The Insurance Contract Act (DFLCS in Spanish) regulates the consequences of insureds or policy holders or beneficiaries, acting fraudulently or with gross negligence, without making any distinction between the two.

The consequences of the insured’s fraudulent or grossly negligent actions can mean that the insurer is released of his duty to cover the claim, or that the cover is reduced in the same proportion as the insured’s conduct effected the conditions of the policy contract; or that the contract is cancelled.

There are two exceptions to the above:

  • if gross negligence is expressly covered under the insurance contract
  • If the fraudulent or grossly negligent action comes from persons under the care of the insured.  

If these exceptions are met, the claims will still have to be paid even if the insured acts with gross negligence. The DFLCS does not define the persons under the care of the insured. The insurance contract will be crucial to determine who those persons are. If the contract is silent on this point, then the principles of the Civil Code can be used that define these people as employees, disabled persons, subcontractors in construction contracts, etc.

The instances in which the DFLCS regulates the consequences of fraud and gross negligence are as follows:

  • Inaccuracy or intentional omission by the insured, either before of after the celebration of the contract, in the declaration of facts that could affect the valuation of risk or that could lead to the non-celebration of the contract.
  • Not reporting the aggravation of the risk in a timely manner.
  • Breach of the obligation to mitigate the consequences of a claim taking all the necessary measures.
  • The policyholder attempting to obtain an illicit benefit from having insured the same risk with two or more insurers without having disclosed this circumstance.  
  • When the claim is intentionally caused by the insured.  
  • If beneficiaries under the policy fraudulently cause the loss, they will lose the benefit of the indemnity.  

The DFLCS also ensures that whenever a party insures a risk for an inflated value, through fraud or bad faith, the party that has acted in good faith has the right to demand the nullity of the contract and indemnity for the damages that the fraud or bad faith have caused.