Contribution is another principle which is supporting the Principle of Indemnity. In some cases, there are chances that the Insured may buy more than one policy for the same risk. This usually happens due to various reasons, like the CEO may cover cars belonging to his team as a part of his fleet under motor insurance and also the same is covered by the Administration manager under a separate motor insurance policy covering all the vehicles belonging to the Company. The same car has been covered under two separate policies. Some covers overlap due to oversight and sometimes there may also be a deliberate attempt to commit fraud.
If for one loss or claim, the insured approaches more than one insurance company and each company pays for the same loss then the insured will be in a beneficial position. This situation is avoided by applying the principle of contribution, which is a supporting principle of indemnity. The Insurance Companies will not fully compensate the insured against the loss but they share the loss in the proportion of their liability.
Example – If the CEO of a Company insures his sales director’s car with Direct Auto Insurance company with a comprehensive motor insurance policy and his administration manager includes the same car in the company motor insurance plan with Good to Go Auto Insurance company. This is treated as duplication of insurance and if a motor insurance claim arises on the vehicle used by the sales director. Let us assume that the cost of loss is about $ 50,000, which is covered under both the policies.
In case the insured approaches both the insurance companies and gets full settlement of the claim from both the companies, then the insured will be in a better position by obtaining a compensation of $ 100,000 against a loss of $50,000. This will violate the principle of indemnity.
In such a situation principle of contribution is applied. Assuming that the terms of both the insurance companies are similar then each company will pay the loss in proportion. Direct Auto Insurance will pay an amount of $ 25,000 and the GoodtoGo will pay the balance which is in equal proportion. This way the Insured is not benefitted from insurance.
The principle of indemnity is not violated. This way the insured will not get more than his loss. But by buying more than one policy he loses more premium; thus, this principle will discourage the purchase of more than one policy by the insured and restrict the payment of claim so that the insured is not in a better position.
However, if the insured buys insurance with an intention to commit fraud, then he may not get any of his claims as the contract will be treated as null and void.
An important principle of Insurance is Insurable Interest. A person without insurable interest cannot buy an insurance policy.
From a laymen’s perspective, Insurable Interest is simply ownership. A person or an entity has an insurable interest if he owns the item or subject matter to be insured. But on a broader front without ownership, if a person has a financial interest in a particular risk, then also it is considered as insurable interest. The entity that is staking a claim under the policy should be the entity suffering the financial loss.
This gives a wider scope to the understanding of the principle of insurable interest. The garages, which are handling the vehicles belonging to the customers, can cover the vehicles of the customer in-spite of them being not the owners of the vehicle. An individual or group, who has a financial interest in another person or property, can also create insurable interest.
For the purpose of buying motor insurance, the employer may have a financial interest in the vehicle owned by his employee as he has provided the loan amount to his employee. Similarly, a bank or a financial institution may have interest in the vehicles belonging to an individual or an entity by virtue of providing a loan on those vehicles.
There are various ways of protecting the interest of the financial institution in an insurance policy, by providing a single interest policy or by dual interest policy. One of the requirements of motor insurance is that a person should have an insurable interest at the time of inception of the coverage, during the currency of the coverage, and at the time of claim.
Case study – Mr. S, is working as a Human Resources Manager for a company known as ABC Corporation, which due to its large group is able to ensure his car at a very reasonable premium with one of the famous insurance companies – Rodney D Young Insurance. One of the friends of Mr. S is Mr. R, who wants his friend to insure his vehicle under the banner of ABC Corporation to get the benefit of premium and coverage.
Individually Mr. R will not be able to get the same premium and coverage like that of Mr. S. However, Mr. S is aware of the principles of insurance and he informs his friend that as ABC Corporation does not have an insurable interest in the car belonging to Mr. R, moreover he is not an employee of ABC Corporation.
He informs Mr. R that in case of an accident and in case of any claim, the claim will not be admissible. He suggests Mr. R buy a very cheap auto insurance with no deposit policy, with individual premiums and coverage to avoid the violation of the principle of insurable interest.
