Most material damage policies include provisions that require the insured to maintain the insured property in good condition. This is particularly common in the so-called machinery all risks insurance. The reasoning for these provisions is that maintenance is crucial to the good functioning of the property. Unsuitable maintenance may lead to a greater loss ratio.
The duty of the insured usually includes an obligation to perform proper maintenance of the property. They are also obliged to ensure that maintenance contracts are up to date with the manufacturers or distributors of the insured equipment. If the insured does not fulfil the maintenance duty then the insurer is released of their duty to indemnify the insured in the event of loss.
No specific provisions regulate the duty of maintenance under Mexican Law. However, the Insurance Contract Act (ICA) states that the insured has the duty of not aggravating the risk and minimising the loss if a covered incident occurs. The insurer is entitled to reduce the indemnity to the amount that would have been indemnified if the insured had fulfilled its duty with diligence. However, if it can be established that the insured acted in bad faith the insurer is entitled to reject coverage.
It should be noted that given the ICA does not regulate the duty of maintenance expressly, much will depend on what has been agreed under the contract of insurance. The policies must expressly mention this obligation in order for it to be enforceable against the insured. If the policy does not include these provisions, there is an alternative for the insurer may reject coverage through proving that the insured did not perform the maintenance commonly required in the industry. However, there is no applicable case law on this subject.
The ICA states that it is the duty of the insured to notify the insurer of any relevant circumstances that can affect the risk. Such circumstances may be caused by the insured or third parties. Therefore, the insured has a duty to notify the inaccurate maintenance of the insured goods. If it can be established that the insured risk has greatly increased, due to the insured’s lack of maintenance, insurers would be released of their duty to indemnify the insured.
Detailed regulation of this situation within the policy terms is crucial to minimise controversies between the parties.