A commercial property valued at \text{N}500\text{ million} is covered under an agreement w… — JAMB UTME

A commercial property valued at $\text{N}500\text{ million}$ is covered under an agreement where three independent insurance companies—Firm X, Firm Y, and Firm Z—contract directly with the policyholder in a single policy to bear $50\%$ , $30\%$ , and $20\%$ of any indemnity liability respectively. Following a fire outbreak causing a total loss of $\text{N}100\text{ million}$ , the policyholder submits a full claim of $\text{N}100\text{ million}$ solely against Firm Y.

Which of the following statements correctly describes Firm Y's legal liability and the nature of this risk-sharing arrangement?

Firm Y is liable to the policyholder for $\text{N}30\text{ million}$ only, because under co-insurance, each insurer maintains a direct contractual relationship with the insured for its agreed proportion of the risk.Answer
B
Firm Y is legally obligated to settle the full $\text{N}100\text{ million}$ claim with the policyholder and subsequently seek $\text{N}70\text{ million}$ reimbursement from Firm X and Firm Z through reinsurance recourse.
C
Firm Y is liable for $\text{N}30\text{ million}$ payable to Firm X as lead insurer, because co-insurance contracts require the insured to deal exclusively with the reinsurer holding the largest share.
D
Firm Y has no direct liability to the policyholder, as the policyholder can only recover losses from the reinsurer that originally underwrote the policy contract.

Answer

Firm Y is liable to the policyholder for

\text{N}30\text{ million}

only, because under co-insurance, each insurer maintains a direct contractual relationship with the insured for its agreed proportion of the risk.

Under co-insurance, multiple underwriting firms share a risk by entering into a direct policy agreement with the policyholder. Each insurer's legal obligation is limited to its agreed percentage of the loss. Therefore, Firm Y is directly liable to the insured for

30\%

of the

\text{N}100\text{ million}

loss, which equals

\text{N}30\text{ million}

Step-by-Step Solution

Identify the risk-sharing mechanism

The arrangement involves multiple insurance companies directly contracting with the policyholder to share fixed percentages of risk, which defines co-insurance.

Co-insurance occurs when two or more insurers jointly cover a risk directly with the insured, whereas reinsurance involves an insurer transferring risk to another insurer without direct involvement of the insured.

Determine direct legal liability under co-insurance

Each co-insurer is severally liable to the policyholder only for its specified percentage of any incurred loss.

Under co-insurance rules, there is no joint liability unless explicitly stated; each underwriter settles claims corresponding to its percentage share directly with the insured.

Calculate Firm Y's financial liability for the loss

Firm Y's liability =

30\% \times \text{N}100\text{ million} = \text{N}30\text{ million}

Firm Y agreed to cover

30\%

of any total loss incurred by the policyholder.

Key Concept

Distinction between Co-insurance and Reinsurance

Estimated Time:2m 0s

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