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House insurance: always read the small print

In Spain the relationship between the insurance company and the insured is regulated by Law 8/1980 of the 8th October on insurance contracts.

When purchasing house insurance, there are several concepts that the buyer needs to keep in mind before choosing the most appropriate policy.

Underinsurance or Infraseguro in Spanish is the situation when the declared insured value is lower than the real value of the property insured. Insurance companies will charge the clients according to the declared value of the house and the contents in it. In case of damages covered by the insurance policy, the compensation will be proportional to the ratio between the insured value and the real value. Let’s explain this situation with two examples.

  1. Building. – Let’s suppose that we insure our house at 75,000€ when the reconstruction value of the property is 100,000€. A fire damages several rooms for an estimated cost of 20,000€. In this case the insurance company will compensate only 15,000€ i.e. (20,000€ * 75,000€ / 100,000€).
  2. Contents – During the same accident the contents of the house were insured for 5,000€ while the contents were estimated at 20,000€. In this case the insurance company will refund 25% only of the content damages

When we buy a home insurance policy, rules and conditions related to the building and the house contents will always be separated. While estimating the house value will be relatively easy, the “real value” that the insurance companies estimate for the contents will vary greatly from company to company (unless a detailed house inventory wasn’t asked by the company). It is therefore extremely important to ask from the insurance broker a written document stating what the insurance company is estimating as real house content in order to avoid underinsurance situations.

It is also important to check for the “Cláusula de margen de error” or Error margin clause. This can vary from 10% to 25% according to companies. This clause states that if there is a difference lower than the error margin between insured value and real value, the proportionality rule won’t be applied.

Over insurance or Sobreseguro in Spanish is the opposite situation than previously and in this case the declared value is higher than the real value of the property. Insurance companies will not apply the proportionality rule that would go in favour of the insured and will only refund the real value of the property. This to prevent fraud situations in which the insured declares a very high property value (compared to the real value) with the intent to receive compensation higher than the property cost.

Nevertheless law 50/1980 that regulates insurance contracts in Spain, states that the insured can claim back the difference between the premium that he paid and the premium calculated by insuring the real value.

First loss policy or Primer riesgo in Spanish is a complement to the contract that is often present in house insurances policies including theft or burglary protection. In a first-loss policy claim, the policyholder will insure a list of specific items up to an agreed amount. This amount won’t be subject to the proportionality rule, but will always be lower than the purchase value. In general object insured this way would be jewels, cash, art objects and high value items.

For example if I own a painting for a value estimated at 20,000€ and it was insured for 15,000€ first loss, in case of theft the insurance will refund 15,000€ in full.

Fairness rule or Regla de equidad in Spanish is the rule that insurance companies enforce when the risk factors were overlooked by omission or false information submitted by the policy holder, in good or in bad faith.

For example let’s suppose a house theft insurance covers 10,000€ and the policyholder claim to have a security door and an alarm system in his house, while in reality he doesn’t have any security features. In case of theft the compensation will be reduced proportionally according to the difference in risk factors between a house without security door and alarm system and a house with these security features.

Comparing House insurance offers

All the factors described above have to be taken into account when comparing different house insurance offers. For example two insurance policies related to the same house covering the same type of damages for the same amounts and charging the same yearly fee could compensate damages very differently as the assumed “real value of the property” might be very different.