Proximate cause refers to the dominant or most immediate cause in a chain of events that results in a loss. It may not necessarily be the first event in the sequence, but it is the cause that directly leads to the loss or damage. To be covered by insurance, the proximate cause must be an insured peril or event specified in the policy.
For example, let’s say a building is damaged by a fire. The fire is the proximate cause of the damage. If fire damage is covered under the insurance policy, the policyholder may be eligible for compensation.
Determining the proximate cause is crucial because insurance policies typically only cover specific perils or events. If the loss or damage is caused by an excluded peril or an event not covered by the policy, the claim may be denied.
- Contribution: Contribution is a principle that comes into play when multiple insurance policies cover the same loss or damage. Contribution allows each insurance policy to share the cost of the claim in proportion to the coverage provided by each policy.
When multiple insurance policies cover the same risk, the policyholder may seek compensation from any or all of the insurance companies involved. However, the policyholder cannot recover more than the actual amount of the loss. Contribution ensures that the policyholder does not receive a double recovery.
Under the principle of contribution, each insurance company pays its share of the claim based on the proportion of coverage it provides. The policyholder may need to inform each insurer about the other policies covering the same risk and provide the necessary information for the contribution calculation.
For example, if a property is insured by two insurance policies, each providing coverage for 50% of the property’s value, and a covered loss occurs, each insurance company would contribute equally to the claim payment.
The principle of contribution helps prevent overinsurance and ensures that the policyholder does not profit from a loss covered by multiple insurance policies.
In summary, proximate cause helps determine the cause-and-effect relationship between an event and the resulting loss, while contribution determines the proportionate share of liability and claim payment when multiple insurance policies cover the same loss. These concepts are essential in determining coverage and avoiding double recovery or unjust enrichment in the insurance industry.
