Chapter 8 Flashcards
What is the definition of the principle of “contribution”?
The right of an insurer who has paid under a policy to call upon others similarly but not necessarily equally liable to the same insured to contribute to the payment
What three things must be common on both policies for a contribution to be valid?
insurable interest, peril and subject-matter
Contribution only applies where the policies cover a common interest in the subject-matter. In other words, the insurable interest is the same (owner, user, bailee etc.). This principle was established in which the case?
North British and Mercantile v. Liverpool and London and Globe (1877), known as the King and Queen Granaries case
What is the North British and Mercantile v. Liverpool and London and Globe (1877) also known as?
the King and Queen Granaries case
Identify two ways in which the principle of contribution is modified?
- Policies contain non-contribution conditions.
- There are market agreements between insurers where they agree not to seek contribution in certain instances
If a policyholder had two life policies would contribution apply?
No, as life policies are benefit policies.
What does rateable proportion contribution condition state?
The the policy will only pay their proportion of the loss
What is the formula for working out the rateable proportion on a sum-insured policy that is dual insured?
Policy sum insured/total sum insured (all policies) x loss
Policy A sum insured: £10,000
Policy B sum insured: £20,000
What % would policy A and then policy B be liable for in the even of a claim where they are both insuring the same thing?
The proportion of the claim paid by policy A is:
10,000/30,000 x100 = 33%
Policy B pays:
20,000/ 30,000 x100 = 66%
Colin’s cottage is valued at £100,000 and is covered by two fire insurance policies with identical terms and conditions. The first policy has a sum insured of £50,000 and the second policy has a sum insured of £100,000. A fire causes damage costing
£60,000 to repair. Once contribution has been agreed between the insurers, how much will be paid by the first policy?
50,000/150,000*60000 = £20,000
“This method calculates the amount payable under each policy as if no
other policy existed and the insurer was alone in indemnifying the insured. The loss is then
shared in proportion to the independent liabilities of the two policies.”
What is this method called?
independent liability method.
When would the independent liability method be used?
This method is used where property policies are subject to average or where an individual loss limit applies within a sum insured.
What is the independent liability method’s formula?
policy sum insured / total value at risk x loss
Policy A sum insured: £10,000
Policy B sum insured: £20,000
Both policies are subject to average.
Total value at risk: £50,000
Loss incurred: £15,000
Whenever the total value at risk exceeds the total sum insured by all policies, what will each policy pay?
policy sum insured / total value at risk x loss
Policy A = 10,000/50,000 x 15,000 = £3,000 or 1/5 of the loss
Policy B = 20,000/50,000 x 15000 = £6,000 or 2/5 of the loss
Total payout = £9,000 or 3/5th’s of the loss.
the remaining 2/5ths the insured will need to cover as he/she was under insured.
What does the non-contribution clause state?
This policy shall not apply in respect of any claim where the insured is entitled to indemnity under any other insurance.
If both policies contain non-contribution clauses - which side would the court favour?
Neither. they are treated as cancelling each other out. This means that each insurer would contribute its rateable proportion.
If one policy has a non-contribution condition and one a rateable proportion condition, what happens?
The insurer with the rateable proportion condition will pay the whole of the claim as they have the weaker clause.
If some specialist jewelry was damaged at someone home, would the home insurance or the specific jewelry insurance cover it?
You would have to check the wording of the policies but there is most likely a clause in there restricting cover in situations where a more specific policy is in place. More specifically - That insurers will not contribute to a loss if the loss is more specifically insured
Identify two market agreements on contribution
Claims under driving other cars extension - vehicle insurers do not seek contribution from driver’s insurers
Travel and household
Identify two reasons insurers have market agreements on contribution
Save cost
Reduce disputes
Define “subrogation”
Subrogation can be defined as the right of an insurer, following payment of a claim, to take
over the insured’s rights to recover payment from a third party responsible for the loss. It is
limited to the amount paid out under the policy.
Define “ Insurers’ subrogation rights”
In keeping with the principle of indemnity, insurers are also not entitled to recover more than they have paid out.
What three ways can subrogation rights arise?
In tort eg negligence
In contract
Under statute e.g. Riot Damages Amendment Regulations (2007)
What does Tort mean?
Under common law, everyone has a duty to act in a reasonable way towards others. A breach of this duty is called a tort. The person who has suffered damage or injury is entitled to compensation.
What is the RCA?
Riots Compensation Act 2016
Under the Riots Compensation Act 2016 what time frame must you notify of a claim within for a riot, civil commotion and malicious damage claim?
7 days of the event
Under the RCA how many days from a riot must an inusurer claim under the rights of recovery against police for riot damage?
42 days
In car insurance, when would a car be considered a total loss?
When the repairs exceed 60% of the market value of the vehicle, as this would be uneconomic
An insurer pays £10,000 and allows the insured to retain the salvage, valued at
£1,000, in settlement of a claim for damage caused by a negligent third party. How
much can the insurer claim from that third party when exercising its subrogation
rights?
£10,000
What are the two method for sharing losses between policies under the principle of contribution
Sum insured method
Independent liability method
How does the sum insured method operate?
Insurer A pays Loss multipled by Sum Insured of Insurer A divided by total sum insured of Insurer A and B
When is the sum insured method used?
On property claims where the policies are not subject to average.
How does the independent liability method work
Loss shared in proportion to liabilities of each insurer if the other had not been paying the loss
When is the independent liability method used?
On property policies where the policies are subject to average. On all liability claims.
In the unlikely event that an insurer recovers more after subrogating than they paid out to the insured who benefits from the over recovery?
The insured
In the event that an insurer recovers £9,000 after paying out £8,500 excess of a deductible of £1,000 who does not recover in full the insurer of the insured?
The insured. The insurer benefits first £8,500 the balance is paid to the insured so they are not indemnified for £500 of their deductible.
What do we mean by salvage
If an insured pays a total loss to the insured they are entitled to retain what is left of the item insured eg written off car
Why do market agreements exist?
to reduce the correspondence and administrative costs
involved in pursuing frequent subrogation procedures
Identify two market agreements on subrogation
ABI Memorandum of understanding – subrogated motor claims
Immobile property agreement
Identify four ways subrogation rights may be precluded.
The Insured has no right
The policy is a benefit policy
Insured has given another party a subrogation waiver
Negligent fellow employees - insurers do not subrogate against
Give an example of when the insured would have no rights?
This could happen if an insured signs an agreement with a ‘hold harmless’ clause, which prevents the insured from pursuing recovery rights.
Why are benefit policies different?
They are not subject to the rules that flow from the principle of indemnity
Why would a benefit policy not benefit from subrogation rights?
It is not an indemnity policy therefore in a personal accident claim even if a person negligently causes an accident in which the insured is injured, the personal accident insurer will have no right of recovery
What would a subrogation waiver mean?
The the insurers agree to waive their rights of subrogation.
Which would case resulted in insurers not pursuing their recovery rights against negligent fellow works?
Lister v. Romford Ice and Cold Storage Ltd (1957)
What is Contribution?
the right of an insurer to recover part of a claim payment where two or
more polices cover the same interest, the same risk and are in force when the loss
occurs.
