Insurance Contract Types and Valuation Principles

Mutual vs. Commercial Insurance Contracts

According to Article 124 of the Commercial Code (C. Com), mutual insurance companies, fire tontines, life combinations to assist the elderly, and any other class, are considered businesses and remain subject to the provisions of this Code when engaged in acts of foreign trade to the mutual fund or corporation, thereby becoming a fixed premium entity. This section highlights the difference between insurance contracts entered into with a public limited company (SA) and those concluded with mutual organizations.

It is crucial to distinguish between fixed premium mutuals and variable premium mutuals. These represent different social forms, primarily based on mutual responsibility:

• In the first case (fixed premium), responsibility is limited to a maximum premium.
• In the second case (variable premium), responsibility is limited to the insured amount.

This distinction is important because contracts with a mutual insurance company or mutual fund must state the mutual responsibility for company debts if such responsibility appears in the statutes (bylaws).

Requirements for Mutual Policyholders

Specific requirements apply to mutual insurance contracts:

• The bylaws of the entity must be delivered to the mutual policyholder or insured at the time of signing the insurance contract.
• The insurance contract must bear the responsibility of membership for outstanding debts related to additional contributions.
• Non-payment of these additional contributions is a cause for termination of membership, provided it occurs within 60 calendar days after payment was reliably required.

Finally, variable premium mutuals are prohibited from allowing the capital insured for each individual policy (or per insured in the case of group policies) to be higher than five times their own uncommitted assets, without prejudice to their reinsurance policy.

Key Insurance Valuation Concepts

Underinsurance and Loss Calculation

• Underinsurance: Occurs when the sum insured does not completely cover the interest insured.
• Total Loss (Siniestro total): The subject matter insured is destroyed completely. The amount of compensation is determined up to the maximum limit of the sum insured (Art. 27 LCS).
• Partial Loss (Pérdida parcial): Compensation may be paid within the limits set by the sum insured. The proportional rule of Article 30 applies.

Overinsurance (Sobreseguro)

Article 31 distinguishes whether the cause of the overinsurance is due to bad faith or good faith. It is possible that the policyholder has overestimated the value in good faith.

Overinsurance in Good Faith

If the sum insured significantly exceeds the value of the insured interest, either party to the contract may require the reduction of the amount and the premium. The insurer must repay the excess premiums paid. If an accident occurs, the insurer shall indemnify only the damage actually caused.

Overinsurance in Bad Faith

When the overinsurance described above was due to the bad faith of the insured, the contract will be ineffective (void). The insurer, acting in good faith, may, however, retain the premiums due for the current period. If the incident occurs, the insurer will only indemnify the damage actually caused. By acting in bad faith, the contract is ineffective, and the insurer retains the premiums already paid as a penalty.