Insurable interest bases
F. Reinstatement (New for Old)
(When premium increases, deductibles decreases.
When deductibles increases, premium decreases)
It is the individual or organization’s right when providing indemnity to another individual, in conformity with an insurance contract, to take the insured rights related to the case concerned, to recover from a third party once the insurer paid for the loss.
When the insurer provide indemnity to the insured for a loss caused by third party, it is just and fair to let the person who caused the loss be financially responsible of the damages. Thus, the company has the right to subrogate on behalf of the insured in claiming indemnity from losses from the third Learning objective
Introducing the trainee to the subrogation principle as it is applied in insurance.
2.4 Subrogation Principle
Two
Chapter
party who caused it, after it provides indemnity for the insured.
Subrogation supports the Principle of Indemnity and does not apply to insurance policies that are not contracts of Indemnity.
The principle of indemnity is to place the insured in the same financial position after a loss as he was in at the time of the loss. There are circumstances, however, when an insured has the possibility to claim monetary reimbursement from more than one party. If he did successfully, he would receive two payments and make a profit from his loss. This breaches the principle of indemnity.
Example
“A” is waiting in his car at a red traffic light. “B” is approaching the red light but failed to apply break in time and crashes into the rear of A’s car causing serious damage. Fortunately, “A” has an insurance policy that will pay for the repairs to his car. However, he also has the option to make a claim against
“B”. What he cannot do is make two claims, one against his own insurance company and the other against B’s.
In this example, if A chooses to ask his insurance company to pay his claim (which is the sensible option as “B” may not be willing to pay him) then the insurance company can act in A’s name and try to recover from “B” (or his insurers).
Therefore, the principle of subrogation states: An insured cannot recover his loss a second time from another party if his insurer has settled his claim. Those rights of recovery pass to the insurer.
Subrogation principle is a right for the insurer only after settlement of the claim: many claims take months or even years to be settled such as catastrophic fires or severe physical injuries.
Because of that, the insurer will not want to wait until it recovers indemnity from the third party or until the insured starts taking procedures that might ruin its chances of success.
Insurance policies, therefore, have a policy condition that states insurers may pursue a claim against another party in the insured’s name before payment. Effectively insurers can start recovery actions immediately after they are aware of the loss.
In Saudi Arabia, the Right of Subrogation is given through a power-of-attorney from the insured to the company for subrogation in the following two cases:
a) Third party Liability for the Loss.
b) Defending the insured in repudiating liability or in determining the indemnity amount.
In addition to legal rights of the insurance company against a negligent party, Subrogation rights, can also happen under a contract e.g. tenancy or warehouse agreements. A breach of a contract term may entitle one party to compensation. If appropriate, these rights could pass to insurers.
When insurers agree to pay a total loss claim, e.g. when a car is so badly damaged that repairs are impossible, there may be some salvage value in the damaged property. As the insured has received a full indemnity, if he kept the salvage he would be in an improved position.
Therefore, the rights in the salvage pass to insurers as part of their subrogation rights.
Two
Chapter Two
If there are uninsured losses such as loss of wages, car hire then the insured can still attempt to claim these from the third party.
In many of the larger insurance markets insurers enter into agreements not to recover from each other. The reasoning is the principle of ‘swings and roundabouts’ (what we gain on the swings we lose on the roundabouts and the result is stalemate). This is due to the large number of claims and consequently the large number of times motor insurers are trying to recover from each other.
In some countries, in motor insurance policies, the insurers have an agreement called “knock for knock” under which each insurer pays the claim for the motor vehicle under their policies and refrain from proceeding against the insurer of the opposite vehicle.
• Breach of trust insurance: an insurer pays the indemnity and has the right to sue the guilty to receive the indemnity he might have paid to the insured.
• Theft insurance: an insurer, who paid indemnity, has a right in the stolen goods.
• Fire insurance: if a mortgagee insured a mortgage, and the house was burned and the insurance company paid the indemnity for it, then the company subrogates the mortgagee right against mortgagor with what it has paid for in indemnity.
• Marine and fire insurance: insurance company takes abandoned items and waste and sell it for its own account, which means that it subrogates the insured ownership of the items he received indemnity for.
• Income and personal accidents insurance: it is noticeable that subrogation principle does not apply to life or personal accidents insurance, since the idea of the principle is to prevent the contractor from receiving a double indemnity for the loss. The loss that results when the insured risk occurs cannot be estimated in cash in personal accident insurance, and therefore, subrogation principle cannot be applied in these cases.(Almasri 176)
Applications of the subrogation principle:
Contribution principle is the insurance company’s right in making a claim for contribution when paying a covered claim (indemnity) knowing that there are other policies with other insurers that cover the same loss
To apply the contribution principle, the following conditions or legal requirements must be present:
Learning objective
Introducing the trainee to the contribution principle, how it is applied, and methods of contribution.
2.5 Contribution Principle
A. Two or more indemnity policies must be available.
B. Same interest (same insured) must be covered in these policies.
C. All policies must cover the cause of loss.
D. All policies must have the same subject matter of insurance.
Chapter
E. All policies must have coverage for the same loss.
F. All insurance policies covering the risk must be in force when the loss occurs.
• The company secretary and financial manager both believing it is their responsibility to deal with the company’s insurance.
• The owner of goods and the owner of the warehouse both insure goods stored in the warehouse.
• Cover under two overlapping policies e.g. holiday insurance and a house policy.
If an insured takes out two insurance policies covering the same risk, he would have dual or double insurance. To allow recovery from both insurance companies would breach the principle of indemnity. Contribution is similar to subrogation; it exists to support the Principle of Indemnity and like subrogation, applies only to contracts of indemnity.
Dual insurance is usually unintentional but may happen through a misunderstanding.
Examples include:
Insurers allow for dual insurance by a contribution condition in their policies, which states that in the event of more than one policy they will only pay their share. This is the contribution or other insurance condition.
The share that each insurer agrees to pay is their rateable proportion of any loss. There are two methods of calculating an insurers’ rateable proportion, based on either sums insured or independent liability.
The goal of contribution method is to prevent the insured from claiming the full sum of indemnity from one insurer, as this will force insurer to go back to other insurers to pay their share of the sum of claim.
There are two ways to explain the meaning of “rateable proportion”:
In this method, the contribution to be paid by each insurer is calculated by apportioning it according to the sums insured.
Saud ensured his house with SR10,000 at Riyadh Insurance Company, with SR20,000 at Jeddah Insurance Company, and with SR30,000 at Dammam Insurance Company. If the house suffered a loss of SR6,000, how much will the Riyadh Company pay of this loss?
This method has an obvious negative side, there are several policies subject to different conditions.
Some policies include some but not all conditions or a different way to assess and settle claims. Thus, we can accurately identify the method used in each policy to deal with a claim, instead of just focusing on calculations regardless of policy condition. For instance, if one or all policies were subject to average condition and there was an underinsurance, then is it fair for an insurer, who has the right to Riyadh Company will pay = 6,000 x (10,000 ÷ (30,000 + 20,000 + 10,000) ) = SR1,000