Legal Definitions - contribution clause

A contribution clause is a provision found in insurance policies that specifies how a loss will be divided and paid when the same risk or property is covered by more than one insurance policy. Its primary purpose is to prevent an insured from recovering more than the actual value of their loss by claiming from multiple insurers, and to ensure that each insurer pays only its fair share.

While the term "contribution" can sometimes be used in a broader sense, particularly in property insurance, to refer to an insured's share of a loss due to underinsurance (a concept more precisely defined by a "coinsurance clause"), the distinct legal meaning of a contribution clause specifically addresses the allocation of a loss among multiple insurers covering the same event or property.

Here are some examples illustrating how a contribution clause works:

• Overlapping Home Insurance Policies:

  Imagine a homeowner who has a standard property insurance policy from Company A. They also purchased an additional, specialized policy from Company B that offers extended coverage for certain perils, some of which overlap with Company A's policy. If a fire causes $200,000 in damage to their home, and both policies technically cover the loss, the contribution clauses in each policy would dictate how the $200,000 loss is shared. Instead of the homeowner collecting $200,000 from Company A and another $200,000 from Company B (totaling $400,000 for a $200,000 loss), these clauses would ensure each company pays a proportionate share, perhaps based on their policy limits or a "pro rata" (proportional) basis. This way, the homeowner receives only the actual $200,000 loss, with each insurer contributing to that total.

• Business Liability Coverage:

  Consider a small manufacturing company that is sued for product defects. The company has a general liability policy with Insurer X. Due to a recent acquisition, it also inherited a similar general liability policy from Insurer Y that covers the same period and type of claim. If a court awards $500,000 in damages against the company, the contribution clauses in the policies from Insurer X and Insurer Y would come into play. These clauses would prevent the company from recovering the full $500,000 from both insurers. Instead, they would establish a framework—such as splitting the cost equally or proportionally based on policy limits—for how Insurer X and Insurer Y share the $500,000 payment, ensuring the company is indemnified for its actual loss without double recovery.

• Health Insurance Coordination of Benefits:

  An individual has health insurance through their employer (Plan A) and is also covered as a dependent under their spouse's employer's plan (Plan B). They incur a $10,000 medical bill. While often referred to as "coordination of benefits" in health insurance, the underlying principle is a form of contribution. The "contribution clauses" (or their equivalent rules) in Plan A and Plan B would determine which plan is primary and which is secondary, or how they share the cost of the $10,000 bill. This prevents the individual from being reimbursed for more than the actual $10,000 cost by claiming from both plans simultaneously, ensuring the insurers contribute their respective shares to cover the single loss.