What Is Your 'contribution'?

By Author: Anderson Wilson
Total Articles: 17
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The term 'contribution', falls under the principles of insurance. When the individual taking up a cover obtains more than one policy on one risk, the principle of contribution comes into play. The aim of `contribution' is to distribute the actual amount of loss amongst the different insurers who are liable for the same risk under different policies with respect to the same subject ( i.e. a car, house etc.).

This means that while the individual taking up insurance cover may take up more than one policy to cover the same risk, he/she cannot recover in total more than a full indemnity ( compensation for damage or loss). In other words, the right of contribution arises when:

1. There are different policies which relate to the same subject

2. The policies cover the same peril which caused the loss

3. All the policies continue to be valid at the time of the loss and

4. One of the insurers has paid to the insured individual more than his share of the loss.

Scenario 1 A house owner has covered his house worth Rs.1 crore with 2 companies for Rs.1 crore each. In case the house is destroyed due ...
... to a mishap that falls under the cover, each of the companies will pay Rs.50 lakhs, so that the house owner is compensated for his Rs.1crore house.

Scenario 2 The house owner has taken a cover of Rs.1 crore from one company and for Rs.50 lakhs with another company for his house worth Rs.1 crore Now if the house is destroyed completely due to a mishap that falls under the insurance cover, the companies will provide a cover that amounts to the total value of the house as per the ratio of their `sum assured'.

i.e. Here the company that provided a cover for Rs.1 crore will pay (1 crore/1.5 crore x 1 crore[loss] =) Rs.66.67 lakhs and the company that provided an insurance cover for Rs.50 lakhs will pay (50 lakhs/1.5 crore x 1 crore =) Rs.33.33 lakhs

Scenario 3 Here, let's assume that the house owner has taken a cover for his house worth Rs.1 crore with 2 companies for Rs.50 lakhs each. In this case, if the house is destroyed due to a mishap that falls under the insurance cover, each company will pay Rs.50 lakhs to make good the loss of the house owner, which is Rs.1 crore.

Scenario 4 Let's say, the house owner has taken up insurance for his house worth Rs.1 crore for only Rs. 50 lakhs. This is a case of under insurance. In this case if the house is destroyed due to a mishap that falls under the insurance cover, the company will pay only (Rs.50 lakhs/1 crore[ratio of insurance]x 50 lakhs[ `sum assured' ]=) Rs.25 lakhs.

Remember though that the principle of contribution does not apply to life insurance.

Preventing loss or damage to insured property

In the event of a mishap, the individual who has taken the cover must take all possible steps to mitigate or minimize the loss to the subject (house, car etc.) of insurance. He should act in the same manner in which he would have acted in the absence of the insurance cover. This means that it is the duty of the individual to make a reasonable effort and take all available precautions to save the insured subject property.

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