As indicated in our previous publication, in July 2018, the General Directorate of Insurance and Pension Funds (hereinafter DGSFP) published the Technical Guide 1/2018 on good practice in legal expenses insurance.
This Guide contained a first section on recommendations of good practice in legal expenses insurance in general that we have already analysed; and a second section that focused on specific recommendations in legal expenses coverage included motor insurance policies that we will analyse here.
(b) Good practices regarding legal expenses insurance in the field of motor insurance.
These recommendations are issued as a result of practices observed in those cases in which the assured has a third-party motor policy covering legal expenses / claim’s management and starts a claim arising from an RTA. In such cases the assured normally notifies his insurer of the accident and this insurer immediately proceeds to claim on his behalf from the liable third party and / or its insurer.
In addition, when it comes to claims for material damages arising from an RTA, Spanish insurers normally handled claims through the so-called Agreement between motor insurers for the direct compensation of material damages to vehicles (hereinafter ADC). Under this Agreement the insurer of the damaged party also deals with the claim in the name and on behalf of the insurer of the liable third party, including the assessment of the damages, the acceptance / rejection of the claim, etc.
This scenario generated a number of conducts that, after having been detected by the DGSFP, have given rise to the recommendations contained in Guide 1/2018.
• Reasoned offer / response
The Law on civil liability and insurance in the circulation of motor vehicles of October 29, 2004 (LRCSVM) imposes on the insurer of the liable party the obligation to give to the damaged party a reasoned offer / response in which the acceptance / quantification of the claim or its rejection is duly justified. Together with the assessment of the claim, the reasoned offer shall also inform the damaged party of his right to receive the payment even if he does not agree with the quantification, without this implying a waiver of the exercise of future compensation that could correspond to the damaged party in law,
Regarding the above referred reasoned offer / response, the DGSFP establishes that it is considered as good practice:
- That the insurer acting on behalf on the damaged party under a legal expenses / claim’s management coverage must transfer any reasoned offer / response received from the responsible insurer of the liable third party or, failing that, inform the assured about the existence of this right and the scope thereof.
- In the case of material damages in which the insurer of the damaged party handles the claim under an ADC with the insurer of the liable third party, the obligation to issue a reasoned offer referred to in the LRCSVM will fall on the insurer of the damaged party. However, this obligation must also be extended to those cases in which the claim is rejected. In these cases, the insurer of the damaged party must inform its assured that the rejection is made on behalf of the insurer of the liable third party and that if he does not agree with the rejection, whether he is entitled to continue the claim under the terms of his legal expenses / claim’s management coverage.
• Conflict of interest
Although the ADC has many advantages for inter-companies claim management, from a legal expenses’ perspective, it may create situations of conflict of interest given that the insurer claiming on behalf of the damages party under a legal expenses / claim’s management coverage, also deals with the claim on behalf of the insurer of the liable third party.
Therefore, when the insurer of the damaged party totally or partially rejects the claim of his assured on behalf of the insurer of the liable third party, it will normally also renounce continuing with the defence of its assured as the claim could be considered as unfeasible or reckless.
In these cases, when the damaged party does not agree with the offered compensation or with the rejection of the claim by his insurer and decides to continue with the claim under the terms of the legal expenses coverage, it shall be considered that there is a conflict of interests and his insurance company must inform him of the existence of this conflict and about his right in such a scenario - In relation to the conflict of interest in the legal expenses insurance in general, see the first part of this comment.
On the other hand, the insurer of the damaged party must inform the assured of the following circumstances:
- The deadlines and the form of exercising direct action against the liable third party.
- The requirement of formally claiming from the insurer of the liable third party before going to court as established in the LRCSVM.
- That the above referred claim suspends the time limit.
• Clauses contrary to contractual balance
Some insurance contracts stipulate that when the assured does not accept a motivated offer issued by his insurer under the ADC, the reimbursement of the legal expenses will be limited to the difference between the offer made and the most beneficial result obtained in Court.
The DGSFP understands that this clause is contrary to the contractual balance and, therefore, detrimental to the insured.