Every insurer has a limit to the risk that he can undertake. If at any time a profitable venture comes his way, he may insure it even if the risk involved is beyond his capacity. Then in order to safeguard his own interest, he may insure the same risk either wholly or partially with other insurers. This is called re-insurance. The reason for re-insurance like the reason for original insurance is the necessity of spreading the risk.
Re-insurance can be resorted to in all kinds of insurance. The insurer has an insurable interest in the subject-matter insured to the extent of the amount insured by him because a contract of re-insurance is also a contract of indemnity. The re-insurers are liable to pay the amount of the loss to the original insurer only if the original insurer has paid the amount to the assured.
The re-insurer is, however, not liable to the insured or assured. This is because there is no privity of contract between them. But re-insurance is subject to all the conditions in the original policy and the re-insurer is entitled to all the benefits which the original insurer is entitled to under the policy. The policy of re-insurance, in other words, is co-extensive with the original policy. If the original policy for any reason comes to an end or is avoided, the policy of re-insurance also comes to an end. A contract of re-insurance is also a contract of uberrimae fidei. The original insurer, vis-à-vis the re-insurer, is in the position of the assured. He must disclose to the re-insurer all the material facts disclosed to him. On payment of the loss under the policy of re-insurance, the re-insurer is subrogated to all the rights of the original insurer including the rights of the assured to which the original insurer is subrogated.
Where the assured insures the same risk with two or more independent insurers, and the total sum insured exceeds the value of the subject-matter, the assured is said to be over-insured by double insurance. There is over-insurance where the aggregate of all the insurances exceeds the total value of the assured’s interest at risk. If there is no express condition in a contract of insurance, both double insurance and over-insurance are perfectly lawful. For example, if A insures his house worth 50,000 USD with B for 40,000 USD and with C for 30,000 USD, there is double insurance. If he insures his house with B and C for 25,000 USD each, there is no double insurance.
The rules which apply in case of double insurance are as follows:
- Recovery of actual loss: A man may insure with as many insurers as he pleases and up to the full value of his interest with each one. If a loss occurs, he may claim payment from the insurers in such order as he may think fit, but in no event is he entitled to recover more than his loss, because a contract of insurance is a contract of indemnity only. This right to sue his insurers in any order he likes is a valuable right for the assured. It protects him against loss in the event of one or more of the insurers becoming insolvent.
- Excess amount recovered to the be held in trust: If an assured recovers more than the value of his interest in case of loss, he holds the excess amount recovered for the insurers according to their respective rights inter se, as a trustee.
- Liability of Insurers Contribution: The insurers as between themselves are liable to contribute to the loss in proportion to the amount for which each one is liable. If an insurer pays more than his ratable proportion of the loss, he has a right to recover the excess from his co-insurers who have paid less than their ratable proportion.
- No limit on Life Insurances: In case of Life Insurance, an assured may take any number of policies on his life and for any amount.