CONCEPT OF CONTRIBUTION AND AVERAGE CLAUSE UNDER INSURANCE POLICY
Dear friends, we know that a man, who ensures his interest in property against loss by any risk, whether that interest be that of a proprietor or creditor, cannot recover from the insurance companies, a greater amount than he lost by the contingency insured against. So, in case of double insurance of the same interest with the different insurance companies, the assured will not be entitled to recover more than the full amount of the loss which he has suffered. This is called the Principal of Contribution.
Contribution may be referred as payment by each party interested of his share in any common liability. An action for contribution is a suit by one of such parties who has discharged the liability common to them all to compel others to make good their share. Contribution is between persons equally bound to honour a common liability.
NATURE OF THE RIGHT OF CONTRIBUTIION
“Contribution exists where the thing is done by the same person, against the same loss and to prevent a man first of all from recovering more than the whole loss, or, if he recovers the whole loss from one which he could have recovered from the other, then to make the parties contribute rate ably. But that only applies where there is the same person insuring the same interest with more than one office.”
CONTRIBUTION CLAUSE IN INSURANCE POLICY
There is nothing in law to prevent a person from effecting two or more insurance in respect of the same subject matter, but the principal of indemnity will come into operation to prevent his recovering more than the actual loss even if total amount of insurance far exceeds the loss. The principal of contribution is resorted to for the purpose of apportioning the amount recoverable, amongst the different sets of insurers in order to prevent the loss being borne in an undue proportion by any one of them.
There is generally a contribution clause in the policies which provides that if, at the time of loss, or damage, there are other insurances in existence covering the same subject matter of insurance, with the other insurers and the liability of the insurers upon the policy in question is limited to their rate able proportion of loss or damage. The insured, under such a policy cannot demand payment in full from the insurers in question, but only the proportion for which they are liable after all the policies subsisting at the time of loss have been taken into consideration.
If policy does not contain contribution clause the assured is entitled to recover the full amount from any set of insurers, and he cannot be referred to other insurance companies for relief.
After payment in full the insurer can call upon the other offices, insuring risk to contribute their share of loss.
The right of insurer in this case is not contractual but it is based on the principles of natural justice.
The contribution clause in an insurance policy limits the liability of the insurers, usually runs as follows;” if at time of any loss or damage happening to any property hereby insured, there be any other subsisting insurance, whether effected by the insured or by any other person, covering the same property, this company shall not be liable to pay or contribute more than its rate able proportion of such loss or damage.”
Contribution Clause is an effective method of preventing any single policy from bearing more than its proper share of loss or damage. The liabilities of the insurers to contribute inter se, being not contractual the rights and liabilities of the respective insures inter se are not varied or effected by the language of Contribution Clause.
APPLICATION OF DOCTRINE OF CONTRIBUTION; Please check below mentioned factors in the Insurance Policy of insurers for effecting Doctrine of Contribution;
The subject-matter of insurance must be the same. It is not necessary that the amount of insurance with each insurer should be the same;
The event insured against must be the same;
The insured must be the same person in all insurance policies;
The right of contribution exists only in respect of insurance which have attached and which are on the face of the policies subsisting insurance.
CONTRIBUTION Vs. SUBROGATION Contribution differs Subrogation in several respects. It implies more than one contract of insurance, each of which undertakes a similar, if not identical liability, in respect of the same subject-matter and same interest therein.
Further the amount of insurance must exceed the value of property insured, all the damages done to it. When above circumstances exist, the insurers by Contribution Clause distribute the actual loss in such a way that each bears his proper share. No one insurer is more liable than any other, no more than the whole loss can be recovered.
The aim of Contribution is to distribute the loss among the different persons liable so as to give each and all of them a diminution of their individual loss.
SUBROGATION it will arise when the assured must have concurrent remedies against the person causing the loss or damage and against the insurer. All that is necessary is that there should be besides the insurer, another person liable to the insured or some other means of indemnity open to the assured other than and besides recourse to the insurer. This an assured has a claim against bailee of his goods by law, custom or contract, and also a claim against his insurers, but the insurer can in satisfaction of loss claim against the bailee who is primarily liable and stands in a position analogous to that of a principal debtor whose debt is guaranteed. In above cases Principle of Subrogation will apply.
In subrogation the aim is to shift the loss on those which would have been liable if there had been no insurance.
The one thing which contribution has in common with subrogation is to reduce the indemnification of the assured within the bounds of real indemnity.
AVERAGE CLAUSE IN INSURANCE POLICY; In absence of a contract to the contrary, an assured is entitled to have the full amount of loss made good at the hands of the insurers. But now days in many insurance policies of different insurers contains a condition called the average clause by which the assured is called upon to bear a portion of the loss himself.
One of such conditions is that if the property covered by the policy is, at the time of the fire, of greater value than the amount of insurance specified in the policy, the insured must be considered to be his own insurer for the different and bear a rate able proportion of loss. This condition is called the pro-rata condition of average. The portion of the loss is ascertained by a rule-of-three sums as follows;
Value of property covered;
Insured amount; and
LET’S US CONSIDER AN EXAMPLE:
Mr. A has insured his house property values at Rs. 5.00 Lakhs and he has taken an insurance policy of sum assured Rs. 4.00 Lakhs and the damage done to his house due to fire is Rs. 1.00 Lakhs. Now in this case the insurance company will pay him Rs. 0.80 Lakh as insurance claim and he has to bear Rs. 0.20 Lakh as his own.
This condition only comes into operation if the assured is under-insured and in the case of partial loss, he would be paid in the ratio above mentioned. In case of total loss Mr. A is entitled to be paid total sum insured i.e., Rs. 4.00 Lakhs.
The policies which are not subject to Average Clause are called Specific Policies. It means that the amount insured is payable irrespective of the value of the property within the risk at the time.
The Average Clause policies are generally used in Commercial or mercantile transactions.
The Specified Policies generally cover personal property.
CONCLUSION: We know that insurance indemnifies us in case of risk or perils. An insurance policy financially helps us facing adverse effects of peril insured. We cannot make profit from insurance policies and we cannot claim more than damages incurred to us against risk/perils insured. Many persons are accustomed to take various insurance policies for same subject manner and same type of peril. In this case if loss or damage occurred then assured/insured cannot claim compensation from each insurer more than amount of loss or damage. Now Doctrine of Contribution provides that in this case where there are more than one insurer insuring same subject matter against same interest then the contribution will be distributed amongst then on the basis if rate able proportion.
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