The principle of contribution follows the concept of indemnity and it applies if there is reinsurance. In case of a loss, all the co-insurers shall share in the loss in proportion to their participation in the risk.
Reinsurance is insurance that is purchased by an insurance company (the "ceding company" or "cedent" or "cedant" under the arrangement) from one or more insurance companies (the "reinsurer") directly or through a broker as a means of risk management, sometimes in practice including tax mitigation and other reasons described below. The ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a "reinsurance premium" by the ceding company, which issues insurance policies to its own policyholders. (Wikipedia) The maximum retention of an insurer per risk should not exceed twenty (20) percent of its net worth. (Insurance Code of the Philippines, Section 221)
The purpose of this principle is to prevent the insured from recovering more than the full amount of his loss where two (2) or more policies exist over the subject matter of insurance.
Illustration
Frodo insured his Php 2,000,000.00 property against fire for Php 2,000,000.00 each with Mabagal and Mabilis Insurance Company, respectively. The property was partially burned and the value of the loss was determined to be Php 1,200,000.00.
If you were Frodo's insurance consultant, what will be your advice to him?
Frodo may file a claim against either one or both insurers, provided his aggregate claim will not exceed Php1,200,000.00. Thus, he can do any of the following:
- File a claim against either insurer for the full amount of loss.
- File two simultaneous claims against the insurers based on their pro-rata share amounting to Php 600,000.00 each.
He cannot collect Php 1,200,000.00 against each insurer at the same time since it will violate the principle of indemnity. The liability of either insurer should not exceed its proportionate share in the loss. In order to determine each insurer's share in the loss, the computation shall be as follows:
Mabagal
____________________
Mabagal + Mabilis multiply by the amount of loss = Mabagal's share
Php 2,000,000.00 x Php 1,200,000.00 = Php 600,000.00
Php 4,000,000.00
