In the event of a claim, each insurer will pay the loss amount in proportion to the Sum Insured under their respective policies, in accordance with the principle of contribution. The object of the principle of indemnity is to place the insured in the same place as he occupied prior to occurrence. Insured is prevented from making claim for full amount of loss under each policy. Insurance company indemnifies the insured only to the extent of actual loss suffered subject to depreciation, policy excess etc., and not permit to make profit out of a loss.
For illustration if an owner of a factory has insured its assets through three polices each from three different Insurers and if each policy is more than Rs 100 Crores, then, the minimum excess works out to Rs 5 lakhs. Assuming that a fire took place and claim has arisen under each policy and total claim amount is Rs 20 lakhs. The question arises whether each Insurer will apply the excess of Rs 5 lakhs for assessing their liability and as a result the insured would get the claim only for Rs 5 lakhs (Rs 20 lakhs- Rs 15 lakhs) as the total excess would be Rs 15 lakhs. But as explained above, the proper interpretation of the “excess clause” under exclusions of All India Fire Tariff is “Event Based” therefore the minimum excess Rs 5 lakhs should be divided in the proportion of sum insured under each policy. The principle of contribution is invariably applied in such claims.