The insured must report to insurers any modification to the particular circumstances of the insured property after the initial declaration of risk.
If a loss arises from a defect in the insured property that was known by the insured at the time the policy was issued, but not declared to the insurer, the situation can be solved as follows:
- Cover the risk in case the insured notified the modifications before the loss and within 14 days after acknowledging the modifications.
- If the modifications are not notified to the insurer, the insured is entitled to reduce the indemnity in proportion to effectively paid premium and the real premium in case the insurer had been aware of the increase on the risk insured.
- Reject coverage in cases where the insured had acted in bad faith trying to obtain an unlawful benefit. In this scenario the insurer is entitled to keep the premium paid up to the loss.
In I and II above, the insurer will be released from their duty to compensate the insured if evidence is provided to the effect that the real or increased risk was not within insurers' underwriting parameters and hence would not have been insured in any event.
If a loss occurs the policyholder or insured must try to minimise the damages with all means available. Failure to comply with such requirement can lead to a substantial decrease in the indemnity payable or even to reject coverage in cases where the insured acted in bad faith causing significant damage to the insurer. As an exception, it should be noted that insurers are not allowed to reject coverage for insured’s bad faith in mandatory civil liability policies. In these cases insurers are required to pay the indemnity to the affected third party and recover from the insured once compensation has been paid.
It is common in the market that policies include exclusions in relation to inappropriate maintenance by the insured of the insured property. In such cases the insurer is allowed to reject coverage if it is evidenced that the insured did not comply with its duty.