The principle of
contribution is a key concept in the insurance industry that ensures fair
treatment when multiple insurance policies cover the same risk. It prevents an
insured individual from claiming more than the actual loss by distributing the
liability for a claim across all insurers that have provided coverage for the
same asset or risk. This principle is essential for maintaining the fairness
and efficiency of the insurance market and is particularly relevant in Ghana
and across Africa, where individuals and businesses may often insure the same
property with multiple insurers.
In this context,
contribution ensures that no party is unjustly enriched and that insurers
share the financial responsibility in proportion to their liability. This
write-up explores the principle of contribution, how it works, its application
in Ghana and Africa, and the challenges faced in its implementation.
What is Contribution in Insurance?
Contribution is a
legal principle that applies when an insured individual has more than one
insurance policy covering the same risk or asset. Under the principle of
contribution, when a claim arises, the insurers share the responsibility of compensating
the insured based on the amount of coverage they provided. The goal is to
prevent the insured from being overcompensated for a loss by receiving payouts
from multiple insurers that exceed the actual loss.
Key features of
contribution include:
Proportional
Sharing of Liability: If multiple insurers cover the same risk, each
insurer is responsible for a portion of the claim in proportion to the
coverage it provided.
No
Double Payment: Contribution prevents double recovery. If the
insured has received compensation from one insurer, the insured cannot
claim the same amount from another insurer, even if they are covered under
multiple policies.
Preventing
Overcompensation: The principle ensures that the insured does not
profit from an insurance claim but only receives compensation up to the
actual loss suffered.
How Contribution Works in Insurance
The contribution
principle works by determining how each insurer shares responsibility for a
claim. The method of determining the contribution can depend on the terms of
the insurance policies, the amount of coverage provided, and the number of
insurers involved. There are two common methods of contribution in insurance:
Equal
Sharing Method (Rateable Proportion)
Under this method, each insurer contributes an equal proportion of the
loss. The amount of the contribution is based on the total coverage
provided by all insurers. For example, if an insured item is covered by
two policies and the total coverage is GHS 100,000, each insurer may
contribute 50% of the claim.
Proportional
Contribution
Proportional contribution is based on the ratio of each insurer's coverage
to the total coverage. If an individual has two policies—one for GHS
80,000 and another for GHS 120,000—the insurers would contribute in
proportion to the coverage amounts. The first insurer would contribute 40%
(80,000/200,000) of the claim, and the second insurer would contribute
60% (120,000/200,000).
Types of Insurance Where Contribution Applies
The principle of
contribution is most relevant when multiple policies are covering the same
asset or risk. Some of the most common types of insurance where contribution
applies include:
Property
Insurance
When a property is insured by multiple policies (e.g., home insurance,
fire insurance, flood insurance), and a loss occurs, contribution ensures
that the liability is shared proportionally by the insurers.
In Ghana,
for example, if a business in Accra insures its property under two
policies—one for fire and one for theft—and a fire damages the
property, both insurers will contribute to the cost of the loss, based on
the value of the coverage.
Motor
Insurance
Many vehicle owners have more than one motor insurance policy, such as
comprehensive insurance from one company and third-party insurance from
another. In case of an accident, contribution ensures that both insurers
share the responsibility for the claim.
In Africa,
where vehicles are often insured by multiple companies due to different
policy terms or coverage, the contribution principle ensures fair payment
for damages, ensuring that the insured does not receive more than the
loss.
Health
Insurance
If an individual holds health insurance with multiple providersand a
medical claim arises, contribution ensures that the insurers contribute
proportionally to cover the medical expenses.
In Ghana,
where the National Health Insurance Scheme (NHIS) is often supplemented
with private health insurance policies, contribution helps to ensure that
multiple insurers share the costs of medical ccarewithout the insured
receiving more than what is necessary.
Life
Insurance
In life insurance, if an individual has policies with different insurers,
the contribution principle ensures that the sum paid to the beneficiary is
not greater than the amount of the insured person's death benefit.
While life
insurance is less commonly multi-covered, in cases where it does apply,
the contribution principle ensures that the total payout does not exceed
the coverage limit.
Examples of Contribution in Action in Ghana and
Africa
Example
1: Property Insurance
An Accra-based company has insured its factory against fire damage with
two insurers. The first insurer provides coverage for GHS 500,000, and the
second insurer offers coverage for GHS 300,000. If a fire causes GHS
400,000 in damages, the first insurer would cover 5/8 of the claim
(500,000 / 800,000), and the second insurer would cover 3/8 of the claim
(300,000 / 800,000). The insured would receive compensation from both
insurers based on this ratio.
Example
2: Motor Insurance
A vehicle owner in Kumasi has two policies: one from Insurer A with a coverage
limit of GHS 50,000 and another from Insurer B with a limit of GHS 30,000.
After an accident, the total damage is valued at GHS 60,000. Insurer A
will cover 5/8 of the claim (550,000/80,000, and Insurer B will cover
3/8 of the claim (3030,000/80,000 The insured will be compensated for
the full amount but not more than the actual damage.
Legal Basis for Contribution in Ghana and Africa
In Ghana and many
African countries, contribution is governed by insurance law and practices
derived from common law principles. The legal framework for contribution often
draws on the doctrine of "double insurance," where multiple insurers
cover the same risk. Most jurisdictions provide a legal basis for contribution
in cases of multiple coverage, ensuring that insurers are obliged to share
responsibility when a claim arises.
In Ghana, the
Insurance Act, 2006 (Act 724), outlines the regulation of the insurance market,
including provisions related to multiple insurance coverage and the application
of contribution. Similarly, the laws of other African countries regulate the
contribution principle to ensure fairness in the insurance market. These legal
frameworks help ensure that the principle of contribution is adhered to by all
insurers, protecting both the interests of policyholders and the integrity of
the insurance industry.
Challenges of Contribution in Ghana and Africa
Lack
of Awareness
One of the challenges in the application of contribution in Ghana and
Africa is the lack of awareness among policyholders. Many individuals and
businesses do not fully understand the principle of contribution, which
can lead to overinsurance or claims for amounts higher than the actual
loss.
Inadequate
Claim Assessment Systems
The process of determining the appropriate contribution by insurers can
sometimes be complicated, especially when there are multiple parties
involved. Insufficient infrastructure, data access, or claim verification
processes can delay the distribution of claims, resulting in
dissatisfaction among policyholders.
Unclear
Policy Terms
Policies in Ghana and Africa may lack clear language on contribution,
which could lead to disputes between insurers and insured parties. Without
a clear understanding of how the principle of contribution works, claims
can become contentious, resulting in delays and potentially reduced
payments.
Fraudulent
Claims
There is also a potential for fraudulent activity when policyholders take
advantage of multiple insurance policies to inflate their claims. While
contribution helps prevent overcompensation, fraud remains a concern in
certain regions.
Conclusion
The principle of
contribution plays a vital role in ensuring fairness and preventing
overcompensation in the insurance industry. It ensures that insurers share the
responsibility for claims in proportion to the coverage they provided. In Ghana
and Africa, the application of contribution helps maintain the integrity of the
insurance market by preventing policyholders from profiting from multiple
claims and ensuring that the compensation received is consistent with the
actual loss. However, challenges such as lack of awareness, inadequate claim
assessments, and unclear policy terms must be addressed to make the
contribution principle more effective and efficient in these regions. The
continued education of policyholders and improvements in insurance practices
will further strengthen the role of contribution in creating a fair and functional
insurance system in Africa.
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