Legal Issues in Contribution & Double Insurance

Double Insurance & Contribution

Double insurance arises when the same party is insured with two or more insurers in respect of;

(i) the same interest;

(ii) the same subject matter;

(iii) the same risk; and

(iv) the same period of time.

Where there is double insurance, in the event of a loss, the insured can claim and recover the full amount of his loss from the insurer of his choice. That insurer then becomes entitled to claim contributions from the other insurers. This scenario is different from co-insurance, where more than one insurer jointly bears the risk of the same policy.

The doctrine of contribution grants an insurer who has paid more than their ratable proportion of the loss the right to recover the excess from the other insurers of similar policies taken out by the insured.

The requirement for the exercise of a right of contribution are that, the insurer claiming contribution;

(i) must have discharged its liability to the insured;

(ii) must have paid more than its rateable proportion of the loss;

(iii) the payment in respect of loss must be in respect of an interest which is the subject of double insurance at the time of loss.

At the proposal stage insurers usually ask the insured to disclose the whether or not there is any other insurance. This will enable an insurer to determine early on the existence of double insurance. Failure of the insured to disclose the existence of any other insurance will be valid ground for the insurer to repudiate the claim. An insured must also take note when taking out multiple insurance policies that in the event of a loss and consequent dispute between different insurers over liability, compensation will be delayed until the matter is resolved.

Judicial authority
North British & Mercantile Insurance v London, Liverpool & Globe, Barnett & Co. (1877), is the locus classicus on the subject. Barnett & Co. took out fire policies to insure grains stored in their warehouse. The policies contained a rateable proportion clause. Fire destroyed some grain stored with the insured and part of the gain belonged to Rodocanachi & Co, who also took out policies on the grain destroyed and those policies covered grain stored elsewhere. Barnett & Co. were paid in full by their insurers for the loss and an action arose to determine the contribution and liability of the insurers of Rodocanachi & Co.

The Court of Appeal held that the contribution condition would only apply to cases where it was the same property of the insurance and the interests were the same but that it could never have been meant to apply to a case of different persons with different interests insuring the same goods. Therefore, the insurers of Rodocanachi & Co. were not liable to contribute to the loss. The Court explained the rationale;
“Contribution exists where the thing is done by the same person against the same loss, and to prevent a man first of all from recovering more than the whole loss, or if he recovers the whole loss, from one which he could have recovered from the other, then to make the parties contribute rateably. But that only applies where there is the same person insuring the same interest with more than one office.”

Types of Contribution Clauses
The most common forms of contribution or other insurance clauses are;
(i) The rateable proportion clause: This provides that multiple policies contribute to a loss on an equal or shared basis by limits of their respective sums insured.
(ii) The excess clause: This makes a policy excess to other insurance and provides that cover is only in place once indemnities under concurrent policies are used up or exhausted.
(iii) The escape clause: This makes a policy inapplicable if other insurance exists. Non-contribution or ‘escape’ clauses state that cover will not apply at all if there is any other insurance in place.

Rateable Proportion Clause
The common policy wording in use by Nigerian insurers is the rateable proportion clause. This provides that in the event of loss,the insured cannot recover the claim in full from one insurer but both or more must be liable for a rateable proportion of the loss. Where there is rateable contribution, there are two main methods of calculating the contribution between insurers, the maximum liability method and the independent liability method.

The maximum liability approach is the standard method used in material damage policies and the ratio of contribution would be the proportion which the sum insured (i.e the maximum potential liability) bears to the total loss. By this method the loss is apportioned between the insurers according to the maximum amount for which each insurer would have been liable to the insured under their respective policies and each insurer will be liable to pay the claim in proportion to their sums insured. The independent liability approach is the method used in liability policies and the ratio of contribution would be the proportion which each insurer would be independently liable for the loss. By this method the loss is apportioned between the insurers according to the amount for which each insurer is liable under their respective policies (assuming there was no other insurance) and the ratio of contribution would be the proportion which their liability bears to the total loss.

John Birds, Modern Insurance Law stated that, “It has now been conclusively settled in Commercial Union Assurance v. Hayden (1977) that the independent liability approach is the legal basis in liability insurance.” In that case the insured took out a public liability policy with Commercial Union CU with a maximum limit of £100,000. The insured also affected another public liability cover, with Hayden, a Lloyd’s underwriter with a £10,000 maximum limit. A claim was settled at £4,425 and paid by CU who claimed a contribution from Hayden on the independent liability method for 50% contribution. Hayden argued that the maximum liability method should be applied and they were only liable for 1/11th of the loss and contribution should be £4,023 and £402 respectively. The High Court applied the maximum liability method in favour of Hayden but on appeal the Court of Appeal agreed with CU and applied the independent liability method.

Clash of Different Contribution Clauses
It is not in every case that the existence of these different contribution clauses give rise to contribution claims because in some cases the clauses may not apply, or may be in conflict, or may cancel each other out. Judicial authority shows that courts generally abhor contribution clauses which seek to avoid liability from other insurers and will usually hold that such other insurance clauses will cancel each other out and both insurers will be liable to contribute to the loss. Weddell v Road Transport and General Insurance Company Ltd (1932), the trial judge held that, “The reasonable construction is to exclude from the category of co-existing cover, any cover which is expressed to be itself cancelled by such co-existence, and to hold in such cases that both companies are liable, subject of course in both cases to any rateable proportion clause which there may be.” In the Canadian case of Northbridge General Insurance v. Aviva Insurance (2022), the Ontario Court of Appeal held that where two policies each contain a clause making them excess if some other insurance exists, then the two excess clauses are irreconcilable and self-cancelling and contribution can be claimed by the paying insurer.

In the American case of Southern Ins. Co. v. Affiliated FM Ins. (2016), two insurance policies were taken out on a house owned by the University of Southern Mississippi and leased to the University’s Alumni Association. The University was insured by an Affiliated policy with an excess clause while the Alumni was insured by Southern with a rateable proportion and excess clause. The house was damaged by a tornado and insurers disputed liability to provide cover. The court held that both insurers covered the same risk and since each insurance policy purported to make its coverage excess to the other, the clauses were mutually repugnant. Under Mississippi Law, where other insurance clauses are mutually repugnant, courts will apportion the loss between the insurers pro rata the policy sum insured.

Comparative Analysis: The Law in Australia
Where an insured has suffered loss or damage and there is double insurance, section 76 of the Insurance Contracts Act 1984 provides that the insured is entitled to recover the full amount of its loss from any one of the insurers and that insurer can then recover contribution from the other insurer also liable to indemnify the insured. When one of the insurance policies contains an other insurance clause which excludes or limits an insurer’s liability where the insured has another policy available, this may prevent the insured from making a claim under that policy and prevent contribution by that insurer. In order to avoid this situation section 45(1) of the Insurance Contracts Act provides that where there is double insurance, any contribution clause that prevents or allows an insurer to escape contribution will be void.

In the Australian case of Allianz Insurance Australia v Certain Underwriters at Lloyd’s of London (2019), the Allianz policy had an excess clause and the Lloyd’s policy had an escape clause. The trial court held that this was not a case of double insurance because the Lloyd’s policy escaped any liability and the Allianz policy had to settle the claim. On appeal, the NSW Court of Appeal held that neither clause applied as the two clauses cancelled each other out and Allianz was entitled to contribution. See also, the decision of the Supreme Court of Victoria in QBE Insurance Australia v Lumley General Insurance (2009).

Reform of The Law in Nigeria
Contribution is one of the cardinal principles of insurance but there is no statutory provision or codification of the principle in Insurance Act 2003. The usual policy wording in use by Nigerian insurers is the rateable proportion clause which provides that an insurer shall not be liable to pay or contribute more than its rateable proportion of any claim. However, there are other types of contribution clauses (e.g excess or escape clause) available in the global insurance market and therefore the Insurance Act should prohibit the use of any other insurance clauses which seek to absolve the insurer from contribution. We should borrow a leaf from foreign legislation like the Insurance Contracts Act 1984 of Australia and enact provisions which prevent insurers from escaping liability and contribution in cases of double insurance.

The article was written by: Jide Bodede LLM(Lond)