The Insurance Contract Act (ICA) states that an insured is obliged to act with the diligence of a good family man, in maintaining the insured property in good condition and preventing the occurrence of any loss.
Throughout the duration of the policy the insured, policy holder and beneficiary are required to notify any modification of the insured risk within five days after discovery. These modifications must affect the risk so that the insurer would have changed the insurance conditions,or not accepted coverage.
Once the insurer is notified of the changes to the insured property, it has 15 days to establish new conditions or to cancel the contract. Afterwards, the insured will have 15 days to accept the new conditions. If 15 days elapse and the insured has not accepted the new conditions, the policy is cancelled.
Is the insurer allowed to reject coverage for lack of maintenance?
The insurer is released of its obligations only in cases where the insured acts in bad faith, or with severe negligence in not notifying the insurer of new circumstances.
Is the insurer allowed to cancel the policy when it finds out that the insured risk has suffered modifications?
The ICA determines that coverage is suspended in cases where the insured does not fulfill the obligations set by the insurer for cases where the insured risk is modified.
As a general rule, the ICA establishes that unless otherwise stated in the policy, the insurer is released of its duty to compensate the insured in cases where the policy holder, insured and/or beneficiary act with negligence.
The ICA does not regulate this situation, however if general principles of law are applied to this case the insurer could be entitled to cancel the contract based on the existence of a breach of an essential condition. This position is based on scholar opinions that may be refuted.
Is underinsurance rule applied to these cases?
Underinsurance (which is the term given to the situation whereby the sum insured exceeds the real value of the property insured) and in the event of a partial loss, insurers only indemnify the insured proportionally to the missmatch between sum insured and the real value, will rarely feature in a lack of maintenance situation. If anything, insurers could face an overinsurance of the risk, whereby, perhaps due to the lack of maintenance, the real value of the property has fallen below the sum for which it was insured. If the insured has acted in bad faith, insurers will be entitled to rescind the contract and sue the insured for damages resulting from the attempted fraud. In the absence of bad faith, the contract will stand, but the indemnity due will not exceed the real value of the insured property. Insurers will be required to return the overpremium charged, but only for the policy period not yet incurred.
The provisions as to overinsurance are mandatory, whereby the ICA allows the parties to disregard the rule of underinsurance if agreed in the contract.