IF1 Module 7 and 8 Flashcards
What is contribution in insurance?
Contribution in insurance refers to the principle where multiple insurance policies covering the same loss are required to share the compensation payment.
Many policies have a contribution clause which compels the insured to make a claim under each valid policy for the sum for which each insurer is liable.
Under common law what requirements must be satisfied before contribution arises:
- Two or more policies of indemnity must exist
- The policies must cover a common insurable interest
- The policies must cover a common peril which gives rise to the loss
- The policies must cover common subject-matter
- Each policy must be liable for the loss
- Neither policy must contain a non-contribution clause
What is rateable proportion?
Rateable proportion is the share of any claim that an insurer pays when two or more insurers cover the same loss. There are two different methods of calculating this.
What is the independent liability method for working out the rateable proportion?
The independent liability method is used where property policies are subject to ‘average’ or where an individual loss limit applies within the sum insured. It is also used for liability insurances.
The amount payable by each insurer is calculated as though no other policies existed and the insurer is alone in indemnifying the insured using the following formula:
policy sum insured/total value at risk * loss
The loss is then shared in proportion to the independent liabilities of the two policies.
What is the sum insured method for working out rateable proportion?
The second and most common method of assessing rateable proportion is by the sum insured. This method is used for property policies which are not subject to average and which have identical subject matter.
For each policy in turn, the sum insured is divided by the total sum insured under all policies, and the result is multiplied by the amount of the loss.
sum insured/total sum insured (all policies) * loss
What are the situations where the principle of contribution is modified?
- Non-contribution clauses
- More specific insurance clauses
- Market agreements
What is a non-contribution clauses?
Some policies may contain a ‘non-contribution’ clause, which states that the policy will not contribute if there is another insurance covering the same loss.
The courts are not in favour of such clauses. When multiple policies are in force, each of which has a non-contribution clause, they are considered to cancel each other out and normal contribution rules apply
What are some more specific insurance clauses that may affect contribution?
This would apply where, for example, a home insurance policy states that it will not cover jewellery if the insured also has more specific all risks insurance covering these items.
What are the market agreements that may affect contribution?
There is ABI agreement that applies when there is an overlap between travel, all risks, home and the personal effects section of a motor policy – the Personal Effects Contribution Agreement (PECA). PECA states that insurers will not insist that the insured claims a proportion from each insurer where the sum involved is modest, regardless of what the policy conditions actually say.
Similarly, a motorist may be covered to drive someone else’s car under a driving other cars extension in their own motor policy and also be insured to drive under the vehicle owner’s policy. In such circumstances, the insurer of the vehicle will deal with any claims without calling for a contribution from the driver’s insurer.
What is the meaning of subrogation?
Subrogation is the common law right of an insurer, after paying a claim, to take over the insured’s rights to recover payment from a third party responsible for the loss. It is, however, limited by the amount they paid out for the loss.
For example, if an insurance company pays the cost of repairs to an insured’s car, the insured cannot then also seek to recover these costs from the person responsible for the damage (this would be contrary to the principle of indemnity) but the insurer can, subject to recovering no more than they have paid out themselves.
What are an insurers’ subrogation rights?
Under common law, the insurer can only pursue the responsible party after the claim has been settled.
However, in practice, this can cause problems, so there is usually a condition written into the policy stating that insurers may pursue the responsible party before the claim is actually settled.
The limitation is that the insurer cannot recover from a third party before it has actually settled its own insured’s claim.
What are the three ways subrogation can arise?
Statute - An insurer requires riot claims to be notified within seven days of the event
Contract - A landlord’s insurer pays out a claim for damage, then seeks to recover the money from the insured’s tenant
Tort - An insurer pays out a claim for damage to property, then seeks to recover the money from the negligent person who caused the damage
Most insurers require that claims for riot, civil commotion and malicious damage must be notified within seven days of the event. This is because under the terms of the Riot Compensation Act 2016 (RCA) insurers may have rights of recovery against the local policing body for riot damage, but have only 42 days from the date of the riot to notify of a claim, with a further 90 days to provide all details and evidence
If a policy is subject to a standard subrogation condition, at what stage can an insurer commence a recovery action against a responsible third party?
As soon as a claim is notified.
Frank is knocked off his horse by a passing motorist and is temporarily disabled. He claims the weekly disablement benefit under his personal accident policy while he is off work. The total amount of his claim is £750.
How much, if anything, is Frank’s personal accident insurer entitled to recover from the responsible motorist?
His insurer wouldn’t be able to recover anything.
Subrogation rights only arise in respect of indemnity payments. Personal accident payments are ‘benefits’ and no subrogation claim can therefore be made. In this example, Frank will be able to sue the motorist separately for compensation and keep any award of damages in addition to his personal accident payments.
What is salvage with respect to insurance and subrogation?
In situations where the insurer considers the insured property (e.g. a car) to be damaged beyond economical repair, a total loss is assumed when calculating a claim payment.
The value of the remaining property, known as salvage, belongs to the insurer.
The Financial Ombudsman Service (FOS) states that the insured should always be given the opportunity to retain the salvage, provided a suitable deduction is made from the claim payment.
How do ‘salvage’ rights work with regards to stolen property?
Another example of ‘salvage’ rights is where stolen property (e.g. jewellery) that is the subject of a claim payment is subsequently recovered.
If the insured wants the property returned to them, they will have to repay the claim. If they decide they do not want the property back, the insurer becomes the owner and is entitled to sell it for its own benefit.
In contrast to subrogation, the insurer is entitled to profit from this situation; for example, the recovered property may be sold for more than the amount of the claim payment.
What are market agreements with regard to subrogation?
Market agreements exist between insurers to reduce the associated correspondence and administrative costs associated with the pursuit of subrogation rights.
What is the main purpose of the ABI’s Memorandum of Understanding - Subrogated Motor Claims?
To set out principles for subrogated motor claims.
In fact, it sets out four key principles:
- consistency of practice in the control of own damage claims irrespective of subrogation rights
- subrogated claims to represent the net cost to the insurer after all discounts and other agreed items are deducted
- supporting documentary evidence to be volunteered
- legal costs should be avoided wherever possible.
What are the four situations where insurers can be barred from exercising subrogation rights. Also known as precluding subrogation rights -
- insured has no subrogation rights (e.g. they have waived them through a ‘hold harmless’ contract clause);
- policy is a benefit policy;
- insurer has waived their subrogation rights (e.g. against a parent or subsidiary company); and
- insurer, having paid a claim under an employers’ liability policy for injury to an employee, has agreed that they will not pursue a recovery against a negligent fellow employee, in line with market practice.
