Chapter 8

Question 1

What is the definition of the principle of “contribution”?

Answer 1

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

Question 2

What three things must be common on both policies for a contribution to be valid?

Answer 2

insurable interest, peril and subject-matter

Question 3

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?

Answer 3

North British and Mercantile v. Liverpool and London and Globe (1877), known as the King and Queen Granaries case

Question 4

What is the North British and Mercantile v. Liverpool and London and Globe (1877) also known as?

Answer 4

the King and Queen Granaries case

Question 5

Identify two ways in which the principle of contribution is modified?

Answer 5

1. Policies contain non-contribution conditions.
2. There are market agreements between insurers where they agree not to seek contribution in certain instances

Question 6

If a policyholder had two life policies would contribution apply?

Answer 6

No, as life policies are benefit policies.

Question 7

What does rateable proportion contribution condition state?

Answer 7

The the policy will only pay their proportion of the loss

Question 8

What is the formula for working out the rateable proportion on a sum-insured policy that is dual insured?

Answer 8

Policy sum insured/total sum insured (all policies) x loss

Question 9

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?

Answer 9

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%

Question 10

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?

Answer 10

50,000/150,000*60000 = £20,000

Question 11

“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?

Answer 11

independent liability method.

Question 12

When would the independent liability method be used?

Answer 12

This method is used where property policies are subject to average or where an individual loss limit applies within a sum insured.

Question 13

What is the independent liability method’s formula?

Answer 13

policy sum insured / total value at risk x loss

Question 14

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?

Answer 14

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.

Question 15

What does the non-contribution clause state?

Answer 15

This policy shall not apply in respect of any claim where the insured is entitled to indemnity under any other insurance.

Question 16

If both policies contain non-contribution clauses - which side would the court favour?

Answer 16

Neither. they are treated as cancelling each other out. This means that each insurer would contribute its rateable proportion.

Question 17

If one policy has a non-contribution condition and one a rateable proportion condition, what happens?

Answer 17

The insurer with the rateable proportion condition will pay the whole of the claim as they have the weaker clause.

Question 18

If some specialist jewelry was damaged at someone home, would the home insurance or the specific jewelry insurance cover it?

Answer 18

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

Question 19

Identify two market agreements on contribution

Answer 19

Claims under driving other cars extension - vehicle insurers do not seek contribution from driver’s insurers
Travel and household

Question 20

Identify two reasons insurers have market agreements on contribution

Answer 20

Save cost
Reduce disputes

Question 21

Define “subrogation”

Answer 21

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.

Question 22

Define “ Insurers’ subrogation rights”

Answer 22

In keeping with the principle of indemnity, insurers are also not entitled to recover more than they have paid out.

Question 23

What three ways can subrogation rights arise?

Answer 23

In tort eg negligence
In contract
Under statute e.g. Riot Damages Amendment Regulations (2007)

Question 24

What does Tort mean?

Answer 24

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.

Question 25

What is the RCA?

Answer 25

Riots Compensation Act 2016

Question 26

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?

Answer 26

7 days of the event

Question 27

Under the RCA how many days from a riot must an inusurer claim under the rights of recovery against police for riot damage?

Answer 27

42 days

Question 28

In car insurance, when would a car be considered a total loss?

Answer 28

When the repairs exceed 60% of the market value of the vehicle, as this would be uneconomic

Question 29

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?

Answer 29

£10,000

Question 30

What are the two method for sharing losses between policies under the principle of contribution

Answer 30

Sum insured method
Independent liability method

Question 31

How does the sum insured method operate?

Answer 31

Insurer A pays Loss multipled by Sum Insured of Insurer A divided by total sum insured of Insurer A and B

Question 32

When is the sum insured method used?

Answer 32

On property claims where the policies are not subject to average.

Question 33

How does the independent liability method work

Answer 33

Loss shared in proportion to liabilities of each insurer if the other had not been paying the loss

Question 34

When is the independent liability method used?

Answer 34

On property policies where the policies are subject to average. On all liability claims.

Question 35

In the unlikely event that an insurer recovers more after subrogating than they paid out to the insured who benefits from the over recovery?

Answer 35

The insured

Question 36

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?

Answer 36

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.

Question 37

What do we mean by salvage

Answer 37

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

Question 38

Why do market agreements exist?

Answer 38

to reduce the correspondence and administrative costs
involved in pursuing frequent subrogation procedures

Question 39

Identify two market agreements on subrogation

Answer 39

ABI Memorandum of understanding – subrogated motor claims
Immobile property agreement

Question 40

Identify four ways subrogation rights may be precluded.

Answer 40

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

Question 41

Give an example of when the insured would have no rights?

Answer 41

This could happen if an insured signs an agreement with a ‘hold harmless’ clause, which prevents the insured from pursuing recovery rights.

Question 42

Why are benefit policies different?

Answer 42

They are not subject to the rules that flow from the principle of indemnity

Question 43

Why would a benefit policy not benefit from subrogation rights?

Answer 43

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

Question 44

What would a subrogation waiver mean?

Answer 44

The the insurers agree to waive their rights of subrogation.

Question 45

Which would case resulted in insurers not pursuing their recovery rights against negligent fellow works?

Answer 45

Lister v. Romford Ice and Cold Storage Ltd (1957)

Question 46

What is Contribution?

Answer 46

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.