Blog Question: Contribution between insurers
I have a claim where the Insured has two policies. One insurer [Insurer X] is deducting the gross settlement from other insurer [Insurer Y] from their settlement so the client is in effect worse off by taking out a second policy.
Fundamentally, I cannot agree with an insurers approach and feel that despite our insured purchasing additional cover through a second insurer to mitigate the first insurers high excess, the insured still wears an uninsured proportion higher up the line.
I’m not 100% convinced that I am right but I don’t think this passes the “pub test” nor serves the purpose of a client purchasing insurance to reimbursement them for a financial loss.
I would appreciate any thoughts you may have that can assist my argument.
Thanks once again
Scott [name and email supplied]
I replied as follows:
On the one hand this is appears complex but at the end of the day, the long standing principles of insurance rise to the occasion.
If the Insured only had the Insurer X policy he would be indemnified by X less the one excess that was imposed on that policy. That I think we all agree on.
What X are doing is that by deducting the full $10,000 payment from Insurer Y, the Insured is not only getting the full benefit of the Insured’s decision to have a second policy. In other words despite being better off by paying an additional premium they are worse off as Insurer X is attempting to deduct the full benefit of the Insurer Y settlement including the excess that applied to that policy.
If nothing else the client is now paying the excess on the Y policy twice, once to Insurer Y and also to Insurer X. On top of this he is being asked to pay the large excess that applies to Insurer X’s policy.
This to me is a nonsense and makes a mockery of the long standing Principles of Indemnity and Contribution that apply to insurance.
Under the rules of contribution the Insured only has to pay one excess where a single policy covers the total amount of his claim less an excess. In this case it has to be the bigger excess.
This is where your case is a little different, in that the Insured has a second policy that has a limit that is less than the first policy’s deductible.
But let us go back to basics. The Insured has paid 2 premiums / has two policies covering the same event. The rules of contribution clearly apply.
There is nothing in either policy to show that one policy is to be an excess of the other and even if it did that is how the contribution should be applied here.
[After getting further information I was able to calculate the amount owed by each insurer]
I believe the Insured is entitled to receive the benefit of both policies to the point that he is fully indemnified. In his case he should be fully indemnified by having two policies in place, less the lower excess, ie. $500 plus the shortfall between Insurer Y’s policy Limit and Insurer X’s policy excess. That is he will be out of pocket $5,500.
Under Insurance Law and the Principle of Indemnity, the Insured is entitled to be indemnified but not more so in respect of any loss.
On the Independent Liabilities method Insurer X Policy is liable to pay $40,123 and Insurer Y, $9,500 making a total of $49,623 which is less than the loss sustained of $55,123 and the claim should fall accordingly against each Insurer.
Section 67 of the Insurance Contracts Act covers this situation and provides the option of an Insured seeking recovery from one of the Insurers if fully indemnifying the loss. That is not the case here.
6 Contribution between insurers
(1) When 2 or more insurers are liable under separate contracts of general insurance to the same insured in respect of the same loss, the insured is, subject to subsection (2), entitled immediately to recover from any one or more of those insurers such amount as will, or such amounts as will in the aggregate, indemnify the insured fully in respect of the loss.
(2) Nothing in subsection (1) entitles an insured:
(a) to recover from an insurer an amount that exceeds the sum insured under the contract between the insured and that insurer; or
(b) to recover an amount that exceeds, or amounts that in the aggregate exceed, the amount of the loss.
(3) Nothing in this section prejudices the rights of an insurer or insurers from whom the insured recovers an amount or amounts in accordance with this section to contribution from any other insurer liable in respect of the same loss.
I would stress that an Insured does not have to pay 2 excesses in every case of dual insurance. Logic demands different approaches in different circumstances.
- If only one policy has an excess and the sum insured on that policy is adequate to cover the full amount of the loss, the adjusted loss is apportioned before applying the excess.
- If both policies contain an excess, but they are different amounts, and the sum insured in the policy with the lower excess is adequate to cover the loss, apportion the adjusted loss after applying the lower excess.
- If both policies contain an excess and the sum insured on the policy with the lower excess is not adequate to cover the entire loss, but the sum insured on the policy with the higher excess is adequate, apportion the adjusted loss after applying the higher excess.
- If neither sum insured is individually adequate to cover the loss, apportion the adjusted loss first and then apply the excess contained in each policy.
To learn more about Contribution, please see Chapter 4 of Mannings Six Principles of General Insurance.
 Ball JMR., 2000, Contribution, Chartered Institute of Loss Adjusters, London.