Page 119 - CFPA-SCR-Award in General Insurance W01_2018-19_Neat

Chapter 8 Contribution and subrogation 8/3

For this reason insurers customarily include a contribution condition in their policies. This condition
restricts the insurer’s liability to its rateable proportion or rateable share of a loss.
The effect of the condition is to compel the insured to make a claim under each valid policy for the sum
for which each insurer is liable, if they wish to receive a full settlement.

A2 How contribution arises

In common law, the following requirements must be satisfied before contribution arises:
• Two or more policies of indemnity must exist.
• The policies must cover a common insurable interest.
• The policies must cover a common peril which gives rise to the loss.
• The policies must cover common subject-matter.
• Each policy must be liable for the loss.
• Neither policy must contain a non-contribution clause.

It is only necessary for the insurable interest, peril and subject-matter to be common to all policies.
There is no requirement for the policies to be identical; but there does need to be some overlap between
one policy and another.
We will now look more closely at the requirements of:
• common insurable interest;
• common peril; and
• common subject-matter.

A2A Common insurable interest
Contribution only applies where all the policies cover the same subject matter. In other words, the
insurable interest is the same (owner, user, bailee etc.). This principle was established in the case of
North British and Mercantile v. Liverpool and London and Globe (1877), known as the King and Queen
Granaries case.
In this case, a merchant had deposited grain at a granary owned by Barnett. Barnett had insurable
interest in the grain as he was responsible for it and had therefore insured it. The owner had also
insured it to cover his own interest.
The grain was damaged by fire and Barnett’s insurers paid the whole claim. They then sought to recover
from the owner’s insurers. However, it was held that, as the two insureds’ interests were different, one
as custodian and one as owner, contribution did not apply and Barnett’s insurers bore the whole loss.
This raises the question of whether both parties may claim under their policies if the interests in the
same loss are different. In theory, both insureds could recover but, in practice, the insurance market has
reached an agreement to protect itself from paying out twice on the same loss. Chapter

Question 8.1 8
Before going on holiday, David purchased travel insurance and, whilst he was away, his camera (worth US$1,000)
was stolen. At that time, he also had in force an ‘all risks’ policy covering personal items.
What is the maximum amount David can claim under either policy?

A2B Common peril
The peril which causes a loss must be common to both contracts. Let us consider a situation where we
have two policies: one covering dishonesty and the other covering dishonesty, fire and burglary. These
can be brought into contribution where the loss is due to dishonesty. However, this is not the case
where the loss is due to fire only, since this peril is not common to both policies. The insurer covering
fire bears the burden for the loss in these circumstances.

A2C Common subject-matter
For contribution to apply, each insurer must provide cover in respect of the subject-matter of insurance
which suffers loss or damage. This is frequently some form of property, but could equally apply to a legal
liability.