CHAPTER 8 CONTRIBUTION & SUBROGATION

2. CHAPTER 8CONTRIBUTION & SUBROGATION 4% OF THE EXAM

3. Contribution and Subrogation • Corollaries of indemnity • Both ensure that the policyholder does not profit from a loss

6. CONTRIBUTION • Shares the burden of the loss fairly among all insurers who cover the loss • Double (dual) insurance • Each insurer is responsible for its own rateable proportion Examples?

7. Also: There are no Non-contribution clauses to apply How contribution arises

8. We will examine these three requirements • Common Insurable Interest • Common Peril • Common Subject Matter

9. King and Queen Granaries Case(North British and Mercantile v Liverpool & London & Globe 1877) • Merchants put grain belonging to Barnett into a warehouse • Both parties had insured the grain • Each had different insurable interests • Court held that contribution did not apply because there was no common insurable interest • Subsequent market agreement that insurers would ‘contribute’ where different interests apply

10. Common peril The Peril that causes a loss must be common to both contracts. Household and travel insurance both cover theft of personal belongings

11. Common subject matter • Same property or • Same liability

13. Rateable proportion • Sum Insured Method Used for property claims where subject matter is identical and where the claims are not subject to average Sometimes called the maximum liability method • Independent liability method Used in all other cases

14. Sum Insured Method Policy Sum Insured Total Sum Insured of All Policies Insurer A has £200,000 sum Insured Insurer B has £300,000 sum insured Claim is made for £25,000 What does each insurer pay? Insurer A – Pays £10,000 Insurer B – Pays £15,000 X Loss

15. Sum Insured Method Policy Sum Insured Total Sum Insured of All Policies Insurer A has £200,000 sum Insured Insurer B has £300,000 sum insured Claim is made for £25,000 What does each insurer pay? Insurer A £200,000 £200,000 + £300,000 X Loss X £25,000 Insurer B £300,000 £200,000 + £300,000 X £25,000 Insurer A – Pays £10,000 Insurer B – Pays £15,000

16. Sum Insured Method Policy Sum Insured Total Sum Insured of All Policies Insurer A has £20,000 sum Insured Insurer B has £60,000 sum insured Claim is made for £10,000 What does each insurer pay? Insurer A – Pays £2,500 Insurer B – Pays £7,500 X Loss

17. Independent liability method Policy Sum Insured Total value at risk Insurer A has £20,000 sum Insured Insurer B has £60,000 sum insured Claim is made for £10,000 What is the independent liability of each insurer? £10,000 Insurer A – Pays £5,000 Insurer B – Pays £5,000 X Loss

18. Independent liability method Policy Sum Insured Total value at risk Insurer A has £20,000 sum Insured Insurer B has £60,000 sum insured Claim is made for £40,000 What is the independent liability of each insurer? Insurer A £20,000 Insurer B £40,000 Insurer A – Pays £? Insurer B – Pays £? X Loss

19. Independent liability method Independent liability Insurer A Independent Liability Insurers A + B Insurer A £20,000 Insurer B £40,000 £20,000 £20,000 + 40,000 Insurer A – Pays £13,333 Insurer B – Pays £26,666 X £40,000

20. CONTRIBUTION RATEABLE PROPORTION BY SUM INSURED - EXAMPLE • Amanda’s house is valued at £200,000 and is covered by two fire insurance policies, one with a sum insured of £100,000 and the other with a sum insured of £200,000. Under the principle of contribution, what maximum payment will Amanda receive from the first policy if a fire causes damage costing £60,000 to repair? • £20,000 • £25,000 • £30,000 • £50,000

21. CONTRIBUTION RATEABLE PROPORTION BY INDEPENDENT LIABILITY - EXAMPLE • Colin’s kayak is valued at £2500 and is insured under two separate policies. Policy A has a policy limit of £1500 and Policy B has a limit of £1000. Under the principle of contribution, what payment Colin will receive from Policy A insurers if his kayak suffers £500 worth of damage? • £200 • £240 • £250 • £440

22. CONTRIBUTION RATEABLE PROPORTION BY INDEPENDENT LIABILITY - EXAMPLE • Colin’s kayak is valued at £2500 and is insured under two separate policies. Policy A has a policy limit of £1500 and Policy B has a limit of £1000. Under the principle of contribution, what payment Colin will receive from Policy A insurers if his kayak suffers £1200 worth of damage? • £600.00 • £545.45 • £654.55 • £1200.00

23. Non-Contribution Clause • Policy A has a Non-Contribution Clause but Policy B does not • Insurer B pays claim in full • Both policies have Non-Contribution Clause • Claim is shared

24. More specific insurance clause • Item is specified under the household policy but not the travel policy • Household policy pays in full

25. Market agreements

26. Which principle enables an insurer to call upon other insurers to share in the cost of settling of a claim from a policyholder? • Contribution • Indemnity • Prescription • Subrogation

27. Simon has two personal accident policies covering loss of sight. Policy A provides £25000 of cover and Policy B provides £50,000 of cover. How much will Policy A pay in the event of a valid claim involving loss of sight? • Nothing • £12,500 • £16,667 • £25,000

29. The right of an insurer, following payment of a claim, to take over the insured’s right to recover payment from a third party responsible for the loss. It is limited to the amount paid out under the policy. SUBROGATION

30. ‘The right of one person, having indemnified another under a legal obligation to do so, to stand in the place of that other and avail himself of all the rights and remedies or that other, whether already enforced or not.’ DEFINITION

31. Castellain v Preston (1833) • Preston was selling his house • Following a fire received a cash payment from his insurers • Did not repair the house • Buyer paid the full price for the house • Insurer usually claims from the third party

33. SUBROGATION ARISES IN THREE WAYS • Tort • Contract • Statute

34. Tort • A civil wrong • Most common is negligence • Insurer claims outlays from negligent party • Claim made in the name of the policyholder

35. Contract examples • Landlord and tenant • Contractor and sub contractor • Insurer claims from third party in the name of the policyholder

36. Riot Damages Acts 1886 and 2016 • Riot is declared • Property damage claim can be made from the local police authority • 14 days to make the claim • Some insurers have 7 day claim notification condition • Insurer claims from police in own name

37. Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd 1961 • Insurer settled claim for £72,000 • Lapse of time, currency fluctuations and inflation meant that £127,000 was recovered • How much was the insurer allowed to keep? £72,000

39. Salvage Belongs to insurer Insurer sells it Allowed to profit

40. Stance of The Financial Ombudsman Service Salvage or recovered items should be offered to the policyholder

42. The ABI Memorandum of Understanding:Subrogated Motor Claims

43. Immobile Property Agreement • Historical agreements between motor and property insurers and many local authorities. • Covered impact damage by motor vehicles. • Whenever a vehicle collided with immobile property the insurer would pay 75% regardless of blame • A small number of agreements still exist with local authorities

45. Insured has no legal rights • Benefit policies • Subrogation waiver • Negligent fellow employees Precluded subrogation rights

46. 'The right of one person, having indemnified another under a legal obligation to do so, to stand in the place of that other and avail himself of the rights and remedies of that other, whether already enforced or not.'What does this define? • Contribution • Indemnity • Insurable interest • Subrogation

47. Which equitable principle allows an insurer to make a claim in the name of the insured? • Contribution • Indemnity • Insurable interest • Subrogation

48. What does subrogation prevent? • An insured from recovering any money from a third party • An insured from recovering for the same loss twice • An insurer from paying a 2nd claim under benefit policy • A third party from claiming direct from an insurer

49. In which of these circumstances is an insurer legally allowed to make a profit? • Sale of salvage • Subrogation claim is made in contract • Subrogation claim is made in tort • Subrogation claim is made in statute

50. In the Riot Damages Act we find an exception to the normal rule in cases where a subrogation right exists. What is that exception? • Insurers must litigate in the name of the insured • Insurers will litigate in their own name • The policyholder must claim from the police and pass the proceeds to the insurer • There is no right to subrogation if there is also dual insurance