The Civil Chamber of the Supreme Court issued a Judgment dated 22 February 2022, in proceedings initiated by a claim filed by the insured party against an insurance company, seeking compensation for the lack of coverage for losses that occurred during the term of an insurance policy previously contracted, after the insurer had rescinded the subscribed policy.
The reason argued by the insurer for cancelling the policy, and thus denying coverage for the reported claims, was the insured’s failure to fulfil the duty to accurately declare the insured risk. The insurer contended that the insured had not disclosed the number of vehicles in its fleet nor the loss history from previous years before entering into the insurance policy, which did not correspond to the magnitude of the risk initially declared.
A judgment was issued at first instance, fully upholding the claim filed by the insured, considering that the insurance company had wrongfully terminated the insurance contract by improperly applying Article 10 of the Insurance Contract Act. This judgment was upheld by the Provincial Court.
Upon appeal before the Supreme Court, the Court held that although the insurer’s termination of the insurance contract was improper—since there was no evidence of fraud or gross negligence in the inaccuracies contained in the insured’s risk declaration—the amount of liability imposed on the insurer should be reduced by applying the principle of proportionality set out in the third paragraph of Article 10 of the Insurance Contract Act. The insurer’s liability must be reduced in the same proportion as the premium it would have received if the policyholder had properly declared the risk.
Once the real risk was known by the insurer at the time of the claim, and provided there was no fraud or bad faith by the insured (as provided by Article 10.3 of the Insurance Contract Act), a proportional reduction of the compensation must be applied, based on the ratio between the premium actually paid and the premium that should have been paid if the risk had been correctly declared.
The Judgment of the Civil Chamber of the Supreme Court dated 22 February 2022 also refers to the formula already applied by the Chamber in a previous decision, Judgment 712/2021 of 25 October, consisting of adjusting the compensation by applying the following formula:
Reduced benefit (compensation) = initial benefit × net premium paid / net premium according to actual risk