The principle of CONTRIBUTION in insurance

For those who watch the American television programme, Crime and Investigation, you would have seen that some spouses take multiple life insurances on the lives of their other halves. After a while the spouses die mysteriously and they are now entitled to the benefits of the various life policies as next of kin or beneficiary. That is, if they manage to stage a perfect crime; and there is scarcely a perfect crime. But, whether genuine or fraudulent, getting such multiple benefits is only possible in life insurance and personal accident policies, not non life insurances, which are contracts of indemnity.

One of the principles, which make it impossible, morally wrong or illegal, for policy holders to enjoy such multiple benefits in non life insurances, is Contribution. You will recall that at the commencement of this column, we said that there are six pillars (principles) on which insurance stands: utmost good faith, insurable interest, proximate cause, indemnity, subrogation and contribution. Subsequently, we treated each of these principles, except contribution. Contribution is a corollary of indemnity. By this, I mean that it enables insurance companies to effectively enforce the principle of indemnity: putting policy holders in the financial position they were just before they suffered the loss, except where average, underinsurance, excess, franchise and deductible apply.

By way of definition, contribution is simply a principle of insurance that spells out the relationship among insurance companies where an insured purchased insurance from two or more companies to cover the same event or peril and there is a loss. For the principle to come into force, certain conditions must exist. One, there must be two or more policies and they must be policies of indemnity, as I explained earlier. Two, each of the policies must cover the same peril which caused the loss. For instance, if there are two policies covering a building; one is fire while the other is burglary, contribution cannot take place in the event of a claim. Depending on the peril that caused the loss, the policy it falls on pays the claim 100 per cent.

Three, each policy must protect the same interest of the same insured. If tenant A and tenant B, living in a block of flats, took property insurance to cover their contents and there is a loss, there will be no contribution. Each insurer pays the claim separately because the interests and policy holders are different. Four, each must cover the same subject matter of insurance. Still using tenant A and tenant B as examples, contribution will not apply, because the subject matters are different. The subject matter of insurance in the policy of tenant A are the contents in his flat, while the subject matter of tenant B are the contents of his flat. Finally, each policy must be operative at the time of the loss. For instance, even if the other conditions are present, but the policies were taken at different times and one of them has expired at the time of the loss, contribution cannot take place. The policy that is still subsisting will pay the whole claim.

When contribution applies, one of the insurers can pay the claim and recover from the others covering the risk. In reality, insurers avoid the hassles of chasing other insurers for reimbursement and protect themselves by inserting a contribution clause in their policy documents: “Notwithstanding anything contained herein to the contrary, it is hereby declared and agreed that the liability under this policy in respect of any destruction of or damage to the subject matter of this policy shall not exceed its rateable proportion…”  It simply means that all the sums insured of the insurances covering the risk will be summed up and each company will pay its percentage of the loss taking into consideration its sum insured in relation to the total sums insured.

There are situations where the principle of contribution can be modified, but I will spare you the technicalities. The main reason we are discussing contribution today is to discourage people who plan to take multiple non life insurance policies so that they can make multiple claims and make profit in the event of an accident. I can tell you straight away that it is not likely to happen. In motor insurance, for instance, the Nigerian Insurance Industry Database (NIID) will expose you. Even in other classes of insurance that do not have the motor insurance kind of platform, you are also likely to be caught. The industry is closely knit, intra industry interaction is high and information flow is very good. So anybody contemplating such an act to defraud should perish the thought. It will amount to a waste of resources taking additional insurance covers for the same risk.

Before procuring insurance, have in mind the value at risk or replacement cost of the subject matter of insurance and this should determine the sum insured, so that you can get full indemnity in the event of a loss, not forgetting going through a registered insurance broker for free professional guidance. But insurance is about the spread of risks, so if you want to insure the same subject matter with more than one insurer, go ahead, but do it for the right reasons.