Insurance and Reinsurance

The insured’s duty to keep the insured property in good condition

The Insurance Act determines the insured’s duty to keep the insured property in good condition and inform to insurers any relevant situation that affects the insured risk. Further to these duties, the mentioned regulation establishes the insured’s duty to disclose all relevant circumstances to the insurer, in case relevant circumstances are not disclosed by the insured, insurers may terminate the corresponding insurance contract.

Are insurers allowed to reject cover?

The Insurance Act allows the insurer to reject coverage in case the insured did not properly notify the circumstances that increased the insured risk. Insurers will be at risk in those cases where the insured’s lack of notification was not caused by negligence or where the insurer was aware of the relevant circumstances, making notification by the insured superfluous.

If the risk is increased by the insured’s behavior, the coverage is suspended from the time the insurer is aware of such circumstance. The insurer has the duty to notify the insured the decision of cancelling the policy within seven days after the circumstance is known. 
In case the increase in the risk was not caused by the insured but by an external factor, the insurer must notify the decision of terminating the policy within 30 days of becoming aware of the relevant circumstances and give seven days notice prior to the final cancellation.

In cases where the policy is cancelled due to the increase in the risk, the insurer is entitled to receive the applicable portion of the premium if the increase in the risk was properly notified or to keep the full premium in cases where the insured did not report the situation.

Another option for the insurer is to continue insuring the risk but to recalculate the premium according to the new scenario and applicable underwriting scheme. 

            Is underinsurance applicable to these cases?

In cases where the claim has not been rejected by the insurer and the insurer did not receive the applicable portion of premium or did not recalculate the premium, the insurer is allowed to apply the rule of average and declare underinsurance, if applicable unless the contract provides otherwise.

This helps keep a proper proportion between the indemnity the insured receives and the premium they pay, as the insurers are not required to pay in excess of the value declared in the policy, even if at the time of the loss, that value has increased.

For further information on this topic please contact Martín G. Argañaraz Luque