Insurance Contract Law (LCS): main things you need to know

Taking out insurance can spring questions to mind, not to mention concerns; or you may simply want to learn more about how it works. What happens if I have an accident? And if something changes halfway through the contract? 

The Insurance Contract Law regulates the basic content of insurance contracts while setting forth the rights and obligations of the parties, along with other complementary regulations. This law was passed in the last century and, throughout the years, policyholder protection has needed to be strengthened through other laws, such as the solvency regulations for insurance companies or the Insurance Distribution Directive. 

The Insurance Contract Law regulates all types of insurance: health insurance,  home insurance, car insurance... It doesn’t matter which one you have or are thinking of taking out. This is why it’s important to be aware of its basic principles. 

What is the Insurance Contract Law and why is it important?

Law 50/1980, of October 8 (LCS), sets forth the legal framework applicable to insurance contracts that guarantees the protection of the interests of the parties, regulating aspects such as:

• Protection of the insured. 
• Legal certainty: setting out clear rules on the content, execution, and termination of contracts. 
• Contractual balance: Regulate the obligations and duties of insured parties and insurers with a view to avoiding inequalities in the contractual relationship.
• Obligation to compensate: Ensure that the insurer compensates the insured in the event of a claim, within the agreed terms.
• Regulation of different types of insurance: Distinguish between property insurance (such as fire, theft or civil liability) and personal insurance (life, health, accident, etc.).

To sum up, the Insurance Contract Law ensures a robust legal framework for the parties involved in an insurance contract.

What parties are involved in an insurance contract?

Several parties are involved in an insurance contract, each with a specific role:

• Insurance Company: It’s the insurance company that, in exchange for paying the premium, undertakes to indemnify or fulfil the agreed benefits should the insured risk be claimed.
• Policyholder: The person who takes out the insurance and is responsible for paying the premium. It may be the insured himself/herself or he/she may take out the insurance on behalf of someone else.
• Insured party: The person or entity whose risk is covered by the insurance. This may be the same as the policyholder or a different person.
• Beneficiary: The person who receives compensation or benefits in the event of a claim. For example, in accident insurance, the beneficiary is usually designated by the policyholder among his/her family members or partner.

What must a policy contain?

As a minimum, the policy must contain the following:

1. Identification of the Parties: Name and address of the insurer, policyholder, insured and beneficiary (if applicable).
2. What is being insured: Clear description of the object or event insured.
3. Nature of the risk covered: Details of the guarantees and coverage granted, as well as exclusions and limitations highlighted typographically.
4. Designation of the insured objects and where they are located: The location of material assets must be specified.
5. Insured sum or scope of the coverage: Indication of the maximum limit of compensation or benefit.
6. Amount of the premium, surcharges and taxes: Insurance cost and payment conditions.
7. Expiry of the premiums, place and method of payment: Dates and methods of paying the premium.
8. Duration of the contract: Stating the start and end of the coverage, with exact date and time.
9. Mediator intervention: If there is a mediator in the contract, their name and type of mediation must be included.

All of the foregoing points are regulated in the general and specific conditions of the insurance, which must be drafted in a clear and precise manner.

What prior information must the insurer provide me before I sign the contract?

In case you were unaware, the regulations complementing the Insurance Contract Law have expanded the information required to be provided to the policyholder prior to taking out the insurance, requiring the insurer to provide the policyholder with the following information before signing the contract:

• Insurance Product Information Document (IPID): This is a standardised document across the European market that provides consumers with key information about an insurance product before a contract is finalised.
• Pre-contract information note: this document provides you with general information about the product you are about to purchase.

 The foregoing documents contain information related to:

• Contract conditions.
• Summary of the limitation and exclusion clauses that must be specifically accepted in writing at the time of taking out the insurance.
• Duration.
• Premiums and payment frequency.
• Information on policy cancellation options. 

This preliminary phase allows the policyholder/insured to make informed decisions and understand what the insurance entails before taking it out.

What are the rights and obligations of each party?

When taking out insurance, the policyholder and the insurer take on specific commitments that both parties must be aware of. Below is a description of the main obligations in each case:

Obligations assumed by the policyholder/insured

• Truthfully provide information on the risk, duly filling in any questionnaire the insurer may ask you to fill in, if applicable.
• Notify any change in circumstances that may increase the risk compared to those initially reported. This obligation shall not apply to health insurance or accident insurance. 
• Pay the premium instalments agreed.
• Report the claim within 7 days.

Obligations assumed by the insurer

• Issue the policy and deliver the complete documentation.
• The insurer must compensate the insured in the event of a claim within the agreed limits.

As you can see, being aware of what the Insurance Contract Law entails isn’t just a matter for lawyers, insurers, or specialists. This is a useful tool for anyone who has taken out insurance or is thinking about taking it out. Understanding what a policy includes, what you can demand, and what is expected of you as the policyholder will give you greater peace of mind.