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Difficulty: MediumInsurance: Principles and Types

A textile merchant, Mr. Danjuma, insured his warehouse inventory against fire loss with two separate insurance companies: Policy A with Royal Exchange for N15,000,000\text{N}15,000,000 and Policy B with Mutual Benefits Assurance for N25,000,000\text{N}25,000,000. During a fire outbreak, the inventory suffered an actual confirmed loss of N8,000,000\text{N}8,000,000. Under the principle of contribution, what amount (in Naira) is Royal Exchange liable to pay to Mr. Danjuma?

Answer: 3000000 Naira

Answer

Royal Exchange is liable to pay N3,000,000\text{N}3,000,000.
The principle of contribution applies when an insured property is covered against the same risk with multiple insurers. The compensation is shared proportionally based on each insurer's share of the total sum insured. Royal Exchange covers N15,000,000\text{N}15,000,000 out of a total sum insured of N40,000,000\text{N}40,000,000 (or 38\frac{3}{8}). Therefore, its contribution toward the N8,000,000\text{N}8,000,000 actual loss is 38×N8,000,000=N3,000,000\frac{3}{8} \times \text{N}8,000,000 = \text{N}3,000,000.

Step-by-Step Solution

1
Find the total sum insured across both insurance companies.
Total Sum Insured = N15,000,000+N25,000,000=N40,000,000\text{N}15,000,000 + \text{N}25,000,000 = \text{N}40,000,000.
Contribution requires evaluating the aggregate cover provided by all active policies on the same subject matter and risk.
2
Determine the proportion of insurance provided by Royal Exchange.
Fraction = N15,000,000N40,000,000=38\frac{\text{N}15,000,000}{\text{N}40,000,000} = \frac{3}{8} or 37.5%37.5\%.
Each insurer pays compensation relative to its share of the total sum insured.
3
Calculate Royal Exchange's share of indemnity compensation for the actual loss.
Amount payable = 38×N8,000,000=N3,000,000\frac{3}{8} \times \text{N}8,000,000 = \text{N}3,000,000.
The principle of indemnity ensures the insured is compensated only for the actual loss, split proportionally among the insurers.

Key Concept

Principle of Contribution
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Topics

Insurance: Principles and Types

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