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Understanding the proportional rule of insurance

Few policyholders are aware of, or concerned about, the proportional rule that dictates the value assessment of their property. Let’s take a few minutes to demystify this rule and discuss its impact on claim settlements.

Assessing the value of your assets

In your insurance contract, the amount listed for compensation may be less than the actual value of your property. Did you know that in the event of a loss, a settlement may not cover total damages? You could be underinsured.

In fact, in the case of a total loss, your settlement will be limited to the amount insured. So you’ll want to determine an insurance amount in line with the value of your property. Or its replacement cost, should you have such a clause on your policy.

But it’s when you suffer a partial loss that the proportional rule is most important. But how and why ?

What is the proportional rule?

According to this rule, the policyholder must establish the amount of their insurance in accordance with the actual value of their property. This rule is found in the vast majority of insurance contracts. When making a claim, failure to abide by this rule will impact the settlement amount.

As outlined in article 2493 of the Code civil du Québec, this proportional rule must apply to 100% of the value, according to CHAD. However, it is not uncommon for an insurance contract to set the percentage at 80% or 90%. Whatever the case, this will have an influence on the settlement payout.

Here’s an example of how it works:

  • The value of your assets is $1,250,000.
  • Under the proportional rule, you must at least take out $1,000,000 coverage.
  • This means that 80% of the value of your property is covered, which is acceptable.
  • Now let’s say the actual value of your assets is $1,500,000.
  • To meet the 80% minimum requirement, your coverage would have to be $1,200,000.
  • What happens if the coverage amount does not meet the percentage required by the rule? It means that the policyholder may have to cover part of the damages.

This amount will depend on the difference between the determined insurance coverage and the minimum amount required by the rule.

Be aware of the proportional rule

What’s the best way to avoid unpleasant surprises? By using this simple calculation to determine your coverage amount: the replacement value of your goods multiplied by the proportional rule percentage.

Wondering if your policy contains this clause? Do you want to make sure that your coverage aligns with the proportional rule? Contact one of our brokers for peace of mind.

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