What is the proportional rule?
As important as it is to take out insurance, it is just as important, if not more so, that it provides for the correct values of the risk to be insured.
Otherwise, if the insured sum turns out to be lower than the real value of the insured interest, when a claim occurs, the insurer can use and apply the proportional rule to determine the real compensation that corresponds to him.
The proportional rule is a simple mathematical operation applied by insurers to correct insured capital shortfalls.
This is set out in the Law 50/1980, of 8 October 1980, on Insurance Contracts.
It also states that the parties (the Insurer and the Insured) may, by mutual agreement, exclude its application in the contract.
To avoid this, there are also insurance formulas, such as first-risk or estimated value insurance.
Application of the rule and example
The formula applied in these cases is as follows:
And there is nothing better than to give an example to understand its application and result.
Imagine that you have taken out a home insurance policy with a content capital of €15,000, and a fire breaks out. The loss adjuster assesses the damage at €6,000, but also calculates and indicates that the real value of the contents you own is €30,000.
Logically, in this case, a capital sum lower than the real value of its assets would have been contracted, thus producing what is technically known as underinsurance.
This would cause the insurer to calculate the value of the indemnity that would be due to it as follows:
The result in this case is that, instead of receiving compensation of €6,000, he would receive exactly half that amount: €3,000, causing him a considerable economic loss but justified.
Surely, the difference in premium resulting from your policy if you had correctly insured the €30,000 of contents would only have meant an increase of around €25 or €30 per year. Therefore, our advice is to review and correctly assess the capital and guarantees contracted in all your insurance policies, before a case similar to the one described above occurs.