Contribution Principle for Insurance

Question

I was reading up on Contribution Principle of Insurance when I came across the following example used to explain the concept

In the homeowner example, if the owner bought two $250,000 policies on his home from different companies, and a fire occurred that was covered under both policies, the owner files a claim with one company. That company will pay out the $250,000 to the owner. Then, in accordance with the contribution principle, the company can collect half of that amount, $125,000, from the other company.

I have the following questions:

1. Why would the home owner buy two policies of the same type when he can only claim from one insurance company ? It does not make sense to pay the premium for two policies and then be able to only claim from one company.

2. Assuming we have insurance company A & B and the homeowner claims from B, how does B know that homeowner has the same insurance policy with insurance company A ?

Answer 1

1. Why would the home owner buy two policies of the same type when he can only claim from one insurance company ? It does not make sense to pay the premium for two policies and then be able to only claim from one company.

Exactly. that is paying double the money for no better coverage. It makes no sense.

2. Assuming we have insurance company A & B and the homeowner claims from B, how does B know that homeowner has the same insurance policy with insurance company A ?

The paperwork when you file a claim will ask you if there is coverage from another policy. Making the same claim to two different policies, without telling them, would be considered insurance fraud.

For that kind of money the insurance company would be involved with paying the re-builder money periodically. Obviously only one re-builder is involved, and they would notice if they were getting paid more than was required.

While you could decide to take the money and not rebuild, but that wouldn't work if you had a mortgage. The lender would want their money or force you to rebuild.