THE 5TH FUNDAMENTAL PRINCIPLES OF INSURANCE

When we discussed the principle of indemnity which was the 4^th fundamental principle of insurance. We have been made to understand that an insured is restored to the same financial position he was enjoying immediately before the loss. That is, an insured is not expected to make a profit from claim settlement.

The last two fundamental principles of insurance to be discussed are:

1. CONTRIBUTION
2. SUBROGATION

These two principles are usually referred to as corollary to indemnity because contribution and subrogation support indemnity. These two principles ensure the insured does not profit from claim settlement.

CONTRIBUTION

There are some cases, where an insured takes out more than one policy to cover his risk. In a case of double insurance, can the insured recover under both policies to receive more than he actually lost? The answer is no. According to the principle of indemnity, we understand that an insured should not recover in total more than the amount lost by claiming under both policies. The insured can only recover the total amount of a loss sustained, regardless of the number of policies held. On this premise, arise the principle of contribution.

A contribution is defined as The right of an insurer to call upon other similarly but not necessarily equally liable to the same insured to share the cost of an indemnity payment.

From this definition of contribution, it means; in a situation where an insured effects double insurance upon a particular risk and loss occurs, when the insured incidents his claim to the first insurer, the first insurer has a right to call upon the second insurer that has equally covered the same risk for the same insured to share the cost of indemnity. This means that the two insurers will contribute proportionately to make up the total amount of the loss sustained and jointly pay the claim to the insured.

CONDITIONS FOR CONTRIBUTION

The following five conditions must be satisfied before contribution arises under common law:

1. Two or more policies of indemnity must exist
2. Two policies must cover a common interest
3. The policies must cover a common peril which gives rise to the loss.
4. The policies must cover common subject-matter
5. Each policy must be liable for the loss.

TWO OR MORE POLICIES OF INDEMNITY MUST EXIST

Let’s look at a situation when an insured takes up a fire and burglary policy on his house with insurer A. He also effects a fire and burglary policy on his house with insurer B. Fire and Burglary policy is a policy of indemnity taken from two different insurance companies. When a loss occurs, the two insurance companies have the legal right to call on each other for contribution in order for the insured to be adequately indemnified.

TWO POLICIES MUST COVER A COMMON INTEREST

By common interest, we mean insurable interest. If you have been following my articles, you will understand by now, what insurable interest is. You can refer to my first article on fundamental principle of insurance. 6 FUNDAMENTAL PRINCIPLES OF INSURANCE YOU NEED TO KNOW

You must be the owner of the risk insured at the two insurance companies for contribution to arise.

If you as the owner insures your property and now keeps the same property with a bailee who also insures the same property with another insurance company. If there is a loss, the contribution principle will not be applicable. For example, if you have insured your plasma television set under house owner insurance, being the owner of the television set. You now take the television to the technician for repair because it has a technical fault. Your technician who is in the custody of your television is a bailee, he also has an insurable interest in that property as a custodian of the property, so he has a right to insure the property. Therefore the interest as the owner is different from the interest as a bailee. So there is no common interest. If the loss occurs while the property is with the bailee, the insurer of the bailee will pay the indemnity cost because it was in the custody of the bailee at the time of loss. This is not a case of double insurance because the policy does not cover a common interest, therefore contribution principle will not be applicable.

THE POLICIES MUST COVER A COMMON PERIL WHICH GIVES RISE TO THE LOSS.

I have discussed peril under proximate cause. Please refer to the third fundamental principle of insurance.THE 3RD FUNDAMENTAL PRINCIPLE OF INSURANCE.

When you insure your house against fire with insurer A and you insure the same house against burglary with insurer B. When a loss occurs as a result of fire incidence, insurer A will not have a legal right to call on insurer B for contribution, because the policies do not cover common peril which gives rise to the loss.

THE POLICIES MUST COVER COMMON SUBJECT-MATTER

For contribution to apply, each insurer must provide cover in respect of the subject matter of insurance which suffers loss or damage. Recall that the subject matter of insurance is the object that was insured. The same object must have been covered by both insurers before there can be a contribution to the indemnity cost.

EACH POLICY MUST BE LIABLE FOR THE LOSS.

Each policy must have been duly activated by receiving a premium with a promise to pay the claim when the loss occurs.

The aforementioned are conditions for which contribution occurs. These conditions are to discourage insured from making profits during claim settlement and invariably discourage double insurance by intention.

However, there are some cases of overlapping cover. When this occurs, a more specific insurance clause is applicable to provide adequate indemnity to the insured. For instance, if a Jewelry has been specifically insured and there is also a blanket policy to cover household contents. When a loss occurs, the insurance for the jewelry will provide indemnity for the jewelry, while the insurance for the household contents will provide indemnity for the loss in the house less the cost of the jewelry because it has been taken care of by the specific insurance for the jewelry.

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