The volume of re/insurance business between Latin America and Europe is growing, which makes it even more important to understand the considerable differences in claims culture between the two regions, says Stirling Leech.
Different cultures, different languages, different laws, different market practices and different expectations - all of these make Latin America a highly interesting environment in which to work. Unfortunately, they also give rise to frustrations and unexpected results.
Latin America has long enjoyed a good relationship with London, and has been placing large amounts of its reinsurance business there for many years. However, the hardening market and a growing claims culture in Latin America have combined to cause misunderstandings and anxieties in both regions, from a claims perspective.
Insurers in Latin America are often confronted by intricate and detailed laws and rules at the European end. These relate to issues such as the treatment of warranties, the interpretation of control and co-operation clauses, and the duties of good faith. On the other hand, the re/insurer in London may also struggle to come to terms with differences in the underlying legal systems - for example, the local civil law system compared to the common law system, or, hidden and draconian local rules, such as the local notification provisions.
On the other hand, although larger claims may be on the increase, they do not always give rise to misunderstandings and difficulties. A good example of this was the incredibly prompt payment in respect of the claim against International Reinsurers following the loss of the Petrobras Oil Platform, the P36.
Law and jurisdiction
In today's very competitive environment, more and more local insureds and reinsureds are pressing for policies and contracts to be governed by local law, which means they may also be subject to local jurisdiction. Commercial reasons will often dictate that this be accepted. However, parties on both sides should be aware of the consequences.
First, it is important to remember that many policies are designed to conform with English law. However, there are several clauses in English law - clauses containing warranties or conditions - which do not have the same effect under local law or will not readily transfer to a local law system. Insurers in London may be used to breaches of warranty of whatever effect discharging them of all liability under the policy from the date of the breach. They may be surprised to find that this is not the effect of such a breach under some local Latin American laws. Thus, in one case, the breach may only operate as a defence to the claim not to liability under the policy as a whole, and also only because it is material to the loss; in another case it may be the same result, but only if the breach is material to a causative of the loss and to the risk.
Furthermore, insurers in London are finding that clauses providing for English law are not being upheld when subject to analysis or construction under local law in the local courts. This can be particularly unsettling, especially when the reinsurance is put in place before the insurance.
In Brazil, Brazilian courts can, in theory, apply foreign law clauses, but often do not. This is 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 texts and witnesses.
In one case, London Institute builders' risks clauses, with an English law clause, were incorporated into a local policy. One of the points at issue was the construction of the words `loss of or damage' and whether this was restricted to physical loss or damage. Under English law it would be. Unfortunately, the Brazilian insured argued strongly that English law was totally irrelevant for interpreting the Institute clauses, and that the meaning of the equivalent word in Portuguese, `danos', encompassed consequential loss too. This is not what was intended in London and may have a very serious impact on the claim if successful.
A local insurer may often think that by agreeing the words `terms and conditions as original' in the reinsurance, he is also ensuring that the reinsurance incorporates the local law and jurisdiction clause. From his perspective of local law, that may be the case. But it will not be the case from the English law perspective, and he may well be surprised when the reinsurers seek to rely on English law and jurisdiction if a dispute arises.
With regard to Mexican business, most foreign reinsurers are not aware that Article 5 of the guidelines for the registration of foreign reinsurers requires them to file an undertaking with the Ministry of the Treasury/Insurance Commission, under which they unconditionally submit all their contracts performed with Mexican cedants to Mexican law and jurisdiction. As a result of this undertaking, even if the reinsurance slip provides for the application of a foreign law and the submission to a foreign court, in Mexico it will be considered null and void.
The message is that re/insurers should try and avoid difficulties or surprises when confronting claims by coming to terms beforehand with issues such as the law and jurisdiction that will apply, and questions of what clauses in the cover will mean locally. This is particularly so for 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. In practice this may not be achieved, which causes considerable problems for the reinsurance.
Notification of claims
The local rules relating to notification and acceptance or rejection of claims often cause major concern. This is a matter which is particularly relevant where control lies with the reinsurer.
In Argentina, which has its own specific insurance law, the insured has three days to notify the insurer of the event which will give rise to the claim. Once the insurer has received all the necessary information required to verify the claim, it must notify the insured in writing within 30 days as to whether or not the claim is covered. Insurers and their reinsurers should be aware that if they do not, and this is the interesting bit, the insurer is deemed to have accepted the claim. Any attempt at an agreement to exempt the insurer for delay is null and void. As for the time bar, the insured must sue within one year, and this is not extendable by agreement. The time bar for reinsurance claims is not entirely clear - there have been decisions in the courts applying one year and five years.
Colombia is also interesting. Here, there is no specific insurance law. Rather, the matter is governed by the Commercial Code, which has been partially modified by Law 510 of 1999. The insured has to give notice of the claim to the insurer within three days (or as extended by agreement) from the date when the claimant knew or ought to have known about the claim (Article 1075). If the insured fails to give proper notice in good faith, the insurer has to pay the claim, but is entitled to claim damages from the insured for any losses suffered.
If the insured fails to give notice but does so in bad faith, the insurer does not have to pay the claim (Article 1078 and doctrine). Thereafter, the insured has to provide evidence to the insurer of the occurrence that gave rise to the claim, and, if appropriate, the quantum of the loss, according to the requirements contained in the policy. There is no time limit to comply with this duty. Subsequently, the insurer is obliged to pay the claim within one month of the date on which the insured establishes the right to claim before the insurer. The onus is on the insurer to demonstrate the facts or circumstances which may exclude liability. If the insurer does not so demonstrate, then upon the expiry of the one-month period, there are two severe consequences of which insurers - and their reinsurers - ought to be aware.
Firstly, the insurer will be liable for so-called punitive delay interest on the principal sum. This is one-and-a-half times the current bank rates, which can be in excess of 50% per annum. Secondly, in the absence of a written communication to the insured rejecting the claim with grounds within the one month period, the insured will be entitled to invoke a `fast track' procedural route to obtain judgment, and obtain security from the insurer (Article 1953).
Let us look at three different scenarios. The first question typically concerns whether, when a third party has sued an insured, the insured can bring the insurer into the same proceedings as a third party, and also whether an insurer can bring in the reinsurer. We know these as `third party proceedings'. In Latin America this possibility is often referred to as `cita en garantia' or `llamamiento en garantia'.
The second question is whether (in liability cases) a non-insured claimant can sue the local insurer (and/or the reinsurer) direct in addition to the insured. The third question is whether an insured can sue a reinsurer direct where, for example, there is a cut-through clause in the reinsurance.
The position depends largely on the local law and procedures, and varies from country to country. In Argentina, the matter is governed by the Procedural Code and by the Insurance Act. Generally speaking, the insured is entitled to bring the insurer directly into any proceedings against him as a third party. In Argentina, this is called `citacion en garantia'. The law provides that any judgment will be enforceable against the insurer up to the limits of the insurance contract. Equally, the insurer can in theory bring the reinsurer into the same proceedings as a third party. This is called `citacion de terceros', and has often been used in the past to bring in INDER, the local reinsurance company. However, foreign jurisdiction and arbitration clauses are usually recognised in Argentina.
However, in Argentina the injured third party generally has no direct right of action against the insurer.
Also, the insured cannot normally sue the reinsurer direct. But what about cut-through clauses? There have been cases in Argentina where these have been enforced. However, they will invariably be challenged where the insolvency of the insurer is involved and/or where there is a foreign jurisdiction clause in the reinsurance.
In Colombia, there is the concept of `llamamiento en garantia'. According to this, a defendant has the right to bring in, as a third party in the same proceedings, any party against whom he has a claim. Therefore, this includes the possibility of an insured bringing in an insurer and an insurer bringing in a reinsurer. Our experience, where there is a foreign jurisdiction clause, is that this clause may not be upheld, but foreign arbitration clauses are more likely to be so.
It is very important to note that the Commercial Code provides for a direct right of action against an insurer by a third party, where there is civil liability insurance cover. On the other hand, the Code also makes it clear that actions by an insured against a reinsurer are not possible, and so cut-through clauses are likely to have no effect.
Obligations of disclosure
In a hard market, a reinsurer in London will often look very closely at any hint of breach of the duty of good faith. Not only will he expect the local Latin American insurer to take any points arising under the local policy, but he will also look very closely at his own position under the reinsurance policy. This is of course perfectly understandable. Often, however, the local insurer, particularly in a nil-retention fronting arrangement, may feel hard done by. Often the reinsurance will have been lined up in principle before the local insurance policy is signed off and a combination of the reinsurers and the intervening brokers will have surveyed the market, the risk and set the terms. If a non-disclosure point is taken by the reinsurer up the line, the local reinsured may well feel very surprised and aggrieved, particularly if the lack of information on the placing was effectively the fault of the broker. The Latin American reinsured might wish to argue that the broker is, in that situation, the agent of the reinsurer, but will have to come to terms with the fact that under English law this is most often not the case.
From the reinsurers' perspective, if they or their reinsureds are subject to local Latin American law, they may find that there is no defence at all. Or, more likely, they may find that the test for the defence applying, or the time period in which the insurer or reinsurer has to act, and/or the remedy, are all different to what they are accustomed to at the English or European end.
In Brazil, good faith is presumed at the moment the contract is entered into and throughout the period of the contract. In other words, the onus is technically upon the insurer to prove otherwise. The test is a subjective test. The legal consequence of incorrect representations is that the claim fails, but the policy continues - unlike in England.
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.
Control and cooperation
This is an area which often gives rise to deliberation and dispute between Latin American reinsureds and their reinsurers. A recent case in England, the Tai Ping case, has given rise to considerable interest amongst reinsurers and Latin American reinsureds alike.
Latin American insurers confronted with SCOR-type cooperation clauses in their reinsurance coverages would be well advised to follow closely the entire judgment in this case. This will go some way to helping them understand some of the duties which also lie with the reinsurer in the case of cooperation clauses. In the case of control clauses too, Latin American reinsureds will often expect reinsurers to be under an obligation to handle claims correctly and efficiently.
From the reinsurer's perspective, in exercising their control in the case of control clauses, they will need to be aware of local factors. A very interesting example is that of Argentina.
Argentina and pessification
Argentina passed a pessification law early in 2002 whereby all debts in US dollars were automatically converted to pesos. This ended an almost 11-year one-to-one peg between both currencies and affected the entire economy, including contracts, credits, debts, bank deposits and tariffs. Many creditors now expect to recover roughly only a quarter of their original debts. There are rumours that the Argentinian Supreme Court will rule that the pessification of bank deposits was unconstitutional. Nonetheless, pessification has had a significant impact on the re/insurance sector.
Reinsurers are aware that, because local claims have lost a considerable amount of value, now is the time for claims to be settled, rather than letting them linger on in the courts. Not only have the claims been reduced in value, but also claimants are particularly keen to get their money quickly, even if this means further discounts.
Also, reinsurers are broadly against pessification of deductibles in cases in which there is no annual aggregate limit - where they cannot obtain the benefit of an annual aggregate limit. On the other hand, in those policies where there is an annual aggregate limit, reinsurers may not be concerned about the pessificiation of the deductible.
It is important to remember that there are considerable differences in claims culture between Latin America and Europe, and as the volume of business from Latin America grows, so will the number of claims.
It is also important to note that a number of Latin American countries have either already introduced specific laws dealing with re/insurance, or are in the process of amending their old codified provisions and introducing new provisions which are relevant to re/insurance. In Brazil, for example, a new Civil Code is about to be introduced for the first time in 86 years. Chapter XV, Article 757 - 798, deals with insurance contracts. There are a number of provisions relating to non-disclosure and aggravation of risk, double insurance and so on. Arbitration is also a very important concept in Brazil and will be used more and more in insurance cases.
In the case of the P36, the claim was paid incredibly quickly, much to the credit of the international reinsurers. What is now at stake is a double insurance claim, which technically involves Brazilian law re/insurance policies, an American law policy, and an English law settlement agreement. Although knowledge on both sides of the Atlantic is growing, it seems that the adjuster and the lawyer specialising in Latin America will continue to be in demand.
By Stirling Leech
Stirling Leech is a partner at law firm Clyde & Co. He is also head of Clyde & Co's Latin American team specialising in insurance and reinsurance.