The Court of Appeal was recently faced with a problem, which, despite the long and influential history of the London insurance market, had not been previously answered. The case in question was Commercial Union Co. Ltd. v. Haydon 1 and it was concerned with the principles of contribution between co-insurers. X & Company had taken out a public liability policy with the plaintiff insurer, the Commercial Union, with a maximum limit of £100,000. X & Co. had also effected another policy, which also gave public liability cover, with the defendant, a representative Lloyd’s underwriter, with a £10,000 maximum limit. A claim for personal injuries was settled at £4,425 and fully paid by the plaintiff insurers. They then sought to claim a contribution from the second insurers and it was the calculation of that contribution that was the subject matter of the disagreement.

The plaintiffs alleged that the method to be employed should be the “independent liability” approach, namely that each insurer should calculate what their liability would have been if they were the sole insurers. As the claim was within the lower limit of £10,000 both parties would have been fully liable. Therefore, as one insurer had paid out, he was entitled to a 50% contribution from the other. The defendants, on the other hand, argued that the method of contribution should be based on the “maximum liability” approach, namely, liability should be in proportion to the maximum limits of the two policies, i.e., to £100,000 and £10,000 respectively. By this calculation the defendants would be liable for 1/11th of the loss and therefore the two insurers’ contribution would be £4,023 and £402 respectively.

The Commercial Court (Donaldson, J.) accepted the defendant’s “maximum liability” formula; the Court of Appeal (Cairns, Stephenson and Lawton, L.JJ.) overruled Donaldson, J., and elected to follow the independent liability approach.

It should be admitted at once that there appears to be no strong logical reason why either approach is to be preferred. For this reason it is worth looking at the way the two courts arrived at their decision. Donaldson, J., attempted a review of the law relating to other types of insurance cover, in addition to liability insurance, while the Court of Appeal presented an answer which they felt reflected the expectations of “reasonable businessmen.”

Neither policy contained a “pro rata” clause reducing the insurer’s liability in case of under-insurance, but both did contain double insurance clauses. The Commercial Union clause read:—

“If at the time of any claim under this Section there shall be any other insurance covering the same risk or part thereof the Company shall not be liable for more than its rateable proportion thereof.”