Lloyd's Maritime and Commercial Law Quarterly
Resolving allocation problems in liability insurance—contract or restitution?
Neil Campbell *
The provision of an indemnity by an insurer under a liability insurance policy sometimes has the potential to provide a benefit to the insured, or to a third party, beyond the benefits for which the insured contracted. These extra-contractual benefits give rise to “allocation problems”, in which the insurer claims to be entitled either to reduce the indemnity so as to avoid providing the benefit, or to recoup a benefit that has been conferred. These problems have troubled United States courts for some time but have only just begun to engage Commonwealth courts. This paper analyses how allocation problems should be resolved. The problems appear on their face to be concerned with the avoidance or restitution of unjust enrichment. However, it is argued that the problems are resolved largely by the law of contract. This is because, although often there is an enrichment at the insurer’s expense, in most cases there is a just reason for the enrichment: it has occurred either as a result of the insurer’s doing what it contracted to do, or as a result of the insurer’s voluntary and self-interested act.
A. ALLOCATION PROBLEMS IN LIABILITY INSURANCE
1. Introduction
Allocation problems arise when, in relation to some loss, a liability insurance policy has the potential:
- (i) to provide a benefit to a party who is not covered by the policy, or
- (ii) to provide a benefit to a party who is covered, but in respect of a risk not covered by the policy.
The term “allocation” is used here because an insurer’s common response to the problem is to ask a court to allocate the underlying loss between the covered and uncovered parties, or between the covered and uncovered risk. In order to explain how these allocation problems can arise, it is necessary to describe the structure of a typical liability insurance policy.
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