Contribution
Definition
The Principle of Contribution applies when the same risk is insured with two or more insurers. In such a case, the insured can claim from any one insurer, but the total claim across all insurers cannot exceed the actual loss. The insurer who pays the full claim has the right to call upon other insurers to share the loss proportionately. This principle works alongside the Principle of Indemnity to prevent the insured from profiting by claiming from multiple insurers.
Explanation in Simple Language
Suppose you insure your shop for ₹20 Lakhs with Company A and ₹30 Lakhs with Company B. Total insurance: ₹50 Lakhs on a shop worth ₹50 Lakhs.
If a fire causes ₹10 Lakh damage, you might think you can claim ₹10 Lakhs from A AND ₹10 Lakhs from B (total ₹20 Lakhs). But NO — the Principle of Contribution prevents this.
You can claim ₹10 Lakhs total (your actual loss), and the two insurers share this proportionally:
- Company A pays: ₹10L × (₹20L/₹50L) = ₹4 Lakhs (40%)
- Company B pays: ₹10L × (₹30L/₹50L) = ₹6 Lakhs (60%)
Contribution ensures the actual loss is shared fairly among all insurers covering the same risk.
Real-Life Indian Example
Mr. Suresh, a jeweler in Mumbai, had his shop insured with three insurance companies:
- Company X: Sum Insured ₹30 Lakhs
- Company Y: Sum Insured ₹20 Lakhs
- Company Z: Sum Insured ₹10 Lakhs
- Total Coverage: ₹60 Lakhs (Shop value: ₹60 Lakhs)
A burglary resulted in a loss of ₹12 Lakhs. Mr. Suresh filed a claim with Company X for the full ₹12 Lakhs.
Company X paid ₹12 Lakhs and then invoked the right of contribution from Y and Z:
- Company X's share: ₹12L × (30/60) = ₹6 Lakhs
- Company Y's share: ₹12L × (20/60) = ₹4 Lakhs
- Company Z's share: ₹12L × (10/60) = ₹2 Lakhs
Company X recovered ₹6 Lakhs (₹4L from Y + ₹2L from Z), bearing only its proportionate share.
Numerical Example
Contribution Calculation Formula:
Each Insurer's Share = (Their Sum Insured ÷ Total Sum Insured of All Policies) × Total Loss
Example:
- Insurer A: SI = ₹40 Lakhs
- Insurer B: SI = ₹60 Lakhs
- Total SI: ₹1,00 Lakhs
- Loss: ₹20 Lakhs
- A's Contribution: ₹20L × (40/100) = ₹8 Lakhs
- B's Contribution: ₹20L × (60/100) = ₹12 Lakhs
- Total Paid: ₹20 Lakhs = Actual Loss
Claim Scenario
Health Insurance Contribution:
Mrs. Anita has two health insurance policies:
- Policy 1 (personal): ₹5 Lakhs with Company M
- Policy 2 (employer group): ₹3 Lakhs with Company N
She was hospitalized for ₹6 Lakhs.
She can choose to claim from either insurer first. Suppose she claims from Company M first:
- Company M pays: ₹5 Lakhs (up to their limit)
- Remaining: ₹1 Lakh
- She claims the remaining ₹1 Lakh from Company N
- Total received: ₹6 Lakhs = Actual bill
Alternatively, if she files with Company N first:
- Company N pays: ₹3 Lakhs (up to their limit)
- She claims remaining ₹3 Lakhs from Company M
- Total received: ₹6 Lakhs = Actual bill
In health insurance, contribution typically works sequentially (one insurer pays first, then the next covers the balance) rather than proportionally.
Common Sales Mistakes
1. Selling a second policy without checking for existing coverage — client may be over-insured
2. Implying that the client can claim from both policies for the same loss
3. Not disclosing existing insurance in the proposal form of the new policy
4. Not explaining the sequential claim process for health insurance with multiple policies
Learning for POSP / Advisor
POSP Learnings on Contribution:
1. Always ask clients if they have existing insurance on the same risk before selling a new policy
2. Explain that having two policies does not mean double payment — total claim = actual loss
3. In health insurance, help clients understand how to file claims when they have two policies (personal + employer)
4. Document all existing policies in the proposal form — non-disclosure of other insurance can cause complications
5. For property insurance, contribution is automatic — the client claims from one, and insurers settle among themselves
6. Multiple policies can be useful for higher coverage, but never for double-claiming
7. Educate corporate clients: Group health + personal health = combined coverage, not double coverage
Summary Notes
1. Contribution = Sharing of loss among multiple insurers covering the same risk
2. Total claim across all policies cannot exceed actual loss (Indemnity Principle)
3. Formula: Each Insurer's Share = (Their SI ÷ Total SI) × Loss
4. In Health Insurance, contribution works sequentially (one pays first, then the next)
5. In Property Insurance, contribution works proportionally
6. Always disclose existing insurance when buying a new policy
7. The insurer who pays the full claim can recover from other insurers
8. Contribution does NOT apply to Life Insurance (not a contract of indemnity)
9. Multiple policies = higher combined coverage, NOT double payment
10. POSP should always check for existing insurance before selling a new policy
Case Study Questions
Q1.A warehouse is insured with Insurer A for ₹1 Crore and Insurer B for ₹50 Lakhs. Total stock value is ₹1.5 Crores. A flood damages stock worth ₹45 Lakhs. Calculate each insurer's share. What if the total stock value was actually ₹2 Crores (under-insurance)?
Q2.Mrs. Sharma has a personal health policy (₹10L) and her husband's employer group policy also covers her (₹5L). She needs surgery costing ₹12 Lakhs. How should she file claims across both policies? Which should she claim from first and why?