Fire Claim with Average Clause, Contribution and Subrogation
A textile factory in Coimbatore insured its building and machinery for ₹30 lakh with Insurer A and ₹20 lakh with Insurer B under separate fire policies, each containing an average (underinsurance) clause. Both policies cover the same interest and period. At the time of loss the assessed value of the insured property was ₹50 lakh. A fire on 15 March, caused by faulty wiring installed by an electrical contractor, damaged property assessed at ₹24 lakh. Salvage realised ₹2 lakh. The insured notified both insurers after ten days. Insurer A paid its share without obtaining a subrogation letter; the insured then recovered ₹5 lakh from the contractor as compensation for business interruption and signed a release in the contractor's favour. Insurer B now argues that its policy is excess and that no contribution is payable.
1. Calculate the amount payable by each insurer, showing the effect of the average clause and contribution.
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Net loss: Assessed loss ₹24 lakh less salvage ₹2 lakh = ₹22 lakh. Salvage is deducted because the insured is indemnified only for the actual net loss.
Average clause: Each policy is separately subject to the average clause because its sum insured is less than the value at risk.
- Insurer A: (30/50) × 22 = ₹13.2 lakh.
- Insurer B: (20/50) × 22 = ₹8.8 lakh.
Contribution: Both policies cover the same interest and period, so B cannot insist on an excess clause without explicit excess-of-loss wording. Even if B were excess, A's collectible amount after average is ₹13.2 lakh, leaving ₹8.8 lakh for B, which equals B's rateable share. Total payable = ₹22 lakh. The insured cannot recover the salvage value twice, and the total must not exceed the net loss.
2. Explain the subrogation position of Insurer A against the electrical contractor, including the effect of the missing subrogation letter and the insured's ₹5 lakh recovery.
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Subrogation arises in equity on payment of the claim: A steps into the insured's shoes against the contractor for the property damage up to ₹13.2 lakh, and B up to ₹8.8 lakh. A's failure to obtain a signed subrogation letter does not necessarily destroy the right, but it weakens enforcement because the insured may have compromised the claim. The insured's release of the contractor can prejudice the insurers; if it was given after payment, A may recover from the insured the amount by which the release impaired its subrogation right.
The ₹5 lakh recovered for business interruption is a separate head of loss not indemnified by the fire policies, so the insurers cannot claim it unless the policies also covered business interruption and the recovery duplicates the same loss. The insured must not retain a double recovery for the same property damage; if the contractor's payment covered property damage, the insurers are entitled to that portion.