Double insurance

It is important that insurers are aware of the consequences double insurance may have on their liability, the rules on claiming contribution from co-insurers and the various policy clauses that insurers may be able to use to protect themselves from being liable for the full loss of their insured.

What is ‘double insurance’?

Double insurance arises where the same party is insured with two or more insurers in respect of the same interest on the same subject matter against the same risk and for the same period of time.

1. Same insured: There can be no double insurance unless at the time of the claim, the same person is entitled to benefit from each policy.
2. Same subject matter: It is not clear whether the policies must cover exactly the same property in its entirety or whether covering a substantial part of the property would suffice. What is important is that the subject matter in respect of which the claim is made is covered under both policies.
3. Same risk: Double insurance will only arise if a substantial part of the same risk is covered by both insurances.
4. Same interest: The policies must also cover the same interest. This is due to the fact that it is not the subject-matter of the insurance as such which is covered by the policy but the insured’s interest in it. There would therefore be no double insurance if two people who have different interest in the subject matter insure their own interest.
5. Same period of time: Finally, the periods of time within each of the policies’ terms during which the insured party is protected from the risk must be the same, or substantially the same. It must also be during that period of time that the event giving rise to the claim occurs.

Whether or not the above conditions are satisfied will be a matter of construction of the policies’ wordings.

Double insurance policy clauses

The general rule is that in the event of double insurance, if a loss is caused by the risk insured against, subject to the terms of each insurance policy, the insured may recover the full amount of his loss from whichever insurer or insurers he chooses. Upon such indemnity being paid from one insurer to the insured, that insurer becomes entitled to claim contribution from the co-insurer.

In practice, the right to a contribution between insurers can be varied or excluded by the terms of each policy or by agreement between the insurers. In the absence of the latter, the issue will most commonly be a matter of construction of the clauses contained within each policy document, which would often aim to pre-empt contribution claims.

The most common double insurance clauses include one or a combination of the following:

• “Notification” clauses: These are clauses providing that unless the insured gives a written notice to the insurer about the existence of a second insurance covering the same risk, the policy will be void. Typical wording would be: “No claim shall be recoverable if the property insured be previously or subsequently insured elsewhere, unless the particulars of such insurance be notified to the company in writing.”[1]
• “Rateable proportion” clauses: Such clauses have the effect of preventing an insured from claiming his full loss from one insurer. Instead they provide that each insurer will be liable for a rateable proportion only. Typical wording would be: “If at the time any claim arises under this policy there is any other existing insurance covering the same loss damage or liability the company shall not be liable … to pay or contribute more than its rateable proportion of any loss damage compensation costs or expense.“[2]
• “Escape” clauses: The effect of these clauses is to relieve the insurer from any liability under the policy in the event of double insurance. Typical wording would be: “We will not pay any claim if any loss, damage or liability covered under this insurance is also covered wholly or in part under any other insurance except in respect of any excess beyond the amount which would have been covered under such other insurance had this insurance not been effected.“[3]
• “Excess” clauses: The effect of these clauses is to turn the policy into an excess insurance whereby it will only come into play if the loss exceeds the limit of the other insurance. Typical wording would be: “If at the time of the occurrence of any injury … loss, or damage, there shall be any other indemnity or insurance of any nature … wholly or partly covering the same, the underwriters shall not be liable to pay or contribute towards any such injury, loss or damage except in excess of the sum or sums actually recovered or recoverable under such other indemnity or insurance.“[4]

Key principles of contribution

Some difficulty with the above provisions often arises where the wordings of two or more policies are in competition with each other. The following key principles have been established in this respect:

• Two “notification” clauses: Each insurance policy will become void if the insured fails to notify the insurer of the existence of the other insurance. However, if the insured fails to notify the second insurer, and that policy becomes void, then the first insurance will be valid as there will be no other valid insurance to provide notification of.
• “Rateable proportion” clauses in property insurances: If the sums insured are the same and cover the same risk, each insurer will be liable for an equal part of any claim for loss. If the sums insured are different but cover the same risk, each insurer will be liable for the proportion of the loss based on their insured sum. For example, if the first insurance covers £10,000 and the second insurance – £20,000, the first insurer will be liable for 1/3 of the loss and the second – for 2/3 of the loss).
• “Rateable proportion” clauses in liability insurances: Each insurer is liable independently of the existence of double insurance. If the first insurance covers £10,000 and the second insurance £20,000, and the loss is £5,000, then each insurer will be independently liable for the full amount and they will share it equally. If, however, the loss is £20,000 (an amount exceeding the limit of the first cover), the first insurer will only be liable for £10,000 and the second insurer will be liable for £20,000. Thus, the first insurer will bear 1/3 of the claim, the second 2/3.
• Two “escape” clauses: Where both policies contain “escape” clauses, they have the effect of cancelling each other so that each insurer is liable for an equal proportion of the loss claimed.
• Two “excess” clauses: Where both policies contain “excess” clauses, they have the effect of cancelling each other so that each insurer is liable for an equal proportion of the loss claimed.

A further difficulty arises in situations where there is a combination of different clauses – for example an “excess” clause in the first insurance and a “rateable proportion” clause in the second. The way in which this situation is to be interpreted has been illustrated in the case of National Farmers Union Mutual Insurance Society Ltd v HSBC Insurance (UK) Ltd [2010] EWHC 773 (Comm). The case concerned a dispute between two insurers over insurance in relation to damage caused by fire to a property which was subject to a sale contract. The fire occurred 17 days after the exchange of the sale contracts but before completion of the sale. At the time, the property was the subject matter of buildings insurances taken out independently by the seller and the buyer. The seller had insured the property with HSBC. The buyer had insured the property with the NFU.

The HSBC policy contained an “excess” clause providing that HSBC would not pay any claim if any loss, damage or liability was covered under another insurance policy, “except in respect of any excess beyond the amount which would have been covered under such other policy had this insurance not been effected”.

The NFU policy contained a “rateable proportion” clause providing that in case of “other insurance” covering the same accident, illness, damage or liability, they would only pay their share.

Upon review of the respective policy wordings, the judge held that the HSBC policy operated only as an excess policy to the NFU policy. Since the NFU policy provided cover for the same risk, the excess clause was triggered and the HSBC policy did not cover the buyer. Accordingly there was no “other insurance” within the scope of the NFU rateable proportion clause and the NFU was liable for the loss in full.

This decision confirms the importance insurers understanding the implications of their policy clauses. Determining whether or not there is double insurance, and if so, how much is each insurer liable for, will largely depend on interpreting the policy wording in any particular circumstances.