Stirling Leech and Alex Wilbraham look at the claims environment for Latin American risks.
Reinsurance is the insurance of an insurer or, as is often said, ‘insurance between consenting adults'. The saying is good as far as it goes, but it fails to mention that the adults in question are, more often than not, of different nationalities who have different legal systems and who speak different languages. In today's global markets capital may be converted with relative ease but when contracts of insurance spread risks between one continent and another, more complex issues arise.
The issues which most cause problems can vary depending upon where you stand. Some questions most commonly arise when Latin American insurers are considering their claims up the line against reinsurers in London or elsewhere. Other sets of issues come to the forefront when reinsurers in London or elsewhere are faced with claims from local markets in Latin America. Some problems are unavoidably difficult and complex by nature but other problems arise because of a mutual lack of understanding of laws and interpretation given to wordings in different countries. This article aims to address some of these issues.
Law and jurisdiction
Normally the English courts will recognise foreign law and jurisdiction clauses. Where, however, a contract of reinsurance makes no provision for law and jurisdiction, the English courts can often decide that English law and jurisdiction are applicable to disputes. This can be so even if the local policy is subject to its own national law and jurisdiction. In these circumstances, Latin American insurers can find themselves pursuing claims in which the result arrived at under English law can be very different to the result they would have expected under their own local law. Perhaps as a result, more and more Latin American insureds and reinsureds are pressing for policies and contracts to be governed by local law, and subject to local jurisdiction. In turn, there are a number of points which arise from this and indeed points of caution for the foreign parties such as London reinsurers.
First, it is important to remember that many policies are designed to conform to English law, several clauses of which do not have the same effect under local law or will not readily transfer to a local law system – clauses containing warranties or conditions, for example. Insurers in England may be used to breaches of warranties of whatever effect discharging them of all liability under the policy from the date of the breach. This is not the effect of such a breach under some local Latin American laws where a breach may sometimes only operate as a defence to the claim. The English case of Groupama Navigicion & Others v Catatumbo (1999) is a case in point, in which because of a ‘follow' clause in the reinsurance contract, a reinsurer was not entitled to rely on a local breach of warranty or discharging of cover under the reinsurance since this was not the position under the local Venezuelan law.
In some Latin American countries, clauses providing for English law will not be upheld when subjected to an analysis or construction under local law or in the local courts. This can be particularly unsettling for international reinsurers, especially when the reinsurance is put in place before the insurance. In Peru, for example, we have had cases where English law clauses, as any other foreign law clause, are not upheld and rather the claim is dealt with according to local law. The Brazilian courts can in theory apply foreign law clauses, but in practice sometimes do not, either on the grounds that the obligations were not constituted there or because of the alleged difficulties of applying a foreign law, even with the help of foreign (i.e. English) texts and witnesses. In contrast, there are some countries where English law clauses will usually prevail without difficulty. Examples of this include Argentina, Uruguay and, usually, Venezuela.
There is also the problem of not being able to apply English jurisdiction to claims – of not being able to proceed in the English courts or arbitration – whether because this is not accepted by agreement in the policy or because it is not accepted by the local courts even if provided for in the policy. The Brazilian Civil Code, to take an example, stipulates that Brazilian courts will always have jurisdiction when the fact or act which gave rise to the claim originated in Brazil. Further, Brazilian courts have exclusive jurisdiction over certain matters, such as disputes relating to properties located in Brazil. These are points well worth considering when it comes to reinsuring a Brazilian shopping centre, for example.
Another related problem that often arises in practice is where English policies or wordings are applied locally but in Spanish or Portuguese translated versions. Often the intended meaning will be lost or not quite precise enough and will give rise to difficulties of interpretation. In another case we are dealing with in Brazil, the worst ‘damages' rather than the Institute Builder's Clauses in an all contractors all risks policy uses a translation to the Portuguese word ‘danos' and instead of being restricted to physical loss, was held to include consequential loss.
The question of damages may also give rise to surprises. Civil law and common law regimes can vary widely in the way they deal with this issue. We could dedicate several articles to this subject alone, though a single example here must suffice. A third party who suffers loss of profits as a result of an insured's negligence will, under English law, only be able to recover reasonably foreseeable losses which are not too remote. Under many civil law regimes in Latin America, however, the concept of ‘lucro cesante' means that far more extensive damages can be recovered.
So, the message for both local insurers and foreign (e.g. English) insurers is beware that issues of law and jurisdiction are most important when dealing with claims up and down the line, and can give rise to surprising results.
Control clauses, co-operation clauses and follow the settlements clauses
One key point for ceding companies in Latin America, or indeed anywhere in the world, is to know how English law treats the relationship between the underlying original contract of insurance and the reinsurance contract.
The English law position may be briefly summarised as follows. In the absence of words evidencing an intention that the reinsurance contract be back-to-back, there is no presumption that this is the case. A reinsurance contract may seek expressly to incorporate by reference some or all of the terms of the underlying insurance contract but general words of incorporation are not always sufficient. Therefore, be very careful when agreeing the reinsurance wording.
The next point which the local ceding company will need to know is the extent of the reinsurer's rights and his obligations to pay the claims and settlement of the reinsured under English law, particularly where there are follow the fortunes/follow the settlements clauses and control or co-operation clauses.
Follow the settlements
Where there is a follow the settlements clause, the reinsurer will be obliged to pay the claim presented by the ceding company provided: the claim on its face falls within the underlying insurance contract or has been found by a court or tribunal to do so; the claim falls within the reinsurance contract; and the reinsured acted in good faith and in a business-like manner in settling the claim. The burden will generally be on the reinsured to establish otherwise.
Where there is no follow the settlements clause, the onus is on the reinsured to prove that the settlement of claim was in respect of a loss covered under both the primary insurance contract and the reinsurance contract.
If there is no claims control clause, the ceding company does not need to notify the reinsurer in advance of any proposed settlement or seek consent. If there is a claims control clause this may not be inconsistent with a follow the settlements clause. A claims control clause, or indeed a claims co-operation clause, needs to be very carefully complied with. If not, depending on its actual wording, a breach may well give rise to the right on the part of the reinsurer to defend not just the claim in question, but to avoid all liability under the policy. Each reinsurance contract has to be carefully scrutinised for its express terms, and often the wording in control and co-operation clauses as well as follow the fortunes clauses will vary from one to the next. Differences in language may give rise to differences in rights and obligations.
Turning to other points, in the absence of any express contractual provisions, under English law the reinsurer is not obliged to pay the costs incurred by the reinsured in relation to any legal proceedings between the reinsured and the original insured. Further, the payment of the claim under the primary policy by the ceding company is not a condition precedent under English law to the liability of the reinsurer.
Let us turn back to the perspective of the foreign reinsurer. There are other differences and pitfalls in the local laws, of which we have to be aware.
Obligations of disclosure and good faith
Most legal systems across the world recognise the principle that contracts of insurance are contracts of the utmost good faith. Difficulties arise, however, when we come to look behind this phrase at how individual countries in Latin America apply the principle. Issues of misrepresentation and non-disclosure can arise at two levels: 1) between the local insured and his insurer; and 2) under the contract of reinsurance. It can often be the case that under the contract of reinsurance, governed by English law, a defence for misrepresentation or non-disclosure exists while, at the same time, such a defence may not exist or may take a different form under the local policy.
English common law has recognised for centuries that, in insurance contracts, there is an obligation on the insured to give full disclosure of material circumstances. The remedy for breach of such an obligation is that the insurer or reinsurer is entitled to avoid the policy. This comprehensive duty of disclosure is applicable in full prior to the conclusion of a contract of insurance or reinsurance. After conclusion of the contract, the duty is diluted somewhat. Insurers and reinsurers who are used to this English law approach to the issue of good faith can have difficulty coming to terms with the way the position alters if their contract of reinsurance is subject to local law. It can come as a surprise to find that there is no defence at all, or more likely that a different test for the defence applies. Sometimes, the time period in which the insurer or reinsurer has to act is different or the remedy itself can be different.
In Argentina, again the duty of good faith exists at the moment of the negotiations for and the execution of the insurance contract, and continues throughout the contractual relationship, including with regard to the handling of losses and presentation of claims. Again, it is presumed, such that the insurer has the onus of proving otherwise. In fact, he has to show intention or gross fault (‘dolo' or ‘culpa grave') in order to give rise to a defence on this issue. So here, a reinsurer may be in a different position to his local Argentinian insurer on this issue.
However, in addition in Argentina there is a specific rule under article 5 of the Law of Insurance which provides that any false declaration or omission, even if made in good faith, which in the opinion of experts would not have led to a contract or would have led to modified terms, makes the contract (not just the claim, as in Brazil) null and void.
The consequence of a breach of the duty of good faith in Chile, as in Argentina, but unlike in Brazil, is the rescission of the contract. The insurer is entitled to retain or call for the premium.
In Mexico, there is a legal presumption of good faith. Mexico has a specific Law of Insurance and this provides for the duty of disclosure to be upon the insured and enables the insurer to avoid the contract in the case of breach proven by him, even if the material facts did not have an influence in relation to the occurrence giving rise to the claim. The insured also has the duty to advise of any changes in the circumstances of the risk, and the insurer has the right to avoid the contract if a so-called ‘essential aggravation of the risk' occurs and the insured does not notify the insurer of this within 24 hours. In either case, the insurer has 15 days to avoid the contract, i.e. 15 days following the date he became aware of the omission or misrepresentation. This can give rise to considerable difficulties in practice.
Another example of how local law may differ lies in the area of the requirements of notification and more importantly, the time periods for the local insurer to respond, and the consequences if they breach these time provisions. In Colombia, for example, generally the insurer has 30 days to reject or accept the properly presented claim. If he does not, the insured may invoke a fast track action for summary judgment, obtain security against the insurer and be entitled to ‘punitive damage delay interest' at one and a half times bank rate. A reasonably similar provision applies under Argentinian law. Reinsurers beware, particularly if there is a control clause in the policy!
Third party proceedings
A final point to mention is the ever-increasing possibility in local Latin American proceedings for foreign insurers and reinsurers to become directly involved as parties. This may arise under the third party rules (‘Llamamiento en garantia' or ‘cite en garantia').
In summary we would recommend, as we do to all our clients, whether London reinsurers or Latin American insurers, that they avoid difficulties or surprises in confronting claims by coming to terms beforehand with issues such as which law and jurisdiction will apply, and questions of what clauses in the cover will mean both locally and under English law or whatever other law applies to the reinsurance contract. This is of crucial importance when dealing with Latin America, where totally different concepts of civil law and interpretation exist. It is also particularly relevant in the case of fronting arrangements where the intention is to have the wording as back-to-back as possible, but where in practice this may not be achieved, thus causing considerable problems both for reinsurers and reinsured alike. As with all matters between consenting adults, the better informed you are, the more success you have.