In this article, we are going to discuss another common term associated with insurance- 'Double Insurance'. After going through this article, you will have a clear idea about what double insurance is and what the general principles of double insurance are. We will also explain the typical clauses pertaining to double insurance.
Let’s start with the basics then!
What is called Double Insurance?
Double insurance refers to a situation when a customer obtains two insurance policies for the same property, either with or without previous knowledge. These insurance policies are obtained from one or more insurers for the same risk and subject matter. Double insurance is not a major issue; however, it can cause insurance providers to argue about whether they have any payout at all, leading to an unexpected delay in claim processing.
There is no provision in the Indian Insurance Act of 1938 or any other law that prohibits double insurance. The Act, rather, encourages the principle of double insurance. Section 34 of the Indian Marine Insurance Act of 1963 outlines the statutory definition of Double Insurance. Accordingly, anyone is free to purchase as many insurance coverages on the same subject as he desires.
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People intentionally insure their property with multiple policies in a few situations. However, there are some circ*mstances in which a person may unknowingly fall into the trap of Double Insurance. For example, if I drive your vehicle with your consent, I have third-party insurance protection under my own insurance plan. At the same time, I am also protected by your Motor Vehicle Insurance Policy. So, the problem may occur when both these policies include an 'escape clause,' which allows both these insurers to avoid liability. As a result, it is critical for you to comprehend these sections. We will touch upon them in one of our subsequent sections here.
Some features of double insurance
Here are some important features of double insurance-
- Multiple Policies: A specific subject matter must be insured either by multiple insurers or by the same insurer but under two different policies.
- Same Insured: In double insurances, the insured person must always be the same. If the same individual is not eligible for the benefits of all policies, it is not considered double insurance.
- Same Interest: The interest in all insurance policies must be the same.
- Same period: lastly, the period of the insurance policies must be the same.
- Same Subject: All policies must be linked to the same risk or subject matter. If not, it cannot be termed double insurance.
The principle of contribution in double insurance
In double insurance, the Principle of contribution is applied to determine the respective shares of payment by each insurer. The principle of contribution is concerned with the equal sharing of losses across different insurers. We know a claimant is not allowed to recover beyond the actual loss in the event of double insurance. This principle helps us in determining the proportional share of each insurer who is obligated to compensate for the loss.
- The conditions involved in the principle of contribution
- There must be double insurance
- The subject must be related to General Insurance Policies.
- All insurance must cover the same risk or subject matter.
- All policies must remain active when the amount is claimed.
- The insurance provider must possess an Insurable Interest in the subject matter and incur some actual loss.
- The policy in question must cover the incident that resulted in the loss.
- The overall loss must be shared proportionally.
- If one insurer has fully reimbursed the claimant, he is entitled to his proportionate share from the remaining insurance companies.
2. The formula to calculate the contribution
Contribution= (Sum assured with one particular insurance company / Total sum assured) x The Actual Loss
Example:
Nitin has obtained health insurance from two different providers, say X and Y. The following are the coverage amounts:
- Rs. 6 Lakh from X
- Rs. 4 Lakh from Y
Assume Nitin is admitted and his total claim is Rs 2 lakhs. He uses the policy from X and receives Rs 2 lakhs. Then he goes back to provider Y and asserts his claim once again. Now, he is no longer eligible because he has already obtained the claim.
However, provider X has the right to claim Rs 80 thousand from provider Y, as per the principle of contribution in double insurance.
Clauses related to double insurance
To minimize liability in the event of double insurance, the insurance providers typically employ the following clauses. They can use any of the following, or a combination of them:
- Excess clause
According to this clause, the liability of one insurer arises only when the loss exceeds the limit of the other insurance. In other words, the excess insurer will only pay the amount that exceeds the limits of the primary insurer's coverage. The purpose of the excess clause is to provide a higher level of coverage for the insured without duplicating the coverage provided by the primary insurer and to prevent the insured from collecting more than the full amount of their loss.
- Notification clause
According to this clause, the insured is obliged to provide an intimation to the insurance provider if he has the same risk insured with another insurance provider. If the insured fails to provide such information, the previous insurance company's liability will be avoided. It is important to emphasize that the insured must provide a written notice only; oral communication will not suffice.
The purpose of this clause is to ensure that the secondary insurer is aware of the primary insurance coverage and can properly apply the liability exemption clause or escape clause in the event of a loss. The notification clause specifies the conditions under which the insured must provide notice, such as the time frame for notification and the information that must be included in the notice. Failure to comply with the notification clause can result in the secondary insurer denying coverage or reducing the amount of the settlement.
- Rateable proportion clause
Insurance providers can evade partial liability by including such clauses. According to this clause, an insurance provider will only cover a part of the loss, if another policy responds to the same risk. The clause requires the insurers to share the loss in proportion to the amount they would have been liable for if there had been only one policy. The clause aims to prevent the insured from collecting more than the full amount of their loss, even though they have multiple policies covering the same loss. This clause is intended to encourage cooperation and sharing of information between insurers and to prevent over-insurance and double recovery by the insured.
In general, most insurance companies include an 'Other Insurances' clause in their policies to reduce liability in the event of double insurance. As a general rule, all policyholders are entitled to claim their losses from whichever insurance company they want. But insurers utilize such clauses to limit the implementation of the notion of Double Insurance and the principle of contribution.In India, insurance companies typically have a set of standard policy wordings, approved by the Insurance Regulatory and Development Authority of India (IRDAI). The IRDAI also has guidelines in place to regulate and monitor the use of excess clauses in insurance policies in India. This is to ensure that policyholders are protected and that the insurance industry operates in a fair and transparent manner.
The dilemma between the principle of contribution and the exemption clauses
By now we have understood the exemption clauses employed by insurance companies to evade liability. Let's consider a scenario where both insurance policies include such exemption clauses. So, does that imply that the insured has no right to seek a claim from any of them? If this type of practice is permitted, it will be against the public interest and will reduce people's trust in insurance policies. As a result, few guidelines concerning these exemption provisions have been formulated to benefit the insured. The following principles have been established to clarify this confusion:
- When there are two excess clauses: If both insurance policies contain an excess clause that relieves them from liability, the loss will be split evenly among all insurance providers.
- When there are two escape clauses: In the event that both insurance policies include escape clauses that relieve both the insurers from liability, the loss will be allocated in an equal proportion among them.
- When there are two notification clauses: If both the insurance policies include a notification clause that necessitates a written notice to be submitted to the insurance company for any previous or subsequent policy obtained on the same risk; failure to notify the second insurance company will relieve him from liability. However, the first insurance company will be held liable as there will not be any other valid insurance at that moment.
- When there are two rateable proportion clauses: The rule here is the same as that in the case of two excess clauses or two escape clauses. The loss must be allocated proportionally among the insurers.
Double insurance and indemnity
When contractual indemnities are provided, your company must exercise caution in light of the risk that the insurance provider may also cover. In some cases, the indemnity is invoked first with the insured before claiming on insurance. For example, when it comes to directors' and officers' liability insurance, the organisation is typically required to indemnify the directors and then claim compensation under the insurance policy.
However, in other cases, the indemnity may be intended to serve as an alternative to insurance. In such cases, ensure that the indemnity is not captured by 'other insurance' rules. Or, you need to ensure that the indemnity agreement does not provide insurers grounds to argue that the insurer should have a contribution right against the indemnifier.
Is double insurance sensible for policyholders?
Except for Life Insurance Policies, having two insurance policies does not enhance the value of the insurance coverage for policyholders. As a result, paying higher insurance premiums for multiple policies may not be economically feasible. The following are some of the factors that make double insurance policies nonsensical or practically unprofitable:
- Due to the possibility of a dispute between the insured and the insurer, having two insurance policies may cause a delay in the payment of claims.
- Whether you purchase one insurance policy or more, nothing more than the loss can be claimed. Thus, the value of insurance coverage will not increase for policyholders.
- Double insurance policies result in you paying more premiums than you were needed to.
- Making a claim on a single insurance policy is a simple process. For example, in the case of health insurance, you need to simply notify the insurer and the hospital and the claim will be handled. On the other hand, if you have multiple policies to claim for, the process may take longer and requires more effort on your part.
- Litigation costs: Taking a disagreement to court may lead to longer trials and thus higher litigation costs. Furthermore, if the matured policies are put in conflict, the insurance company is required by law to pay the amount to the court. This may delay the process of collecting the claim amount.
The footnote:
We hope the discussion above will help you understand what the term double insurance means, what the general principles of double insurance are, and about the typical clauses related to double insurance.
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