What are the legal effects of non-compliance, and can these really carry any weight in how a claim is finally resolved? Can officers of the insured company also be held liable in any way? In this article, we provide a brief account of how non-compliance can play-out in a spread of key Latin American countries, including Argentina, Colombia, Peru, Venezuela, Mexico and Ecuador.
An insurer will normally be subject to a variety of different obligations, ranging from paying claims to compliance with operation standards imposed and/or controlled by the Regulatory Authority.
We refer to “non-compliance” throughout this article as the situation whereas insurers fail to fulfil policy obligations despite being legally liable to pay the insured under the terms of the contract. Thinking of this as scandalous or foreign to any particular insurer is a misconception.
Many times honest disagreements as to the validity of a claim, or as to the extent of coverage or damages may get in the way of a prompt payment. Unclear policy wordings may lead to diverse interpretations, and this will do its bit as well. Human error is also a factor by which an organization can be inadvertently, but inexcusably, non-compliant. Or a local authority (administrative or judicial) may decide that a claim that was being handled correctly -as one in regards to which insurers were not liable- should be paid in contradiction with current usages or previous criteria.
There are simply too many issues in play to make non-compliance totally avoidable. In this imperfect world insurers will encounter many such situations, and this will continue to occur. That is why the possibility is best conceived as a normal business issue, which can have a very diverse array of implications depending on where the insurer is conducting its activities.
What are the legal effects of non-compliance, and can these really carry any weight in how a claim is finally resolved? Can officers of the insured company also be held liable in any way? Will the consequences be contained within the boundaries of the specific claim at issue, or can these go so far as to potentially affect the business as a whole? In this article, we provide a brief account of how non-compliance can play-out in a spread of key Latin American countries, including Argentina, Colombia, Peru, Venezuela, Mexico and Ecuador.
In Argentina liability under a policy is tacitly accepted if insurers do not deny the claim within 30 days after it has been advised (Article 56 of the local Insurance Statute). This period can be extended by way of requesting additional information or documents to adjust the claim. As documents are received, local adjusters will normally advise insureds in writing in respect to any pending documents which might be necessary for the adjustment, and also to create awareness that the 30-day period has not commenced. But once a “property” loss adjustment is finished and the indemnity amount has been established, insurers have 15 days to pay the claim. No such provision exists in “third party liability” cases because of the way the insurer’s intervention is structured. Insurers do not reimburse the insured but take the client’s place in providing the indemnity payment to claimants directly.
While the local regulatory authority will receive complaints related to “irregular activity” of insurers, agents and/or loss adjusters, the entity will not go so far as to decide the validity of a claim or the indemnity amount due to the insured. These issues will remain for the courts to decide. Sanctions can be applied by the regulatory authority for failing to comply with other numerous obligations, normally “administrative” in nature although they can be related-to or be triggered by a claim. An example of this would be the case of an insurer that failed to comply with minimum reserving criteria in relation to one or more claims. It goes without saying that officers of the company will not be held personally liable for non-compliance of the type described above.
In Colombia, insurers have one calendar month to either pay or reject a claim filed by an insured. This period starts as from the date that the insurer receives a written claim and all documents or information upon which the claim has been based, as the insured is burdened with the need to provide evidence of both the occurrence and quantum. As documents are received, following the recommendations of their appointed adjusters local insurers will normally advise insureds in writing in respect of any pending documents which might be necessary for the adjustment, and also to create awareness that the one month period has not commenced. However, the one month period can be extended by agreement of the parties up to a maximum of 60 additional business days, if the following requirements are met:
- The insured is a legal entity (not an individual)
- The subject matter of the insurance is “property” and
- The insured sum is higher than 15,000 times the monthly minimum wage effective at the date the policy incepted. (currently about USD4.6m)
If the parties enter into such agreement to extend, they can also agree on the default interest to be applied to the quantum of the loss. (Article 185 of the Financial System Organic Code)
If insurers do not pay nor reject a claim during the statutory period or the agreed-upon extension, they are subject to pay default interest currently at a rate of 28.82% per annum. Default interest starts running as of when the one month period referred-to above has elapsed (Article 1080 of the Colombian Code of Commerce). Additionally, article 1053.3. of the Colombian Code of Commerce allows the insured to file collection proceedings against insurers for the amount initially claimed. In this jurisdiction no fines nor personal sanctions to company officers apply.
In Peru, once a loss occurs adjusters have to work with the documents that the insured volunteers in support of its claim, and can only ask for additional documents if these are set out in the policy. Article 74 of statute 29946 provides that a claim is deemed accepted by insurers if 10 days elapse after the insured signed the adjustment agreement and the insurer has not made objections. Provided there are no objections, insurers have 30 additional days to pay the claim. If the insurer objects to payment amounts, a new adjustment can be performed, or the insurer can propose a different adjusted sum, or offer to apply the arbitration clause or to have the dispute resolved in court.
In case of non-compliance, insurers are obligated to pay the insured special interest of 1.5 times the average interest rates used, in the currency of the policy from the date payment is due until the claim is fully paid. Currently the local currency interest rate runs at 21.50% annum, meaning that non-compliant insurers would pay 32.25%, and the interest rate in dollars is 7.5% annum, which would be increased to 11.25% in the case of non-compliance as described here. No other sanctions for non-compliance apply, neither in relation to the insurer nor its officers.
In Venezuela, article 130 of the Insurance Activity Act establishes that insurers must either pay the claim or issue a written denial in 30 days after the last information or evidence regarding the loss is submitted. The insured can make specific requests relating to this information. As information or evidence is received, or from time to time, insurers will issue letters to the insured with an account of what information was requested and remains pending, with which the 30-day period will not have yet commenced. If the claim is denied, insurers must explain the factual and legal causes that justify total or partial denial of the claim.
If insurers do not comply with the above, article 166 of the Insurance Activity Act establishes that they will immediately incur in “administrative liability” and could be forced to pay a fine of between USD30,240 and USD40,320 if the insurer is merely tardy or gives only generic arguments, or between USD40,320 and USD50,400 if the insurer is perceived as purposely eluding payment (figures are approximate using current exchange rates for the bolivar and the value of “Tributary Units”, an index unit of funds used in Venezuela that is adjusted to compensate inflation).
Article 170 establishes that, if an insurer is sanctioned more than 5 times for not complying with the 30-day deadline in a period of 2 years, it will also be sanctioned with a business closing for a period of between 24 and 72 hours -during which the insurer must guarantee service to the policyholder and general claims handling continuance. Also, in such a case, the members of the board and executives of the insurer can be fined between USD80,630 and USD100,790. (Figures are approximate as mentioned in the previous paragraph)
Article 71 of the Mexican Insurance Statute establishes that insurers must pay a claim in 30 days after having received all required documents or information upon which the claim has been based. The insurer will draft a letter to the client indicating what documents need to be presented to substantiate the claim, and as these are supplied the insurers prepares a form which clearly establishes which documents have been presented and which are pending reception.
Article 135bis establishes that if the insurer does not comply with its obligations as these become legally enforceable (meaning after the 30-day period referred-to above elapses), the debt in local currency will be expressed in “Units of Investment” (Unidades de Inversión, or UDI - an index unit of funds used in Mexico which is adjusted to compensate for inflation).
Punitive interest will also then be charged at an increase of 25% over the interest rates published by the Bank of Mexico in use by multiple bank institutions in respect to liabilities in UDIs. When the principal obligation is in foreign currency, the 25% increase will also be applied but over interest rates published by the Bank of Mexico in use by multiple bank institutions in respect to liabilities in US dollars. The total punitive interest charged for 2013 was approximately 5.37% per annum for obligations in local currency, and approximately 4.46 per annum for obligations in US dollars.
Additionally, the National Commission of Insurance and Securities of Mexico can fine the insurer for a value of between 1,000 and 10,000 general daily minimum wages (that is between about USD5,000 and USD50,000), and in case the offense is repeated the insurer’s license can be revoked.
Reference to Mexico would not be complete without mention that there have been a few very notorious cases which have exceeded the ambit of civil and commercial law to be dealt with as criminal offenses. One of the most well-known of these is the Fertinal case. As a result of hurricane “Juliette” in Baja California, mining giant Fertinal suffered a serious loss caused by flooding of a phosphor mine. As far as we were able to learn through public media, there was a dispute concerning insurance coverage with ING, and the insurer resisted payment to some degree. This was cause for a criminal investigation for fraud by which several ING executives were apprehended and an order to attach approximately USD300M of the insurer’s assets was issued. ING pulled out of the country as a result of this serious mishap. There was also ample media coverage relating to a dispute between Grupo Azteca and AIG in regards to the denial of a D&O coverage payment. Such as the previous case, a criminal investigation for fraud was also carried-out and a high-ranking AIG officer was incarcerated. We are offering no opinions as to the substantive issues in play in these cases, but rather only intend to provide readers with an objective account of how non-compliance -as dealt with through local legal channels- has resulted in very serious personal consequences for some executives and their organizations.
In Ecuador, article 42 of the local Insurance Statute establishes that insurers must pay claims in 30 days after having received a written claim and all of the documents or information required by the policy, upon which the claim is to be based. The insurer can also formulate “fundamental objections to the claim”, in which case the insurer is to immediately advise the Superintendencia de Compañías, Valores y Seguros (SCVS).
If the insurer does not pay the claim within the aforementioned time period the insured can have the SCVS intervene. Insurers can validly defend their position indicating that the insured has yet to provide all the necessary documents to adjust the loss. Within 30 additional days, the SCVS will review if the insurer’s objections are valid or if the insured’s claim is to prevail. If warranted after this review, the SCVS will direct the insurer to make the indemnity payment along with interest at the highest conventional rate according to law within 10 additional days. This interest rate today is approximately 7.84% per annum, to be calculated as of when the 30-day period for payment of claim mentioned in the previous paragraph elapses.
If the indemnity payment obligation is not met after the case was decided by the Regulatory Authority in favor of the insured, the SCVS will have the insurer undergo a forcible liquidation process. (And this has occurred on more than one occasion)
If insurers are in disagreement with the SCVS’s resolution, the company can file suit. But the rules were reformed in mid-2014, and now provide that before taking such action insurers must first pay the claim. The claim is paid on the basis of the SCVS resolution, which will contain reference to the indemnity and interest due. The SCVS can also impose sanctions and immediate business close-downs if the insurer is found non-compliant with any aspect of article 42.
A 30-day period seems to be a constant throughout the region for establishing insurer’s payment liability. Once established, non-compliance has a surprising variety of consequences in the different jurisdictions. Since special interest is applied in the majority of the jurisdictions as a means of reprimand, insurers are advised to be careful with large claims -especially those which have gone unpaid for an extended period of time. But in other jurisdictions fines will also ensue, and –for better or for worse- these do not necessarily have to be proportional to the value of the claim at issue. These cases should therefore be assessed on the basis of their individual merits in order to establish the best handling strategy. Making company officers personally liable for their insurer’s non-compliance is not a wide-spread legislative/regulatory practice in the region, but certainly something to take into account where applicable, such as Venezuela.
There are countries where measures can be extreme to the extent of putting the whole business at risk, such as suspending or revoking the insurer’s license or forcing liquidation proceedings upon the company. This risk is of particular relevance in Ecuador, where non-compliance relating to one single case can very rapidly evolve into a very threatening situation. Reinsurers should be aware of the extreme pressure that cedents can face in this jurisdiction where, if the regulatory authority has decided that the insured’s claim is valid, payment cannot be avoided.
But extreme sanctions are very rare. So while caution is advised, this issue is hardly one that would make business unviable in these countries. The most effective counter-measure might involve early identification of problem cases as an invaluable first step. These can usually be recognized as those where the relationship with the client is in crisis, as visibly displeased customers are those who will advise the authorities triggering the process by which sanctions normally ensue. Cases thought to be potentially dangerous should be handled by the most experienced staff, who would typically perform an evaluation of additional non-compliance costs to include in the reserve or settlement assessment. Depending on their potential, in-house staff should decide if the case needs to be handled under the advice of legal counsel and/or keeping senior management in the loop in view of the obvious business implications. A good preventive measure is to set out in the policy which documents the insured is required to provide with its claim, and also to spell out the definition of gross negligence and other policy terms crucial for the handling of claims.
As mentioned in the opening paragraphs to this article, insurers in the region are bound to face this problem. But in difficult markets, a well thought-out handling procedure in place to avoid unnecessary friction with the authorities while putting a lid on additional costs can be an important edge over the competition.