Insuring property with multiple insurers — The implications
Just as the human life is regulated by principles, so is insurance. Insurance, as I earlier espoused in this column, is highly technical and governed by certain key principles. These principles are triggered upon the occurrence of a mishap; and thus, are applied in assessing the validity or otherwise of an insurance claim, particularly, in the area of property insurance. The following two scenarios typify the discussion on the topic:
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Awudu, the taxi driver
• Scenario One:
Awudu, my taxi driver friend, insured his car with three insurance companies. On one hot afternoon, Awudu pulled up at a bus stop along the N1 Highway to have lunch at a popular ‘chop bar’ around the Lapaz stretch. Whiles enjoying his bowl of fufu, he heard a sudden loud sound outside the eatery, with spontaneous loud shouts. He gazed through the window and found that his cabby was run into by a sand-carrying tipper truck. Upon submitting his claim to one of his insurers, he was told the claim could not be processed since it was found that he had insured the same cabby with two other insurers. He was, however, told that he would be paid retable claim. Awudu didn’t take kindly to this explanation and, therefore, contemplated a suit against his insurers, for refusing to honour what he thought was a legitimate claim. As a friend, Awudu called on me for advice.
• Scenario Two:
Awudu pulled up at a bus stop along the N1 Highway to have his lunch. In his attempt to cross over to the other side of the road, he was knocked down by a KIA truck and while at that another vehicle, a Toyota highlander ran over him; crashing his lower limbs in the process. Both drivers sped off after the near fatal accident to avoid arrest, but eyewitnesses were able to track their vehicle registration numbers, which were subsequently given to the Police for investigation. Awudu went into coma for four days before regaining consciousness. Now it is about time Awudu got compensated! Who pays the insurance claim in this case – is it the insurer of the KIA truck or the insurer of the Toyota Highlander?
The principle of contribution
Awudu’s case falls under the principle of contribution, which cannot be properly explained in isolation from the principle of indemnity. Technically, insurance is a risk transfer mechanism which allows us to be indemnified when the risk occurs. In property insurance, the principle of the indemnity simply states that when a loss occurs, the insured ought to be restored to his former position prior to the loss (indemnity) and not to be made richer. Simply put, one cannot insure his property against same risk with more than one insurer, since insurance is not for profit. In the event of such multiple insurance, as was the case with my friend Awudu, the principle of contribution is applied.
Contribution and subrogation
In most insurance write-ups or literature, it is always said that contribution is a twin repercussion of subrogation. Contribution in insurance simply refers to the equitable method of sharing a loss among insurers when the risk in question has been insured with more than one insurer, whereas subrogation refers to the right conferred on an insurer to stand in the shoes of the policyholder to recover from any third party owing a duty of care to the insured. Thus, this gives the right to an insurance company to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss. For example, when an insured driver's car is damaged through the fault of another driver, the former’s insurer will reimburse the covered driver under the terms of the policy and then pursue legal action against the defaulting driver’s insurer.
From the perspective of Common Law, a policyholder may not recover more than the sum assured, notwithstanding the fact that he may have more than one policy on the subject matter for insurance. However, this is not applicable in life and health insurance, as an insured is allowed to take as much policies as s/he may afford.
Conditions giving rise to contribution
From the common law standpoint, the following conditions precede the application of the principle of contribution:
1. There are two or more policies
2. Policies in question cover a common peril
3. Policies cover common insurable interest
4. Policies cover common subject matter
5. Policies are liable for the loss
Policy wordings on contribution
Given the technical nature of the application of the principle of contribution, most indemnity policies make emphatic statements with clear wordings on their policy documents. Typically, a policy may have the following wording:
“If at any destruction of or damage to any property hereby insured, there be any other insurance effected by or on behalf of the Insured covering any of the property destroyed or damaged, the liability of the insurer hereunder shall be limited to its retable proportion of such destruction or damage.”
How is contribution arrived at?
To arrive at the retable portion of claim payment when the subject matter of contribution arises in claim payment, three generally accepted methods are often used. These are:
a. Sum Insured method
b. Independent liability Method
c.Mean Method
The most commonly used method is the Sum assured method which uses the separate sum assured on the property to arrive at the claim. For example, in Awudu’s case, assuming the total damage to his car has been assessed to be GH¢9000, with the following sum assured: company A at GH¢ 16,000; company B at GH¢12,000; and company C at GH¢10,000. Then, each company’s contribution will be calculated by dividing their individual insured amounts by their total insured amount, and multiplied by the cost of damage. This is illustrated as follows:
Company A: = 16,000 X 9000
38,000 = 3,789
Company B: = 12,000 X 9000
38,000 = 2,843
Company C: = 10,000 X 9000
38,000 = 2,368
My advice to Awudu in Scenario One!
In Awudu’s case, all he needs to do is pursue the legitimate claim from any one of his insurers after which he will grant the insurer the right of subrogation. With that right, the particular insurer will then pursue the two other insurers to recover proportionate contribution from them. In this regard, Awudu can only claim the value of loss and not the loss amount from the three companies, respectively.
What will happen in Scenario Two?
Technically, the proximate cause was the KIA truck. The insurer of the KIA has the obligation to pay all claims arising thereon; however, they could later fall on the insurer of the Toyota Highlander for part of the money spent on paying the claim. This is known in insurance as contribution.
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The way forward
The insuring public must appreciate that insurers cannot indemnify more than the state in which an insured was prior to the occurrence of a mishap. Besides, it’s inappropriate to insure the same property with more than one insurer, since this could result in complications during a claim. In this regard, making claims from more than one insurer on the same event or property is not permissible.
Until next week, ‘This is Insurance from the eyes of my mind’