Fraudulent conduct by an insured is much more difficult to establish than gross negligence. The Insurance Contract Act permits insurers to reject claims in the event of gross negligence in the following instances:
- On an insured’s misrepresentation of the risk to be insured
- Where there is inaccuracy in the notification of the loss
- On a failure to mitigate the consequences of the loss
- In theft and fire insurance, coverage can be rejected if the loss was due to the gross negligence (culpa in vigilando) of the insured.
However, Spanish courts have relaxed the application of these principles. Usually, they find that it is only fraud by the insured that entitles insurers to decline liability under the policy. The court's main reason for requiring fraud, instead of gross negligence is for the protection of the insured. In life insurance, rejection of coverage is only possible in fraudulent conduct cases, even under the Insurance Contract Act.
In other jurisdictions, there is a distinction between fraud, gross negligence and ordinary negligence, establishing three separate levels of liability. In Spain, the definition of fraud is clear and simple: the insured must act with bad faith in trying to increase the exposure of insurers.
The definition of negligence is not in the Insurance Contract Act but in the Civil Code. Negligence is defined as “the omission of due diligence needed according to the nature of the obligation, the moment, time and circumstances of those involved. When the obligation does not specify the level of diligence needed, it will be that expected from a sensible head of family”. Ordinary and gross negligence are not distinguished. The Supreme Court confirms that every case must be individually examined in order to determine the level of diligence needed. Once established, the Court can then determine whether the negligence was ordinary or gross, depending on its consequences.
However, the criterion being followed by the courts is far from consistent. In a recent instance, the Court of Appeal of La Coruña ruled that the non-disclosure of an insured, whose daughter was under 25 years old and was going to be the regular driver of the insured vehicle, allowed the insurers to reject the coverage. But there is contrary case law on very similar facts, on the basis that this situation is an inadvertent omission in the proposal form, not giving insurers the right to reject coverage.
It is worthwhile noting that, even in cases where the existence of fraud or sufficiently convincing gross negligence has been proved to the court, insurers will have to overcome a second hurdle prior to being entitled to reject the claim. They will have to prove that the conduct of the insured caused a direct and quantifiable loss under the terms of the policy.
Statutory insurance law and related case law in Spain are based on the principle that it is necessary to protect the insured as the weaker party of the contract. It does not seem reasonable though, that the protection the insured enjoys in Spain prevents the pursuit of insurance fraud. It would be better for all parties involved if steps were taken to establish a system where the parties’ intentions when entering the contract, and the contract itself, were given greater priority by the courts when considering claims.