Contribution
Overview
Suppose you insure the same shop against fire with two different companies, and then a fire strikes. Can you collect the full loss from each one and walk away with twice what you lost? Insurance law says no, and the rule that stops you is the principle of contribution. It quietly makes sure that no matter how many policies cover a loss, you receive one indemnity and the insurers share the bill between them.
In this lesson you will learn exactly what contribution is, why it is the natural partner of indemnity, and the conditions that must all be met before it can operate. You will work through the calculations examiners love, splitting one loss between two or three insurers by their rateable proportions, and you will see what happens when a policy quietly carries a non-contribution clause that changes who pays.
Objectives
- Define contribution and explain how it supports the principle of indemnity
- State the conditions that must be satisfied before contribution operates
- Calculate each insurer's rateable share where a loss is covered by more than one policy
- Explain the effect of a non-contribution clause on the settlement of a claim
Mind map
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Flashcards
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Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Contribution. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- The principle of contribution ensures that where a loss is covered by more than one policy, the insured: A. Recovers the full loss from each insurer B. Recovers the loss once, with the insurers sharing the cost C. Recovers nothing until the insurers agree D. Recovers only from the policy with the largest sum insured Answer: B
- Which of the following is NOT a condition for contribution to operate? A. The policies cover a common peril B. The policies cover a common subject matter C. The policies are contracts of indemnity D. The policies were taken from the same insurer Answer: D
- Stock is insured for 4,000,000 naira with Insurer A and 6,000,000 naira with Insurer B, on the same stock against the same peril. A fire loss of 500,000 naira occurs. Under the maximum liability method, how much does Insurer A pay? A. 300,000 naira B. 250,000 naira C. 200,000 naira D. 500,000 naira Answer: C
- Contribution is best described as a corollary of the principle of: A. Utmost good faith B. Insurable interest C. Indemnity D. Proximate cause Answer: C
- A non-contribution clause in one of two overlapping policies has the effect of: A. Sharing the loss equally between the insurers B. Shifting the whole loss onto the other insurer C. Cancelling both policies D. Reducing the claim by the sum insured Answer: B
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Revision Questions
Wondering what past questions for this topic looks like? Here are a number of questions about Contribution from previous years
Question 1 Report
(a) Explain two factors that could reduce the amount of indemnity under an insurance-contract.
(b) A property owned by bal Ltd was covered by three insurers, A, B and C for the Sum of N150,000, N120,000 and N90,000 respectively. The insured suffered a loss of N60,000. Calculate the liability of each insurer.
Answer Details
(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.