Key aspects to know about Spain's Insurance Contract Act

Here we present a brief guide that covers some of the most important points about this law

One of the first things we do when we buy a house, car or any other valuable item is purchase an insurance policy that covers it in the event of a problem or accident. However, do you really know what you are contracting? Do you understand what your rights and obligations are as a policyholder?

Let's turn to Law 50/1980 on Insurance Contracts to explain some its most relevant aspects.

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When contracting an insurance policy

When you decide to purchase an insurance policy, you need to be clear about exactly what you will actually be getting. The text of the first article of the Insurance Contract law is reproduced below, which summarizes the essence of this type of product: “An insurance contract is one in which the insurer commits, by charging a premium, to cover, within the agreed limits, the damage caused to the policyholder or to pay an amount or provide a similar compensation, as agreed, whenever a covered loss takes place".

This first article contains the five key elements to any insurance policy: the insurer, the policyholder, the insured object or insurable interest, the risk, and the premium paid. We can see that the party purchasing the insurance (who may or may not be the same as the party actually being insured) is obligated to pay the premium in exchange for the coverage granted by the insurer, in order to prevent the need to confront a greater economic hardship if the loss that occurs is within the coverage guarantees contracted in the policy. All of these details must be made very clear in the insurance policy document that the insurer is obligated to deliver to the policyholder at the start of the contract.

Specifically, as a customer it's important for you to remember that your insurance policy has to include the following information:

  • Full name or company name of the contracting parties along with their addresses, plus designation of the additional insured party and beneficiary when applicable.
  • The type of insurance involved.
  • The nature of the covered risk, clearly and understandably describing the guarantees and coverage types being granted under the contract, as well as any exclusions and limitations that may be applicable, emphasized typographically.
  • Designation of the assets being insured and their locations.
  • The amount insured or scope of the coverage.
  • The amount of the premium, plus any other surcharges and taxes.
  • Due dates for the premiums, and place and form of payment.
  • Duration of the contract, including the specific dates and times when its validity will begin and end.

In summary, the policy must make very clear who the insurer and policyholder are, what is insured, the value that is insured, the cost of the premium and the duration of the policy.

The law also considers the regular payment of the policy, that is, the premium. “The insurance policyholder is obligated to pay the premium under the conditions stipulated in the policy”. It should go without saying that, just as with a contract for any other type of service, it is essential to remain current with these payments.

Moreover, in the case of insurance, if premium payments are not made on time, we risk letting the coverage lapse. “If the first premium has not been paid and this is the fault of the policyholder, or if the single premium is not received by its due date, the insurance company has the right to dissolve the contract or demand payment of the premium due by filing a legal action based upon the terms of the policy. Unless otherwise agreed, if the premium has not been paid before the loss occurs, the insurer will no longer be obligated to provide compensation for the loss”.

We have to take special care, then, to stay current on the premium payments since we risk being unprotected in the event of loss.

What to do in the event of a loss event?

Although insurance companies offer guidelines for filing claims, several articles in the law also regulate this process and it's important to know what they say, since whether or not the insurer restores the damaged goods could depend on it.

The law sets a maximum period of seven days to report the loss from the time the "loss becomes known". This means that as soon as you realize that a loss has occurred, you must contact your insurance company and provide them with “all types of information about the circumstances and consequences of the loss”.

The law also states that policyholders must use all the means at their disposal to “reduce the consequences of the loss”. If this is not done, the insurer can reduce the amount of compensation offered or even deny compensation altogether if it is demonstrated that there was an “intention to harm or deceive the insurer”.

Then, "if the parties were to agree at any time as to the amount and method of compensation, the insurer shall pay the agreed sum or take the necessary steps to replace the insured object".

If, however, an agreement is not reached, each party shall assign an expert. These experts can reach an agreement and jointly resolve “the causes of the loss, the value of the damages, and any other circumstances that may influence determination of the compensation amount”. However, if the experts cannot agree, a third expert designated jointly by both parties will come into the picture, and this third expert will pronounce a resolution.

It's important to keep in mind that in this process, each party will pay for its own expert, and if a third expert is needed, that cost will be divided between the insurer and the policyholder. There is one exception however, which is that if either of the parties has made the hiring of experts necessary by claiming an assessment of the damage that is clearly disproportionate, this party will be solely responsible for all of these expenses.

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The compensation process

As a customer, you should know that the insurer "shall, within forty days after the loss claim is filed, pay the minimum amount that the insurer may owe". At any rate, it may also be the case that, due to reasons beyond the control of the insurance company, this time period cannot be complied with and payment of the compensation for the loss may be delayed. For example, when the insurance company is waiting for the policyholder to provide certain documentation, such as the repair estimate or invoice, or if a delay occurs due to a lack of the materials or items in stock needed to repair the damaged asset.

Note that this compensation doesn't have to involve money; rather, "when allowed by the nature of the insurance and if agreed by the policyholder, the insurer may, instead of making a compensation payment, repair or replace the damaged item".

Termination of the insurance policy

When someone buys insurance, the policy specifies the coverage period, as well as any extensions that may be available. However, “either party may decide not to allow extension of the contract, simply by notifying the other party in writing at least one month in advance of the conclusion of the validity period in progress when the party opposed is the policyholder, or two months in advance when it is the insurance company that is opposed to the extension”.

Broadly speaking, these are key aspects you need to know about the Insurance Contract Act, so that you can always clearly understand your rights and obligations as a policyholder.

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