This is the first instalment of a QuickStudy Series reviewing aspects relevant to the handling of insurance claims in Latin America, particularly with a focus on the seven economies (LA-7) which make up approximately 85 percent of regional GDP: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
As the region continues to receive an influx of (re)insurers and policyholders with international insurance programmes this QuickStudy Series aims to serve as a brief guide to understand key legal provisions relevant to insurance claims in those countries and to identify recent regulatory developments and court precedents.
This introductory QuickStudy offers a bird’s-eye view of the region and our following quarterly instalments will focus on each of the LA-7 countries.
- Regulated Contracts - In Latin America, insurance contracts are regulated contracts with default provisions. The substantive provisions concerning insurance contracts are codified either in bespoke statutes entitled ‘Ley sobre el Contrato de Seguro’1 or within chapters of the commerce codes2 (the exception being Brazil and Paraguay where insurance contract provisions are contained within their civil codes, and Brazil and Mexico have additionally bespoke statutes for marine insurance contracts).
- Approval of Wordings - Insurers usually have to obtain approval of their standard wordings from the local regulators, including any amendments, before these are marketed. Commercial and consumer policies alike are frequently in standard form and disputes often arise with brokers, policyholders and insurers having different or outdated versions.
- All Risks Insurance - Given the structure (see below) of insurance contract statutes in Latin America and their interplay with consumer legislation, Latin American courts have an inclination to consider insurance contracts as covering “all risks” within a line of business, except those expressly excluded in the policies. This, in turn, has an impact on the discharge of burdens of proof when claims are litigated.
- - Typical structure: (1) chapter on contract formation including disclosure duties, payment of premium etc., and claim procedures; (2) chapter on indemnity insurance, including subcategories such as fire, business interruption, transport, liability, and surety insurance; (3) chapter on personal insurance including health and life insurance.
- Prudential Regulations - Increasingly, in Latin America the regulations governing insurers’ conduct of business (“ICOB”) are overlapping the scarce provisions on claims handling procedures that can be found within the statutes governing insurance contracts.
- Beware of Creating the Perfect Storm - A combination of factors including vague statutory provisions, lack of generally applicable case-law, litigation practices that greatly differ to those in England and the United States, and statutory presumptions that insurance losses are covered — as long as policyholders follows certain minimal steps — can create problems at insurance and reinsurance levels if adequate claims handling procedures are not followed.
- Reservation of Rights - Despite the increasing claims handling duties placed on insurers via ICOB rules and the inherent risks of litigating in Latin America, locally the concept of “reservation of rights” is neither well understood nor a current market practice. This is likely to change as reinsurers become more aware of the local regulatory changes and particularly in instances where the contract includes claims control or cooperation clauses.
- Loss Notification - In Latin America, policyholders have a statutory duty to notify insurers of the occurrence of losses within a period that ranges from three to eight days3 from the time the insured is aware of the loss, and, in the case of Brazil and Uruguay, the requirement is to provide immediate notice to insurers. The statutory notice period, which can be increased contractually, may vary in case of liability insurance and with this type of policies the notice period is computed from the date in which the insured becomes aware of the potential liability and/or from the time court proceedings are served on the insured.4
If policyholders fail to give notice of insured losses within the prescribed time limits usually the legislation reduces the indemnity owed under the policy to the extent that insurers are prejudiced or, alternatively, entitles insurers to claim damages from the insured. Sometimes the failure to notify losses is a ground to repudiate claims, particularly under liability insurance contracts.5
- Presumption of Cover Following Loss Notification - Once notice of an insured loss has been given to insurers most Latin American legislations provide that the insured is entitled to enforce payment of the indemnity within a period ranging from 15 to 60 days after all the particulars of claim have been submitted to insurers or the loss adjustment has concluded.6 Some Latin American legislations also expressly require that insurers must communicate to the insureds within a specific period (usually 30 days) whether or not the claim is accepted.7
- Penalty Interests - Under many Latin American legislations once the statutory adjustment period expires — usually 15 to 30 days after the policyholder has presented all particulars that are reasonably required by the insurer to establish the circumstances of the loss and its quantum — the insured becomes a creditor of the insurer. In essence a debt claim arises and penalty interests begin to accrue in favour of policyholders.8 This legal presumption is relevant to limitation periods (see further below) and can have additional implications at reinsurance level under follow the settlement clauses, particularly in instances where the local cedant has not settled claims in a proper and business-like manner.
- Loss Adjusters - To protect their positions vis-à-vis the statutory presumptions described above most local insurers appoint adjusters to request information concerning the circumstances and quantum of the loss. Whilst technically speaking the adjustment report is not generally binding on the parties, the correspondence exchanged by the loss adjuster with policyholders and the content of the report itself may be accepted by the courts as evidence that these have satisfied their burden of proof and, in the absence of carefully drafted reservation of rights, these documents can easily shift the balance in court proceedings.
- Unreasonable Requests - With ever more frequency judges in Latin America are prepared to rule against local insurers who do no more than request additional documents/information from the insured, without setting out in a coverage letter their position with respect to the loss. A mere claim repudiation requiring the insured to prove that its loss is covered under the policy is not an option in Latin America if insurers wish to succeed at trial.
- Premium - In Latin America the insureds’ statutory duty to pay premium can have an impact on claims handling. The cover cannot commence until the premium is paid and failure to do so generally entitles insurers to elect, within a certain period, either to rescind the policy or to grant grace periods. It follows that losses sustained before the premium is paid may be without cover and this situation may extend to reinsurance contracts governed by local legislation.
- In certain countries, once the policy is terminated due to the non-payment of premium, policyholders have the statutory right to reinstate the cover but without it having retroactive effect. It is not uncommon to find reinstatement clauses within local insurance policies.
- Risk Aggravation and Loss Mitigation - In Latin America policyholders have a general duty to avoid the alteration of the insured risk once the cover begins as well as a duty to mitigate insured losses.
- Most of the local legislations require policyholders to notify insurers of alterations to the insured risk that are “essential”, and, to this end, distinguish whether the alteration of the risk was or not caused by the insured. Once risk aggravations are notified, local insurers are entitled to terminate the contract or reconfirm cover, and, if the risk alteration is not notified, the burden is on insurers to establish that this in fact occurred.
- Most local legislations require policyholders to mitigate insured losses, to the extent that this is possible, and to comply with insurers’ instructions in carrying out the mitigation, who are ultimately responsible for the reasonable expenses incurred. Lack of compliance can reduce the indemnity owed under the policy in the same measure as the insurers’ interests are prejudiced.
- Condition Precedents - In great part, the statutory duties placed on policyholders on risk alteration and mitigation are related to the fact that, generally speaking, local legislations do not allow insurers to terminate the policy or repudiate a claim if the insured breaches contractual warranties concerning the risk insured (the exception is when the breach of warranty has a direct incidence on the loss).
- Misrepresentation/Non-Disclosure - The majority of the local legislations entitle insurers to terminate the policy within specific statutory periods once they discover a misrepresentation/non-disclosure concerning the risk insured, and this is regardless of whether or not the non-disclosure was related to the operative cause of the loss.
- Limitation Periods - In Latin America the limitation period to start legal proceedings under non-marine insurance claims is generally short, as follows: Argentina - 1 year; Bolivia - 2 years; Brazil - 1 year; Chile - 4 years; Colombia - 2 years; Costa Rica - 4 years; Dominican Republic - 2 years and 3 years under civil liability policies; Ecuador - 2 years; El Salvador - 3 years; Guatemala - 2 years; Honduras - 3 years; Nicaragua - 3 years; Mexico - 2 years; Panama - 1 year; Paraguay - 1 year; Peru - 10 years; Uruguay - 1 or 3 years depending on whether the contract was or not executed within the country; and, Venezuela - 1 or 3 years depending on whether the insurer has declined the claim (1 year) and in any other case 3 years from the time of the loss.
- The limitation period usually starts accruing at the time the policyholder is aware of the loss and in some countries when insurers reject the claim.
- Liability Insurance - With liability insurance it is also necessary to keep an eye on the underlying limitation periods, which are usually between one and four years.
- Litigation - If insurance claims are repudiated some Latin American legislations allow policyholders to present a complaint with the regulator and statutory mediation services are available. If the claim is litigated the proceedings may be governed either by the ordinary civil procedure or by a slightly more expeditious mercantile procedure, particularly in those countries where insurance policies are regulated within commerce codes or bespoke statutes. Arbitration clauses are generally recognised and enforced in the region.