Underinsurance and the proportional rule: the trap that cuts your claim payout

1. Underinsurance: a risk that lies dormant until the loss

Underinsurance occurs when the declared sum insured in the policy — the insured value — is lower than the real value of the property. In property damage insurance, this real value is the as-new rebuilding cost of the building (excluding land), plus incidental costs. This is why a policy is calibrated on the rebuilding value and not on the market value — a point we detail in our guide on the right basis of value for insurance.

The danger of underinsurance is that it is invisible. As long as nothing happens, the policyholder even pays a slightly lower premium — and mistakenly sees it as a saving. The bill arrives on the day of the loss, when the insurer has the real value of the property assessed and compares it with the declared sum insured.

2. The proportional rule of capital: the mechanism

It is the sanction of underinsurance, and it is provided by the Moroccan insurance code (law 17-99) in property damage insurance: if the declared value is lower than the real value of the insured thing, the policyholder is deemed to be their own insurer for the uncovered share, and therefore bears a proportional fraction of the loss. Concretely, the payout is reduced by the ratio between the declared value and the real value:

• Payout = loss × (declared value ÷ real value) — the policyholder receives the loss reduced pro rata to the underinsurance.
• The reduction does not depend on the size of the loss: it hits a total loss and a partial damage alike.
• Deductibles, caps and exact terms vary from one policy to another: these clauses must be checked with your insurer.

In other words, the policyholder who believes they have “slightly” under-declared discovers that this under-declaration applies to every loss, not only on the day of a total catastrophe.

3. Worked example (illustrative)

The figures below are purely illustrative: they serve to show the mechanics, not to provide a scale or a rate applicable to your situation. Take a building whose real rebuilding cost is estimated at MAD 2,000,000, but declared in the policy at MAD 1,200,000 (sum insured frozen on an old purchase price, works not reflected).

• Coverage ratio: 1,200,000 ÷ 2,000,000 = 60%. The policyholder is covered for only 60% of the real value.
• Partial loss assessed at MAD 500,000 of damage: the payout would not be 500,000, but 500,000 × 60% = MAD 300,000. The remaining MAD 200,000 is borne by the policyholder.
• Even a small damage of MAD 50,000 would suffer the same discount: payout reduced to about MAD 30,000.

The lesson is clear: the “small saving” on premium made by under-declaring is paid back a hundredfold on the day a loss, even a minor one, occurs. These amounts are for illustration only — your situation depends on your policy and the real value of your property.

4. Why so many properties are underinsured

Underinsurance is almost never deliberate: it sets in through inertia. The most common causes:

• A sum insured frozen at an old purchase price, never revalued despite the continuous rise in construction costs over several years.
• Undeclared works: extension, added floor, high-end finishes, added outbuilding — all extra rebuilding value the policy ignores.
• Confusion of bases: having insured the market value thinking you were “generous”, without realising that the land share is not indemnifiable and that the structure itself may be under-covered.
• Forgetting incidental costs — demolition, clearance, professional design fees — which are nonetheless part of the real reinstatement cost.
• An atypical property (specific architecture, particular materials, rare features) that no standard flat rate reflects correctly.

5. The remedy: a properly appraised insured value

There is only one reliable way to neutralise the proportional rule: declare a sum insured equal to the real rebuilding cost, established by a cost approach and not by a percentage of the purchase price. It is the same work described in our note on the RICS Red Book bases of value, where the insurance basis (as-new value) is clearly distinct from market value.

• Built areas of the building, distinct from the land area.
• Construction method and level of finishes — the same square metre does not cost the same to rebuild depending on the standing.
• As-new construction cost at current conditions, then incidental costs (demolition, clearance, fees).
• Land excluded: the land is not destroyed by the loss, it never appears in the insurance base.

The deliverable is a documented rebuilding sum insured — areas, cost assumptions, incidental costs — used to set or adjust the sums insured in the policy. This is the purpose of an appraisal mission carried out by RICS-certified experts, with a report compliant with RICS standards, from MAD 3,500 excl. VAT, delivered within 5 to 8 days (48-72 h express). On reading and understanding such a report, see our article on the content and legal weight of an appraisal report.

6. After a loss: it is a negotiation, not a judgment

If the insurer invokes underinsurance, the settlement is handled amicably, within the framework of the policy. The policyholder is not powerless:

• The loss assessor: the policyholder can appoint their own expert to argue their reading of the damage and the value, facing the insurer's expert.
• Third-party expertise: in the event of persistent disagreement, many policies provide for the appointment of a third expert to decide.
• A prior independent estimate of the rebuilding value is the trump card in this discussion: it documents the real value and allows the coverage ratio to be discussed on objective grounds.

This is an amicable negotiation between the parties and their experts, framed by the policy. An independent appraisal is not meant to “impose itself” on the insurer: it strengthens the policyholder's position in the dialogue and helps support your position with third parties by objectifying the value at stake.

7. And for condominiums? The same trap, on a larger scale

The proportional rule does not only concern the single house. In a condominium, the building's multi-risk insurance covers the common areas on the basis of a global rebuilding sum insured — and the underinsurance of a whole building exposes all co-owners to a reduced payout in the event of a major loss. Here again, a periodic estimate of the rebuilding value protects the collective. Our condominium advisory service can help structure this.

8. FAQ

Note: The proportional rule of capital is a principle of property damage insurance provided by the Moroccan insurance code (law 17-99). The guarantees, caps, deductibles and application terms (including the existence and scope of the proportional rule) depend on your policy and the regulations in force: confirm your situation with your insurer. The worked figures in this article are purely illustrative. To establish the rebuilding value of your property, see our real estate appraisal page or the blog.