Property insurance in Spain: consequences of risk aggravation and considerations on mandatory loss adjustment proceedings

For those policy risks subject to the Spanish Insurance Contract Act (ICA 50/1980, 8 October 1980), communication of aggravation of covered risks by the insured to the insurer is essential.

Here, we outline the Spanish Supreme Court decision number 712/2021 dated 25 October 2021 which clarifies the consequences of a lack of communication of risk aggravation after a loss occurrence.

We then touch on mandatory loss adjustment proceedings for property insurance contracts subject to the ICA provisions where disputes arise between insurer and insured on the assessment of covered losses.

I. Consequences of lack of communication on risk aggravation by the insured (Supreme Court judgment number 712/2021 [25.10.21]

As a general rule, failing to communicate risk aggravation before an accrued loss entails the insurer to avoid payment of indemnity (if bad faith can be proved), or to reduce the indemnity in proportion to the difference between the premium already paid and the amount corresponding to the aggravated risk.

Here, an insured premise in Teguise (Canary Islands) suffered a fire loss. Conditions of the property policy required having fire prevention and fire extinguisher systems in place and  connected to a security company. When the loss occurred, the said systems were not in place.

The insured made a claim for all damages caused. The Court decided that the indemnity should be reduced by applying the proportional rule - applying a percentage reduction, which corresponded to the actual risk, had the claimant notified the absence of the said fire alarm systems.

For assessing risks in due course and to fix the appropriate premium sum, the Supreme Court stressed the importance that the insured provide accurate information when answering questionnaires and statements.

The Court stated “their loyal declaration becomes essential, when answering the questionnaires to which they are submitted, so that the companies (insurers) can accept or reject coverage and, in the first case, calculate the applicable premium, the amount of which is proportional to the object, frequency and severity of the risk assumed”.

In this case, the Supreme Court clarified that the insurer is entitled to proportionally reduce the indemnity, resulting from calculations provided by the third expert appointed following loss adjustment proceedings (Section 38 ICA).

II. Mandatory loss adjustment proceedings: steps, terms and costs

Section 38 of the ICA, referred to by the Supreme Court judgment summarised above, outlines the specific and mandatory proceedings that should be followed by insurer and insured for resolving disputes on the quantification of a covered loss. The process of these proceedings has also been considered by the Barcelona’s Court of Appeal decision number 595/2021 [14.12.21].

These proceedings have some similarities with arbitral proceedings, as a third expert is appointed by the parties to decide, alongside two other experts (one appointed by the insurer and another by the insured), an impartial valuation of the loss.

Steps and terms of these proceedings are as follows:

1. Once the loss has occurred, the insured shall provide the insurer with all information on the pre-existent goods, list of recovered objects and the assessment of damages.
2. Should no agreement on assessment of damages be reached in 40 days, each party has to appoint an expert. The failure by either party to do so within eight days after being required to do so, is understood as acceptance of the other expert assessment, and is binding.
3. In the event the experts reach an agreement, a joint statement is then issued. The joint statement will include the causes of the loss, agreed valuation of damages and other relevant circumstances.
4. Should no agreement be reached, a third independent expert is appointed, by agreement of the parties or by the Court or Public Notary proceedings. Once appointed, the third expert will issue a third valuation together with the other experts, within 30 days (if no other term is agreed).
5. Once this third assessment is issued and notified to the parties, it shall be binding on the parties, unless challenged at Court within 30 days (insurer’s term) or within 180 days (insured’s term). Should no lawsuit be filed in these terms, the expert opinion shall be deemed binding for the parties.
6. Should the third expert assessment be challenged, the insurer shall pay the part of indemnity deemed uncontested.

Regarding experts costs, the general rule is that each party will pay the fees of its own expert, and fees of the third one shall be paid by both parties. Notifications made to the insurer via a broker shall have the same effect as if made direct by the actual policyholder.

Comment

Property claims for risks in Spain are usually subject to ICA provisions. Therefore, disputes arising between insured and insurer on assessment of damages are frequently resolved by Section 38 loss adjustment proceedings.

In the case of an aggravation of risk that is not communicated to the insurer before the loss accrues, proportional reduction of indemnity should apply according to the applicable regulations and interpretation provided by the Supreme Court of Section 12 ICA.

Insurers should be aware of these applicable provisions as an alternative option to be taken into account for strategy when dealing with coverage disputes.