Reduction of the indemnity in the ratio of the sum insured to the true value of the property, applying even to a partial loss.
Where property is insured for a sum below its true value, the policyholder is treated as its own insurer for the difference, and compensation is cut in the same ratio. The rule surprises people because it bites even where the loss is far smaller than the sum insured: a building covered for half its value is indemnified for only half of a partial loss, although the sum bought would have paid it in full. Its justification is a rating one rather than a moral one: premium is computed on the declared sum, and without the rule it would always pay to under-declare, staying covered on the partial losses that make up most of the frequency. It can be set aside by a waiver of average clause, often bought by companies, or neutralized by automatic index linking of the sums insured. The problem solved is under-declaration that would otherwise always be rational for the policyholder.
Article L. 121-5 of the French Insurance Code states the rule. A building insured for 600,000 euros while worth 1,000,000 suffers a partial loss assessed at 200,000 euros: compensation falls to 120,000 euros, 60% of the damage, although the sum bought covered the loss three times over. It is the least understood sanction in insurance contract law.
sous-assurance, règle proportionnelle de valeur