The Proportional Premium Rule in Insurance – BTS Insurance Course

L’assurance est un outil essentiel pour se protéger contre les risques et les imprévus qui peuvent survenir dans la vie quotidienne. Que ce soit pour assurer sa maison, sa voiture, sa santé ou son entreprise, l’assurance offre une sécurité financière en cas de sinistre. Cependant, il est important de comprendre les termes et conditions de son contrat d’assurance, notamment la règle de réduction proportionnelle.

The rule of proportional reduction is a principle that can have significant consequences for policyholders in the event of a claim. It states that if the insured value of an asset is less than its actual value at the time of the claim, the compensation paid by the insurer will be proportionally reduced to the difference between these two values. In this article, we will explore the rule of proportional reduction, its functioning, and its importance for policyholders. According to Article L113-9 of the Insurance Code:

“The omission or inaccurate declaration by the insured, provided that bad faith is not established, does not result in the nullity of the insurance.”

If it is discovered before any claim, the insurer has the right either to maintain the contract, subject to an accepted premium increase by the insured, or to terminate the contract ten days after notification sent to the insured by registered letter, restituting the part of the premium paid for the period during which the insurance is no longer in effect.”

In cases where the discovery occurs only after a claim, the indemnity is reduced in proportion to the ratio of premiums paid compared to the premiums that would have been due if the risks had been fully and accurately declared.”

Understanding the rule of proportional reduction

The rule of proportional reduction is a principle applied in insurance contracts that stipulates that if the insured value of a property is less than its actual value at the time of the claim, the compensation paid by the insurer will be proportionally reduced to the difference between these two values.

For example, if a house is insured for an amount of 200,000 euros, but its actual value is 300,000 euros at the time of the claim, the indemnity paid by the insurer will be reduced proportionally to the difference between these two values. If the house sustains damages worth 100,000 euros, the insurer will only pay 66.67% of this amount, or 66,667 euros, pursuant to the rule of proportional reduction.

The criteria influencing the application of the rule of proportional reduction include the insured value of the property, its actual value at the time of the claim, as well as the limits and exclusions of the insurance policy. It is important for policyholders to understand these criteria well to ensure that their coverage corresponds to the actual value of their assets and that the rule of proportional reduction does not apply unexpectedly in the event of a claim.

Advantages and disadvantages of the rule of proportional reduction

The rule of proportional reduction presents advantages for insurers but disadvantages for policyholders.

Advantages for the insurer include protection against overvaluation of insured assets and reduction of indemnity costs in case of a claim. Indeed, if the insured value is less than the actual value, the insurer will only pay the amount corresponding to the insured value, thus avoiding paying compensation exceeding the true value of the damaged asset.

Disadvantages for the insured include a lower indemnity than the actual value of the damaged asset, as well as an incentive to underestimate the real value of the asset to reduce the insurance premium cost. Furthermore, the rule of proportional reduction can be unexpectedly applied in case of a claim if the actual value of the asset has increased since the policy was taken out.

Alternatives to the rule of proportional reduction include insured value agreements, which allow the policyholder to agree on a predetermined value for their insured asset. This agreed value is set in advance and remains valid until the next renewal date of the insurance contract, thus avoiding surprises in the event of a claim. However, this option may be more costly due to the insurer’s commitment to pay the agreed value in case of a claim.

How to avoid the rule of proportional reduction?

There are several measures policyholders can take to avoid the rule of proportional reduction.

Before taking out insurance, it is important to accurately assess the real value of the assets to be insured and to subscribe to an insurance coverage matching this value. Policyholders can also opt for insured value contracts to avoid the rule of proportional reduction.

After a claim, policyholders can take measures to minimize the application of the rule of proportional reduction. It is important to document damages and provide evidence of the true value of the damaged asset, such as purchase receipts, property evaluations, or technical assessments. Policyholders can also negotiate with their insurer to obtain a higher indemnity than the insured value, proving that the actual value of the asset was higher than the insured value at the time of the contract’s inception.

Finally, policyholders can also consider regularly re-evaluating the value of their assets and updating their insurance coverage accordingly to avoid underestimating the true value and the application of the rule of proportional reduction in case of a claim.

In conclusion

In conclusion, the rule of proportional reduction is a common provision in many insurance contracts that can result in lower indemnity than the real value of the damaged asset in the event of a claim. Insurers may apply this rule to prevent overvaluation of insured assets and to reduce indemnity costs. However, policyholders can take steps to avoid the rule of proportional reduction by properly valuing their assets, subscribing to insured value contracts, and providing documentary evidence in case of a claim. It is also important to regularly re-evaluate the value of assets and update insurance coverage accordingly.