Proportional rule of Art. 10 Insurance Contract Act (LCS) versus termination of the contract by the insurer
In this article we will analyse the different options that art. 10 of the Law of Insurance Contracts proposes as an alternative to the policy holder’s failure to comply with his duty to declare to the insurer, in accordance with the questionnaire that the latter submits to him, all the circumstances known to him that may influence the valuation of the risk.
The resolution of the claim, in any of the cases described in art. 10 LCS, by the insurance company, may be the following:
1. The rejection of the claim since, if the risk had been properly declared, the policy would not have been accepted, and may entail the return of the premiums paid.
2. The rejection of the claim with the cancellation of the policy.
3. Payment of the claim adjusted proportionally to the rating that would have been received if all the available information had been available.
4. Payment of the claim if the omission of the information does not affect the guarantee.
If the company’s decision is the one described in point three of the options described above, we find ourselves in the case dealt with by the STS of 17 February 2022, which analyses the problems involved in the application of the rule of proportionality established in art. 10 LCS.
This judgement describes the consequences of the fact that the insured person makes a declaration of risk with errors, inaccuracies or lack of precision at the moment of contracting the policy.
It also analyses the way of calculating the reduction of the compensation and the requirements that the insurer has to fulfil in order to apply it.
The question arises as to whether it is necessary for the insurer to have cancelled the contract within a period of one month after becoming aware of the inaccuracy of the declared risk in accordance with the provisions of art. 10 LCS.
In the case analysed by the judgement, the insurer after the declaration by the insured person of a series of claims decided to communicate to the insured person his decision to modify the conditions of the policy because he considered that the current conditions were not adjusted to the reality of the risk declared by the insured person.
This communication was rejected by the insured because he considered that the modification sought by the insurer had no legal or contractual basis.
In view of the insurer’s refusal to pay the claim, the insured presented a claim, which the insurer opposed based on the non-fulfilment by the policy holder of his duty to declare the risk, the number of vehicles and their accident rate.
The claim was upheld by the court of first instance, considering that the insurer was already aware of the risk previously and when it decided to modify the conditions of the policy, more than one month had already passed as foreseen in art. 10 LCS, and had not proceeded with the proportional refund of the unearned premium. On the other hand, the amount was documented.
This judgement was appealed, the appeal being based on the fact that the court recognised the inaccuracies committed by the insured person when declaring the risk and that the insurer was not aware of this until a later moment, which gives him the right on the basis of the principle of good contractual faith to modify the conditions and in his case to apply the rule of proportionality to the real risk foreseen in art. 10 LCS.
It is also suggested that if there was fraud in the contracting concealing the real risk, the insurer would not be obliged to pay any compensation.
Subsidiarily, and if fraud is not found, the insurer would only be obliged to pay for the damages prior to the communication of the termination.
The hearing dismissed the appeal basically on the grounds that the termination had not complied with the one-month period stipulated in art. 10 LCS, and that it had not returned the unearned premium in accordance with the provisions of the policy.
An appeal in cassation was lodged against this judgement for infringement of the provisions of art. 10.3 LCS in accordance with art. 3 and 20.8 LCS.
This appeal was partially upheld but the important thing is that the judgement clearly establishes the two options that art. 10 LCS grants to the insurers in the event that there is no fraud or serious fault at the moment of declaration of the risk by the insured, to terminate the contract within one month of knowledge of the inaccuracy of the declaration of the risk, or to maintain the policy and apply the criterion of the proportional reduction of the compensation foreseen in 10.3 LCS, or to maintain the policy and apply the criterion of the proportional reduction of the compensation foreseen in art. 10.3 LCS.
In this case, as the precept indicates, if the claim occurs before the insurer terminates the contract within the period of one month, the benefit of the insurer will be reduced proportionally to the difference between the agreed premium and that which would have been applied if the true nature of the risk had been known.
If there has been fraud or serious fault on the part of the policy holder, the insurer will be released from the payment of the benefit.
The judgement of the SC partially upholds the appeal of the insurer, and as it has been proved that there was no fraud or serious fault at the time of the declaration of the risk, the rule of proportionality should be applied.
The judgement establishes a clear differentiation between the faculties granted by art. 10 LCS to the insurer:
A.- To terminate the contract within a period of one month from when it becomes aware of the inaccuracy of the declaration of the risk.
B.- The other faculty foreseen in section 10.3 of the LCS in the supposition that the contract has not been cancelled and a claim occurs, in which case the rule of proportionality or equity, as the SC has also called it, will be applicable. In this case the compensation will be reduced proportionally.