Principle of contribution
The principle of Contribution is one of the 7 primary principles of insurance. This article will aim to provide clarity on this concept and enlighten the reader on the benefits, features, and use cases of the principle of contribution in insurance.
We will also aim to solidify the concept of contribution with a couple of easy-to-understand examples. Let us begin.
What is the principle of contribution?
The principle of contribution comes into effect when a person insurers the same object with two or more insurance companies. The principle states that even though the insured files a claim with one insurance company and gets his claim amount, that company has the right to get reimbursed by the second insurance company. This is the principle of contribution in action.
Let us get further clarity on this principle with 2 simple to understand examples.
Examples of principle of contribution
- Let us say that Mrs. Joshi had 2 health insurance policies with different companies having coverage of 2 lacs each.
- Let us assume that Mrs. Joshi was admitted to the hospital for a minor condition.
- The bill amount came to 2 lacs.
- Upon discharge, Mrs. Joshi decided to claim the entire 2 lacs from insurance company 1.
- Insurance company 1 paid her the entire claim amount and Mrs. Josh was happy.
The principle of contribution states that insurance company 1 can legally claim 1 lac from company 2, as company 2 also provided insurance to Mrs. Joshi
- Let us assume that Mr. Mohan had 3 fire insurance policies with 3 different insurance companies, amounting to 5 lakhs each
- Now, Mr. Mohan’s wear house catches fire and causes damages of 10 lakhs
- Mr. Mohan files a claim with 2 insurance companies and both of them pay him 10 lakhs cumulatively
Now, both company 1&2 will raise a claim with company 3 for Rs 166667/- each as company 3 also agreed to bear the risk equally
Principle of contribution features
- The principle of contribution will only come into effect if the insured has 2 or more policies.
- The insured should insure the same object with 2 or more insurance companies.
- The insurance companies should cover the same risks.
- It is enforceable by law.