Principle of Contribution

Principle of Contribution

Principle of Contribution is one of the derived versions of the principle of indemnity. It applies to all contracts of indemnity, if the insured has taken out more than one policy on the same subject matter. According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. 

If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers.

For example:- Your Shipping Company insures the Ship worth $ 15,000,000 with two insurers say “AIG Ltd.” for $ 9,000,000 and “New India Ltd.” for $ 6,000,000. Ship has a fire and destroyed to some extent, the total cost of repair is $ 6,000,000, then your company can claim the full loss of $ 6,000,000 either from AIG Ltd. or from New India Ltd., or your company can claim $ 3,600,000 from AIG Ltd. and $ 2,400,000 from New India  Ltd.

If your claims full amount of compensation from one insurer then your company cannot claim the same compensation from other insurer and make a profit. Secondly, if one insurance company pays the full compensation then it can recover the proportionate contribution from the other insurance company.