It has been well established through the Principle of indemnity that on the happening of a loss, the insured shall be placed back into the same financial position, as if no loss has taken place. He shall be paid neither more nor less.
In order to preserve this principle if, therefore, there comes up any possibility which is likely to disturb this principle, that is to say, if somebody is likely to get more than the amount of loss, then that has to be checked so that the principle remains undisturbed.
In other words, if there comes up any possibility whereby the insured, after the happening of a loss, is likely to get more than the amount of the loss then this is certainly wrong and has to be stopped.
In fact, however, there would have been possibilities of getting more than the actual loss had the principle of contribution not been established with legal force.
Just to give a probability, the insured would have received a claim in full, numbers of times, by effecting numbers of policies with different insurers thereby defeating entirely the principle of indemnity.
Like subrogation, therefore, has come up the principle of contribution with the sole intent to preserve the principle of indemnity.
“Contribution is a right that an insurer has, who has paid under a policy, of calling other interested insurers in the loss to pay or contribute ratably to the payment”.
This means that if at the time of loss it is found that there is more than one policy covering the same loss then all policies should pay the loss proportionately to the extent of their respective liabilities so that the insured does not get more than one whole loss from all these sources.
If a particular insurer pays the full loss then that insurer shall have the right to call all the interested insurers to pay him back to the extent of their individual liabilities, whether equally or otherwise.
The insured, under no circumstances, shall be allowed to take the advantage of all the policies individually so as to get the full claim number of times.
Even if the insured recovers from all the policies, he shall have to refund all such payments in excess of the actual loss sustained.
As this principle virtually comes to the rescue of the principle of indemnity, therefore, like subrogation, the assertion “it is a corollary to the principle of indemnity” equally holds well with regard to the principle of contribution.
It has to be remembered that as this principle has had its birth from the principle of indemnity and will maintain its continued existence to preserve the principle of indemnity, therefore, it applies only to those insurance contracts which are contracts of indemnity. As life and personal accident contracts are not contracts of indemnity, this principle does not apply thereto.
CONTRIBUTION AS APPLIED TO CLAIMS
It is virtually in the perspective of claims settlement that this doctrine is of vital importance. In this regard the following considerations must be noted carefully by the students or readers;
WHEN CONTRIBUTION OPERATES
Before contribution can operate the following conditions must be fulfilled;
- There must be more than one policy involved and all the policies covering the loss must be in force. This is well understood. If there is only one policy involved there is nothing which can contribute and similarly if at the time of loss it is found that a particular policy in the lot is not in force because of some reason than that policy cannot be called upon to contribute.
- All the policies must cover the same subject-matter. If all the policies cover the same insured but different subject-matters altogether then the question of contribution would not arise.
- All the policies must cover the same peril causing the loss. If the policies cover different perils, some common and some uncommon, and if the loss is not caused by a common peril,, the question of contribution would not arise.
- All the policies must cover the same interest of the same insured. An example will make the proposition clear. Let us assume that A’ is the owner of a car and has obtained a loan from ‘B’ on the security of the car. Here both A and B have got insurable interest and can, therefore, effect policies individually. In case of damage to car both A & B will get claims independently and no contribution will apply in between the policies.
The reason being that the interests are different and also the insured’s. It should be remembered that if any of the above four factors is not fulfilled, contribution will not apply;
HOW CONTRIBUTION WORKS
Once it is established that the above factors are satisfied and contribution is to apply then the next course is to find out the liability under each policy.
Usually, this is on the sum-insured basis under each policy and is commonly known as proportionate liability or respective liability of each policy. The formula applied is,
Lets see the examples below to get a better idea;
POSITION OF CONTRIBUTION UNDER COMMON LAW AND POLICY CONDITION
It should be clearly borne in mind that even though there is no contribution condition in the policy, that is to say that, even if it is not mentioned in the policy that contribution would apply, nevertheless, it is the legal right of the insurers to get the benefit of contribution.
The right is implied at law. However, the position as to when and how the right can be exercised differs at common law and under policy condition.
Under common law the position is this that the insured can claim the full amount of loss from any of the insurers of his choice, when that insurer will have the trouble of asking contribution from the other interested insurers.
But under a policy condition the insurers may require the insured to claim proportionately from all the insurers right at the inception rather than claiming full from the policy subject to this condition: in practice, non-marine policies do usually contain a condition as such and it is most unusual to find such a condition in marine policies.
Sometimes a special clause is put in a policy to keep the same away from contributing under circumstances where the loss is covered by a more specific policy.
In such circumstances, the nonspecific policy having this clause shall not contribute to the loss unless the specific policy is exhausted and then only for the excess amount.
In the study of the principle of contribution also the student should try to recall the legal principle as laid down in the leading English case of CASTELLAIN V. PRESTON (1883) discussed earlier.