Principles Of Contribution In Insurance
Usually, insurance coverage contracts are between one insured or customer and one insurance company. When in fact, it is possible to come into an insurance contract between one customer and more than two insurance companies for the same coverage object. That is, the insured object has two different policies issued by two insurance companies. So, if there is a claim, the payment of claims will be made by two insurance companies based on the principle of indemnity and the amount of contribution. Business practices like this can be done because it is commonly known the principle of contribution (contribution).
However, to keep the process payment of claims out of conflict with the indemnity principle, the existence of this contribution principle is necessary. The purpose of this contribution principle is actually the same as the principle of subrogation or subrogation needed to secure the purpose of the principle of indemnity (compensation), i.e. how to put the insured in the same financial position after the occurrence of a loss as shortly before the loss occurred. So, the existence of the principle of contribution is more to ensure that in the subrogation scheme the insured gets compensation in accordance with the value of the loss experienced, no more or less.
For example, a person has two vehicle insurance policies for 1 (one) vehicle object from two different insurance companies. When the object of the insured vehicle has an accident with a claim value of IDR 5,000,000, the value of the claim will be paid by two insurance companies that are divided based on the portion of contributions that have been arranged in the policy provisions. Without applying the principle of contribution, customers have the potential to get a claim value greater than the value of the claim submitted. This is contrary to the principle of indemnity.
Thus, this contribution principle only applies when there is double insurance or two coverages against the same object. In addition, the principle of contribution which is a safeguard of the principle of indemnity also applies only to insurance policies that are indemnity.
So, what is the principle of contribution?
Referring to insurance law in the UK, contribution in the context of insurance is defined as the right of a person who is the insurer to involve or ask other insurers who are equally responsible to the same insured to divide an indemnity payment (indemnity).
The use of the word "indemnity" indicates that the principle of contribution only applies to indemnity insurance policies, and does not apply to life insurance policies and personal accident insurance. The reason is, life insurance policies and personal accident insurance policies are not indemnity policies.
Meanwhile in Indonesian insurance law, the principle of contribution in a loss as intended by the definition of contribution according to insurance law in the UK is contained in Chapter 277 Commercial Law, which reads:
"If various insurers, in good faith, have been held regarding the only goods, while in the first coverage only fully accounted for, then only the first coverage is binding, while the next insurers are released. If in the first coverage it is not fully insured, then the next insurers are responsible for the remaining price, according to the orderly closing of the following coverages"
When can the principle of contribution be applied?
In the case of common law referring to English law, contributions will only apply if the following conditions are met:
- There are two or more indemnity police involved.
- These policies guarantee or close a common interest.
- The policies warrant the same danger (common perils).
- The policies are a common subject-matter object.
- Each of these policies guarantees the same losses.
To make it easier to understand the application of the contribution principle, let's look at the following two examples of cases:
Case I: Mr X keeps his rice stock in warehouse owned by Company Z. In order to mitigate the risk of loss due to warehouse fires, Company Z, which under the provisions of the law acts as strict liability for the goods stored in its warehouses insures the stock. Mr X's rice, on the other hand as the direct owner of rice stocks, has also insured his goods to mitigate losses during storage.
Then, Company Z's warehouse suffers a severe fire that causes losses to Mr X's rice stock. Regarding this incident, the principle of contribution does not apply because the terms of common interest are not met. The reason is, the interest of Mr X is as the owner of the goods, while the interest of Company Z is as a bailee or the party responsible for supervising the stored goods in warehouse. So, in this case the insurance claim is covered by only one insurer. This conclusion refers to the jurisprudence of the King Granaries case of 1877.
Case II: Mr X as the owner of all contents (including stock) of a factory building, has insured the contents under an insurance policy property to A Insurance Company. Mr X has also insured the stock only under another property insurance policy to the B Insurance Company.
Then, Mr X's warehouse suffers a fire that results in losses. However, the losses caused by the fire are only in the stock, while both policies owned by Mr X guarantee losses on stock only.
Thus, the conditions experienced by Mr X are eligible for the enactment of the contribution principle because the two policies owned by Mr X all bear stock risk.
How to divide the portion of contributions in any losses?
Basically, how to divide the portion of contributions varies depending on the type of insurance, including:
- Rateable Proportion is divided into two, namely the proportion to the price of coverage and the limit of liability.
- Market practice refers to standard methods that are often used and sometimes have been incorporated into formal agreements between/among large groups of companies.
- In marine insurance, the division of the proportion of each handler in a loss is on the basis of the price of coverage (sum insured) on each policy.
- For property insurance, the division of such proportions usually refers to the market practice in the UK, namely for property policies without the provision of the average division of proportions carried out on the basis of sum insured and property policies with the provision of average proportion division is carried out on the basis of independent liability methods.