Understanding Contribution

If you have been following along with our exploration of the technical aspects of insurance over the last few months, then you will be aware that in recent weeks we have covered the following topics:

• Understanding Risks
• What is an Insurance Contract?
• How Agency arises in Insurance
• What is Insurable Interest?
• What is Proximate Cause?
• What is Utmost Good Faith?
• What is Indemnity?

All of these doctrines, of theories of insurance are critical in the application and utility of your coverage. However, when it comes to claims the settlement of a loss can be complicated by a number of factors. As we’ve seen, there are policy mechanisms which may see you, as a policyholder, receive less than full indemnity.

How Contribution Works

Contribution impacts claims, but in a slightly different way. This is a claims related doctrine of insurance that applies towards indemnity, in which there has been double insurance of a loss.

It is not beyond the realm of possibility that two or more policies exist to cover the same risk. This is to say, that a policyholder (or holders) may have obtained multiple insurance products covering the same loss.

Let’s say, for example, a husband and wife each (independently) obtain insurance coverage on their car. This could be due to a miscommunication – the husband and wife each assume that they were responsible for taking out the insurance on the vehicle, and so the car is covered by two comprehensive motor insurance policies.

The car is worth $100,000, and each policy covers the car for $100,000.

If there is a loss, the policyholders would not receive $200,000 in cover. Instead, each insurer providing insurance for the vehicle will share in a $100,000 loss.

How Does Contribution Work?

As with all things insurance, contribution is bound to any relevant policy provisions appearing in any of the coverage applying to a single risk. However, with this understanding, contribution normally works as follows:

Any one of the insurance underwriters covering the loss is bound to pay for the full settlement amount that would have been payable to the policyholder, were no other policies of insurance in force. After settling the indemnity towards the policyholder, that insurer is then entitled to call upon the other insurers covering the risk to contribute towards the cost of the claim.

It is important to note that where two or more insurers are covering the same risk, with the same insurable interest, contribution may occur on a similar basis but not an equal one.

Where contribution applies, the total sum of all the insurers contributions towards the loss in question will be 100% of the insured’s loss. Each individual insurer may contribute an unequal amount towards the financial settlement of a loss, but as a policyholder you will still receive a settlement up to your policy limit.

Essential Criteria for Contribution

In order for Contribution to apply to a claim, a number of conditions must be satisfied.

• The insurance covers must be providing an indemnity.
• Each insurance policy must cover the same insurable interest on the loss
• Each insurance must cover the proximate cause of the loss.
• Each insurance must cover the same subject matter (property/liability) of the loss
• Each policy must be liable to the loss.

The most critical factor in applying contribution towards a claim is establishing whether there are multiple policies covering a single risk, and that all the policies are providing an indemnity. As contribution only applies to indemnity products, rather than benefit products, it does not influence specific types of insurance.

Life insurance, for example, is generally considered to be a “Benefit” product rather than an “indemnity” product. As such, if an individual dies while covered by two or more life insurance plans then, in most cases, each policy must pay in full as the insurance is not subject to indemnity.

With regards to the same insurable interest, this gets far more complicated. Suffice it to say that it is only policies activated under the same interests that will apply towards contribution. In the case where multiple products exist covering a single risk, but with different principle interests, then another claims doctrine, the doctrine of Subrogation, will normally apply.

Limitations on Full Contribution

Generally, the relationship of the insurance companies as dictated by the equitable doctrine of contribution is of no concern to a policyholder. However, there may exist in the terms and conditions of the policy contract that will restrict or limit full contribution by one or more insurers.

Rateable Proportion Clause

If an insurance contract contains a rateable proportion clause then it restricts an insurer’s liability under the doctrine of contribution to its rateable share of the loss. The outcome of this clause is that the policyholder would be unable to claim all of their loss from a single insurer – they would need to claim from each insurer and then have the insurers settle only their rateable amount.

In practice, the insured will receive the full settlement they are entitled to, but the claims process is complicated significantly.

Non-Contribution Clause

If an insurance contract contains a Non-Contribution clause then, in effect, that contract will not pay for a loss in a contribution situation. The policyholder would need to receive their claim from the other policy, or policies, impacted by the contribution.

Partial Contribution

Often called the “Marine Salvage” clause, and most commonly encountered in marine indemnity products, partial contribution is not something a policyholder will normally encounter. Simply put, this is a way of determining contribution above rateable proportion, and determines in which amounts each individual policy is liable for any given loss.

Contribution and Your Insurance

Contribution isn’t a great concern to most Hong Kong insurance consumers. In some rare instances, a situation demanding contribution can be created through miscommunication or oversight, in which case (depending on the terms and conditions in your insurance contract), settling the claim can be a minor headache as you deal with multiple underwriters.

Contribution exists as a doctrine dictating claims handling because multiple policies can and will exist covering the same risks. This is not a great worry for you, as a policyholder, but depending on your specific coverage circumstances, could created small difficulties after you experience a loss.

If you have any questions about the different principles and practices of insurance in Hong Kong, or if you would like to receive a free, no-risk, no-obligation quotation for any of the insurance products we offer, please Contact CCW Global Today.