This is another corollary of the principle of indemnity. It ensures the payment of exact financial compensation to the insured by discouraging the insured from obtaining compensation from more than one source. It is applicable in a situation involving more than one policy covering the same subject matter. That is, it prevents the insured that holds several policies with different insurers from recovering in all more than the amount of the loss.
MEANING OF CONTRIBUTION
Contribution is the right of an insurer to invite the other insurers that are similarly but not necessarily equally liable to the same insured in the event of double insurance. This liability will be apportioned on equitable proposition between the insurers that are involved.
This principle arises where the insured has two or more policies in respect of the same property. If loss should occur to the property, the sum total of his recoveries should not exceed his actual loss sustained. If the insured is allowed to make gain from claiming full indemnity from the two insurers, this is contrary to the principle of indemnity and equity. The application of contribution doctrine is to check this act, by ensuring that the insurers concerned contribute ratable proportion towards the settlement of the loss by the insured.
HOW CONTRIBUTION MAY ARISE
The principle of contribution becomes applicable if the following conditions are met:
- There must be two or more policies of indemnity.
- The subject matter of insurance must be common to all policies.
- The peril insured must be common to all.
- The same insured must be interested in all the policies.
1) Same peril: Contribution arises if both policies include the peril which has caused the loss. For example, a standard fire insurable policy will contribute in the loss of insured property caused by fire with another policy covering fire, explosion, lightning, flood, storm, earthquake and aircraft impact. This simply means that the peril that causes the loss must be common to both insurance policies.
2) Same subject matter: Also, the subject matter of the insurance must be common to all the policies. This does not mean that the subject matter of the policies called into contribution need to exactly be the same. It means that both policies must cover the item in respect of which a claim is made. It is possible for either or both to cover other items in addition. For example, a motor cycle dealer may cover a specific motor cycle with one insurance company and cover the rest with another insurance company. If an accident happens to the motor cycle that is common to both insurers, the claim may be covered under both policies and contribution arises.
3) Same interest: The interest in the various insurance to be brought into contribution must be the same. This implies that all policies must be intended to benefit the same person. This was contained in the classical case of North British and Mercantile V Liverpool and London Globe (1877) known as “king and queen qualities” case. It was a friendly action instituted by one office against the other to determine the effect of contribution condition of their policies, whether contribution applied in the case or not.
Here, a firm of merchants named Rodocanachi had deposited grain at a granary owned by Barnet, a wharfinger. Rodocanachi had insured the grain to cover his own interest as owner. Also Barnet has a strict liability for the grain in his possession by the custom of his trade in London and had insured it. The grain was later destroyed by fire at the warfinger king & queen granaries. As each policy covers the fire risk, it was cleared that one or both insurers were liable for the loss. The bailer’s insurers paid and sought to recover from the owner’s insurers. The court held that the contribution would not arise as the interests involved were different. That is to say, one is the owner and the other a bailee. This judgment showed that for there to be contribution between policies, the interest in the subject matter of insurance must be the same.
METHOD OF CALCULATING CONTRIBUTION
1) Payment in Proportion to the sum insured: In practice, the common method adopted by insurer is to contribute according to the sum insured. Insurer will pay their ratable proportion to the cover they have provided in line with this formula.
Sum Insured of one insurer ÷ Total sum insured of all the insurers × Loss
For example, assuming there are three insurance policies in existence which certify the condition of contribution having sum insured as stated below.
Insurance policy X = N30,000
Insurance Policy Y = N40,000
Insurance policy Z = N20,000
If a loss of N15,000 is sustained, the contribution proportion to the sum insured will be calculated thus:
Insurance policy X contributes:
Insurance policy Y contributes:
Insurance policy Z contributes:
2) Contribution based on the proportion of its liability: Assuming liability of insurance policy X, Y,and Z are N150,000, N200,000 and N250,000. A loss of 100,000 is recorded, the formula to calculate individual policy liability is:
Insurance policy X’s liability
Insurance policy Y’s liability
Insurance policy Z’s liability
3) In the event of not subjected to average: In the case of insurance of property which are not subject to average, where the subject matter of insurance are identical, the sharing of loss will be calculated using sum insured method.
For example, Adegbesin Insurance Company insured a building for N200,000 while Ngaka Insurance Company insured same building for N400,000. A loss resulting from fire of N240,000 would be shared as follows:
Adegbesin Insurance Company pays:
Ngaka Insurance Company pays;
4) Subject to Average: Where policies are subject to average, the use of independent liability method is adjusted. It is used to calculate what each insurer will have to pay if it should be assumed tobethe only insurer covering the subject matter of insurance at the time of loss.
For example, ABC Ventures Ltd insured their property against fire with Standard Trust Assurance Plc and Niger Insurance Plc for the sum of N1,500,000 and N1,300,000 respectively.
A loss of N400,000 is recorded while the value of the property at the time of loss is N3,000,000. The share of loss will be apportioned to the two insurance companies as follows:
Standard Trust Assurance pays:
Niger Insurance Plc pays:
The liabilities of standard trust is N200,000 while that of Niger Insurance is N173,000. The balance of N27,000 to make up the loss will be provided by the insured which is considered by the two policies as its own insurer for under-insuring their property.
MODIFICATION TO THE PRINCIPLE OF CONTRIBUTION
An insured who effected two or more insurers can recover fully from one of the insurers his loss while the insured pursues other insurers to recoup his outlay. Insurers consider this as inconveniences and riddled with dangers. In order to prevent this situation, they inserted in most of their policies contribution condition or clause to express their intention.