Transition rules and new products
On May 24 2017 the Superintendence of Private Insurance (SUSEP) published Circular 553, which establishes new general guidelines on civil liability insurance policies for directors and officers (D&O), replacing the existing regulations on this matter (ie, SUSEP Circulars 541 and 546).
The new regulation, albeit flawed, has been welcomed by the market, as the previous D&O regulations did not reflect market practices:
- in 2012 SUSEP's regulation for civil liability excluded D&O coverage from the line of general liability insurance;
- in 2014 SUSEP submitted a draft for public consultation for the first D&O regulation; and
- after almost two years, in October 2016 SUSEP issued the first D&O regulation (Circular 541), which was so strongly criticised by the market that in February 2017, SUSEP suspended its effects for 90 days.
The new regulation has kept some concepts from the replaced law, such as the following:
- An extensive list of defined terms (eg, 'bodily injury', 'physical damage to the person', 'material damage', 'pain and suffering damage', 'indemnity', 'claim', 'insured' and 'society') was maintained. Arguably, the maintenance of the defined terms may lead to a lack of flexibility in policy provisions and an unnecessary standardisation of concepts that, if allowed to be described differently by each insurer, could lead to a differential in the pricing of the product, to the benefit of the consumer.
- Exclusion for environmental damages – environmental damages are encompassed by civil liability for environmental risks policies; as a result, it is unclear whether the defence costs in environmental claims can be covered by D&O insurance.
- The circular maintains an express possibility for insurers to pay an injured third party directly, instead of reimbursing the insured.
- The circular also upholds the express possibility that the coverage may encompass civil and administrative fines imposed on the insured when in exercise of his or her duties or on the policyholder or its subsidiaries or affiliates. This coverage is extremely positive, given that it makes contracting insurance more effective.
- Finally, the circular sustains the prohibition on insurers from insuring their own directors and officers, which is in line with governance practices.
The new regulation has introduced the following relevant aspects:
- Defence costs may now be included in the basic coverage (in the previous regulation, this was possible only as an additional coverage); in such a case, the policy must contain a right of recourse provision giving the insurer the right to subrogate against the insured whenever:
- damages are the result of wilful misconduct; or
- the insured acknowledges his or her liability.
This innovation is positive, considering the difficulty that insurers have when trying to recover the amounts advanced to cover defence costs.
- The new regulation has included the possibility for insurance to be contracted directly by the individual and not exclusively by the legal entity.
- Damages caused to third parties must now be classified as general civil liability (another line of insurance) whenever the company's liability is a result of acts of its managers.
- Finally, the regulation has introduced the possibility of using foreign terms or expressions, as long as they are commonly used in the Brazilian insurance market and locally translated or translated in the insurance glossary.
Transition rules and new products
Insurers will have 180 days from May 24 2017 (the date of publication of the regulation) in order to:
- stop selling new D&O insurance which does not comply with the regulation; and
- replace products currently offered with new ones which comply with the new regulation.
Any existing insurance policies which are currently in force but will expire within the 180-day deadline from May 24 2017 can be renewed for a maximum term of one year. Policies which will expire after the 180 days cannot be renewed.
The new regulation has improved some aspects of the revoked one, but it does not reflect all of the local insurance market's concerns which led to the suspension of the previous regulation. There are still some aspects that are unclear and which may generate discussions and lead to litigation, which is detrimental to the market as a whole and to sale of individual products in particular.
For further information on this topic please contact Marcio Mello Silva Baptista or Barbara Bassani de Souza at TozziniFreire Advogados by telephone (+55 11 50 86 50 00) or email ([email protected] or [email protected]). The TozziniFreire Advogados website can be accessed at www.tozzinifreire.com.br.