made is obliged to settle the claim in full and seek compensation from others who are also liable for the same loss. He can however not call on the other insurers until after he has made payment. This selection is however disadvantageous to the insurer to whom the claim is made as he has to lay out all the money for the period of time which could be substantial, until he can be able to recover from the others
Methods of Sharing in the The Principle of Contribution
Sum Insured method:
It is majorly used by insurers who do not incorporate the prorate condition of average, which are concurrent .Under this arrangement each insurance company takes a proportion loss suffered in proportion to the total amount insured by the to ensure that the loss suffered is collectively covered by them and the insured indemnified. The sum assured method is also known as the maximum liability method
Given the following insurance arrangement:
Policy A Sum insured kshs. 3000
Policy B Sum insured kshs. 4000
Policy C Sum insured kshs. 2000
Formula: Sum insured by individual policy/total of sums insured by all policies
Policy A pays 3000*1800/9000 = 600
Policy B pays 4000*1800/9000 = 800
Policy C pays 2000*1800/9000 = 400
Independent liability Method
It is majorly used for policies which are subject to the average condition or are non concurrent. The independent liability of an insurer is the liability of the insurance after the application of average and any limits and excess applicable. The application makes the approach by ignoring the existence of any other insurance to arrive at the amount that would be payable by the policy in the absence of any other insurance company. In other words an insurance company assumes that it is the only one that should compensate the insured who has suffered a loss
This method is appropriate where:
One or both policies are subject to the condition of average
The range of policies is different, for example one policy may be specific while the other covers a wide range.
If one of the policies provides unlimited cover e.g. liability insurances.
Computation of ratable proportion by the independent liability method follows the following progression
The liability of each insurer for the particular loss is assessed ignoring the existence of any other policy. Any limits expressed like average and excess will be appropriately expressed
The result in each case will represent the independent liability of that insurer in the loss
The loss is then shared in the proportion o f the independent liabilities of all the insurers involved
Conclusion on The Principle of Contribution
The The Principle of Contribution just like any other insurance principle aims at indemnifying the insured and ensures that he does not gain too much. The Principle of Contribution is thus as described above.