In Spain, insurance for businesses and insurance for consumers are referred to as large risks and mass risks, respectively.
Large risks are defined in Section 13(27) of the Solvency II Directive (2009/138/EC). In Spain, large risks are defined in Section 11 of Law 20/2015 on regulation, supervision and solvency of insurance and reinsurance entities.
Large risks include aircraft, vessels, trains and goods in transit, civil liability of aircraft (including the carrier’s liability), and civil liability of vessels (including the carrier’s liability). Large risks also include credit and surety. Likewise, land vehicles (other than trains), fire and natural elements, other damage to property, civil liability concerning automobiles including the carrier’s liability, general civil liability and miscellaneous financial losses where the policyholder, individually or on a consolidated basis in the case of groups of companies, meets any two of certain specified thresholds relating to balance sheet, turnover or number of employees.
In Spain, the main substantive insurance rules are contained in the Insurance Contract Act 1980 (ICA). Generally, all the provisions of the ICA are mandatory, except as otherwise provided. However, clauses that benefit the insured shall be permissible and valid. ICA provisions strongly protect consumers, with the aim of correcting the alleged economic imbalance of the parties when negotiating the contract.
The parties to a contract involving a large risk, however, are not subject to the otherwise mandatory provisions of the ICA (Section 44 with regard to Section 2) and may agree as they wish, subject always to the general limits of party autonomy as set forth in Section 1255 of the Civil Code (the law, public policy and public morality) and the basic principles of insurance law. The rationale is that the buyers of this type of insurance are experienced entrepreneurs who do not need the protection afforded to ordinary consumers. It is assumed that the contract’s clauses will be negotiated on equal foot.
Accordingly, Section 107.2 of the ICA provides that the parties to an insurance contract involving a large risk are free to choose the governing law. Section 7(2) of EU Regulation 593/2008 on the law applicable to contractual obligations (Rome I), which applies to insurance contracts concluded after 17 December 2009, sets out that an insurance contract covering a large risk shall be governed by the law chosen by the parties. If no choice of law is made, the insurance contract shall be governed by the law of the country where the insurer has its habitual residence, unless the contract is manifestly more closely connected with another country.
Hence, if the parties freely choose Spanish law, i.e., the ICA, to govern an insurance contract covering a large risk, the parties are free to depart from the otherwise mandatory provisions of the ICA and to agree the conditions of the contract as they may deem appropriate, provided that they respect the general limits to party autonomy, the basic principles of insurance (risk, insurable interest, indemnity principle in the case of casualty insurance, etc.) and the provisions of the ICA that recognize rights to third parties (as is the case of the third party direct action in civil liability insurance, Section 76).
However, if the parties have not agreed on a certain aspect of the contract, which is expressly regulated in the ICA, it may well be understood that such relevant provisions will be applicable on a supplementary basis, and there is where the danger lies.
Notwithstanding that the parties to an insurance contract involving a large risk are not subject to the otherwise mandatory provisions of the ICA, in practice we often find insurance contracts involving large risks where the parties choose the ICA to govern them without specifying anything to the contrary or derogating the ICA’s mandatory provisions. This omission can result in the undesired application of certain mandatory rules which are typical of mass risk insurance. For example: the punitive interest for the insurer’s late payments and limitative clauses, among others.
Under Section 20 of the ICA, insurers are required to pay a so called “special” interest rate when payment of the claim is not made under certain timeframes, unless there are sound and justified reasons for the delay proven by the insurer which courts tend to construe very rigidly. The special rate is the legal interest increased by 50% the first two years the payment is in arrears and no less than 20% per annum thereafter. It is punitive in nature since, contrary to the general civil rule on compensatory damages in the framework of monetary debts, the rate is unrelated to the actual cost of money. The punitive nature of this interest rate has been confirmed by case law.
Therefore, it is of the utmost importance, when drafting a contract involving a large risk, to agree explicitly on a different and less onerous compensation system for late payment that would exclude the “special” interest rate.
Section 3 of the ICA provides that clauses which limit or restrict the rights of the insureds must be particularly highlighted in the policy and specifically accepted in writing by the insured. Otherwise, it will be understood that the clause has not been included in the contract and the insured will not be bound by it. By signing the contract, the policyholder expresses his consent to the mentioned clauses and accepts them.
It should be noted that it is not uncommon to see in large risks contracts that the parties include the provision where the policyholder admits having received, read and agreed to the general conditions and accepts the clauses highlighted (in bold letters) that limit its rights.
Spanish courts have ruled that the inclusion of these clauses in an insurance contract involving a large risk means that the parties agreed to be bound by the mandatory provisions of the ICA concerning limitative clauses.
In view of the above, it is advisable that underwriters review their wordings in order to avoid the onerous consequences of the inadvertent application of the mandatory provisions of the ICA.