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Preliminary and jurisdictional considerations in insurance litigation
In what fora are insurance disputes litigated?
As an introductory note, the Chilean insurance landscape was altered when amendments to Chile’s Commercial Code came into force on 1 December 2013 (the new law). Until 1 December 2013, Chilean insurance contracts were governed by laws dating back to 1865. The changes to the legislation were purportedly made to bring Chilean insurance law into line with modern insurance law at a national and international level.
According to article 29 of the Chilean Insurance Act (also known as DFL 251), any dispute arising from insurance and reinsurance contracts governed by the law shall come under the jurisdiction of the Chilean courts. This rule is mandatory and cannot be repealed by agreement of the parties. Therefore, although there is contractual freedom to agree on the applicable law, any dispute must be settled in principle in the Chilean courts. Nevertheless, once an insurance or reinsurance dispute effectively arises, the parties to the insurance or reinsurance policy are entitled to resolve disputes under Chile’s international arbitration rules.
In addition, the new law states that insurance disputes will usually be resolved through arbitration, although an insured has the right to make a claim in the local courts where sums of 10,000 Unidades de Fomento (a unit index inflation-linked to the Chilean peso) are at stake. Insurers are now obliged to provide authorised copies of final arbitral awards to the regulator, with the aim of improving the scope of jurisprudence available for parties to consider in the event of a dispute. Arbitral awards will not be binding but we expect that this provision will improve certainty over policy interpretation.
Causes of action
When do insurance-related causes of action accrue?
The limitation period applicable to non-marine insurance contracts is four years from the date on which the insured had an enforceable right under the policy. In the case of marine insurance the limitation period is two years. However, for life insurance the term will run from the date that the insured had knowledge of the right to claim under their insurance, but this period shall not exceed 10 years from the date of loss.
Limitation periods must be protected according to the general rules contained in the Chilean Civil Code. In this respect, article 2518 of the Civil Code states that the limitation period can be interrupted by filing a lawsuit (known as civil interruption). Interruption will take place when the lawsuit is duly and legally served against the defendant through a service clerk (the receptor judicial). In addition, as per the new law the limitation period can also be interrupted by the insured’s notice of the claim. In such a case, the limitation period will be renewed as of the moment the insurer communicates its decision on the matter.
What preliminary procedural and strategic considerations should be evaluated in insurance litigation?
Stages of litigation
Generally speaking, in Chile civil and commercial disputes at first instance comprise three main phases: discussion (exchange of pleadings), evidence and issuance of the judgment.
Unless remedies are waived, under Chilean law the right of appeal arises when the decision of the inferior tribunal causes grievance to one or more parties (there are no specific causes). The appeal remedy is available for most first instance court rulings and is usually heard by a court of appeal. The appeal remedy must comply with basic form requirements. The regular term for appealing is five days but, in the case of a final decision, the period is 10 days counted as of the service of the decision. Depending on the subject of the trial and the type of decision appealed, the processing of an appeal can take up to two years.
Regarding appeal stages, in Chile there is only one appeal stage, and the second instance tribunal is allowed to review both factual and legal issues. Having said this, in Chile it is possible to challenge the decision of a second instance tribunal through exceptional remedies such as cassation (these remedies are heard by the Chilean Supreme Court).
There are no discovery obligations in Chile, but the parties are free to submit evidence based on documents, witnesses, parties’ confessions, inspections ordered by the court, expert reports and presumptions.
In respect of insurance and reinsurance disputes, under the new law, ordinary and arbitration courts are entitled to the following specific faculties relating to evidence issues:
- at the request of a party, to accept additional means of proof to those pointed out above;
- to decree evidentiary measures ex officio at any stage of the trial;
- to request recognition of documents and deal with objections; and
- to assess evidence under the ‘sane critic’ doctrine.
Except for minor expenses associated with service, paperwork and auxiliary officers, there are no court fees payable in Chile. As to lawyers’ fees, they can be recoverable, but only if the judge rules that there was no reasonable basis to litigate.
If the dispute is resolved through arbitration, then arbitrators’ and administrative fees will apply. Those cases subject to institutionalised arbitration, such as under CAM Santiago, are subject to a referential table or calculator based on the amount at stake and with caps. In case of ad-hoc arbitration, the arbitrators are free to propose what they believe is reasonable. However, recently some of them have started to use these parameters, which are more objective.
What remedies or damages may apply?
Generally speaking, under Chilean law in case of breach of contract the parties are entitled to request either the rescission or the forced performance of the contract, plus compensation of damages, which are restricted to costs incurred, loss of profits and, in certain cases, moral damages. However, under the new law there are the following specific remedies.
The new law provides that the insured must respond to an insurer’s request for information about a risk by honestly disclosing the information requested, to allow insurers to identify the object of the insurance and assess the nature of the risk. If the insured provides information that is false, the insurer can avoid the policy and return the premium. As noted below, the insured must also disclose circumstances that increase the risk during the policy period.
Gross negligence and recklessness
Insurers can decline to indemnify the insured if the loss is triggered by an act of recklessness or gross negligence on the part of the insured, unless the policy provides otherwise.
Termination of the policy and aggravation of the risk
A policy will be terminated if the risk is extinguished after the policy is entered into. If the risk increases, the premium will be adjusted. If the insured fails to pay premium, the policy will be terminated. Under the new law, the insured must inform the insurer of circumstances that substantially aggravate the risk within five days. However, this provision applies only to risks that the insurer could not have discovered in another way.
Levels of indemnity
Insurers can claim a reimbursement from the insured if an insured receives a payment for a value higher than the amount of its loss. If it appears that the insured has acted in bad faith, insurers can seek damages or press for criminal proceedings. Under the new law an insurance contract can never constitute an opportunity for enrichment or gain. In addition, the policy will provide for an indemnity in money, unless the policy provides that insurers will replace or repair the item insured.
Where co-insurers jointly cover the same insured interest, the insured can claim against any of the co-insurers.
Under what circumstances can extracontractual or punitive damages be awarded?
The concept of extracontractual damages is much wider than that related to contractual ones. According to article 2,329 of the Chilean Civil Code, ‘. . . all damages that may be attributed to malice or neglect to one person, must be repaired by such person’. There is no general rule as to how courts should award these type of damages, thus its acceptance is determined to the factual background of each case.
As regards punitive damages, they are not contemplated under Chilean law.
Interpretation of insurance contracts
What rules govern interpretation of insurance policies?
Insurance and reinsurance contracts are subject not only to the Commercial Code, but also to the general provisions relating to the interpretation of contracts in the Civil Code (article 1560 et seq) plus certain provisions contained in DFL 251.
The Chilean position can be broadly summarised as follows:
- The provisions of the new law are in general mandatory, unless stated to the contrary. However, if a clause is deemed to provide an insured with a greater benefit than is provided under the law generally, the specific terms of a policy will prevail over the Code of Commerce.
- Chilean law considers it of paramount importance to determine the intentions of the parties at the time of contracting and to give effect to those intentions even if they are not reflected in the literal words of the contract.
- A Chilean tribunal will strive to facilitate clauses in contracts with the goal of ensuring that the parties’ intentions are fulfilled. Actions can include amending the contract if no provision is made for a given state of affairs.
- Under Chilean law, it is permissible for a tribunal to ascertain the parties’ intention by looking outside the contract at, for example, the negotiations between the parties and market practice at the date of contracting.
- In the event of ambiguity in a policy, the interpretation that is more favourable to the insured prevails. Given that DFL 251, article 3 (E), paragraph 3 specifically imposes a duty on the insurer to make sure that the wording is clear and understandable, this presumably remains the position even if the insured or the broker has drafted the wording, or if the wording is the result of negotiation between the insurer and insured.
When is an insurance policy provision ambiguous and how are such ambiguities resolved?
See question 6.
Notice to insurance companies
Provision of notice
What are the mechanics of providing notice?
Under the new law, when any event that may constitute a loss occurs, the insured must notify the loss to the insurer or insurers as soon as possible upon becoming aware of the event (this term may be altered by the agreement of the parties). In addition, should there be a loss the insured has also the obligation to take all necessary measures for saving or recovering the subject insured or for keeping its remains. Furthermore, the insured has to prove the loss occurrence and sincerely state its circumstances and consequences.
What are a policyholder’s notice obligations for a claims-made policy?
See question 8. However, careful checking of the precise policy wording is relevant.
When is notice untimely?
See question 8.
What are the consequences of late notice?
The effect of an untimely notice has yet to be tested by Chilean courts. However, as per some legal cases prior to the new law, an insurer could deny coverage based on late notice of claim only if it demonstrates prejudice.
Insurer’s duty to defend
What is the scope of an insurer’s duty to defend?
Unless otherwise agreed, under the new law there is no general rule placing the insurer to defend a claim made against the policy holder. However, according to Chilean practice in the absence of express provisions the parties will usually try to reach an agreement on the claim handling or, otherwise, the insured will carry on with its defence and seek for the insurer’s liability once coverage has been determined.
Failure to defend
What are the consequences of an insurer’s failure to defend?
Should the insurer agree to take responsibility for the defence, failure to comply with any contractual provision may constitute a breach of contract and the insured would be entitled to request either the rescission or the forced performance of the contract, plus compensation of damages.
Standard commercial general liability policies
What constitutes bodily injury under a standard CGL policy?
As an introductory note, in Chile insurance and reinsurance companies must word their contracts using the models of policies and clauses available in the Register of Policies of the Chilean regulator (CMF). Strictly speaking, they are able to use non-registered models when this relates to general insurance, where the insured or the beneficiary are legal entities, and when the annual premium is higher than around US$8,150. In addition, non-registered models can also be used for cargo, transport, marine or aircraft hulls, or related insurances. However, in practical terms the use of non-registered models is quite common and careful review of their terms and conditions is always important as they may differ from the registered models.
Normally the Chilean equivalent to a standard CGL policy (the civil liability policy) defines bodily injury as that caused to third parties.
What constitutes property damage under a standard CGL policy?
Usually under the Chilean equivalent to a CGL policy, property damage is defined as that material damage affecting third parties during the policy term. Since those damages are usually referred to liability arising from provisions of the Civil Code, they would regularly include destruction, deterioration or loss of economic value of the corresponding goods.
What constitutes an occurrence under a standard CGL policy?
Normally under the Chilean equivalent to a CGL policy, the term occurrence is not defined. However, in general terms it can be deemed as a harmful event of an extracontractual nature that has a connection with an act or omission of the insured and that takes place during the policy period, which in turn may give rise to a claim by the affected third party.
In this respect, the Chilean equivalent to a CGL policy covers payment to be made by the insured owing to their civil liability in connection with damages suffered by third parties, including death, bodily injury, damage to property and expenses for legal defence.
How is the number of covered occurrences determined?
The Chilean equivalent to a CGL policy would normally consider a group of claims based on bodily injury or property damage as one single loss or occurrence provided that they have originated from the same cause and notwithstanding the amount of claimants.
What event or events trigger insurance coverage?
Those expressly agreed under the coverage provided by the policy. Events not covered or excluded by the policy cannot trigger insurance coverage.
How is insurance coverage allocated across multiple insurance policies?
As regards the effects of multiple insurance policies, the insured can claim against any of the insurers and, if there is a balance, can claim against others. However, the total amount of indemnity received by the insured is limited to the value of the insured object.
On a related subject, under the new law co-insurance occurs when two or more insurers, with the approval of the insured, agree to jointly cover a specific risk. In such a case, the insurers are obliged to pay the insurance indemnity in accordance with their respective share.
First-party property insurance
What is the general scope of first-party property coverage?
First-party property coverage is usually agreed as per non-registered policies with the Chilean regulator. Its scope would normally comprise sudden and unforeseen losses or damage affecting agreed property of the insured related to their commercial operation at agreed facilities and limited by the applicable exclusions. In addition, these policies usually cover business interruption damages.
How is property valued under first-party insurance policies?
It is up to the parties to agree the valuation basis, but Chilean practice usually considers the following criteria:
- products in process and finished goods: effective cost incurred at the time of the loss (direct and indirect costs of the product);
- raw material, supplies, machinery spare parts and other merchandise bought from third parties: subject to the formula applied on the subject matter insured, replacement value as new at the time and location of the loss less depreciation;
- buildings, machinery, equipment and other assets: subject to the formula applied on the subject-matter insured, replacement value as new at the time and location of the loss less depreciation;
- reconstruction in a different location: usually capped to the amount that it would cost to reconstruct at the original site. If the insured decides not to reconstruct or replace the damaged property, the indemnity can be based on actual value; and
- insured amount: the insurer is not liable for amounts exceeding those agreed in the policy.
Is insurance available in your jurisdiction for natural disasters and, if so, how does it generally operate?
Generally speaking, Chilean property policies provide specific coverage for damage caused by fire started by natural phenomena such as earthquakes (fires arising from earthquakes are usually contracted as an additional cover), wind, floods and tsunamis, in accordance with the models of policies and clauses available in the Register of Policies of the CMF.
In this respect, it is worth noting that - following the 2010 earthquake that affected the centre and south of Chile - Chilean adjustment regulations include two provisions specifically aimed at catastrophe losses: first that the Chilean regulator can extend the adjustment to 180 days and second, where there is more than one loss notified at a condominium, each insurer shall appoint only one adjuster.
Directors’ and officers’ insurance
What is the scope of D&O coverage?
Generally speaking, registered D&O policies provide coverage to managers and directors of companies against financial losses (usually it comprises damages, defence costs and investigations costs) as a result of any claim (scope usually expressly established) presented for the first time during the policy period because of negligent or improper acts for acts committed in performance of their duties.
What issues are commonly litigated in the context of D&O policies?
In Chile D&O disputes are usually related to breach of duties regulated under different laws and provisions, including but not limited to the Chilean Securities Market Law (Law 18,045); the Stock Companies Law (Law 18,046); the Superintendency of Securities and Insurance Law (Decree Law 3538); the Mutual Fund Administration Law (Decree Law 1328); the Foreign Equity Investment Law (Law 18,657); the Mutual Funds Law (Law 18,815); the Custody and Deposits Law (Law 18,876); the UK Financial Services and Markets Act 2000; the United States Securities Act of 1933; and the United States Securities Exchange Act of 1934.
What type of risks may be covered in cyber insurance policies?
Generally speaking, registered cyber insurance policies will provide cover for damages and costs as a result of claims presented within the term established by the policy in connection with the use and processing of private data, including errors and omissions; malicious acts; web security; liability for electronic content; cyber extortion; loss of digital files; and business interruption.
What cyber insurance issues have been litigated?
Cyber insurance is just emerging and at present we are not aware of significant disputes in Chilean courts.
Is insurance available in your jurisdiction for injury or damage caused by acts of terrorism and, if so, how does it generally operate?
Terrorism coverage is usually agreed as per non-registered policies with the Chilean regulator, which usually follow international market forms. In this respect, it is always important to check how terrorism is defined and the applicable exclusions. Having said this, terrorism in Chile is regulated by Law 18314, also known as the Anti-terrorism Act. This law does not have a specific definition but in its articles 1 and 2 establishes the acts that can be deemed as terrorist acts, whose common element is that the illegal act is committed with the intention to cause fear in the general population. From a practical standpoint, it is worth noting that in recent times Chilean authorities and courts have been reluctant to investigate potential offences under the aforementioned law, which normally end up treated as offences under general criminal law. Local loss adjusters have also adopted ambiguous criteria.