Understanding the Doctrine of Contribution

The principle of contribution is one of six basic principles of general insurance. Insurable interest, utmost good faith, subrogation, indemnity and proximate cause are the others. The principle of contribution is related to the principles of indemnity and proximate cause. It is based on the premise that no one should gain from a loss, since an insurable risk is a pure risk. Contribution is essentially “the right of an insurer to call upon to call upon others similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment.”

Let’s say a building is insured for $1,000,000. It is insured for the same amount with two different insurers. The entire sum insured is therefore $2,000,000.00. A loss occurs that is estimated at $600,000.00. According to the principle of contribution, each insurer is liable for half of the damage (1 million/ 2 million). This would amount to an indemnity payment of $300,000.00 by each insurer. If one insurer pays the full claim, that insurer can make a subsequent claim on the other insurer address the imbalance. Contribution thus ensures that the principle of indemnity is enforced.

The way to calculate the contribution amount would be to divide the sum insured by a particular insurer by the total sum insured and multiply this factor by the loss amount. According to the principle of indemnity, the loss should not exceed the replacement value. Even if the asset is fully insured with two insurers, the contribution principle would work.

For the principle of contribution to be applicable, two or more policies of indemnity must exist. Another requirement is that each policy must cover the same risk giving rise to the loss. Let’s assume that one policy covers fire and malicious damage while another covers fire to the exclusion of malicious damage. If arson is the determined cause of the loss, the insurer covering malicious damage cannot call on the other insurance to help indemnify the insured. This is because the proximate cause of the fire was malice and the other insurer excluded malicious damage.

The same subject matter must be covered. In general insurance, terms of coverage are very specific. You could insure a building, but insuring the building would not be the same as insuring the building and its contents. If a loss is related to contents of the building occurs, then the insurer that covers stock would be called on to indemnify. The other policy would have covered the building alone, so that insurer would not be liable.

Another pre-requisite is that each policy must protect the same interest of the same insured. All policies must be in force at the time of the loss. With general insurance, timing is everything. The difference between being covered or not could be a matter of minutes. There is no grace period with general insurance, so this pre-requisite assumes paramount importance.

Some policies may contain a non-contribution clause. This prevents an insurer from being liable if the insured is covered under another policy, even if all pre-requisites for contribution are satisfied. The principle of contribution is essential in maintaining the integrity of other insurance principles.