Article first published in Insurance Day 

Highest court reviews London market business interruption wording

On February 27, 2006, a Colombian company, Cueros y Diseños SA Comercializadora Internacional filed a claim against BBVA Seguros de Colombia alleging failure by the defendant to fulfil its obligations under an insurance contract.

The claimant alleged there had been a fire at the claimant’s premises, which triggered coverage under the business interruption policy. The claimant notified a claim to the defendant. The defendant requested additional documentation to analyse the claim. After the requested documentation was delivered to the defendant, the claimant alleged it had received no response from the defendant for more than two years.

The claimant filed a lawsuit to determine the trigger of the coverage for business interruption and the payment of the accrued amounts. The limitation period of two years established by Colombian law had passed; therefore the defendant alleged the claim had become time barred.

At first instance, the Colombian judge acknowledged the existence of a claim, however the judge also confirmed the lawsuit had been filed outside the limitation period, therefore the claim was time barred.

At second instance, the court analysed the nature of business interruption insurance as interpreted in the London market and determined business interruption insurance has as its purpose to indemnify the insured for “loss of net utility solely caused by the reduction of income and increase of operative costs”. However, the court at second instance also confirmed that the case was time barred. Consequently, the claimant requested the case be appealed to the Supreme Court of Colombia.

The Colombian Supreme Court handed down its decision on July 15, 2016. It held the claim had not become time barred when the lawsuit was filed. As the quantum of the loss was not determined until October 2005, owing to the complexity of business interruption policies, the court held the statute of limitation had only started to run from that date. Thus, the case had not become time barred and the lawsuit filed by the claimant was valid.

The defendant was ordered to pay Peso670,908,333.34 (approximately $211,500) plus default interest from the May 10, 2007 (Colombian Commercial default interest can be agreed by the parties; however, if the parties fail to agree the same, the applicable interest will be between 21% and 32.01% per annum, which is much higher than many international parties expect) plus procedural costs.

The decision of the Supreme Court of Colombia says if a policy is for property damage and business interruption, both will be triggered at the same time, but the amount of damages related to business interruption will be determined when one of the following conditions has been satisfied: the insured has resumed its normal business activities; or the maximum time of coverage for business interruption has passed.

The limitation period for starting legal actions will only start to run when one of the two conditions is fulfilled and the obligation of an insurance company to indemnify will be suspended until the valuation of the business interruption losses has been carried out.