Contribution

Akọwa Nkọwa

(a) Two factors that could reduce the amount of indemnity under an insurance contract

• Under-insurance and the application of the "average" clause: Where the sum insured is less than the true value of the property at the time of loss, the insured is treated as his own insurer for the shortfall. Under the average clause the claim is scaled down in the proportion that the sum insured bears to the actual value, so the insured recovers less than the full loss. \( \text{Claim} = \dfrac{\text{Sum Insured}}{\text{Value at Risk}} \times \text{Loss} \).
• Excess (deductible) or franchise: Many policies require the insured to bear the first part of every loss (the excess). This agreed amount is deducted from the claim, so the indemnity actually paid is reduced by the excess. (Other valid factors: deduction for depreciation, wear and tear since indemnity restores the insured only to the value immediately before the loss; deduction of salvage value; and contribution where more than one policy covers the same loss.)

(b) Calculation of each insurer's liability (contribution)

Where the same property is covered by more than one insurer, each insurer contributes rateably in the proportion that the sum it insured bears to the total sum insured. This follows the principle of contribution.

Total sum insured: \[ N150{,}000 + N120{,}000 + N90{,}000 = N360{,}000 \]

Loss to be shared = \( N60{,}000 \).

Insurer A: \[ \frac{150{,}000}{360{,}000} \times 60{,}000 = N25{,}000 \]

Insurer B: \[ \frac{120{,}000}{360{,}000} \times 60{,}000 = N20{,}000 \]

Insurer C: \[ \frac{90{,}000}{360{,}000} \times 60{,}000 = N15{,}000 \]

Check: \( N25{,}000 + N20{,}000 + N15{,}000 = N60{,}000 \), which equals the total loss. Each insurer's liability is therefore A = N25,000, B = N20,000 and C = N15,000.