Hiring insurance with a capital lower than the real value of the home, business, or protected goods can lower the premium, but it can also cause a significant reduction in the compensation. This situation is known as underinsurance.
The problem usually arises when a claim occurs. Although fire, flood, theft, or breakdown are covered, the company may consider that the insured only protected a part of the total value and apply the so-called proportional rule.
What it means to be in a situation of underinsurance
There is underinsurance when the insured sum is lower than the value of the insured interest at the time of the claim.
The insured sum is the capital that appears in the policy as the company's limit of liability. The insured interest is the real economic value of the asset that is intended to be protected.
For example, if the contents of a home are worth 100,000 euros but the policy only states 60,000 euros, there is an underinsurance of 40%. The insured has paid a premium calculated to protect only 60% of the value of their assets.
The situation can affect homes, commercial premises, warehouses, machinery, furniture, computer equipment, inventory, and other goods included in damage insurance.
How the proportional rule works
Article 30 of the Insurance Contract Law establishes that, when the insured sum is lower than the value of the interest, the company will compensate for the damage in the same proportion in which the contracted capital covers that value.
The usual formula is as follows:
Compensation = amount of damage × insured sum ÷ real value of the asset
This means that the percentage of underinsurance also applies to partial claims. The insurer does not have to wait for the complete destruction of the asset to limit the payment.
Why underinsurance can appear without you noticing
Underinsurance does not always respond to a deliberate decision to pay a lower premium. It can also arise over time for various reasons:
- The increase in the cost of materials and construction.
- Uncommunicated renovations or expansions.
- Purchase of new furniture, machinery, or equipment.
- An incorrect initial estimate.
- Failure to update the capitals for several years.
- Incorrect declaration of square meters.
- Insufficient limits for jewelry, works of art, or objects of special value.
A policy that was correctly calculated when contracted may become outdated years later if the capitals are not reviewed.
When the proportional rule does not apply
The Insurance Contract Law itself allows the parties to agree to exclude the proportional rule. That is why it is necessary to review the particular and general conditions of the policy.
Some contracts include a clause of waiver of the proportional rule, provided that the difference between the declared capital and the actual value does not exceed a certain margin.
There are also first risk insurances. In them, the company commits to pay the damages up to a specific limit without comparing that capital with the total value of the goods. This can occur, for example, in certain theft coverages, aesthetic damages, or breakage of glass.
Another possibility is the compensation of capitals between building and contents. This clause may allow using the excess insured in one item to partially compensate for the insufficiency of another, but it only applies when it is provided for in the policy and its requirements are met.
What to do if the insurer applies underinsurance
The insured can request a detailed explanation from the company indicating:
- The value attributed to the asset before the loss.
- The insured sum used in the calculation.
- The total amount of recognized damages.
- The formula applied.
- The clause of the policy that regulates the compensation.
- The possible compensations or exceptions.
If there is disagreement about the valuation, the Insurance Contract Law provides for an expert procedure. A claim can also be submitted to the company's customer service, and once the corresponding requirements are met, one can go to the Complaints Service of the General Directorate of Insurance and Pension Funds.
To avoid the problem, it is advisable to periodically review the insured capitals, especially after a renovation, an extension, or the purchase of high-value goods.