Page 121 - CFPA-SCR-Award in General Insurance W01_2018-19_Neat

Chapter 8 Contribution and subrogation 8/5

B1B Independent liability method
An alternative method for calculating each insurer’s share of a loss is the independent liability method.
This method calculates the amount payable under each policy as if no other policy existed and the
insurer was alone in indemnifying the policyholder. The loss is then shared in proportion to the
independent liabilities of the two policies.

This method is used where property policies are subject to average or where an individual loss limit
applies within a sum insured. Independent liability is also the method used for calculating contribution
in liability insurances.
The formula used is:
policy sum insured
× loss
total value at risk

Example 8.2
Policy A sum insured US$20,000
Policy B sum insured US$40,000

Both policies are subject to average.
Total value at risk US$100,000
Loss incurred US$30,000
Whenever the total value at risk exceeds the total sum insured by all policies, each policy pays:
policy sum insured
× loss
total value at risk
Policy A pays:
20,000
=
× 30,000 6,000 ( of loss)
1
5
100,000
Policy B pays:
40,000
=
× 30,000 12,000 ( of loss)
2
5
100,000
The total payment, in this example, made by the two insurers is therefore US$18,000. The balance of the
loss (US$12,000) must be borne by the policyholder as they have not fully insured the total value at risk. Chapter

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