Contribution

Question 1

What does the principle of contribution seek to do?

Answer 1

Share the burden of the loss fairly among insurers who cover the loss.

Question 2

What is dual insurance?

Answer 2

When 2 or more policies cover the same loss.

Question 3

What is a contribution condition and why do insurers often include them in their policies?

Answer 3

A contribution condition restricts that insurers liability to its rateable proportion/rateable share of a loss. Insurers include this as otherwise the customer is entitle to claim the whole amount from any insurer liable. This means that insurer will then have to recover shares from the other insurers.

Question 4

What must be common to all policies in order for contribution to arise?

Answer 4

Subject matter, peril and insurable interest.

Question 5

What is the definition of contribution?

Answer 5

The right of an insurer to recover part of a claim payment where 2 or more policies cover the same interest, same risk and are in force when the loss occurs.

Question 6

Which case established that contribution only applies when the insurable interest is the same?

Answer 6

North British & Mercantile v. Liverpool Glove (known as King and Queen Granaries case) - grain

Question 7

What is rateable proportion?

Answer 7

The share of any claim that an insurer pays when 2 or more insurers cover the same risk, usually in relation to the sum insureds.

Question 8

What are the 2 ways of determining the rateable proportion?

Answer 8

Sum insured

Independent liability - method calculates the amount payable under each policy as if no other policy existed (used where property policies are subject to average)

Question 9

In what situations might the principle of contribution be modified?

Answer 9

Non-contribution condition - means the policy would not contribute if there was another insurance policy in force (unfavourable by courts)

More specific insurance clauses - policy may restrict cover where a more specific insurance exists (common in HH policies)

Market agreements - agreements amongst insurers to ensure contribution runs smoothly

Question 10

What is the sum insured method of working out contribution?

Answer 10

Sum insured of 1 policy ÷ sum insured of all policies × loss

Question 11

What is the independent liability method for working out contribution?

Answer 11

Policy sum insured ÷ total value at risk × loss