There are no specific legal provisions that determine it is the duty of the insured to maintain the insured property in good condition while the policy is in effect. However, this duty can be extracted from the general principle of good faith that must guide all commercial contracts and is protected in the Code of Commerce. In fact most property policies have provisions that include the insured’s duty to maintain the insured property in good condition, and this would be respected by the courts in the context of the parties having freely negotiated a commercial contract.
The lack of maintenance leading to an increase in the risk insured can lead to a declinature of coverage, if the lack of maintenance is proved to be the ultimate cause of the loss.
There is no case law on this subject, but it is our opinion that judicial and arbitration courts would likely rule in favour of the insured and make the insurer indemnify the loss, unless the insurer can provide evidence that the lack of maintenance was the main cause of the loss. In cases where the lack of maintenance has a collateral impact on the occurrence or extent of the loss, it may be possible for insurers to reduce the indemnity based on certain provisions of the Civil Code, according to which parties must bear the consequences of its own negligent behaviour.
The local market offers first risk policies and also contracts that set out the application of underinsurance rules. Both options are accepted and widely used in the local market.
The Code of Commerce allows the application of the proportional or average rule where the real value of the insured property exceeds the sum insured (underinsurance). However, the Code is silent as to the consequences of the property insured depreciating in value since inception of the policy and up to the loss. It is common practice, adopted from motor insurance policies, that the parties will agree, in the contract, that the indemnity shall be based on market value i.e. the market price of the insured property at the time of the loss. In such cases, insurers will be entitled to take into account the maintenance of the property, or lack thereof, when determining the market price at the time of the loss.