If we want to Calculate Contribution In Insurance, then a few things should be checked. Once it is established that the factors which influence the application of the principle of contribution – are satisfied and contribution is to apply then the next course is to find out the liability under each insurance policy. Usually, this is on the sum-insured basis under each policy and is commonly known as proportionate liability or respective liability of each policy.
The formula applied to Calculate Contribution In Insurance is = (Sum-insured under each policy x Loss)/ Total sum-insured under all policies. Lets have a look on some examples:
Example 1 To Calculate Contribution In Insurance :
Policy A … Sum-insured… $ 1000
Policy B … Sum-insured …$ 2000
Policy C … Sum-insured …$ 4000
Say, Loss $ 700, then
Policy A pays, (1000×700)/7000=$100
Policy B pays, (2000×700)/7000=$200
Policy C pays, (4000×700)/7000=$400; total pay equals the loss $700
Example 2 To Calculate Contribution In Insurance:
Policy A … Covers property I ……….…Sum-insured $ 1000
Policy B … Covers property II & III …. Sum-insured $ 2000
Policy C … Covers property II & III …. Sum-insured $ 4000
Say, Loss $ 333 to property II , then
Policy A does not contribute anything as property II is not covered.
Policy B &C only contribute as property II is covered.
Policy B pays, (2000×333)/6000=$111
Policy C pays, (4000×333)/6000=$222; total pay equals the loss $333
Example 3 To Calculate Contribution In Insurance:
Policy Property Sum Insured Policy Period Perils Covered
A I 1000 1.1.16 to 31.12.16 Fire
B I 1000 -Do- Lightning
C I 1000 -Do- Fire
D II 1000 -Do- Fire
E I 1000 1.1.16 to 30.6.16 Fire
Say, Loss $500 to Property II by Fire on 2.7.16.
On careful observance it would be noticed that the policies are not exactly identical. There is difference of property, policy period and perils in some of the policies. The contribution will be as follows : Policy B does not come into picture as it does not cover fire, policy D does not come into picture as it does not cover property I. Policy E does not come into picture as the loss took place after the expiry of the policy. Therefore, only policies A and C contribute to the loss as under :
Policy A Pays, (1000 X 500)/2000=$ 250
Policy C Pays, (1000 X 500)/2000=$ 250, total pay equals the loss $500