Maritime Insurance Law Part 30
Pursuant to the earlier topic of Introduction to Maritime Law in Malaysia, published on 22 February 2021, in the coming series the basis and elements of Marine Insurance claims will be explored.
The Insurer’s Right To Contribution
The insurer is entitled to a contribution from another insurer who has insured the same risk of loss, in respect of any loss which the first insurer has indemnified, pursuant to section 80 MIA. There is an equivalent right of contribution available in equity. Such rights of contribution arise only if the assured is over-insured in respect of the same loss by double insurance. There is an over-insurance by double insurance in the circumstances set out in section 32(1) MIA , namely when:
- two or more policies are effected
- on the same adventure
- on the same interest or any part thereof.
Where the two policies in question insure different interests, then there will be no double insurance.
The existence of double insurance merely gives the insurer a right to contribution. It does not provide a defence to the insurer against the assured’s claim for an indemnity. The assured is entitled to a full indemnity from any one of the insurers (subject to the terms of the policy). However, the assured is not entitled to receive more than an indemnity; if the assured receives more than his or her loss, he or she will hold the excess in trust for the insurers, subject to the rights of contribution between them (section 32(2)(a) and (d) MIA).
In the event of double insurance, the assured will be entitled to a return of a proportionate part of the premium (section 84(3)(f) MIA).
The Nature Of The Right Of Contribution
If there is an over-insurance by double insurance, the insurer who has paid more than his or her rateable share of the loss sustained by the assured, will be entitled to a rateable (i.e. a proportionate) contribution from any other insurer covering the risk. In order to determine whether or not there is a right of contribution, each of the insurers must be at least potentially liable to indemnify the assured in respect of the loss as at the date of the loss.
Therefore, if for some reason the other insurer can rely on a defence to refuse the claim if presented by the assured based on circumstances which arise after the loss (e.g. the assured’s failure to comply with a condition precedent requiring prompt notification of the loss to the insurer), that will be irrelevant to the insurer’s right of contribution from the other insurer who could otherwise rely on that defence, but this proposition is not without its critics (Legal and General Assurance Society Ltd v Drake Insurance Co Ltd, O’Kane v Jones, contra Eagle Star Insurance Co Ltd v Provincial Insurance plc; Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd.
However, if the other insurer can rely on a defence under the policy as at the date of the loss, the indemnifying insurer is not entitled to an indemnity. Similarly, if the other insurer can rely on the assured’s failure to disclose material facts, in breach of the duty of utmost good faith, such that the other insurer is entitled to avoid and does avoid
the insurance contract, the indemnifying insurer will not be entitled to claim a contribution from the other insurer, even if the avoidance was effected after the loss, because the entitlement to avoid arose prior to the loss and because the effect of the avoidance is to set aside the contract as if it had never existed.
Note the possible impact of the Civil Liability (Contribution) Act 1978:
see Greene Wood McLean LLP v Templeton Insurance Ltd; International Energy Group Ltd v Zurich Insurance plc UK Branch.
Calculation of the contribution
The MIA does not expressly specify how the contribution is to be calculated. There are three possible methods for calculating the other insurer’s contribution. In order to understand each of these methods, consider the following example.
Assume Insurer A insures a ship in the sum of US$8,000,000 and insurer B insures the same ship for the same assured in the sum of US$16,000,000; the assured suffers a loss of US$10,000,000 and is paid US$10,000,000 by insurer B; how much can insurer B recover from insurer A by way of contribution? The three methods of calculation produce the following results:
- The ‘independent liability’ method: by this method, one apportions the loss between the insurers having regard to the amount for which each of the insurers is liable or would have been liable to the assured under their respective policies: accordingly, insurer A would have been liable for US$8,000,000 and insurer B was liable for US$10,000,000; consequently, they would share the loss in the proportion 8:10 so that insurer B would be entitled to recover from insurer A 8/18ths of the sum paid to the assured or US$4.44 million.
- The ‘maximum liability’ method: by this method, one apportions the loss between the insurers having regard to the maximum amount for which each of the insurers could have been liable to the assured under their respective policies: accordingly, insurer A could have been liable for a maximum amount of US$8,000,000 and insurer B could have been liable for a maximum amount of US$16,000,000; consequently, they would share the loss in the proportion 8:16 so that insurer B would be entitled to recover from insurer A 8/24ths of the sum paid to the assured or US$3.33 million.
- The ‘common liability’ method: by this method, one apportions the loss equally between the insurers up to the lower limit of liability agreed to by the insurers and attributes the entirety of the loss above that limit to the insurer with the higher limit of liability; accordingly, the loss is split equally up to US$8,000,000, namely US$4,000,000 each and insurer B bears the entirety of the loss thereafter so that insurer B is entitled to recover only US$4,000,000 from insurer A. The third method has received less approval from the Courts.
At the moment, there is little certainty as to which of these methods would be approved by the Court.
If you have any questions or require any additional information, please contact our lawyer that you usually deal with.
This article is written by our Principal Associate, Chakaravarthi
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