Regulatory overhaul in both Chile and Peru require foreign insurers to take note and understand how these changes will impact them.
Both Chile and Peru have recently introduced a significant raft of new insurance legislation and understanding the main features of the changed legal landscape in these countries is vital for any foreign insurer subject to local law and jurisdiction.
The law regulating insurance contracts in Chile is contained within the Código de Comercio (Commercial Code) (first drafted in 1865). Major reforms were introduced to the Code in December 2013 and the definition of a contract of insurance to which the new code applies is prescriptive and therefore inflexible.
The new regime comprises a mandatory rule under which contractual provisions that are more beneficial to the insured (or third-party beneficiary) are deemed valid. This does not however extend to hull insurance, air and marine transport cover, nor “damages” insurance (such as civil liability covers) with a premium of more than 200 Unidad de Fomento (approximately USD 8,250).
Certain rules (of general application) do favour the insured. For example, the new code consolidates the rules relating to misrepresentation.
Some of the rules are written rather blandly. For example, the new code includes a concept of warranty as a written contractual term “to circumscribe or diminish a risk”. A policyholder must observe the warranty if any indemnity is to be paid. There is, however, no rule addressing the question of whether the failure to comply with the warranty was related to the cause of a loss. Further, if a claim arises from several causes, the insurer will be responsible for the loss if any of the concurrent causes correspond to a risk covered by the policy. This leaves open the issue of what happens if one of the causes is specifically excluded (where English law would be likely to deny an indemnity arising from a scenario underwriters had decided not to cover).
The recent overhaul of insurance law in Peru resulted in Insurance Contract Law No. 29946, which came into force on 27 May 2013 and applies to all classes of insurance.
A striking aspect of the new law is the extent to which it is pro-insured; the first three articles each expressly provide that in case of ambiguity or doubt, contractual provisions will be interpreted in favour of an insured. The new Peruvian code also requires a restrictive interpretation of clauses imposing an expiration of an insured’s rights.
Some balance to this “insured-friendly” approach is given by Part IV(5), which provides interpretations that accord with generally observed commercial custom and practice will prevail over any other sense given to certain words.
While the new law recognises the principle of utmost good faith and requires the insured to declare truthfully all relevant facts about a risk (failing which the contract is void), it also imposes some limitations on an insurer’s ability to exercise its defences.
It is a curiosity of the new law that arbitration clauses will be void in insurance contracts (but not reinsurance contracts). Although the parties may opt to arbitrate once a loss has occurred, at that point it may better suit one of the parties to air their dispute publicly through the court system.
Another important feature is the ten year limitation period, commencing from the date of loss, applying to actions based on a contract of insurance. After this period, no action may be brought.
Neither of the new codes dedicates much space to reinsurance contracts. Both oblige the reinsurer to indemnify the reinsured within the limits and conditions established in the contract and the Chilean rule adds the phrase: “In these [reinsurance] contracts, international customs and practices as to reinsurance will be used to interpret the intentions of the parties.” As highlighted above, Peru operates a similar rule, absent the international dimension. Beyond this, however, little is said and accordingly it is likely clauses such as claims control and “follow the settlement” will be construed in a similar manner as under English law.
Importantly, both codes expressly recognise the lack of privity of contract between a reinsurer and the original insured, protecting the reinsurer from a direct action brought by the original insured. Neither code makes any provision which might relieve the direct insurer of its obligation to pay the claim to the insured, although if an insurer becomes insolvent, a direct action against a reinsurer is possible where there is a contractual “cut through” clause. An underlying feature of “civil law” legal systems is the comprehensive codification of basic principles of law and legislative updates are infrequent (but significant) events. However, the rules are often less detailed than those seen in common law systems and there may be a sense here than an opportunity to draw on the experience of other jurisdictions and further develop the rules has been lost. There is also a risk of “curious outcomes” from trying to squeeze together rules about consumer and business contracts.
It is notable also in civil law systems judges are generally not obliged to follow previously decided cases and it is the approach of the legislation itself that guides the application of the codes and the interpretation of policy terms. The pro-insured reforms of both countries will therefore have considerable impact for some time.