Principle of Contribution in Marine Insurance

The principle of contribution is an essential and fundamental principle of the insurance industry. It plays a pivotal role when two insurance policies are in force, ensuring the same asset or risk.

According to this principle, an insured cannot earn a profit by raising an insurance claim if the insured asset suffers a loss or damage. In simple words, the insured cannot collect any amount over and above his actual loss combined from all the policies.

The main purpose of this principle is to indemnify the policyholder only to the extent of his actual loss and prevent him from making any financial gains. In other words, if two insurance policies are involved each company will only pay the proportionate share of the claim.

Therefore, the principle protects the interest of the insurance companies, ensuring that they do not suffer financial losses.

Conditions for Applying the Principle of Contribution

• The principle of contribution comes into effect only when multiple insurance policies are involved and in force at the same time. If one of the policies in question has lapsed or is not in effect, then this principle will not be applied.

• Each policy must cover the same subject matter. This means that if the policyholder is the same but the subject matter insured is different, the question of contribution will be null and void.

• The policies in force must cover the same peril or risk. If the policies cover different perils, then the contribution principle can be avoided.

• The policies must cover the same subject as well as the same insured. If the subject is the same with different insured, then the question of contribution does not arise.

• For example, Mr “A” purchases a car on loan from Bank “B”, keeping the vehicle as a collateral security. Now, both A and B have an insurable interest in the subject matter (car) and can make insurance claims in their respective policies.

• The principle of contribution is not applicable if any of the four conditions mentioned above are not satisfied.

Over-Insurance is Prevented

The principle ensures that there is no over-insurance of a subject matter. It prevents the insured from getting more money, which is above the actual loss. Therefore, the integrity of the insurance system is maintained, preventing insurance of an asset above its value.

Fair Distribution of Cost

It ensures fair distribution of costs among the insurance companies involved. Each insurer bears the cost in a fair proportion and nothing in excess of their share. The principle prevents an insurance company from bearing the burden of the claim alone, leading to an increased premium cost for the policyholders.

Keeps Insurance Affordable

The absence of this principle can lead to over-insurance, which will increase the insurance cost for the insured. In certain cases, insurance may become unavailable. Therefore, by preventing over-insurance, the principle of contribution keeps insurance affordable and available for all.

Prevents Individuals from Taking Unnecessary Risks

Over-insurance encourages individuals to take greater risks as they know they can gain higher benefits from the loss. The principle of contribution prevents over-insurance and discourages people from taking unnecessary risks to make profits from them.

Ensures Regulatory Compliance

Adhering to the principles of insurance is a regulatory requirement under many jurisdictions. Therefore policyholders are required to follow the principles in order to comply with the regulations.

The principle of contribution is applicable when the conditions mentioned above are fulfilled. In such a scenario, the liability of each insurer is calculated based on the sum insured by each of them. It is called a proportionate liability or respective liability of each insurance company.

The claim amount is calculated using the following formula:

(Sum insured under individual policy/Total sum insured under all policies) x Loss amount

Let us consider an example to determine the claim liability under the principle.

Mr Pal insures his assets with two insurance companies. The sum insured with company A is ₹1 cr and with company B is ₹1.5cr.

In the event of an accident, Mr Pal’s assets suffered a loss of ₹1 cr. The liability of each insurer will be calculated proportionately so that Mr Pal does not earn profit from his loss.

We shall use the formula stated above:

Liability of Company A: ₹1 cr/₹2.5cr x ₹1 cr = ₹40 lakhs

Liability of Company B: ₹1.5cr/₹2.5cr x ₹1 cr = ₹60 lakhs

Principle of Utmost Good Faith

According to this principle, the insurer and the insured are bound to disclose all the material facts that may affect the insurance contract. Both parties must not conceal any crucial information and act in good faith towards one another.

**Principle of Indemnity **

The principle of indemnity ensures that the insured is compensated only to the extent of the loss suffered by him. It aims to compensate the insured for the loss while also taking care that the insurer does not suffer financial loss.

**Principle of Insurable Interest **

It states that the insured must have a legal relationship or an insurable interest in the asset at the time of loss. In the event of any accident or unfortunate event, you must suffer a loss with the insured property. On the other hand, you must earn a profit if the insured asset reaches its destination safely.

**Principle of Proximate Cause **

As per this principle, an insured is liable to receive compensation for loss occurring due to the most direct or proximate cause. An insured must pay you the compensation if the policy covers the proximate cause of your loss.

**Principle of Subrogation **

This principle is based on the principle of indemnity. It aims to ensure that the insured does not make profit out of the losses. As per this principle, an insured cannot use the damaged goods after receiving compensation.

The principle of contribution in marine insurance is an essential principle that ensures no insured makes a profit out of the insurance policies. In the complicated landscape of insurance, this principle establishes fairness and equity between the insured and the insurer.

Therefore, this principle plays a pivotal role in maintaining equilibrium and ensuring that the parties to the insurance contract are safe from all kinds of unfair losses.

If you are looking for a reliable insurer for transit insurance, Tata AIG is the name you can trust. We offer protection to your cargo in transit, protecting it from potential damages due to theft or loss during transportation.

There are various types of insurance available, such as single transit, open transit, goods in transit through multiple carriers, customised transit insurance and much more.

With the help of a marine insurance policy from Tata AIG, you can keep your goods and vessel safe from damages that may occur during transportation. It covers transit by road, sea, rail, air etc.

Get your marine insurance today to get peace of mind while your goods are in transit.

Who needs marine insurance?

Marine insurance is beneficial for cargo owners, shipping corporations and ship owners. It shields the ship/cargo from potential damage due to the perils of the sea.

What are the types of marine insurance?

The three major types of marine insurance are:

• Freight insurance

• Ship or hull insurance

• Cargo insurance

• What does marine insurance cover?

• Marine insurance covers the following:

• Damage to the cargo due to sinking, explosion, fire or misplacement

• Total loss of shipment due to mishandling during loading/unloading

• Any loss or damage occurring due to natural calamities, including earthquakes, floods, lightning, etc.

• Cargo loss during loading and unloading

• Non-delivery or loss of cargo due to attacks, accidents, crashes, collisions, derailment, etc.