Contribution In Insurance – #1

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You, like 60% of people in America, may still be confused about contributions to insurance. Contributions play a crucial role in determining how multiple insurance insurance policies interact when covering a certain shared risk.

This article is tailored to deal with all the worries about contributions in Insurance. By the time you’re done reading, you should know all about the principles and implications of contribution in insurance.

You cannot understand contribution without a good grasp of certain terminologies that apply to it, which is why we will deal with that in the next section of this article.

Let’s get started!

Key Terminologies Around Contribution In Insurance

The following terminologies will help you understand how contribution in insurance works, as well as foster better communication with your insurers:

  • Policyholder/Insured: This is you or the entity that purchased the insurance policy.
  • Premium: This is the amount you are to pay to the insurance company for your coverage.
  • Insurer/Insurance Company: The entity providing insurance coverage in exchange for premiums.
  • Coverage: The protection and benefits outlined in the insurance policy.
  • Deductible: The amount the policyholder must pay out of pocket before the insurance coverage kicks in.
  • Contribution: The sharing of loss among multiple insurance policies.

What is Contribution In Insurance?

Contribution is, in simple terms, the concept of proportionally sharing the burden of a certain loss among multiple insurance policies that cover the same risk.

From the above definition, I believe you can sense that contribution shields you the policyholder, as it will ensure you don’t receive more than your fair share of compensation in the event of a claim. This ensures fairness and prevents you from profiting unduly from an unfortunate and unforeseen event.

There are different types of contributions in insurance. Let’s quickly discuss them.

The Different Types of Contribution

In Insurance, there are 2 basic types of contributions, and they are:

  • Pro-rata Contribution
  • Excess Contribution

#1. Pro-rata Contribution:

In Pro-rata contribution, the loss is distributed proportionally among the various insurance policies covering the same risk. This method usually comes into play when policies have the same terms and conditions.

Pro-rata contribution works in a way that the amount that was paid by each insurer for the loss is proportional to the limit of liability specified in their respective insurance policies. 

Pro-Rata Contribution - Insuranceopedia
Pro-Rata Contribution – Insuranceopedia

For better understanding, let’s take an example;

Consider a scenario where a Building valued at $500,000 is insured by Insurer X for $250,000 and Insurer Y for $150,000. If the building incurs a loss of $100,000, Insurer X would contribute 50% ($250,000 / $450,000) of the loss, amounting to $50,000, while Insurer Y would contribute 30% ($150,000 / $450,000), totaling $30,000.

#2. Excess Contribution

In this type of insurance contribution, multiple insurance policies cover the same claim or risk, and one insurer ends up paying more than their fair share of the claim.

In this case, the other insurers will have to reimburse the first insurer for the excess amount that they paid.

Here are some reasons why this happens:

  • When the policies have overlapping coverage: This implies that both insurance policies cover the same event or loss.
  • When the policies have different excess amounts: An excess is that amount of money that You, the policyholder have to pay out of pocket before the insurance company starts to pay their part. So, this implies that If one policy has a lower excess than the other, that insurer will end up paying more of the claim.
  • When the policies have different limits of liability: Briefly, a limit of liability is the maximum amount that an insurance company will pay for a claim. If one policy has a lower limit of liability than the other, that insurer will reach its limit first and the other insurer will have to pay the rest of the claim.

If you’re looking to avoid excess contribution, consider:

  1. Make sure that your insurance policies do not overlap and that you understand the terms and conditions of your policies, including the excess amounts and limits of liability, as we explained earlier.
  2. You may also want to consider purchasing excess contribution insurance, as it will reimburse you for any excess contributions that you have to pay.

Principle of Indemnity in Contribution

You can’t really talk about contribution without mentioning the principle of indemnity. This is where insurance seeks to restore you the insured, to the same financial position as before the loss occurred. If you can clearly understand this principle, playing around with contributions in insurance becomes easy.

Now, that we’ve sorted out the basics, let’s move on to the real deal! Ready?

Real-World Applications of Contribution in Insurance:

#1. Contribution to Property Insurance:

You know when it comes to property insurance, the risk of damage or loss is ever-present and likely inevitable, so contribution comes in helpful.

When you have multiple policies covering the same property for example; homeowners, flood, and earthquake insurance, then contribution must come into play, so it can necessitate the fair distribution of liability.

#2. Contribution to Liability Insurance:

Here, Contribution comes in when you the policyholder have coverage under multiple liability policies. So in cases of personal injury or property damage, the concept of contribution will ensure that the responsibility of covering the insured is shared appropriately.

#3. Contribution to Commercial Insurance:

If you run a business, you will attest to the fact that most businesses often hold various insurance policies to mitigate diverse risks. Contribution now becomes helpful in commercial insurance scenarios, where overlapping coverage is common.

We advise Insurers to navigate and clearly understand the principles of contribution to determine their respective obligations in case of a claim.

#4. Contribution to Life Insurance:

We all know that Life insurance isn’t like property insurance, where physical assets are at the forefront. In life insurance, we are primarily dealing with human lives and financial protection.

So like other insurance policies, contribution in life insurance would come into play when a policyholder holds multiple life insurance policies. The main objective is to prevent you from over-insuring your life and, in turn, profiting from multiple policies in the event of death.

You also need to know that while contribution is designed to bring clarity to the distribution of loss, disputes can arise.

Some of the common challenges include:

  • Disagreements on the valuation of the loss
  • Differences in policy terms
  • Varying interpretations of the contribution principle.

In order to address these contribution disputes, alternative dispute resolution mechanisms, such as arbitration or mediation, should exist.

These mechanisms over time, provide a faster and more cost-effective resolution compared to traditional methods.

Some Practical Implications of Contribution in Insurance

You may still not understand the significance of contribution in insurance.

Here are some practical implications that contribution has on both the insurer and the insured:

  • Coordination of Policies
  • Subrogation and Contribution

1. Coordination of Policies:

As an individual juggling multiple insurance policies, it is crucial that you understand how contribution affects your policy coordination.

Partaking in contribution creates a seamless collaboration with your different insurers, which in turn ensures you have well-coordinated policies, and leaves you stress-free.

2. Subrogation and Contribution:

Subrogation is simply the right of an insurer to pursue a third party that is responsible for a loss, and this case most times intersects with the contribution.

Insurers mostly seek contributions from other parties to help the overall cost of a claim, emphasizing the interconnected nature of these principles.

The Importance of Contribution To Insurance

The following are the importance of contribution in Insurance:

  • Fair distribution of risk
  • Avoidance of over-insurance
  • Encouragement of Sound Underwriting Practices
  • Efficient Claim Settlements:

#1. Fair Distribution of Risk:

Contribution helps to ensure that the financial burden of a loss is equitably distributed among the insurers. This has over time helped to prevent any single insurer from bearing the entire responsibility and promotes a sense of shared risk within the industry.

#2. Avoidance of Over-Insurance:

Contribution also helps to act as a deterrent against over-insuring a property or asset. If contribution is not in place, you the policyholder might be inclined to secure multiple policies for the same risk, potentially gaining more than the actual loss in the event of a claim, which is not good.

#3. Encouragement of Sound Underwriting Practices:

Most of these Insurers that are motivated by the concept of contribution, are usually prompted to engage in serious underwriting practices. This ensures that the pricing of policies is perfect, and the risks involved are thoroughly assessed, which at large contributes to the overall stability of the insurance industry.

#4. Efficient Claim Settlements:

With the contribution, the guidelines on how the loss is to be shared have been clearly stated. This ensures a smoother and more efficient way to settle the claims process. The insurers involved can streamline the resolution process, minimizing disputes and speeding up compensation to the policyholder.

Frequently Asked Questions on Contribution In Insurance

[sc_fs_multi_faq headline-0=”h3″ question-0=”How does contribution work in insurance?” answer-0=”Contribution in insurance is just like sharing the risk. When multiple people have insurance, they each contribute a bit, so if something goes wrong, the cost is shared among them.” image-0=”” headline-1=”h3″ question-1=”What factors affect how much I contribute to my insurance policy?” answer-1=”Your contribution depends on things like how much coverage you need, the type of risks you want protection from, and how much risk the insurance company thinks you have. They look at these factors to figure out how much you should contribute.” image-1=”” headline-2=”h3″ question-2=”How can I make sure I’m contributing wisely to my insurance?” answer-2=”To contribute wisely, you have to manage risks smartly. Things like staying healthy, having safety measures in place, and choosing the right coverage for your needs can help you contribute in a way that makes sense for you.” image-2=”” headline-3=”h3″ question-3=”Is contribution the same for different types of insurance, like life and property insurance?” answer-3=”Contribution works a bit differently for each type of insurance you listed. For life insurance, it’s about your health and lifestyle. For property insurance, it’s about protecting your belongings.” image-3=”” headline-4=”h3″ question-4=”How is technology changing contribution in insurance, and what’s coming next?” answer-4=”Technology is making things easier and faster. Things like using apps to buy insurance or using smart devices to prevent accidents can change how much you contribute. In the future, more cool tech could help us all contribute in even smarter ways.” image-4=”” count=”5″ html=”true” css_class=””]

Important Recommendations


Trust you got value. You should have realized that the concept of contribution shows together fairness, risk-sharing, and efficiency, and you profit a lot as a policyholder.

Embrace contribution, and the insurance industry will not only safeguard its economic stability but also foster a culture of accountability and transparency through this.

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