In Brazil, good-faith on the part of the contracting parties is an essential and indispensable element for correct execution and performance of an insurance agreement (article 765 of the Brazilian Civil Code).
According to Brazilian Law, the insured party’s good faith involves, among other issues, supplying accurate, complete and reliable information to the insurance company. Failure to comply with this duty will result in the following to the insured party:
- If the false statements were provided with malicious intent/bad faith, this behaviour grants the insurer the right to deny payment under the policy and, even in this case, the insurer remains entitled to charge for the corresponding premium (articles 766 and 768 of the Brazilian Civil Code).
- If the false statements are not a result of the insureds' bad faith, the insurer has the right to either terminate the contract, or charge the difference of the premiums, even after a loss occurs, considering the new accurate scenario (article 766 of the Brazilian Civil Code).
It has been recognised by case law that it is in order for insurers to avoid the contract when the insured party made false statements with malicious intent/bad faith regarding the circumstances of the risks covered. A recent leading case in the field of D&O coverage is related to the (bankrupted) Banco Santos case. The State Court of São Paulo recently denied D&O coverage to Banco Santos’ directors and officers, as they provided false statements to take out the policy (State Court of São Paulo, Appeal No. 543.194-4/9-00).
The application of these rules by Brazilian Courts depends on the contracting parties and a case by case analysis.
When the insured is a “consumer”, i.e. a party that does not take out such coverage to develop a profession or an enterprise, he is usually considered to be the “vulnerable/weak party”, as per the Brazilian Consumer Protection Code. Therefore, Brazilian Courts tend to tolerate certain negligence and usually interpret on behalf of the consumers, weakening the concept and effects of the breach of the good-faith duty.