The rule of equity in insurance is a mechanism that applies in different types of policy.
What Does the Rule of Equity Consist Of?
The rule of equity is provided for in Article 12 of the Spanish Insurance Contract Act, Law 50/1980 of 8 October.
Essentially, it establishes a calculation rule for paying indemnities for damage arising from risks that had not been considered when the insurance contract was agreed.
Sometimes the wording of policy clauses is not as exhaustive or clear as it should be. There may also be changes in the circumstances covered by the insurance.
If these changes have not been communicated, the right scenario may arise for the application of the rule of equity. In this sense, the rule is taken into account in cases of omission or oversight. If there has been bad faith by the insured person or policyholder, the insurer may be released from its obligation to pay.
Even so, it is difficult to prove that the insured person or policyholder acted in bad faith, which is why the rule of equity often becomes the usual solution in these situations.
When Is the Rule of Equity Applied and How Does It Work?
Broadly speaking, it applies when there has been an aggravation of risk that was not assessed in the policy. The following are examples where this rule may be relevant:
- A business insurance policy where information on protection devices, such as no longer using an alarm, has not been updated, which becomes important when a burglary occurs.
- An incorrect date of birth appearing in a life insurance policy.
- A car insurance policy where the kilometres driven by the insured vehicle were not specified accurately enough.
Distinguishing the Proportional Rule from the Rule of Equity
It is also useful to distinguish the rule of equity from the proportional rule.
Proportional Rule: Underinsurance
The first one, the proportional rule, linked to the concept of underinsurance, applies when, in a partial claim, the insured sum is lower than the real value of the insured asset.
Rule of Equity
The rule of equity is based on a mathematical formula that multiplies the premium paid by the amount of damage and divides the result by the theoretical premium for the real risk.
Taking this recalculation formula into account, it can be deduced that the indemnity received by the insured party will be lower the higher the premium that should normally have been paid.
In short, avoiding the rule of equity in insurance means informing the insurer properly and on time of changes affecting the policy.