The Chilean legislature was recently presented with a draft law designed to modernize the insurance and reinsurance provisions contained within Chile’s Code of Commerce. If enacted, the legislation would replace Chile’s current laws concerning private insurance and reinsurance in their entirety. Several aspects of the proposed law are of particular note:

  • Article 513 (Definitions): The existing provisions’ set of outdated and limited definitions are replaced with 22 new definitions that recognize certain modern realities and developments in the global insurance business. New definitions are provided for the terms “beneficiary,” “deductible,” “insurable interest” and “collective insurance.”
  • Article 518 (Contents of a Policy): An insurance policy should contain, among other things, the following items: (1) the identity of the insurer, insured, counterparty and beneficiary (if any); (2) specification of the insured material; (3) the insurable interest; (4) the risks transferred to the insurer; (5) the inception and termination date of the policy; (6) the amount or quantity insured or the means of determining same; (7) the premium and time, place and form of payment; (8) the signature of the insurer and date of execution; and (9) the signature of the insured when required by law. The authenticity and authority of the insurer’s signatory is presumed.
  • Article 519 (Delivery of the Policy): The insurer should deliver the policy or certificate of insurance within five days of the perfection of the insurance contract. Failure to complete this delivery obligation shall entitle the insured to recover damages from the insurer or broker. If the contents of the delivered policy differ from the agreed contents, the insured shall have one month to object, which right must be clearly stated in the policy.
  • Article 524 (Insured’s Obligations): The insured is obligated to properly disclose to the insurer all circumstances necessary to identify and appreciate the insured risk both before the insurance agreement is reached and afterward as circumstances arise, and is further obligated to inform the insurer of any other insurance in place concerning the risk. In addition, the insured is obligated to use caution in seeking to avoid an insured loss, to not aggravate any risk, to make all efforts to preserve the insured asset in the event of loss, to notify the insurer within five days of any occurrence or circumstance and to fully disclose all circumstances and consequences of any loss.
  • Article 525 (Errors, Omissions and Inaccuracies in Risk Information): If the insured makes errors or omissions or provides inaccuracies in its disclosure to the insurer of information concerning the insured risk, the insurer’s rights against the insured depend upon the nature of the error, risk or inaccuracy: (1) if the issue not properly disclosed would have caused the insurer not to issue the policy, the insurer may rescind the policy; (2) if the issue not properly disclosed would only have caused the insurer to charge a higher premium or impose stricter conditions, the policy shall remain valid but indemnification in the event of a loss shall be reduced pro rata by the difference between the premium charged and the premium that would have been charged had the insurer known of the issue (unless such non-disclosure was “inexcusable”, in which case the insurer is entitled to rescind the policy); (3) if the insured was required to complete an application provided by the insurer and disclosure of the issue was not required by the insurer’s form, indemnification shall not be reduced (unless such non-disclosure was “inexcusable”, in which case the insurer is entitled to rescind the policy). These sanctions do not apply if the insurer was aware of the inaccuracies before entering into the insurance contract or if it became aware of the issue after issuance of the policy and accepted the risk either expressly or implicitly.
  • Article 529 (Indemnification Obligation/Bad Faith): The insurer’s principal obligation is to indemnify the insured for covered loss. The indemnification obligation of the insurer shall never exceed the policy limit. However, where the insurer fails to indemnify, the insured may be entitled to interest. Furthermore, if the failure to indemnify is due to the insurer’s bad faith, the insured may recover additional damages in addition to indemnification.
  • Article 534 (Subrogation): By indemnifying the insured, the insurer becomes subrogated to all rights that the insured has against any third parties as a result of the loss.
  • Article 543 (Arbitration): Arbitration is mandatory for coverage disputes exceeding a certain amount (approximately $200,000), while coverage disputes for less than that amount can be submitted to arbitration or the ordinary courts of Chile.
  • Article 572 (Third Party Rights Under Liability Insurance): Third parties may pursue a direct action against the liability insurer for damages allegedly caused by the insured and covered by the policy. In such situations, the insurer shall have the right to appoint defense counsel and control the defense of the insured.
  • Articles 585-589 (Reinsurance): Like the existing code, the proposed legislation provides little regulation as to reinsurance. However, the reinsurance sections of the proposed law do establish certain guiding principles: (1) the terms of the reinsurance contract shall prevail over legal norms, except to the extent such norms concern public order; (2) international customs and usages concerning reinsurance shall assist in the interpretation of reinsurance contracts; (3) reinsurance shall have no effect upon the scope of the insurer’s obligations pursuant to the underlying insurance contract; (4) reinsurance contracts may call for the insurer’s indemnification payments to be made directly by the reinsurer; and (5) any disputes regarding the reinsurance contract shall be submitted to an arbitrator in Chile who shall apply national law to the dispute unless the parties agree that the arbitrator is to resolve the dispute in accordance with international business arbitration norms recognized in the laws of Chile.