CONTRIBUTION ‘JRM Ball FCI FCILA © The author and the CILA.APPENDIX CONTENTS Preface What is Contribution? When Does Contribution Arise? Methods of Apportionment Policy Wordings The Contribution Checklists ABI Rules on Contribution AOA Rules on Contribution Common Problems Recommendations 1. ABI Rules on Contribution 2. AOA Rules on Contribution Reinstatement Memorandum 4. Case LawCHAPTER I PREFACE Research in an effort to resolve practical problems involving Contribution revealed a singular lack of authorities on the subject. In fact, there is very little written material at all. Much of what has developed in the 115 years since the well known King and Queen Granaries case could, in truth, be quite properly described as customs of trade. Enquiries of major insurers have revealed that as respected authorities in claims departments who have had experience in these matters retire, their knowledge of the more intricate workings of the various methods of contribution has been lost to the industry. Accordingly, it is considered that there is a need for a definitive paper on the subject, in order to collect such authorities as there are. It is also appropriate to make recommendations for the resolution of common problems in the hope that they may become accepted by the market as a whole. ‘This paper therefore considers how the present customs relative to contribution have developed, how the subject is handled today and makes suggestions with a view to simplifying the practice for the future. ABI Rules on Contribution, Appendix 1 are reproduced here by kind permission of the Association of British Insurers.CHAPTER 2 WHAT IS CONTRIBUTION? To say (as some legal text books say) that Contribution is one of the twin corollaries (with subrogation) of indemnity is not entirely helpful. Subrogation is the right of insurers to stand in the shoes of the policyholder to pursue any recovery of their outlay from any third party owing a duty to the insured and being in breach of that duty. This should be contrasted with contribution which is an equitable method of sharing the loss between insurers. Contribution can only apply in respect of policies of indemnity. All policies covering property - even those designated reinstatement - are policies of indemnity. All the reinstatement wording does is indicate the manner in which the indemnity is to be calculated. At common law, a policyholder may not recover more than an indemnity, notwithstanding that he may have more than one policy. He may have as many as he wishes but this does not entitle him to recover more than he has lost. Contrast this with life policies, permanent health insurance etc. where the insured can recover as much as he can afford to pay for in terms of premium as it is not possible to put an indemnity value on one's life, health etc. Accordingly, whenever there is more than one policy covering property, insurers will wish to share the claim payment. At common law, the policyholder is entitled to claim against whichever insurer he wishes in the first instance and is not obliged to claim against all the policies. If claiming against more than one, he may claim against them in any order he wishes. It would, however, be fraudulent to seek to recover more than he has lost. ‘The case law and statutory provisions in support of this principle includes Godin v London Assurance (1758) Scottish Amicable Heritable Securities Association Limited v Northern Assurance Company (1883) and the Marine Insurance Act (1906). In the ancient case of Godin v London Assurance (1758), Lord Mansfield stated "if the insured is to receive but one satisfaction natural justice says that the several insurers shall all of them contribute pro-rata to satisfy that loss against which they have all insured" In the judgement in SCOTTISH AMICABLE HERITABLE SECURITIES ASSOCIATION LIMITED v NORTHERN ASSURANCE COMPANY (1883), it is stated "that principle (i.e. contribution) or rather that rule of practice depends on the doctrine - one not of law only but of common reason - that a man who insures his interest in property against loss by fire whether that interest be that of a proprietor or creditor, cannot recover from the insurer a greater amount than hehas lost by the contingency insured against. So, in the case of double insurance of the same interest with different insurance companies, the assured will not be entitled to recover more than the full amount of the loss he has suffered". Section 32 of The MARINE INSURANCE ACT 1906 provides that "the assured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may think fit, provided that he is not entitled to recover any sum in excess of the indemnity allowed by this Act". Case law has demonstrated that the provisions of the Marine Insurance Act have application in general insurance. Dual insurance may arise intentionally or unintentionally. In the absence of any term or condition in the policies to provide for payment to be restricted to a rateable proportion of the loss, each insurer would have a liability to the insured to make a payment in accordance with the terms and conditions of the policies. However, each insurer could limit his payment to the amount of the indemnity less any amounts received by the insured from the other insurers.CHAPTER 3 WHEN DOES CONTRIBUTION ARISE? Contribution is likely to arise when there is more than one policy. It does not matter that the policies do not cover precisely the same perils or property. They do not have to be identical but there must be an overlap. For example; one policy covering building A only and one covering buildings A and B; or one policy covering fire only and one covering fire and perils. At common law, contribution will only apply when the following conditions are met: There are two or more policies of indemnity. These policies cover a common insurable interest. These policies cover a common peril which gave rise to the loss. These policies cover a common subject matter. Each policy is liable for the loss arising. At common law, insurers may seek contribution from any other policy. The position is altered under the policy wording which forces the insured to make claims under all the policies available to him. (See chapter 5) There are also various private agreements between insurers which cater for contribution even when there are different rights and interests. (See chapter Tand 8) There is case law relative to the question of a common insurable interest. The leading case is North British & Mercantile Insurance Company v London, Liverpool and Globe Insurance Company (1877) - The King and Queen Granaries case. This case arose out of a serious fire that took place at a granary in the London Docks on 14 December 1871. The granary was entirely destroyed and stock with a value of almost £130,000 was lost. ‘The grain was owned by Rodocanachi & Company who hed insured with London, Liverpool and Globe but as there was a custom of trade holding the granary keeper responsible, that company, Barnett & Company, had also insured it with North British. In the first instance, North British paid the loss in full to Barnett & Company and they reimbursed Rodocanachi & Company. However, the insurers felt that there should be contribution between the two policies as two premiums had been taken by the insurance market covering the same stock. Furthermore, Condition 9 of Barnet & Company's policy read as follows: "If at the time of any loss or damage by fire happening to any property hereby insured, there be any other subsisting insurance or insurances,whether effected by the insured or by any other person, covering the same property, the company shall not be liable to pay or contribute more than its rateable proportion of such loss or damage". Notwithstanding that London, Liverpool and Globe had already contributed towards North British’s loss on an independent liability basis, the two companies therefore entered into a friendly action to test whether or not there should be contribution. In judgement it was said that "contribution only applies where it is an insurance by the same person having the same rights and does not apply where different persons insure in respect of different rights". As there were different rights and interests (one as bailor and one as baile) it was held that North British had to pay the loss in full and there was no right of contribution. Examples of how there could be contribution involving the same rights and interests include: * Under an all risks policy where there is also a contents policy and the loss occurs at home involving one of the principal perils (as opposed to accidental loss). * Under a household and a motor policy if the loss is froma car. * Under a contents and a travel policy. * Where a policy has been effected with a particular insurer at the behest of a mortgagee and the insured decides to effect a second policy with another insurer to cover the difference between the amount lent and the value of the property. * Where partners have not realised that the other party has effected a policy and duplicate covers are arranged covering the same interests.Now do the exercise again but with the smaller loss first. For garage: Policy A pays: £10,000 x £100,000 (sum insured) £9,091 £110,000 (total sum insured) Policy B pays: £10,000 x £10, 000 (sum insured) £110,000 (total sum insured) jt 909 For house: Policy A pays the loss in full as policy B doesn't extend to cover the house = £30,000 Tabulate this calculation as follows: SUBJECT INSURANCES Loss POLICY PAYS A B A B House } - £30,000 £30,000 - } £100,000 Garage} £10,000 £10,000 £9,091 £ 909 NB Now add together the sums the policies are liable for and divide by two: A B Taking larger loss first £38,750 £1,250 Taking smaller loss first £39,091 £ 909 £77,841 £2,159 Divide by 2 = £38,920 £1,080 Therefore, A pays £38,920 B pays £1,080 £40,000 No matter how many policies are involved, there are only ever two calculations; largest to smallest then smallest to largest and divide by two. If a policy is exhausted after any calculation, nil is then entered subsequently. It must however be noted that if one of the apportionments does not meet the whole of the insured loss, the working which gives the insured the best result must be utilised.CHAPTER 4 METHODS OF APPORTIONMENT Case law and policies all make reference to "rateable proportion” but this phrase has never been judicially defined. Asa result, three methods of apportionment have evolved - * Sums insured * Independent liability * Mean method ‘The mean method is now very rarely used, although there may be occasions when it is appropriate for it to be used. The basic rule is that in common law contribution if there is more than one method of apportioning a loss between insurers, the one more favourable to the policyholder (provided he is not over-indemnified) must be adopted. In the case of the various private agreements, the agreement will specify the method of apportionment - usually independent liability. Each of the three methods operates as follows: 1. SUMS INSURED: In this method, the loss is apportioned between the various policies pro-rata to the sums insured. The position is the same as in co-insured policies where an insurer will subscribe for say 20% of the risk, take 20% of the premium and pay 208 of the claims. For example, the insured has two policies which are concurrent (covering the same property) and not subject to average covering his domestic contents. Policy A Sum insured £20,000 Policy B Sum insured £16,000 Total Sum Insured £36,000 Loss agreed at £7,250 Therefore: Policy A pays £7,250 x S.I. Pol.A £20,000 Total S.1. £36,000 = £4,027 Policy B pays £7,250 x S.I. Pol.B £16,000 ‘Total S.1. £36,000 = £3,222INDEPENDENT LIABILITY: This method is also known as the maximum potential liability method. It requires a calculation to be made in respect of each of the policies to establish the sum that policy would have paid if it were the only policy in force. It takes into account all adjustments that would be made to the claim under that policy. The total of the independent liabilities of all the policies is then calculated and the loss apportioned in the ratio that the independent liability of each individual policy bears to the total independent liabilities. For example, consider two policies, both concurrent but subject to average covering a commercial building. Policy A has a sum insured of £100,000 Policy B has a sum insured of £250,000 Value at risk £300,000 Adjusted loss £ 80,000 (before average) Therefore: Independent liability of A: Adjusted loss £80,000 x S.I. £100,000 = £26,667 VAR £300,000 Independent liability of B: Adjusted loss £80,000 x S.I. £250,000 = £66,667 VAR £300,000 Total Independent Liability = £93,334 Therefore Policy A pays £80,000 x I.L, OFA £26,667 = £22,857 Total I.L. £93,334 Policy B pays: £80,000 x ILL. OF B £66,667 = £57,143 Total I.L. £93,334 £80,000 Chapter 7 will consider ABI Rules on Contribution which require an independent liability contribution, It is important to recognise that when —the independent lability method is used in common law contribution the sum apportioned is the loss suffered. However, when it is used in connection with ABI Rules on Contribution the sum that is apportioned is the loss paid by the insurer primarily liable, which may be different from the loss suffered by the insured. If the loss to be apportionment is under liability policies the independent Liability method must be used in accordance with the precedent in Commercial Union v Hayden, 197. This was an Appeal Court case revolving around contribution in connection with a public liability claim. Commercial Union had issued a public liability policy with a limit (the law reports emphasise limit as opposed to sum insured) of £100,000. Lloyds Underwriters (Hayden) had issued a similar policy for the same risk but with a limit of £10,000. The claim had been agreed at £4,425 and the question was whether this should be apportioned between the two insurers on the basis of the sums insured method (which would mean Commercial Union paying 10/110) or on the basis of independent liability which would mean the loss being shared equally. Although the High Court decision was in favour of the sums insured method, this was reversed on appeal and the correct basis was agreed as, independent liability. MEAN METHOD: The mean method is appropriate when policies are non- concurrent ~ that is they do not cover exactly the same property. The simplest example would be policy A covering house and garage and policy B covering the house only. These policies would be non-concurrent. If there is a fire damaging both the house and the garage, it may, be necessary to undertake a mean method apportionment. Two trial apportionments have to be worked out. If only two subject matters are involved, this is done larger first, then smaller. If more than two subjects, work from largest to smallest. Add the totals, divide by two and take the mean. It is important to set out the details properly first to ensure the correct figures are dealt with. For example: Policy A covers a house and garage for £100,000 Policy B covers the garage only for £10,000 The loss is £40,000 - being £30,000 for the house and £10,000 for the garage.The correct way to set this out is as follows: SUBJECT INSURANCES Loss A B House} - £30,000 } £100,000 } £10,000 £10,000 Garage Taking the larger loss (house) first, the apportionment is as follows: For house: Policy A pays the loss in full as Policy B doesn't extend to cover the house = £30,000 Then taking the smaller loss (garage) For garage: Policy A pays: £10,000 x £70,000 (S.T. less sum paid on house) £80,000 (total available sum insured) = £8,750 Policy B pays: £10,000 x £10,000 (sum insured) = £1,250 £80,000 (total sum insured) = £10,000 ‘The tabulation is therefore revised to: SUBJECT INSURANCES Loss POLICY PAYS A B A B House } : £30,000 £30,000 - } £100,000 Garage} £10,000 £10,000 £8,750 £1,250CHAPTER 5 POLICY WORDINGS ‘The majority of policies incorporate some form of contribution or non-contribution condition. The following are typical contribution conditions. Care needs to be taken with Lloyds policies where there is often a non-contribution clause. STANDARD FIRE POLICY: "If at the time of any destruction of or damage to any property hereby insured there be any other insurance effected by or on behalf of the insured covering any of the property destroyed or damaged, the liability of the Company hereunder shall be limited to its rateable proportion of such destruction or damage”. ABI STANDARD WORDING: "If at the time of any damage there is any other insurance effected by or on behalf of the insured covering any of the property lost destroyed or damaged the liability of the insurer hereunder shall be limited to its rateable proportion of such damage". TYPICAL DOMESTIC POLICY: "If at the time of any incident which results in a claim under this policy there is any other insurance covering the same damage or lability or any part of it, we will only pay our rateable proportion of the claim (excluding personal accident, criminal assault and death by fire claims)". LLOYDS NON-CONTRIBUTION CLAUSE: "There shall be no liability under this insurance in respect of any claim where the insured is entitled to indemnity under any other insurance except in respec: of any excess beyond the amount which would have been covered under such insurance had this insurance not been effected". The contribution conditions do not create any new rights in respect of contribution generally. Contribution arises out of equity at common law. The only benefit is that the appropriate condition will prevent the insured from selecting who to claim from which might otherwise cause difficulties if the policies have different conditions - for example one on an indemnity basis and one onreinstatement. This will ensure there is agreement between the insurers before the claim is settled. If there are two policies which both appear to exclude all liability if the property is otherwise insured, the clauses in effect cancel each other out and contribution arises in the usual way in accordance with the precedent in Gale v Motor Union (1928). ‘This is the leading of two cases arising out of the same incident. There were two policies in force (on a motor vehicle) and each purported to exclude liability in its entirety if the vehicle was otherwise insured. Both insurers indicated that this was the case and declined to respond to the claim. It was held that where the policy terms are mutually exclusive, both policies will be liable and contribution arises.CHAPTER 6 THE CONTRIBUTION CHECK LISTS: Adjusters and claims handlers have to be clear in their own minds not only that there is contribution (which - with some exceptions -merely requires there to be more than one policy covering the same peril and property and in force at the time of the loss) but also the basis on which contribution arises. This will affect both the method adopted for contribution but also the manner in which the loss is settled. In an effort to clarify the thought process, checklists have been developed: -13-CHECK LIST Check list 1 shows the different approaches if the policies cover the same rights and interests or different rights and interests. If covering the same rights and interests, the loss is apportioned between the policies when reaching agreement with the policyholder. Separate acceptance forms are obtained and separate payments are made by the insurers. If different rights and interests, contribution only arises out of the private agreements between insurers, to which the policyholder is not a party. The policyholder does not, therefore, have any involvement in the apportionment. Settlement is made under the policy primarily liable with a single acceptance form being taken and a single cheque being sent to the policyholder. That insurer then seeks contribution towards the loss he has paid. This can be important because the sum paid by the insurer primarily responsible may not be the same as the loss suffered. For example. Policy A Sum Insured £10,000 Policy B Sum Insured £20,000 Value at Risk £15,000 Loss £6,000 Both policies subject to average Neither policy has an excess (1) If same rights and interests: Independent liability of A £6,000 x £10,000 = £4,000 £15,000 Independent liability of B = £6,000 Total Independent Liability = £10,000 Therefore A pays £6,000x £4,000 = £2,400 £10,000 B pays 26,000 x £6,000 = £3,600 £10,000 £6,000 (2) If different rights and interests and if policy A primarily liable: A pays insured £6,000x £10,000 = £4,000 £15,000 And seeks contribution to THAT sum -14-i.e. Independent liability of A (loss paid) £4,000 Independent liability of B (S.I.adequate) = £6,000 Total Independent Liability £10,000 ‘Therefore B contributes to A: £4,000 x £6,000 = £2,400 £10,000 A's net payment is therefore = £1,600 There should be no difficulty over which policy is primarily liable. This is the policy effected in the name of the policyholder who would suffer the loss if there were no policies in force. In a landlord/tenant situation, the position should be governed by the lease. Ina bailment, it would be governed by the contract or custom of trade or at common law. In the case of purchaser/vendor, it would be governed by the conveyance ~15-CHECKLIST 1 MORE THAN ONE POLICY SAME RIGHTS DIFFERENT AND RIGHTS & INTERESTS INTERESTS APPORTION SETTLE UNDER BETWEEN PRIMARY POLICIES POLICY TAKE SEPARATE SEEK ACCEPTANCE CONTRIBUTION FORMSCHECK LIST 2: Check list 2 takes the process into the next stage and considers the position when there are the same rights and interests. There is then contribution at common law and the words "rateable proportion” come into play. However, before getting to the method of apportionment, it is wise to check that the position has not been amended by the policy in any way and, in particular, that there is no non- contribution clause. It is also appropriate to check whether the AOA Agreement (see Chapter 8) would apply. The next step is to look to see what sort of policies are involved. The policies will either be subject to average or non-average and either concurrent or non- concurrent. Both factors must be brought into play and each policy will be designated by a combination of one term from each of the two sections, as follows: Non average concurrent Non average non-concurrent Average concurrent Average non-concurrent The practice (probably largely a custom of trade) is that the method of, apportionment adopted for each is as follows: Non average concurrent = Sums insured Non average non-concurrent = Mean method or independent Liability Average concurrent Independent liability Average non-concurrent Independent Liability As mentioned previously, contribution in liability policies is on the basis of independent liability, following CU v Hayden, 1977. In respect of alternative accommodation, although the policies are in the same names and they are, almost certainly, concurrent and not subject to average (therefore at first sight suggesting a contribution on the basis of sums insured) market practice is that this apportionment should be on the basis of independent lability. The reason for this may very well be that, as opposed to sums insured, there are limits in force (usually 10% or 20% of the sum insured). Alternatively, this situation may have arisen because of the very large disparity between the sums insured under the two policies with building sums insured being generally much higher than contents sums insured whereas the rates of premium are very different with the cortents premium often being greater than the buildings premium. The market generally accepts it is equitable to apportion these losses on the basis of indeyendent liability rather than sums insured. -17-CHECKLIST 2 SAME RIGHTS + INTERESTS NON-CONTRIBUTION COMMON LAW d CLAUSE? CONTRIBUTION AOA AGREEMENT? NON-AVERAGE > SUM CONCURRENT INSURED MEAN METHOD OR NON-AVERAGE » INDEPENDENT NON-CONCURRENT LIABILITY AVERAGE-CONCURRENT NON-CONCURRENT > INDEPENDENT LIABILITY POLICIES LIABILITY ALTERNATIVE > INDEPENDENT ACCOMMODATION LIABILITYCHECK LIST 3: Check list 3 identifies the procedure to be followed in respect of the AOA AGREEMENT (which applies to policies covering the SAME RIGHTS AND INTERESTS): ‘The AOA Agreement will be considered in more detail in Chapter 8. It relates only to certain classes of property, that is personal effects and the like insured under theft/household/ motor/all risks/travel policies. The idea is to avoid the criticism sometimes made by policyholders about the necessity to claim under a series of policies for relatively small amounts. The apportionment method is always independent lability. ~19-CHECKLIST 3 SAME RIGHTS & INTERESTS > TYPE OF LOSS A THEFT/HOUSEHOLD MOTOR/A.R. TRAVEL POLICIES Ss AOA AGREEMENT > INDEPENDENT LIABILITYCHECK LIST 4: Check list 4 covers the situation arising when there are policies covering DIFFERENT RIGHTS AND INTERESTS. When there are different rights and interests, contribution can only arise as a result of a market agreement (ABI Rules on Contribution). ABI Rules on Contribution apply in respect of fire and certain specified perils (there are some exceptions notably theft and subsidence), so before confirming the operation of the rules, it is necessary to identify the cause of the loss. The apportionment is always on the basis of independent liability. However the important difference between this and common law contribution on the basis of independent liability is that the sum entered for contribution (against which a contribution is sought) is the sum paid by the insurers primarily responsible, not the loss suffered by the insured. The operation of ABI rules on contribution will be considered in detail in Chapter 6. Appendix 1 is a complete copy of the Rules, reproduced here by kind permission of A.B.T. -21-CHECKLIST 4 DIFFERENT RIGHTS & INTERESTS Ve TYPE OF LOSS VY FIRE & PERILS Excl. THEFT,SUBSIDENCE XL ABI RULES ON CONTRIBUTION VY INDEPENDENT LIABILITYCHAPTER 7 ABI RULES ON CONTRIBUTION: The rules are shown complete in Appendix 1. Of the three rules, Rule 1 is the most important. It is stated quite clearly in a single sentence but is then clarified by a series of conditions or definitions and a series of exclusions. Rule 1 says: "WHERE THERE ARE TWO OR MORE SUBSISTING INSURANCES IN THE NAMES OF PARTIES HAVING DIFFERENT RIGHTS AND INTERESTS COVERING THE SAME LOSS SUCH LOSS SHALL AS BETWEEN INSURERS BE APPORTIONED RATABLY TO THE INDEPENDENT LIABILITIES OF SUCH INSURANCES WITHOUT REGARD TO THE LIABILITIES OF THE INSURED PARTIES TO EACH OTHER". There are seven important requirements within the sentence, which can be explained as follows: 1. ‘There must be two or more policies. Contribution arises whenever there is more than one policy. 2. The policies must be subsisting. A subsisting insurance is one against fire and/or specified perils effected by or on behalf of anyone having at the time of the fire or operation of the peril an insurable interest in the subject matter of the insurance and in respect of which insurance the insurer could be liable to the insured. 3. The policies must be in the names of parties having DIFFERENT rights and interests. If the interests are the same (or can be construed as being the same) then contribution arises at common law and not under ABI rules. 4. The insurances must cover the same loss. However, it does not matter that one policy may cover only fire and the other fire and perils so long as the loss is as a result of the peril common to both or all policies. 5. The loss is to be apportioned AS BETWEEN INSURERS. This emphasises the private nature of the agreement. The apportionment is nothing to do with the policyholder. 6. The loss shall be apportioned rateably to the independent liabilities of such insurances. In other words the only method to be used is independent liability (see Chapter 3) -23-A2 a3 Ad AS "FOR THE PURPOSE OF THIS RULE LOSS SHALL MEAN MATERIAL LOSS. OR DAMAGE RESULTING FROM THE FOLLOWING PERILS: - FIRE, LIGHTNING, EXPLOSION, AIRCRAFT, RIOT AND CIVIL COMMOTION, MALICIOUS DAMAGE, EARTHQUAKE, SUBTERRANEAN FIRE, SPONTANEOUS FERMENTATION, STORM OR TEMPEST, FLOOD, BURSTING OR OVERFLOWING OF WATER TANKS, APPARATUS OR PIPES, IMPACT AND SPRINKLER LEAKAGE". Originally, the wording simply referred to fire or perils. However, because of the introduction of all risks policies, it has been necessary for insurers to limit their exposure under the rules. The important point is what is missing - notably theft and subsidence. Lloyd's Underwriters subscribe only in respect of fire, lightning and explosion. "FOR THE PURPOSE OF THIS RULE THE INDEPENDENT LIABILITY OF AN INSURER SHALL BE THE LIABILITY OF THE INSURANCE AFTER THE APPLICATION OF AVERAGE AND OF PROPORTIONAL, PERCENTAGE OR MONETARY LIMITS, AND EXCESSES". This is essentially straightforward, but emphasises that it is necessary to take into account everything that may affect the payment under the policy when calculating the independent liability. "FOR THE PURPOSE OF THIS RULE CONTRIBUTION WILL NOT BE PREVENTED BY THE INSERTION OF ANY CLAUSE IN THE INSURANCE RESTRICTING THE INSURANCE TO PROPERTY FOR WHICH THE INSURED IS RESPONSIBLE OR TO PROPERTY NOT OTHERWISE INSURED, BUT EFFECT SHALL BE GIVEN TO ANY OTHER LIMITATION IN THE INSURANCE AS TO THE EXTENT OF THE LIABILITY OF THE INSURER". One often comes across policies which cover stock and customers goods in trust for which the insured are responsible. They may not be responsible in the particular circumstances but that does not prevent contribution under ABI Rules. "FOR THE PURPOSE OF THIS RULE, AVERAGE SHALL NOT BE APPLIED TO ANY INSURANCE COVERING HOUSEHOLD GOODS IN A PRIVATE DWELLING OR TEMPORARILY REMOVED THEREFROM". More and more domestic policies are now incorporating average. ~25-The sum against which a contribution is sought is the sum paid by the insurer and not the loss suffered by the insured. Bearing in mind that the sum paid by insurers may have been after average, policy limits, and excesses this can make a significant difference. The apportionment is without regard to the liability of the insured parties to each other. In the King and Queen Granaries case, the liability attached primarily to Barnett and Company, the warehousemen who were required to indemnify Rodocanachi and Company. The insurers of Rodocanachi did not have to make any payment. Had ABI rules been in force at that time, they would however have made a payment to the insurers of Barnett and Company. Once again, this emphasises the private nature of the agreement. Section A consists of nine conditions or definitions relating to Rule 1. Most are fairly straightforward but some are not. Al "FOR THE PURPOSE OF THIS RULE A SUBSISTING INSURANCE IS AN INSURANCE EFFECTED BY OR ON BEHALF OF, ANYONE HAVING AT ‘THE TIME OF DESTRUCTION OR DAMAGE AN INSURABLE INTEREST IN ‘THE SUBJECT MATTER OF THE INSURANCE, AND IN RESPECT OF WHICH INSURANCE THE INSURER COULD BE LIABLE TO THE INSURED; AN INSURANCE IN WHICH THE INSURER IS NAMED AS THE INSURED, EITHER ALONE OR JOINTLY WITH ANOTHER PARTY OR PARTIES, SHALL BE A SUBSISTING INSURANCE IF IT OTHERWISE FALLS WITHIN THIS DEFINITION". The important point in this definition is that a subsisting insurance is one in respect of which the insurer COULD be liable to the insured. He does nol have (o be liable to the insured in the particular circumstances. For example, going back again to the King and Queen Granaries case, the insurers of the owners of the cargo were not liable to their insured in the particular circumstances because their insured had not suffered a loss. They had been indemnified from somewhere else. A similar situation would arise in respect of a bailment. The contract may leave the owner of the goods responsible for them and, therefore, the bailees’ policy would not respond on this particular occasion. However, had the conditions been different, or if the bailees had been negligent, they might have had a liability to the insured in which case their insurers would have responded. It is necessary to determine whether the various policies could have paid their policyholder not whether they do in the particular circumstances under consideration. ~24-However, it is not universal and this clause has been introduced to avoid any unfairness in the calculation. However, it is only for the purpose of a calculation under this agreement that average is not applied. For example in calculating the independent liability of a household insurer with an average clause, it may be necessary for there to be reduction for under-insurance. Let us say that the claim was settled at £5,000 before average and £3,000 after average. The insurer will seek contribution towards the £3,000 paid but in calculating their independent liability will use the figure as if average did not apply. Equally, it could work the other way around that the insurer primarily responsible does not have an average clause on his policy and having settled at £5,000 would be unhappy is the other insurer based their independent liability on £3,000. After all, both have taxen a premium and the premium is more than enough to give an adequate sum insured. It is only because the policies are in different rights and interests that there is not contribution at common law which would preclude average applying. See the following example: -26-AB Policy A sum insured on contents £30,000 Policy B (subject to average) SI on contents £15,000 Value at risk £25,000 Loss £5,000 Different rights and interests If Policy B is primarily liable, they will pay £3,000 i.e. £5,000 x £15,000 225,000 = £3,000 They then seek contribution from Policy A - to the £3,000 they have paid, not the £5,000 loss suffered. For the purpose of rule A5 average is ignored in calculating the independent liability, i.e. IL, of Policy B (as if average did not apply) £5,000 LLL. of Policy A £5,000 £10,000 Therefore Policy A pays to Policy B £3,000 (loss paid) x £5,000 £10,000 = £1,500 Net loss paid by Policy B = £1,500 £3,000 If Policy A is primarily responsible, use the same method and same calculations of independent liability but apportion the payment made by Policy A - £5,000. ‘Therefore each insurer will contribute £2,500. If the loss involves buildings or commercial contents of any description, Rule AS does not apply; apportion in the usual way, calculating the independent liability reflecting average if applicable. "FOR THE PURPOSE OF THIS RULE INSURANCES COVERING IMPLEMENTS AND UTENSILS OF HUSBANDRY SHALL BE DEEMED TO EXCLUDE POWER DRIVEN VEHICLES AND IMPLEMENTS AND THEIR ACCESSORIES IF AND SO FAR AS THEY ARE OTHERWISE INSURED". This should not cause any problems; it merely eliminates certain items from the contribution process. -27-AT A8 "FOR THE PURPOSE OF THIS RULE WHEN ONE INSURER IS REQUIRED TO CONTRIBUTE WITH TWO OR MORE OTHER INSURERS WHO ARE NOT IN CONTRIBUTION WITH EACH OTHER, THE PROPORTION CONTRIBUTED SHALL BE ONE HALF OF THE INDEPENDENT LIABILITY OF EACH OF THE OTHER INSURERS LESS ANY DEDUCTION FOR AVERAGE AND FOR PROPORTIONAL PERCENTAGE OR MONETARY LIMITS AND EXCESSES APPLYING TO THE FIRST INSURANCE; EACH CONTRIBUTION TO BE TREATED AS A SEPARATE LOSS FOR THE PURPOSE OF THE APPLICATION OF EXCESSES AND LIMITS". This is probably the most difficult clause in the whole of ABI rules on contribution. The drafters of the document realised how difficult this would be to understand and attempted to illustrate it by an example appended to the rules. It would apply typically to a laundry or warehouse with a number of bailors' goods in trust. "FOR THE PURPOSE OF THIS RULE THE AMOUNT CONTRIBUTED BY INSURERS SHALL NOT EXCEED (A) THE AMOUNT THE INSURER COULD HAVE PAID TO ITS OWN INSURED AS A LIABILITY WITHIN THE TERMS OF ITS INSURANCE (B) THE BALANCE OF THE SUM INSURED ON THE SUBJECT MATTER AFTER PAYMENTS AND RECOVERIES HAVE BEEN MADE UNDER THE INSURANCE EITHER AS A LIABILITY OR EX-GRATIA". The first part indicates that insurers cannot be called upon to pay more than their sum insured by virtue of the contribution agreement. If for example, there is a sum insured of £10,000 and insurers have already paid £9,500 but contribution suggests they should pay a further £1,000, they would in fact be limited to a payment of £500. This should not cause much difficulty. The second part requires a little bit of explanation. The important point is the ex-gratia payment. Under normal circumstances, an ex-gratia payment does not reduce the sum insured (being paid outside of the policy). However, for the purposes of FOC contribution ex-gratia payments are regarded as reducing the sum insured. ~28-Ag "FOR THE PURPOSE OF THIS RULE AN INSURER INTENDING TO SEEK CONTRIBUTION SHALL NOTIFY SUCH INTENTION WITHIN SIXMONTHS OF THE DATE OF THE LOSS". This six month limitation relates to the date of the loss and not the date of notification to insurers. Accordingly, even if for some reason the insured fails to notify his insurers until after six months contribution would be precluded by this condition. In practice, most insurers would probably be realistic and if there were good reasons for them to do so they may waive this rule. It is wise for insurers or adjusters if they are notified of a loss within six months and they think contribution might apply they should notify any other insurers or adjusters immediately, even if it is just a precaution. The practical implication of this is that it enables the contribution calculations to be drawn up six months after the loss, without any fear that they will subsequently have to be re-calculated. EXCLUSIONS: Part B of rule 1 consists of 11 exclusions. Bi B2 B3 "CONTRIBUTION WILL NOT ARISE WHERE THE INSURANCE IS ON PROPERTY OUTSIDE GREAT BRITAIN, NORTHERN IRELAND, THE ISLE OF MAN OR THE CHANNEL ISLANDS". This is self-explanatory, simply indicating the geographical limitations within which the rules apply. "CONTRIBUTION WILL NOT ARISE WHERE THE INSURANCE IS IN RESPECT OF RENT OR CONSEQUENTIAL LOSS". Once again, this is self-explanatory, making it clear that the rules apply only to material damage losses. "CONTRIBUTION WILL NOT ARISE WHERE ONE OR MORE OF THE INSURANCES IS A PUBLIC LIABILITY, ENGINEERING OR CONTRACT WORKS, MOTOR, MARINE OR GOODS IN TRANSIT INSURANCE". This excludes contribution between different types of policy and, once again, should be self-explanatory. ~29-B4 BS BE "CONTRIBUTION WILL NOT ARISE WHERE THE LOSS IS PAID EX- GRATIA IN THE ABSENCE OF LIABILITY". If insurers have agreed a loss (or part of a loss) on an ex-gratia basis they should not seek contribution in respect of that loss or that part of the loss. Equally, if they receive an approach from another insurer or adjuster for contribution where they suspect that it may have been paid ex-gratia, they should seek confirmation that it has been paid as a liability before including the item in the contribution calculation. "CONTRIBUTION WILL NOT ARISE WHERE THE AMOUNT RECOVERABLE FROM AN INSURER IS LESS THAN £5 FOR THEIR PROPORTION OF THE LOSS UNDER ANY ONE INSURANCE". This does not say that insurers or adjusters should not seek contribution when the sum paid is less than £5. What it means is that if after undertaking the independent liability calculation, the amount payable or recoverable is less than £5, that particular contribution is abandoned. CONTRIBUTION WILL NOT ARISE WHERE IN RESPECT OF PROPERTY HELD IN TRUST OR ON COMMISSION (A) THE INDEPENDENT LIABILITY OF THE INSURER OF ANY ONE BAILOR IS LESS THAN £100. (B) THE TOTAL OF THE INDEPENDENT LIABILITIES OF THE INSURERS OF ALL THE BAILORS (EXCLUDING INDIVIDUAL LOSSES WHERE THE INDEPENDENT LIABILITY IS LESS THAN £100) IS LESS THAN £1,000. PROVIDED ALWAYS THAT IN RESPECT OF THE LOSS OF SUCH PROPERTY THE INSURERS OF THE BAILORS SHALL WAIVE RIGHTS OF SUBROGATION AGAINST THE BAILEE OR THEIR INSURER AND SHALL INFORM THE INSURER OF THE BAILEE OF ANY PAYMENT MADE TO THEIR INSURED, WHETHER OR NOT CONTRIBUTION IS REQUIRED BY THIS RULE". A bailee is the person looking after goods and the bailor is the owner. The insurer of the bailees will disregard all requests for contribution where the sum paid (the equivalent of the independent liability of the bailor's insurer) to any bailor is less than £100. They are quite simply excluded in their entirety from the contribution. Having ignored them, if the total of the remainder is over £1,000, contribution will arise. If it -30-BT BB is less than £1,000 it does not. If contribution does apply it applies only to the losses over £100. "CONTRIBUTION WILL NOT ARISE WHERE THE LOSS IS RESTRICTED TO THE PROPERTY OF EMPLOYEES". This exclusion is also illustrated by an example appended to the rules. Most household contents policies have extensions in respect of personal effects temporarily removed to the policyholder's place of work. Accordingly, if the employer's policy on contents is extended to include contents including employees' effects, there is dual insurance and contribution could arise. However, if the loss is only in respect of employees' effects, contribution is excluded. "CONTRIBUTION WILL NOT ARISE WHERE THE LOSS IS IN RESPECT OF ‘THE BUILDING AND ITS FIXTURES AND FITTINGS INSURED IN THE NAME OF THE TENANT (LESSEE) AND SUCH INSURANCE IS RESTRICTED TO A PART OR PARTS OF THE PREMISES DEMISED TO HIM; PROVIDED THAT IF THE INSURER OF THE LANDLORD (LESSOR) RECEIVES A CLAIM FROM ITS INSURED FOR LOSS TO THE BUILDING (AND ITS FIXTURES AND FITTINGS) IT WILL WAIVE RIGHTS OF SUBROGATION WHICH MAY EXIST BY THE TERMS OF THE LEASE. A POLICY COVERING TENANT'S LIABILITY FOR DAMAGE TO THE BUILDING OF A PRIVATE DWELLING UP TO A DECLARED PERCENTAGE OF THE SUM INSURED ON CONTENTS SHALL BE DEEMED TO BE AN INSURANCE ON PART ONLY OF THE PREMISES DEMISED TO HIM". Mr. EJ D Peverett who drafted the current ABI Rules, admitted in an article published in the Post Magazine in 1977 that this was one of the most difficult rules to draft, It is for many also a difficult one to understand. ~31-Bg The basic intention is to deal with buildings claims as submitted either by tenant or landlord (per the lease) under the terms of their individual policies and not to seek contribution unless the tenant's policy insures the whole of the building let to him and not just part of that building. For example, if a tenant takes on lease an entire building but by the terms of the lease is required only to insure the shop front, even if there is a landlords policy covering the building including the shop front, there will be no contribution under this rule. On the other hand, if a tenant occupies say the fifth floor of a ten-storey building and is required to insure the whole of that floor, there would be contribution, notwithstanding that he occupies part only of the building, because he has insured the whole of the building demised to him. An alternative illustration would be a multi-storey purpose-built block of flats. Let us assume that the freeholder has insured that whole building but the occupier of flat 22 (or whatever) has insured the whcle of his flat. Contribution arises. If however the occupier of Flat 22 hes merely insured his contents with an extension of 15% covering decorations etc. , contribution will not apply. It should be noted that the waiver of rights of subrogation is only in respect of contractual obligations under the lease and it does not extend to other subrogation rights, for example arising out of tort. "CONTRIBUTION WILL NOT ARISE WHERE A LOSS IN RESPECT OF PROPERTY INSURED UNDER A HOUSEHOLD BUILDING POLICY IS ALSO COVERED UNDER A HOUSEHOLD CONTENTS POLICY (SECTION COVERING TENANT'S LIABILITY FOR DAMAGE TO THE BUILDINGS ETC)". ‘There is a footnote which says "IT IS ACCEPTED THAT INSURERS MAY GENERALLY PREFER TO DEAL WITH CLAIMS UNDER HOUSEHOLD BUILDING POLICIES WITHOUT ENQUIRY AS TO THE LIABILITY OF TENANTS". The most important part of this rule is the footnote. The intention is broadly as outlined in Exclusion B8. However, the insurer or adjuster must always check that if the landlord is paying for decorations and recovering under his policy, the tenant is not also seeking to claim under his contents policy with the extension in respect of decorations. Alternatively, if the tenant is claiming these costs, they should satisfy themselves that the landlord is not also claiming them. ~32-B10 "CONTRIBUTION WILL NOT ARISE WHERE A FLOATING INSURANCE IN RESPECT OF BUILDINGS AND LANDLORDS! FIXTURES AND FITTINGS CONTAINS A CLAUSE EXCLUDING PROPERTY OTHERWISE INSURED AND IN WHICH NO AMOUNT HAS BEEN INCLUDED IN THE SUM INSURED FOR THE PROPERTY SUFFERING LOSS OR DAMAGE". There is a footnote making it clear that the reference to "OTHERWISE INSURED" means otherwise insured by the same interest. This exclusion arose out of a particular problem where there was a fire involving a building covered under a blanket policy covering several properties which contained a clause excluding property otherwise insured. However, in compliance with the lease, the building in question was insured by another insurer. That insurer sought contribution from the blanket policy which they suggested was a subsisting insurance under the rules. The then FOC decided that for the purpose of the rules governing contribution, the blanket policy should not be considered to be a subsisting insurance and they amended the rule accordingly. B11 "CONTRIBUTION WILL NOT ARISE WHERE ONE OF THE POLICIES IS ON A CONTINGENCY BASIS (AT A PREMIUM SUBSTANTIALLY LESS THAN, THAT REQUIRED FOR A FULL INSURANCE) INTENDED TO APPLY ONLY WHEN THE INSURED IS UNABLE TO RECOVER IN RESPECT OF LOSS OR DAMAGE TO PROPERTY BELONGING TO HIM OR IN WHICH HE HAS AN INSURABLE INTEREST AND LIABILITY FOR WHICH RESTS ELSEWHERE". Again this should be fairly easy to interpret. It becomes crystal clear when one bears in mind that the whole purpose of the rules is to share losses where premiums have been taken by more than one insurer. Here, because one premium is much reduced as the policy is on a contingency basis, it would be unfair to offer contribution. Rule 2 relates to arbitration and indicates that every difference which shall arise between the insurers as to the apportionment of any loss under Rule 1 shall be referred to the Dispute Committee of the ABI. It should be noted that only members of the ABI can refer matters to the Committee and it is not for adjusters to do. Rule 3, although appearing at the end of two pages on contribution when the policies cover different rights and interests, does not in fact relate to different rights and interests. That is only Rule 1. This rule relates to contribution involving the same interests. It makes it clear that if applying the normal rules of contribution including the importation of average produces a result whereby -33-the policyholder receives less than he would otherwise do so, then the policy that does not have the average clause in its original form (before average was imported by virtue of the contribution conditions) shall make up any shortfall. -34-CHAPTER 8 ACCIDENT OFFICES ASSOCIATION RULES ON CONTRIBUTION AOA Rules on Contribution (which form Appendix 2) relate to common law contributions as amended by the policy and can therefore be contrasted with ABI Rules on Contribution which relate to contribution where there are different rights and interests. The rules are limited in their effect to personal effects insured under household, all risks, motor and travel policies. In one of the notes to the agreement it is indicated that they are it is intended to apply to any insurances covering personal effects such as policies on bicycles, caravans, sports equipment ete. A quick glance at the first part of the agreement might lead one to believe that it relates only to items stolen from or damaged in a motor accident. In fact, later in the agreement it suggests that any loss involving personal effects (and where there is contribution with all risks, motor, travel etc. policies) will fall within the ambit of this agreement. Particular reference is drawn to Paragraph 3 where it refers to “all other claims for the loss of personal effects". There is a lower limit of £100. In other words, no request for contribution should be made or should be honoured if it relates to a loss paid by the insurer settling it in the first instance at less than £100. Once again this can be contrasted with ABI Rules where the £5 limit (rule 5) relates to the sum payable after the contribution calculation has been made. This limit applies to the sum being entered for contribution. All contributions should be on the basis of independent liability. ‘The claim should be dealt with by whichever insurer receives it first. This, in fact, gives the policyholder the option of selecting the policy that gives him the better terms. An example appears in the notes incorporated in the agreement where it implies that a policyholder might choose to claim under a household all risks policy in preference to his motor policy where he might suffer loss of a no claim bonus. Interestingly, the rules and notes do not appear to cater for the situation where one policy on its own is inadequate but the two together are adequate. However, it is likely in those circumstances that the insured will claim up to the limit available on one policy and then seek the balance under another. There is nothing in the rules to preclude this and in such a case, we would probably have to go back to the basic rules applicable to any kind of common law contribution as amended by the policy wording. -35-Rule 2 makes it clear that claims in respect of items specifically listed under an all risks or household policy should be settled by that insurer without seeking contribution unless there is in existence another all risks cover specifically listing the items. Only then can there be contribution (on an independent liability basis). This avoids the problems that would otherwise arise where one might have a household/all risks cover with specified items of jewellery and a travel policy which simply covers personal effects including jewellery. In such a case, no contribution arises. One should not overlook the notes headed "purpose of agreement". The purpose is to avoid small transfers between insurers and to avoid criticisms from policyholders. This should be borne in mind whenever a contribution under these rules is suggested. -36-CHAPTER 9 COMMON PROBLEMS POLICIES WITHOUT SUM INSURED Of late, some domestic policies have been arranged without a sum insured, having either a "rebuilding guarantee" (common with policies effected via building societies) or being "bedroom rated”. Therefore, consider the problems that arise in the following circumstances: Policy A, sum insured £120,000 Policy B, rebuilding guarantee, no sum insured Value at risk £200,000 Adjusted Loss £ 20,000 If the policies cover the same rights and interests and are not subject to average, the apportionment should be on the basis of sums insured, but one policy does not have a sum insured! Some rebuilding guarantee policies have an agreed value for premium calculation purposes and, if this can be established, that figure should be used for the purpose of calculating the apportionment. If his cannot be established or if the policy is "bedroom rated" it is suggested that the value at risk be utilised. ‘The position is clearer if the policies cover different rights and interests or the one with a sum insured is subject to average, when the apportionment will be on the basis of independent liability. -37-POLICIES WITH DIFFERENT EXCESSES Ifa policyholder has twe policies, only one of which has an excess, he will almost certainly wish tc claim on the policy which gives him the better payment, that is the policy without the excess. If that policy were adequate, he would receive full payment, why then should he be penalised and suffer an excess because, probably inadvertently, a second policy has been effected? If both policies have excesses, but of different value, which excess should be applied? The alternatives are the lower, the higher or both combined. The problem only arises in respect of policies covering the same rights and interests, as under ABI rules, the insurer primarily liable pays the loss under the one policy and then seeks contribution to the sum paid rather than the loss suffered. Solutions to this problem are outlined in Chapter 10. ~38-REINSTATEMENT /INDEMNITY POLICIES The Reinstatement Memorandum (see Appendix 3) incorporates a special condition which indicates that in the event of there being another policy in force covering the insured's interest which is not on identical terms (in so far as the reinstatement provisions are concerned) the Memorandum shall be of no effect. The policyholder then finds himself in the position that he has paid an additional premium for reinstatement cover and may even have a combined sum insured that is well in excess of the value at risk, but can only recover on an indemnity basis. It is therefore sometimes suggested that the indemnity loss should be apportioned between the policies and the reinstatement policy additionally pays the reinstatement difference. ‘There is nothing in the Memorandum permitting this and nor is the problem addressed in ABI Rules on Contribution. Whilst the Rules generally relate to Contribution when policies cover DIFFERENT rights and interests, Rule 3 allows for the situation where a policyholder is prejudiced by the importation of average into a non-average policy by virtue of the policy conditions. Where the policyholder receives less than he would otherwise do, then the non-average policy is required to make up any shortfall. There does not seem to be any general market agreement - along similar lines - relating to the shortfall between an indemnity and a reinstatement settlement. ~39-4. | WHO DEALS IN PRACTICE The "custom of trade" is - 1. When same rights and interests. The adjuster/insurer with the bigger share 2. Alternative accommodation. The contents adjuster/ insurer. 3. All others. The adjuster/insurer for the party primarily responsible. ~40-SAME OR DIFFERENT RIGHTS AND INTERESTS It is sometimes not entirely clear whether separate policies are covering the same rights and interests where there are multiple interests involved. Three particular cases come to mind: Peverett in Fire Insurance Law and Claims says (P263, first edition) if bailees policy covers goods in trust (without the qualification "for which he/they are responsible) the policy is for the benefit of the bailor. Does this imply there would then be "common law" contribution on the basis of sums insured with any policy effected by the bailor, or would we look for independent liability contribution under ABI Rules? Recommendations are incorporated in Chapter 10. In the case of Nichols and Company v Scottish Union and National Insurance Company (1885) mortgages insured a building at the cost of the mortgagors. It was a condition of the agreement that any claim money was to be expended on reinstatement or in reduction of the mortgage. ‘The mortgagors effected a second policy in their own name. It was held that both policies covered the interest of the mortgagors and, therefore, contribution did arise at common law. A situation arose on one occasion when substantial freeholders in Central London, had effected a policy in their name but noting the interest of the lessee. The lessee had arranged a separate policy. The question that arose was not whether there would be contribution - there would be either at common law or under ABI Rules on Contribution - but whether it should be at common law because the policies covered the same rights and interests (see Nichols v Scottish Union) or under ABI Rules because they were different rights and interests. The significance was that under the former, contribution would be on the basis of sums insured (which would be more expensive for the insurers of the freeholders) or the latter when it would be independent liability (and cheaper for freeholder's insurers). The problem was submitted to them and they agreed it was the same rights and interests and therefore an apportionment at common law on the basis of sums insured. -41-CHAPTER 10 RECOMMENDATIONS As indicated in the preface to this paper, it is considered appropriate to make recommendations for the resolution of common problems in the hope # t they may become acceptable to the market: a REINSTATEMENT / INDEMNITY POLICIES. Where two (or more) policies are in contribution at common law but one (or more) is on an indemnity basis whilst the other(s) ere on a reinstatement basis, the apportionment - either on the basis of sums insured or independent liability should be of the indemnity settlement, with the reinstatement policy then accepting in addition the reinstatement balance. For example: Policy A sum insured £50,000 (indemnity) Policy B sum insured £75,000 (reinstatement) Adjusted loss reinstatement £25,000 Adjusted loss indemnity £20,000 Therefore (sums insured method): Policy A pays £20,000 x £ $0,000 £125,000 £ 8,000 Policy B pays £20,000 x £ 75,000 £125,000 = £12,000 + £5,000 = £17,000 £25,000 Alternatively, assume the policies are subject to average with a value at risk of £60,000. Contribution is therefore calculated on the basis of independent liability. Independent liability of Policy A: £20,000 x £50,000 £60,000 = £16,667 Independent liability of Policy B: 5 £20,000 36,667 Therefore Policy A pays £20,000 x £16,667 £36,667 = £9,081 Policy 8 pays £20,000 x £20,000 £36,667 = £10,909 + £5,000 = £25,908 -42-MEAN METHOD The mean method of apportionment is an alternative applicable to contributions involving non-average, non-concurrent policies. As it is time-consuming and little understood, it is recommended that it be eliminated and substituted by the independent liability method. BAILEES/BAILORS Where a bailee's policy extends to cover bailors' property without the caveat for which the policyholder (i.e. bailee) is responsible, it should be accepted that the bailee's policy is arranged for the benefit of the bailor and be regarded as covering the same rights and interests The apportionment should then be at common law on the basis of sums insured rather than under ABI rules on contribution on the basis of independent liability. POLICIES WITHOUT SUMS INSURED Where one or more of the policies called into contribution does not have a sum insured, the value at risk should be substituted. HANDLING EXCESSES Problems arise when policies have excesses. At common law (whether the apportionment is on the basis of sums insured or independent liability) one must determine what to apportion - the loss before excess, after application of the lower excess, after application of the higher excess or after application of both excesses combined. Logic demands different approaches: (i) If one policy only has an excess and the sum insured on that policy is adequate, apportion the adjusted loss before the excess. Gi) If the sum insured on the policy with the lower excess is adequate, apportion the adjusted loss after application of the lower excess. (iii) If the sum insured on the policy with the lower excess is not adequate, but the sum insured on the policy with the higher excess is adequate, apportion the adjusted loss after application of the higher excess. (iv) If neither sum insured is individually adequate, apportion the adjusted loss before the excess and then apply the excess applicable to each policy. -43-For example: Policy A Sum Insured £10,000 excess £100 Policy B Sum Insured £15,000 excess £500 Adjusted Loss £5,000 ‘Therefore Policy A pays £5,000 x £10,000 £25,000 = £2,000 - £100 = £1,900 Policy B pays £5,000 x _ £15,000 £ 2,500 = £3,000 - £500 = £2,500 £4,400 -44-SECTION 4 PARTS CONTRIBUTION 1, Contribution—different rights and interests Where there are two or more subsisting insurances in the names of parties having different rights and interests covering the same loss such loss shall as between insurers be apportioned ratably to the independent liabilities of such insurances without regard to the liabilities of the insured parties to each other. A. For the purpose of this rule:— (1) A subsisting insurance is an insurance effected by, or on behalf of, anyone having at the time of destruction or damage an insurable interest in the subject matter of the insurance, and in respect of which insurance the Insurer could be liable to the Insured; an insurance in which the Insurer is named as the Insured, either alone or jointly with another party or parties, shall be a subsisting insurance if it otherwise falls within this definition. 2) Loss shall mean material loss or damage resulting from the following perils:— fire, lightning, explosion, aircraft, riot and civil commotion, malicious damage, earthquake, subterranean fire, spontaneous fermentation, storm or tempest, flood, bursting or over-flowing of water tanks, apparatus ‘or pipes, impact and sprinkler leakage. @) The independent liability of an insurer shall be the liability of the insurance after the application of average and of proportional, percentage or monetary limits, and excesses. (4) Contribution will not be prevented by the insertion of any clause in the insurance restricting the insur- ance to property for which the insured is responsible or to property not otherwise insured, but effect shall be given to any other limitation in the insurance as to the extent of the liability of the insurer. () Average shall not be applied to any insurance covering household goods in a private dwelling or temporarily removed therefrom. (6) Insurances covering implements and utensils of husbandry shall be deemed to exclude power-driven vehicles and implements and their accessories if and so far as they are otherwise insured. (1) When one insurer is required to contribute with two or more other insurers who are not in contribution with each other, the proportion contributed shall be one half of the independent liability of each of the other insurers less any deduction for average and for proportional, percentage or monetary limits and excesses applying to the first insurance; each contribution to be treated as a separate loss forthe purpose of the application of excesses and limits. (8) The amount contributed by an insurer shall not exceed— (@) the amount the insurer could have paid to its own insured as a liability within the terms of its insurance. (©) the balance of the sum insured on the subject matter after payments and recoveries have been made under the insurance either as a liability oF ex gratia. (© An insurer intending to seek contribution shall notify such intention within six months of the date of loss. B. Contribution will not arise where:— (1) The insurance is on property outside Great Britain, Northern Ireland, the Isle of Man or the Channel Islands. (@) The insurance is in respect of rent or consequential loss. G) One or more of the insurances is @ Public Liability, Engineering or Contract Works, Motor, Marine or Goods in Transit Insurance (4 The loss is paid ex gratia in the absence of liability (8) The amount recoverable from an insurer is less than £5 for their proportion of the loss under any one insurance (6 In respect of property held in trust or on commission, () the independent liability of the insurer of any one bailor is less than £100 (©) the total of the independent liabilities of the insurers ofall the bailors (excluding individual losses where the independent liability is less than £100) is less than £1,000; provided always that in respect of the loss of such property the insurer(s) of the bailor(s) shall waive Fights of subrogation against the bailee or their insurer and shall inform the insurer of the bailee of any payment made to their insured, whether or not contribution is required by this rule (D The loss is restricted to the property of employees.SECTION + PARTS (8) The loss isin respect of the building and its fixtures and fittings insured in the name of the tenant (lessee) and such insurance is restricted to a part of parts of the premises demised to him: provided that if the insurer of the landlord (lessor) receives a claim from its insured for loss to the building (and its fixtures and fittings) it will waive rights of subrogation which may exist by the terms of the lease. A policy covering tenant's liability for damage to the building of a private dwelling up to a declared percentage of the sum insured on contents shall be deemed to be an insurance on part only of the premises demised to him. (9) A loss in respect of property insured under a household building policy is also covered under a household contents policy (section covering tenant's liability for damage to the buildings etc.) NOTE: It is accepted that insurers may generally prefer to deal with claims under household building policies without enquiry as (0 the liability of tenants. (10) A floating insurance in respect of buildings and landlords’ fittings and fixtures contains a clause ex- cluding property otherwise insured and in which no amount has been included in the sum insured for the property suffering loss or damage. NOTE: The reference ta "otherwise insured” shall mean otherwise insured by the same interes, (11) One of the policies is on a contingency basis (at a premium substantially less than that required for a full insurance) intended to apply only when the Insured is unable to recover in respect of loss ‘or damage to property belonging to him or in which he has an insurable interest ard liability for which rests elsewhere. 2. Arbitration Every difference which shall arise between insurers as to the apportionment of any loss under the above shall be referred to the Disputes Committee — see Section 6. 3. Contribution—Average Where a non-average policy shall by its conditions become subject to average owing to the existence of another average policy, tbe loss shall as between Offices be apportioned on the basis ofthe non-average policy being made subject t0 average. But if this importation of average results in the aggregate amount recoverable by the insured being less than st would be without the importation of average, the diference shall be made good by the non- average insurance. For examples of apportionments, see pages 32 and 33,SECTIONS PARTS EXAMPLES OF APPORTIONMENTS (1) Calculation of independent liability: Policy A: (Tenant) building sum insured £10,000 subject to averase, 20% Insured Coinsurance Clause. Policy B: (Landlord) building sum insured £18,000 subject to average. ‘Value £20,000. Adjusted loss £500. Payment by Policy B: 18,000/20,000 of £500=£450. Apportionment Independent liability of A 10,000/20,000 (average) of £500= £250 Tess excess 25 Less 20% Coinsurance Clause Independent liability of B 18,000/20,000 (average) of £500 Total of independent liabilities A & B ‘Therefore Policy B will recover from Policy A 180/630 of £450: (2) Application of Rule 1B(8). Policy A: (Landlord) building sum insured £10,000. Policy B: Decorations, tenant’s improvements & shop front: sum insured £2,000. Contribution does not arise in respect of any payment made by Policy A or Policy B. @) Apportionment of Loss of Goods in Trust. Policy A: (Bailee) goods in trust for which the insured is responsible: sum insured £50,000. Policy B: (Bailor) goods insured at premises of bailee: sum insured £5,000. Fire loss of bailor’s goods agreed at £2,000 and sums insured adequate on both policies. Apportionment Independent liability of Independent liability of Total of independent liabilities of A & B=£4,000. If £2,000 paid by Policy A—Policy A will recover from Policy B 2,000/4,000 of £2,000=£1,000. If £2,000 paid by Policy B—Policy B will recover from Policy A 2,000/4,000 of £2/000=£1,000. (4) Application of Rule 1B(6)a). Policy A: Goods in trust for which the insured is responsible: sum insured £50,000 Twenty bailors have losses ranging from £5 to £99 each and totalling £1,150. Each is separately insured Contribution does not arise under the Rules and the insurers of the bailors waive any subrogated rights |. against the bailee (Policy A). (5) Application of Rule 1B(6)(). Policy A: Goods in trust for which the insured is responsible: sum insured £50,000. Fire caused loss of £1,015 to property of two bailors. First bailor paid £65 by his insurer and second bailor paid £950 by his insurer. Contribution will not arise under the Rules because the total liability of £1,015 is less than £1,000 after deduction of the £65 (individual liability less than £100). (©) Application of Rule 1B(7). Poliey Az Item includes all other contents covering, inter ali, employes’ effets not otherwise (@) Fire on 20th August: damage to property of three employees £50 each; no other damage. If employees have personal insurances covering their losses no payment is made by Policy A. ‘The employees’ insurers cannot require Policy A to contribute to their payments. (b) Fire on 30th August: damage to property of three employees £50 each and three customers £50 Employees" personal insurers pay £150 and recover £75 from Policy A—assuming that no limitations operate under Policy A. Customers’ insurers pay £150 but cannot recover any amount from Policy A (See (4) above),SECTION 4 EXAMPLES OF APPORTIONMENTS (continued) ARTS (7) Application of Rule 14(7). (@) Bailee and four bailors—all poi are average. S.L adequate Sum Insured Loss ‘or value Policy A: Goods in trust for which the insured is responsible £50,000 — adequate Policy B: Bailor's goods £1,000 £50 adequate Policy C: Bailor’s goods £500 £150 adequate Policy D: Bailor’s goods £2,000 £500 adequate Policy E: Bailor’s goods £10,000 «£5,000 value £20,000 Total loss=£5,700 ‘The bailee has legal liability for loss and Policy A pays £5,700. Policy A recovers a half of the independent liability of each other insurer, with the exception of Policy B, ie., £30 =Nil from policy B (Rule TB(6(4) One half of £150 =£75 from p Gas half of £300. =£280 ftom poly D One half of £2,500*=£1,250 from policy E £3,200 * Average applies to Policy E. () Bailee and three bailors—all policies are average. Sil, adequate ‘Sum Insured Loss or value Policy A: Goods in trust for which the insured is responsible £10,000 = £20,000 Policy B: Bailor’s goods £2,000 £1,000 adequate Policy C: Bailor’s goods £5,000 £4,000 £10,200 Uninsured bailor’s goods s £5,000 = Total loss=£10,000 ‘The bailee has legal liability for loss and Policy A pays to bailee the sum of £5,000 because average operates. ‘The bailee pays £10,000 to the bailors and has to bear his uninsured loss of £5,000. Policy A recovers from B and C one half of their independent liabilities further reduced by the application of average under Policy A, i.c., A recovers from B: One half of £1,000=£500 less_10,000/20,000=£250. A recovers from C: One half of £2,000=£1,000 less 10,000/20,000=£500. (©) Bailee and three bailors—all policies are average. Su adequate Sum Insured Loss or value Policy A: Goods in trust for which the insured is responsible £25,000 = £50,000 (£100 excess) Policy B: Bailor's goods £10,000 £10,000 adequate Policy C: Bailor's goods #5000 £5000 adequate (£50 exzess) Uninsured bailor’s goods _ £3,500 = Total loss=£18,500 Policy A does not accept that insured has legal liability but agrees to payment to uninsured bailor to avoid litigation against their insured. Therefore Policy A pays its insured £1,650 (average ané £100 ‘excess), leaving the insured to pay the balance of £1,850. Policy B has paid its insured £10,000. Policy C has paid its insured £5,000 less £50 excess=£4,950. (Application of Rule 14(4)). Policies B & C recover from Policy A one half of their independent liabilities further reduced by the application of average and the £100 excess under Policy A—ic. B recovers from A one half of £10,000=£5,000 less 25,000/50,000 and £1 C recovers from A one half of £4,950 =£2,475 less 25,000/50,000 and £100=£1,137.50.