What Is the Contribution Principle for Insurance?

The contribution principle governs relationships between insurance companies.

The contribution principle governs relationships between insurance companies.

The contribution principle in insurance is a rule that specifies what happens when a person buys insurance from multiple companies to cover the same event, and that event occurs. The principle says that if the policyholder files a claim with one company, that company is entitled to collect a proportional amount of money from the other involved insurance companies.

Double Insurance

If one person insures some property, such as a home or business, and takes out two policies covering that property, they have purchased double insurance. Individuals are allowed to purchase as much insurance as they please on their property. For example, a homeowner might buy two $250,000 policies on his home from two different insurance companies. Double insurance does not necessarily imply two policies -- there may be more.

Contribution Principle Rules

Before the contribution principle kicks in for insurance companies, a double insurance situation has to meet certain requirements. The policies must all cover the same property and the same event, and all the policies must be in effect and enforceable. If all of these conditions have been met and a covered event occurs, damaging the covered property, the contribution principle will go into effect for the involved companies.

Filing the Claim

The insured party files a claim with only one company in the case of a covered damaging event. That insurance company pays out the money to the insured person. Afterward, under the contribution principle, the company is entitled to collect money from the other involved insurance companies according to how much coverage the policyholder has bought from each one. The contribution principle only affects the relationship between insurance companies, and does not concern the policyholder.

Example

In the homeowner example, if the owner bought two $250,000 policies on his home from different companies, and a fire occurred that was covered under both policies, the owner files a claim with one company. That company will pay out the $250,000 to the owner. Then, in accordance with the contribution principle, the company can collect half of that amount, $125,000, from the other company.

 

About the Author

Andrew Gellert is a graduate student who has written science, business, finance and economics articles for four years. He was also the editor of his own section of his college's newspaper, "The Cowl," and has published in his undergraduate economics department's newsletter.

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