Here are excerpts from a great article that was published in the Canarian Weekly 14th May 2010. It is important for expats to understand the legal implications of  an insurance contract and the correct process of cancellation.

Mr. Smith is phoning around asking for quotes, the day before the renewal date of his car insurance policy. But Mr. Smith doesn’t know that it is already too late. He should have given two months notice to cancel the policy. Don’t think that by cancelling the DD or by not paying the bill, Mr. Smith will get away with it. Probably he will face a judicial process. Read here how you can avoid getting in to trouble and change insurance company in the correct manner.

An insurance policy is a contract. Just like your rental contract or even your work contract. Having that in mind, Insurance is a contractual relationship entered into by the insurer and the insured (you). The Deal is quite simple: on such a contract, commonly called the policy, usually provides that, on payment of the premium, the insurer promises to indemnify and reimburse the insured for any loss incurred by him from certain stated causes. This contract in Spain is ruled by the Law 50/1980, and if you want to cancel your policy you should know the following:

Most people are not aware that they should advise the insurance company 2 months before it is due. This is the Law in Spain, and even if you are not “aware” of the law you are obliged to act accordingly. The Law of Insurance (art. 22 de la Ley 50/1980) says that if you want to cancel your insurance contract, you must send a written letter or fax with a minimum of two months notice. If you don’t do that, Insurance Companies can reclaim in court the payment of the premium. Before the European Economical Crisis, most Insurance Companies didn’t bother to claim unpaid premiums, but nowadays, as sales are decreasing and costs are getting higher, Insurance Companies are coming back to claim unpaid premiums, specifically if they are more than 300€/a year. And Insurance Companies have nothing to lose: when they take you to court, if they win, you are entitled to pay your premium, the cost of their lawyer (and yours) and the costs of the judicial process. The Insurance Company will win, because they are acting accordingly to the law.

Bad Bank or Good Bank?

One of the reasons why Insurance Companies are getting back to claim unpaid premiums from their clients is mainly due to bad banking practices in Spain. Banks can’t give anymore mortgages so they are looking for other ways of income. So Bank directors are pressuring their employees (who normally have no clue about insurance) to sell insurance to their clients, no matter how. Bad banking practices include all sorts of schemes: from breaking data protection, getting inside your account, checking when your insurance is running out and calling you before the renewal to give you a more “tentative” price, or worse, to return your direct debit on purpose, so that they can place their insurance product on you. In the last year we have seen how Banks in Spain are returning massive stocks of insurance receipts without the permission of their clients. So Insurance Companies to avoid this “Old-west Scenario” are getting back to claim their rights in court.

How it Works

So the policy, as a contract, must contain all of the elements necessary for a valid contract. The mutual considerations here are the premium paid by the insured and the promise of coverage made by the insurance company.

The causes of damage as provided for in the policy are also called “risks”. The company specifically stipulates those risks which are covered under the particular policy. Any risk that is not stated shall not be included. A policy must have a subject which is to be insured. It may be the life of a designated person, a house, your car, etc. The risk or peril against which the life or property is to be insured must be specified in the policy: the death of a person, liability resulting from the negligent operation of an automobile, etc.

The amount for which the policy covers the loss must be indicated. The insurance taker is the holder of the policy. Normally the term during which the policy will be in effect is 1 year, after which it is renewed automatically unless you decide not to renew it, in which case you should previously advise the insurance company 2 months before it is due.

An insurance company may cancel an insurance policy only under the following circumstances: If the insured has lied or made false statements on his/her application or in a claim he/she submitted; If the peril covered is increased. In these cases when there is no good faith, the insurance company shall pay the difference between the premium agreed and the premium which should have been paid for the increase of the risk; if the insured object is sold.

Failure to pay premiums when they fall due, there is a 30-day grace period available to the insured to give him an opportunity to pay the premium without affecting his rights under the policy.