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8/4 W01/March 2018 Award in General Insurance

B Application of the principle of contribution

We have seen that insurers contribute to a claim on the basis of what is termed a rateable proportion.
Insurers contribute to
a claim on basis of
rateable proportion
B1 Rateable proportion
Rateable proportion is the share of any claim that an insurer pays when two or more cover the same risk;
usually in proportion to the respective sums insured. We are going to look at two possible ways of
determining the rateable proportion of a claim, namely:
• by sum insured; and
• by independent liability.

B1A Sum insured method
One method of calculating the rateable proportion of a loss is by apportioning it in line with the sums
insured under each policy. The rateable proportion is calculated using the formula:
policy sum insured ×
total sum insured (all policies) loss

Example 8.1
Find a contribution condition on a standard fire policy and see how it is worded.

Policy A sum insured US$20,000
Policy B sum insured US$40,000
Total sum insured US$60,000
policy sum insured
× loss
total sum insured (all policies)
The proportion of the claim paid by policy A is:
20,000
= 1
60,000 3
Policy B pays:

40,000
= 2
60,000 3

Question 8.2

Assuming a loss of US$15,000, how much would policy A pay and policy B pay to the policyholder if policy A has a
8 sum insured of US$20,000 and policy B a sum insured of US$30,000?
Chapter This method of assessing contribution is used for property policies which are not subject to average and

which have identical subject-matter. However, the sum insured method ignores the fact that different
restrictions, such as average (or an excess), may apply to each policy.

Sample examination question 1
Colin’s house is valued at US$200,000 and is covered by two fire insurance policies with identical terms and
conditions. The first policy has a sum insured of US$100,000 and the second policy has a sum insured of
US$200,000. A fire causes damage costing US$120,000 to repair. Under the principle of contribution, what
maximum payment will Colin receive from the first policy?
a. US$40,000. F
b. US$50,000. F
c. US$60,000. F
d. US$100,000. F