Understanding Multiple Insurance and Loss Sharing

When a property owner takes out insurance policies from more than one insurer for the same property against the same risk, this is known as multiple insurance. In such cases, if a loss occurs, the policyholder cannot claim the full amount of the loss from each insurer. This is because the principle of indemnity in insurance states that the insured should only be compensated for the actual loss suffered, not profit from it.

To prevent the policyholder from getting more than the actual loss, the principle of contribution comes into play. This principle applies when there is multiple insurance covering the same risk on the same subject matter. According to the principle of contribution, each insurer is liable to pay a proportion of the loss. But how is this proportion determined?

Calculating Loss Share in Multiple Insurance

In the case of multiple insurance on a property, the insurers share the loss based on the proportion of the amount assured by each policy. This is the standard method used in most property insurance scenarios unless the policy explicitly states otherwise (which is rare). The ratio is calculated based on the maximum liability each insurer has undertaken, which is the sum insured by their policy.

Let's consider an example:

• A property is insured with Insurer A for $200,000.
• The same property is also insured with Insurer B for $300,000.
• The total value insured is $200,000 + $300,000 = $500,000.
• Suppose a loss of $100,000 occurs.

The loss will be shared in the ratio of the amount assured by each insurer, which is $200,000 : $300,000, simplifying to 2:3.

The proportion of the loss paid by each insurer is calculated as:

• Insurer A's share = (Amount assured by A / Total amount assured by all insurers) × Total Loss
• Insurer B's share = (Amount assured by B / Total amount assured by all insurers) × Total Loss

Using the example:

• Insurer A's share = $\left(\frac{$200,000}{$500,000}\right) \times $100,000 = \frac{2}{5} \times $100,000 = $40,000$
• Insurer B's share = $\left(\frac{$300,000}{$500,000}\right) \times $100,000 = \frac{3}{5} \times $100,000 = $60,000$

The total paid by both insurers is $40,000 + $60,000 = $100,000, which equals the total loss, upholding the principle of indemnity.

This distribution can be shown in a table:

Therefore, in the case of multiple insurance, insurers share losses in the ratio of the amount assured by each policy.