Imagine that you have just bought a new house for 200,000 euros and you decide to insure it, but you do so at 100,000, which is less than its real value. This is what is known as a situation of underinsurance. If, unfortunately, your home suffers any kind of partial loss, such as a burglary or a flood, you will need your insurance to cover the damages and, at that point, the proportional rule or equity rule will come into play.
But… Do you know what the proportional rule is and how exactly it is applied? We explain it to you in this new post.
What is the proportional rule in insurance?
The proportional rule is the contractual formula or principle applied in all property policies. This rule appears on the scene when there is a case of underinsurance, i.e. when the sum insured is less than the actual value of the insured object at the time when the loss occurred.
According to the proportional insurance rule, the insurer’s indemnity is reduced proportionally to the difference between the agreed premium and the premium that would have been charged if the true extent of the risk had been known.
How is the proportional rule applied?
The application of the proportional rule is based on a mathematical formula. Remember the example we gave you at the beginning?
Well, looking at this case, if the insured amount is 100,000 euros, and your home is actually worth 200,000 euros, this means that you are only insured for 50% of its real value.
If the damage caused to it amounts to 25,000 euros, your insurance company will cover 50% of the damage, which corresponds to a total of 12,500 euros in compensation for the damage suffered.
By the way! If you are interested in taking out a policy for your home, remember to take a look at our post on the Best Home Insurance in 2023.
When does the proportional rule not apply in insurance?
You already know a little more about the insurance equity rule, but, at this point, one of the main doubts you may have is… what does the Law say about it?
For it is precisely the Spanish Insurance Contract Law 50/80 that establishes the proportional insurance rule. However, the regulation also mentions that an insurance company may establish the agreements it considers with its clients to exclude this rule.
If both parties agree, it is completely legal not to apply the equity rule, but only as long as it is stated in the policy contract.
This means that, under certain circumstances and if there is common agreement, you can determine with your insurance company what indemnity would be paid to you in case of loss, without having to apply that proportionality based on the difference between the premium paid and the premium you should have paid.
What is underinsurance and how is it calculated?
If we talk about the proportional rule in insurance, it is essential to understand the concept of underinsurance, which we have already talked about at the beginning of this article.
Underinsurance occurs when the declared value of an insured property is lower than its actual value, and is the main trigger for insufficient indemnity in the event of a loss.
In these cases, we use the insurance proportional rule to calculate the amount of indemnity, adjusting it to the ratio between the insured and the true value.
How to avoid underinsurance?
Do you want to avoid underinsurance? Then you’d better establish an accurate and fair statement of the value of the property to be insured before taking out any policy.
For this you will need detailed and updated information about your insured property. For example, if you want to insure your car, you will need the exact model and a detailed list of all its accessories. And, if what you are going to contract is a home insurance, it will be essential that you know the exact value of your building and contents.
A correct valuation will ensure that the premium paid is adequate and, in case of loss, you will receive the expected compensation, without having to apply the proportional rule. And how do you know if you are valuing your assets properly? For this task it is always advisable to have the help of a professional brokerage, such as PIB Group Iberia.
With more than 30 years of experience behind us, property appraisal is one of our strengths.
In addition, it is not only essential to properly value your assets at the time prior to the contract, but it is also necessary to review this value periodically, in case it could have changed. And here we can also help you.
Contact PIB Group Iberia now and forget about having to learn how the proportional rule is applied in insurance, we are here to advise you!
