Double Insurance, Over-insurance and Reinsurance

Double Insurance and Over-insurance

Double (or multiple) insurance happens when a single person is insured by 2 or more insurers separately with regard to the same subject matter and interest. Over-insurance, on the other hand, happens when the amount of the insurance is greater than the insured's insurable interest. Both double and over-insurance may or may not exist together; it depends on the insured himself.

In case there is over-insurance because of double/multiple insurance, the insurers are not required to pay for the whole loss. Their obligation is only pro-rata. The insured, on the other hand, isn't allowed to recover more than his insurable interest.

To illustrate, let's say this guy Bob owns a house worth Php5,000,000.00. He takes a fire insurance on it for Php5,000,000.00 from Big Auntie Insurance and paid Php5,000.00 in premiums and another one from Big Uncle Insurance for Php5,000,000.00 also with Php5,000.00 in premiums The house is then burned down by by a nut who threw a lighted cigarette into the window and set fire to the living room. The ratable contributions will be computed like this:

Big Auntie:

5,000,000.00 x 5/10 = 2,500,000.00

Big Uncle:

5,000,000.00 x 5/10 = 2,500,000.00

So both Big Uncle and Big Auntie are liable only for Php2,500,000.00 each.

The premiums to be returned to Bob will be computed this way:

Big Auntie: 5,000 x (5,000,000/10,000,000) = 2,500

Big Uncle: 5,000 x (5,000,000/10,000,000) = 2,500

Therefore both Big Auntie and Big Uncle will return Php2,500.00 each to Bob.

Reinsurance

Contrary to what the name implies, it doesn't mean that the insurance contract is renewed. Instead, it means the insurer draws up a second insurance contract with a third person to insure him (the insurer) against loss/liability due to the original insurance. The original insured isn't a party to the second insurance contract so he will only have a cause of action in either of the following cases:

1.) The reinsurance contract has a stipulation favoring the original insured

2.) It novates the original insurance contract

The law requires non-life insurance companies to take reinsurance when they assume a risk on a subject whose worth exceeds their retention limit (20% of the insurance company's net worth.) So if a non-life insurance company with a net worth of Php1 billion insures a hotel building worth Php250 million, it has to draw up a contract or reinsurance for the Php50 million with another insurance company because its retention limit is Php200 million.