Chapter 8: Contribution & Subrogation

Question 1

What is dual insurance?

Answer 1

Where a policyholder holds two insurance policies that both provide coverage for the same loss

Question 2

What is a contribution condition?

Answer 2

A policy condition limiting the amount an insurer must pay out for a claim to their contribution

Question 3

What happens if a policyholder that has dual insurance makes a claim and the policies do not have a contribution condition?

Answer 3

The insured is entitled to claim the whole amount from any of the insurer’s liable. That insurer can then recover costs as appropriate from the other insurer(s)

Question 4

Define contribution

Answer 4

The right of an insurer to recover part of a claim payment where two or more policies cover the same subject matter and risk, and are both in force at the time of loss

Question 5

When does contribution apply?

Answer 5

Two or more policies of indemnity cover the same insurable interest, subject matter and common peril. Both are liable for the loss and neither contains a non-contribution clause

Question 6

A merchant deposits his grain in a granary owned by another person. Both the merchant and the granary owner have insurance policies covering the grain. A fire occurs. Does contribution apply?

Bonus: What tort law case does this come from?

Answer 6

No. The merchant had insurable interest as the owner of the grain. The granary owner had insurable interest as he could have been held liable for it’s loss since it was stored in his granary. The policies do not cover the same insurable interest, so contribution does not apply

Bonus: North British and Mercantile v. Liverpool and London and Globe 1877 (known as King and Queen Granaries case). In this case the merchant claimed from his insurer and they fully paid out but it was ruled they could not make any recovery from the granary owner’s insurance

Question 7

What is the rateable proportion?

Also called rateable share

Answer 7

The share of a claim that an insurer must pay when contribution is applied

Question 8

What are the two main ways of calculating the rateable proportion?

Answer 8

1. By sum insured

2. By independent liability

Question 9

How is rateable proportion calculated by sum insured?

Answer 9

The claim is proportioned along the same lines as the sum insured under each policy

Rateable proportion = (policy sum insured/total sum insured)*loss

EG
Policy A covers £100,000, policy B covers £200,000
Total sum insured is £300,000
Policy A pays 1/3 of any claim, policy B pays 2/3

Question 10

Your house is valued at £500,000 (congratulations). You have two policies with identical terms and conditions, including a contribution condition. Policy A has a sum insured of £100,000. Policy B has a sum insured of £400,000. A storm occurs causing damage costing £50,000 to repair. How much can you claim from each policy?

Answer 10

Policy A = £10,000

Policy B = £40,000

Question 11

When is independent liability used to calculate the rateable proportion?

Answer 11

When the policies are subject to average (underinsurance) or when an inner loss limit applies to a sum insured

Question 12

How is rateable proportion calculated using the independent liability method?

Answer 12

(Policy sum insured/total value at risk)*loss

Question 13

The contents of your house are valued at £50,000. You have two identically worded policies, policy A has a sum insured of £10,000 and policy B has a sum insured of £20,000. A loss occurs causing £20,000 of damage. How much does each policy pay?

Answer 13

Policy A = £4,000 (1/3 of the loss)
Policy B = £8,000 (2/3 of the loss)

The total payment is £12,000. The remaining £8,000 must be paid by the insured due to underinsurance - they have not fully covered the risk

Question 14

What is a non-contribution clause?

Answer 14

The policy shall not apply for any claim where insured is entitled to indemnity under any other insurance

Question 15

What happens in a dual insurance situation if both (or all) policies have a non-contribution clause?

Answer 15

They cancel each other out and are treated as if they did not have the non-contribution clause and pay out in respect of their rateable proportion

Question 16

What is the Personal Effects Contribution Agreement (PECA)?

Answer 16

A market agreement between members of the Association of British Insurers (ABI)

Where is an overlap between travel, household, motor personal effects, and all risk policies, insurers will not insist an insured make separate claims against each insurer in proportion where the loss is modest. This is regardless of the policy conditions

Question 17

Define how subrogation applies to insurance

Answer 17

The right of the insurer, having paid a claim, to assume the insured’s rights to recover payment from a third party responsible for the loss, limited to the amount actually paid out

Question 18

You are in a car accident and make a claim from both your insurer and the other driver’s. You receive a cheque from each. Are you entitled to keep both?

Answer 18

No, as this would place you in a better financial position than you were in before the loss. Under the principle of subrogation the cheque from the other driver’s insurance should go to your insurer to compensate it’s loss. However if they paid out less than the amount on this cheque, you would only have to return them that amount and may keep the rest, which would probably represent your excess or uninsured losses

Question 19

What is the leading case covering subrogation and indemnity?

Answer 19

Castellain v. Preston 1883

Question 20

You are selling your house. During the course of the sale it is damaged by a fire. You claim for this damage from your insurer and they settle via cash payment. However you do not use this money to repair the house. You subsequently receive the full purchase price for the house. How does subrogation and indemnity apply?

Answer 20

You have received more than a full indemnity - you are in a better financial position than you were before the loss. Your insurer has a right of subrogation against you and can recover their costs, in this case the cash payment

This is Castellain v. Preston 1883

Question 21

In what 3 ways may subrogation rights be caused?

Answer 21

1. Statute
2. Tort
3. Contract

Question 22

What is a tort?

Answer 22

A breach of your duty to act in a reasonable way towards others under common law

Question 23

How does the Riot Compensation Act 2016 affect subrogation?

Answer 23

Insurer’s may have rights of subrogation against the police for payments relating to riot damage, for 42 days from the date of the riot. As a result it is a standard condition for riot damage to be notified to the insurer within 7 days

Question 24

What happens to the property subject matter in the event of a total loss settlement, most notably in motor claims?

Answer 24

It becomes salvage. Even though repair would not be economic it may still hold some value. As long as the insurer meets the value of the loss in full the insurer is entitled to the salvage value, so become owners of the property

Question 25

What happens to salvage?

Answer 25

The insured has the right to retain the salvage, however if they do a deduction is made from any claim settlement to account for the salvage value.

If the loss is paid out in full then the salvage becomes property of the insurer

Question 26

What is the ABI Memorandum of Understanding for Subrogated Motor Claims?

Answer 26

A market agreement between Association of British Insurer’s.

Sets out principles for dealing with subrogation in motor claims. Essentially boils down to insurer’s communicating “honestly and transparently” in order to avoid disputes and legal action and ensure prompt payment

Question 27

List four common scenarios where the insurer has no subrogation rights

(ie the subrogation rights are precluded)

Answer 27

1. The insured has no rights, therefore the insurer cannot assume them
2. Subrogation waiver clauses in the policy (eg against the insured’s parent or subsidiary companies)
3. Benefit policies - principle of indemnity does not apply therefore neither does subrogation
4. Negligent fellow employees (technically there is a right here but insurers generally agree not to pursue it except in extreme circumstances)

Question 28

Following a claim an insurer has paid out a settlement of £900 to their insured. The insurer then subrogates against the responsible third party and recovers £1000. Who is entitled to the £100 difference and why is there a difference?

Answer 28

The insured. It could represent either their excess or an uninsured loss

Question 29

An insurer makes a payment to settle a claim for £1000. Following this they retain the salvage. The later sell the salvage for £1500. Who is entitled to the £500 difference?

Answer 29

The insurer. They have indemnified the insured and become owner of the salvage and are entitled to it’s full value, regardless of if it increases in price after becoming owner or sells for more than the claim

Question 30

Your car is damaged and is assessed to be total loss. The insurer offers you a payment of £5000. You opt to retain the salvage, valued at £1000. In light of this the insurer makes you a payment of £4000 and allows you to keep the salvage. When exercising their subrogation rights, how much can the insurer claim from a negligent third party?

Answer 30

£4000 - this is the amount they have paid out so is the limit of their subrogation rights

Question 31

What kind of insurance policies do not have subrogation rights?

Answer 31

Benefit policies

Question 32

When does an insurer’s right to subrogation begin?

usually - assume the policy has a standard subrogation condition

Answer 32

As soon as the insurer is notified of their insured’s claim

Question 33

What is a more specific insurance clause? What kind of policy usually has these?

Answer 33

A clause restricting cover where a more specific insurance policy has been arranged. These are most common in household policies because policyholders sometimes arrange specific cover for jewellery and other high value items and by including a more specific insurance clause the household policy does not have to contribute to any claim