Tunde insured his commercial delivery truck, valued at \text{N}20,000,000, against acciden… — JAMB UTME

Tunde insured his commercial delivery truck, valued at $\text{N}20,000,000$ , against accident risks with two insurers: $\text{N}8,000,000$ with Insurer P and $\text{N}4,000,000$ with Insurer Q. Both policies contained an average clause. A negligent motorist rammed into the truck, causing damage worth $\text{N}10,000,000$ . The insurers settled Tunde's claim in accordance with insurance principles. Subsequently, Tunde successfully sued the negligent motorist and recovered the full $\text{N}10,000,000$ in damages. Based on the principles of indemnity, contribution, and subrogation, how much of the recovered $\text{N}10,000,000$ is Tunde legally entitled to retain?

$\text{N}4,000,000$ Answer
B
$\text{N}10,000,000$
C
$\text{N}6,000,000$
D
$\text{N}0$

Answer

Tunde is legally entitled to retain

\text{N}4,000,000

Under the average clause, the total insurance payout was limited to

60\%

of the loss, which equals

\text{N}6,000,000

. Tunde was left with an uncompensated loss of

\text{N}4,000,000

. Under the principle of subrogation and indemnity, when damages are recovered from a liable third party, the insured is entitled to retain enough money to make up their actual uncompensated loss (

\text{N}4,000,000

). The remainder of the recovery (

\text{N}6,000,000

) must be handed over to the insurers to reimburse the payouts they made, ensuring the insured does not make a profit above full indemnity.

Step-by-Step Solution

Calculate total insurance coverage and assess under-insurance.

Total Sum Insured =

\text{N}8,000,000 + \text{N}4,000,000 = \text{N}12,000,000

. Property Value =

\text{N}20,000,000

. Under-insurance ratio =

\frac{\text{N}12,000,000}{\text{N}20,000,000} = 0.60

(or

60\%

The average clause applies because the property is under-insured.

Calculate the compensation paid by insurers under the average clause.

Total Indemnity Paid =

0.60 \times \text{N}10,000,000 = \text{N}6,000,000

Under an average clause, insurers pay only the proportion of the loss that the sum insured bears to the total value.

Determine the uninsured loss borne personally by Tunde.

Uninsured Loss = Actual Loss - Insurance Payout =

\text{N}10,000,000 - \text{N}6,000,000 = \text{N}4,000,000

Tunde acts as his own insurer for the remaining

40\%

of the property value.

Apply the principles of subrogation and indemnity to the third-party recovery.

Out of the

\text{N}10,000,000

recovered from the third party, Tunde keeps

\text{N}4,000,000

to cover his uninsured loss, while the remaining

\text{N}6,000,000

is refunded to Insurers P and Q.

Subrogation allows insurers to recover claims paid, but the insured is entitled to be fully indemnified for their actual loss first without making a profit.

Key Concept

Subrogation and Average Clause in Under-insurance

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