In motor insurance, what is the purpose of the 'contribution' principle?

The purpose of the 'contribution' principle in motor insurance is to avoid over-insurance and double recovery. This principle comes into play when an insured individual has multiple insurance policies covering the same risk. In such cases, the contribution principle dictates that each insurer is liable to pay a share of the claim in proportion to the coverage amount provided in their respective policies. This means that the insured can only recover the actual loss suffered and cannot profit from having multiple policies.

By applying this principle, the insurance market ensures that the insured is not compensated more than their actual loss, which maintains the integrity of the insurance system. This is crucial for preventing moral hazards, where individuals might intentionally cause a loss, given they have multiple coverages that could pay out for the same event.

Understanding this principle is important as it helps both consumers and insurers to navigate the complexities of claim settlement and ensures that the system remains fair and sustainable.