The Principle of Contribution in fire insurance ensures fairness when multiple insurance policies cover the same asset. It states that if the insured has taken more than one policy for the same subject matter and it covers the same risk, the compensation for the loss must be proportionately shared by all the insurers.

This principle applies only when the insured claims compensation for the same loss from more than one insurer. If the insured receives full compensation from one insurer, that insurer has the right to recover the proportionate amount from other insurers. This stops the insured from making a profit from a loss and gets only the actual amount of the damage sustained.

Example:

An individual insures a property worth ₹10,00,000 with two separate fire insurance policies:

• Policy A: ₹6,00,000
• Policy B: ₹4,00,000

If the property suffers a fire loss of ₹5,00,000, the contribution from each insurer will be calculated in the following way:

• Policy A pays: (6,00,000 / 10,00,000) × 5,00,000 = ₹3,00,000
• Policy B pays: (4,00,000 / 10,00,000) × 5,00,000 = ₹2,00,000

Thus, both insurers share the burden in proportion to the sum assured under their respective policies.

The principle of contribution prevents the insured from making a profit by claiming from multiple
insurers. It supports the fundamental insurance rule that the insured can recover only the actual loss—not more—regardless of how many policies are in force for the same risk.

Also Read: Fire Insurance for Factory

The Principle of Contribution in fire insurance comes into play when the insured has taken multiple fire insurance policies on the same asset. All insurers covering the asset share the claim amount as per the sum insured under their respective policies.

This distribution can be based on:

• Sum Insured: Each insurer contributes according to the ratio of their policy's sum insured to the total sum insured across all policies.

• Equal Shares: Each insurer pays an equal share of the loss until their policy limits are reached.
  This principle prevents the insured from recovering more than the actual loss and ensures fair distribution of liability among insurers.

Example of Contribution:

Let us assume a business owner goes for their factory insurance against fire with three different insurance companies:

• Policy A: ₹5,00,000
• Policy B: ₹3,00,000
• Policy C: ₹2,00,000

So, the total sum insured = ₹10,00,000

Now, suppose the factory suffers a fire, and the loss is assessed at ₹4,00,000. The insured can claim the amount from any of the three insurers, but that insurer will then recover proportionate contributions from the others.

Formula for Contribution Calculation

To calculate how much each insurer pays, use the following formula:

Contribution = (Sum Insured with Individual Company / Total Sum Insured) × Loss

Let us calculate the contribution for each:

• Policy A: (5,00,000 / 10,00,000) × 4,00,000 = ₹2,00,000
• Policy B: (3,00,000 / 10,00,000) × 4,00,000 = ₹1,20,000
• Policy C: (2,00,000 / 10,00,000) × 4,00,000 = ₹80,000

Read More: Standard Fire and Special Perils Policy

• Multiple Policies Covering the Same Subject Matter: The asset must be insured by more than one policy, each covering the same property.

• Policies Cover the Same Interest: The insured must have a consistent financial interest in the property across all policies. For instance, a property owner insuring the same building with multiple insurers.

• Policies Cover the Same Risk and Period: All policies must protect against identical perils (e.g., fire) and be active during the time of the loss.

• Policies Valid at the Time of Loss: Each policy must be in force when the damage occurs to be considered for contribution.

Also Read: Principles of Fire Insurance Policy

In fire insurance, when multiple policies cover the same property and peril, insurers employ specific methods to equitably distribute claim payments. This ensures the policyholder does not receive more than the actual loss. The primary methods of contribution are:

• Pro-Rata Method

The pro-rata method, also known as "contribution by limits," is the most commonly used approach. Each insurance company pays a share of the loss based on how much they are insured compared to the total insurance amount. The formula is:

Contribution = (Individual Insurer's Sum Insured / Total Sum Insured) × Loss Amount

This method ensures that each insurer pays according to their share of the total coverage.

• Independent Liability Method

The independent liability method works by treating each insurance policy separately. It calculates how much each insurer should pay as if no other policy exists. The amount is based on how much that insurer covered and the total value of the property. The formula is:

Contribution = (Policy Sum Insured / Total Value at Risk) × Loss Amount

This approach is mostly used when policies are subject to average clauses or in liability insurance scenarios.

• Maximum Liability Method

The maximum liability method divides the loss based on each insurer's policy limits. Each insurer's share is calculated by dividing their policy limit by the total of all applicable policy limits and then multiplying by the loss amount.

• Contribution = (Policy Limit / Total of All Applicable Limit) × Loss Amount

This method is generally applied in complex cases where policy limits vary significantly. Understanding these contribution methods is necessary for policyholders with multiple fire insurance or fire & burglary insurance policies.

Read More: What does RSMD mean in Fire Insurance?

• Prevents Overcompensation: This clause makes sure the total payout from all insurers doesn’t go over the actual loss.
• Equitable Liability Distribution: Every insurer pays only their part based on how much risk they took. It keeps things fair.
• Encourages Full Disclosure: Policyholders are more likely to share details of all their insurance policies. This helps insurers understand their risk better.
• Legal Enforcement: The clause is legally valid. If one insurer pays more than their share, they can recover it from others.

In India, the Contribution Clause in fire insurance is governed by regulations set forth by the Insurance Regulatory and Development Authority of India (IRDAI). This clause ensures that when multiple policies cover the same property, insurers share the indemnity proportionally.

What Policyholders Should Do

• Disclosure of Multiple Policies: If the same property is insured with more than one company, inform all insurers about it.

• Accurate Declaration of Property Value: Make sure the insured amount matches the actual value of the property. This helps avoid problems during claims.

• Prompt Notification of Claims: If there is any loss, inform all insurers right away. Also, submit the required documents to support your claim.

Also Read: Fire Insurance for School

Understanding the principle of contribution in fire insurance is necessary, yet several misconceptions persist:

• Claiming Full Amount from Each Insurer: It is a common misconception that businesses can make a claim against different insurers for the entire amount of their loss. In practice, each insurer makes a proportionate contribution based on their coverage, and the insured can only recover the actual loss.

• Equal Contribution by All Insurers: It is a common misconception that each insurer bears an equal portion of the loss. Contributions, however, are usually determined by dividing the total insured amount by the sum insured by each policy.

• Having Multiple Policies Means More Money: Businesses may assume that having more policies means they can claim more money from insurers. That is not true. The total payout will never exceed the actual loss. Insurers calculate their share and pay accordingly.

Understanding the contribution principle in fire insurance helps prevent confusion and unfair claims. It ensures all insurers share the loss in the right way. This keeps things honest and simple for everyone and helps avoid extra payments beyond the actual loss.

TATA AIG offers fire & burglary insurance that is fair and easy to understand. Our fire insurance policy protects your factory, office, godown or shop from fire, lightning, explosions, and even smoke or water damage during firefighting. With our fire insurance with burglary coverage, you also get coverage for losses due to burglary or theft.

We believe in providing complete protection with fair claim settlements. That is why we follow the fire insurance policy contribution rule strictly—so businesses never pay more, and we never pay less. Our goal is to help business owners recover from any fire-related or theft-related loss with peace of mind.