5.3 The Principle of Contribution

5.3 The Principle of Contribution

Quick Summary: Contribution applies where the same loss is covered by two or more indemnity policies (double insurance). The insured cannot collect more than the loss, so an insurer that pays may recover a rateable share from the other insurers who are also liable. Like subrogation (Section 5.2), contribution protects the principle of indemnity.

---

The Principle of Contribution

Definition and Legal Nature

Contribution is the equitable right of an insurer that has paid more than its rateable share of an indemnifiable loss to recover the excess from other concurrent insurers covering the same loss.

Where an insured holds two or more policies covering the same property, the principle of indemnity prohibits double recovery. Under common law:

1. The insured may select which insurer to claim from, and that chosen insurer is legally liable to pay the full loss (up to its policy sum insured).
2. Having paid full indemnity, that insurer then possesses an equitable right of contribution to compel the other concurrent insurers to reimburse their rateable proportions.

---

The Five Essential Legal Conditions for Contribution

For the right of contribution to arise at common law, all five of the following conditions must be concurrently satisfied at the time of the loss:

1. Two or more policies of indemnity must exist: Contribution applies only to contracts of indemnity. It does not apply to benefit policies (e.g., life or personal accident insurance).
2. The policies must cover a common subject matter: the subject matter affected by the loss must be covered by both policies, but the policies need not cover exactly the same things. A policy on goods in one warehouse and another on goods in all the insured's warehouses overlap for a loss at that warehouse.
3. The policies must cover a common peril: both must cover the peril that caused the loss, although their ranges of perils need not be identical. An all risks policy can contribute with a fire policy for a fire loss, while a theft-only policy does not contribute to a fire loss.
4. The policies must cover the same insurable interest: Both policies must protect the financial interest of the same person or entity. If different parties insure their own separate insurable interests in the same asset, contribution does not apply: Key Exam Case: A landlord insures their freehold interest in a commercial shop-house, while the tenant independently insures their leasehold interest and stock against fire. If a fire occurs, both policies cover the same building and the same peril, but they protect different insurable interests. Therefore, neither insurer has a right of contribution against the other.
5. Each policy must be liable for the loss: if one insurer can reject the claim, for example because the insured breached a notification condition under that policy, the other insurer's claim for contribution may fail.

---

Methods of Calculating Contribution

In Singapore general insurance practice, two primary mathematical methods are used to determine each insurer's rateable proportion:

1. Rateable Proportion by Sum Insured

Used standardly in property insurance where policies cover identical risks without complicating deductibles. Each insurer's share is calculated as the ratio of its policy sum insured to the total sum insured across all valid policies:

$\text{Insurer's Share} = \frac{\text{Policy Sum Insured}}{\text{Total Sum Insured of All Policies}} \times \text{Loss}$

Worked Example 1: Sum Insured Basis

A commercial building suffers fire damage assessed at S$180,000. The owner holds two concurrent fire policies with different insurers:

• Insurer A Sum Insured: S$300,000
• Insurer B Sum Insured: S$600,000
• Total Sum Insured: S$300,000 + S$600,000 = S$900,000

$\text{Insurer A's Share} = \frac{300,000}{900,000} \times 180,000 = \frac{1}{3} \times 180,000 = \text{SGD } 60,000$

$\text{Insurer B's Share} = \frac{600,000}{900,000} \times 180,000 = \frac{2}{3} \times 180,000 = \text{SGD } 120,000$

• Total Settlement: S$60,000 + S$120,000 = S$180,000 (the insured receives exact indemnity).

2. Independent Liability Basis

The independent liability basis is applied in liability insurance and complex property claims where policies feature different deductibles, sub-limits, or non-concurrent terms. Under this method, the loss is apportioned based on what each policy would have paid if it had been the sole policy in existence:

$\text{Insurer's Share} = \frac{\text{Independent Liability of Policy}}{\text{Sum of All Independent Liabilities}} \times \text{Loss}$

Worked Example 2: Independent Liability Basis

A commercial liability loss of S$80,000 occurs. The insured holds two liability policies:

• Policy X Limit: S$50,000 (No deductible). If Policy X existed alone, its liability would be capped at its policy limit of S$50,000.
• Policy Y Limit: S$100,000 (No deductible). If Policy Y existed alone, it would pay the full loss of S$80,000.
• Sum of Independent Liabilities: S$50,000 + S$80,000 = S$130,000

$\text{Policy X's Share} = \frac{50,000}{130,000} \times 80,000 \approx \text{SGD } 30,769.23$

$\text{Policy Y's Share} = \frac{80,000}{130,000} \times 80,000 \approx \text{SGD } 49,230.77$

• Total Settlement: S$30,769.23 + S$49,230.77 = S$80,000.00.

---

Policy Clauses Modifying Contribution

Insurers routinely insert contractual clauses into policy wordings to modify common law contribution:

• Rateable Proportion Clause: Standard in property policies. It provides that if any other insurance exists covering the same loss, the insurer is liable to pay only its rateable proportion directly to the insured. This prevents the insured from claiming 100% from one insurer and forcing that insurer to recover via contribution.
• Non-Contribution (Escape) Clause: Says the policy will not contribute if another insurance is in force. The courts do not favour such clauses, and where both policies contain them, the clauses are treated as cancelling each other out, so each insurer pays its rateable share.
• More Specific Insurance Clause: Common in householder's policies. Where an item, such as jewellery, is insured more specifically elsewhere, the general policy covers only the amount above the specific insurance, so the two do not share the loss equally.
• Market Agreements: insurers may agree to share losses where contribution would not strictly arise in law, for example where policies cover different interests in the same property. They may also agree to waive contribution. In motor insurance, when A drives B's car and injures C, B's insurer (the insurer of the vehicle) indemnifies A and does not seek contribution from A's own "driving other cars" cover.

---

Structural Comparison: Subrogation versus Contribution