In review: the essentials of insurance and reinsurance law in Chile

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Insurance and reinsurance law

i Sources of law

The legislative framework applicable to insurance and reinsurance consists in various regulations and laws:

1. Title VIII of Book II of the Code of Commerce, entitled 'About Insurance Contracts' and, in particular, Article 512 et seq., regarding non-maritime insurance;
2. Title VII of Book III of the Code of Commerce, entitled 'Maritime Insurance';
3. DFL 251, which regulates insurance companies;
4. Supreme Decree 1055-2013;
5. resolutions issued by the CMF (and resolutions issued formerly by the SVS); and
6. general provisions relating to the interpretation of contracts found in the Civil Code.⁹

The provisions on general and non-marine insurance contained in the Code of Commerce were enacted almost 140 years ago and for a long time were not revised, despite numerous industry developments. However, on 9 May 2013, a new law was enacted (Law 20,667 (the New Insurance Law)), which replaced all the former non-marine provisions (contained in Title VIII of Book II of the Code of Commerce) and finally updated Chilean insurance law to be in line with current trends and market practice. The New Insurance Law also changed certain provisions on marine insurance (contained in Title VII of Book III of the Code of Commerce) and introduced a couple of amendments to DFL 251. The New Insurance Law entered into force in December 2013.

ii Making the contractEssential ingredients of an insurance contract

Under the New Insurance Law, an insurance contract is an agreement whereby one or more risks are transferred to an insurer, in exchange for a premium, who becomes obliged to indemnify the damage suffered by the insured or to satisfy capital, income or other agreed provisions.

The essential ingredients of an insurance contract are the insured risk, the insurance premium and the insurer's conditional obligation to indemnify. The absence of any of these ingredients renders the contract void.

In addition, the New Insurance Law defines reinsurance as an agreement whereby the reinsurer undertakes to indemnify the reinsured within the limits and modalities set out in the agreement, for liability affecting its patrimony as a consequence of the obligations it has undertaken in one or more insurance or reinsurance contracts. For construing the will of the parties, the New Insurance Law takes into account international reinsurance practice.

Utmost good faith, disclosure and representations

Chilean law recognises the concept of utmost good faith and the insured must honestly disclose the information requested by the insurer to allow the latter to identify the object of the insurance and assess the nature of the risk.¹⁰ For these purposes, it suffices that the insured reports exclusively according to the aforementioned insurer's request.¹¹ However, if the insurer fails to request information at the placement stage, the insurer is then not allowed to allege any errors, reticence or inaccuracies by the insured, nor any facts or circumstances not included in the request for information.¹²

If the loss has not occurred and the insured has been culpably reticent or committed errors or inaccuracies that are decisive in the risk assessment according to the above rules, the insurer can rescind the insurance contract. However, if the errors, reticence or inaccuracies are not decisive, the insurer can request an amendment of its terms to adjust the premium or coverage to account for the unreported circumstances. If the insured rejects the insurer's amendment proposal or fails to answer within 10 days of the date on which it is sent, the insurer can rescind (avoid) the contract.¹³

If the loss has occurred, the insured may be exonerated from its liability to pay indemnity if the risk is one that could have allowed the rescission of the insurance contract in accordance with the above-mentioned rules. If not, the insurer can request that the indemnity is proportionally reduced to the difference between the agreed premium and the one that would have been applied if the true extent of the risk had been known.¹⁴

The above sanctions are not applicable if the insurer, before concluding the insurance contract, has known or should have known the errors, reticence or inaccuracies contained in the insured's statement of risk or, after its conclusion, agrees to remedy them or accepts them either expressly or tacitly.¹⁵

The insurance contract is null and void if the insured knowingly provides substantial false information when giving the risk statement to the insurer and the contract is avoided if the insured engages in conduct of this kind when claiming compensation. In these cases, once the annulment or avoidance of the contract is declared, the insurer may retain the premiums or claim for payment along with the expenses needed as proof, even though the risk has not run. The foregoing is without prejudice to the criminal action that may apply.¹⁶

In addition, under Chilean insurance law, the insured is subject to the obligation of not aggravating the risk.¹⁷ The main principles related to aggravation of risk are contained in Article 526 of the Chilean Code of Commerce, which can be summarised as follows:

1. The rules on aggravation of risk are only applicable to circumstances that substantially aggravate the risk.
2. The insured must inform the insurer of circumstances that substantially aggravate the risk within five days of the time he or she becomes aware of them.
3. It is assumed that the insured knows the aggravation of risk that comes from events that occurred with his or her direct involvement.
4. If the loss has not occurred, the insurer has 30 days to inform the insured about either the rescission of the insurance contract or an amendment of its terms to adjust the premium or coverage to the true state of the risk.¹⁸ If the insured rejects the insurer's amendment proposal or fails to answer within 10 days of the date on which it is sent, the insurer can rescind the contract.
5. If the loss has occurred and the insured has not informed the insurer about the circumstances that substantially aggravate the risk, in accordance with (b) above, the insurer is exonerated from its obligation to pay the indemnity.
6. If the aggravation would have led the insurer to conclude the insurance contract with more onerous conditions for the insured, the insurer cannot rescind the insurance contract. However, in a case of this kind the insurer can request that the indemnity is reduced in proportion to the difference between the agreed premium and the one that would have applied if the true extent of the risk had been known.
7. The above sanctions do not apply if because of the nature of the risk the insurer could have known and agreed on it, either expressly or tacitly.
8. Except in the event of wilful aggravation of risk, if the insurance contract is terminated, the insurer must return to the insured the proportion of the premiums related to the period for which it is consequently discharged from liability.

Recording the contract

Pursuant to the New Insurance Law, the execution of an insurance contract is consensual, and its terms and existence can be proved by all legal means of proof, including but not limited to electronic documents, provided that there is prima facie written evidence arising from a document. In this respect, the insurance policy is defined as the document that justifies the insurance and, once issued, the insurer cannot challenge its terms.

iii Interpreting the contractGeneral rules of interpretation

As stated in Section III.i, insurance and reinsurance contracts are subject not only to the Code of Commerce, but also to the general provisions relating to the interpretation of contracts in the Civil Code¹⁹ plus certain provisions contained in DFL 251.

The Chilean position can be broadly summarised as follows:

1. The provisions of the New Insurance Law are generally 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.
2. 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.
3. 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.
4. 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.
5. In construing the intention of the parties to a reinsurance contract, Chilean insurance law will consider international reinsurance practice.

According to Article 3(e) DFL 251, insurers must ensure that the contracted policies are drafted in a clear and understandable fashion. In the event of any doubt regarding the meaning of a provision when using model policies or clauses registered with the CMF (see below), the interpretation that is more favourable to the insured prevails.²⁰

Incorporation of terms

Insurance and reinsurance companies must word their contracts using the model policies and clauses maintained in the CMF's Register of Policies. Exceptionally, 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 200UF. In addition, non-registered models can also be used for cargo, transport, marine or aircraft hulls, or related insurance policies.

Reinsurers are subject to the principle of freedom of contract with a few mandatory restrictions, such as the fact that the reinsurer cannot alter the terms of the insurance contract and fund provision clauses are not enforceable. Direct actions of the insured against the reinsurer are not valid unless otherwise agreed in the reinsurance contract or subject to an assignment of rights from the reinsured to the insured after the loss.

Types of terms in insurance contracts

Under Chilean regulations, insurance policies must contain the following basic provisions and information:

1. identity of the insurer, insured and beneficiary (if applicable);
2. insured matter;
3. insurable interests;
4. risks taken by the insurer;
5. policy period;
6. insured amount;
7. value of the insured matter;
8. premium;
9. policy date and the insurer's signature; and
10. the insured's signature when mandatory by law.

Warranties

An insurance warranty is defined as 'the requirements aiming to confine or decrease the risk, which are stipulated in the insurance contract as conditions that must be met to allow payment of an indemnity after a loss'.²¹

Conditions precedent

In Chile, conditions precedent are not regulated. However, the insurer or reinsurer can achieve similar effects if they are treated as essential conditions of the contract, which are defined by the Civil Code as those without which the contract does not produce effects at all or degenerates into a different contract.

iv Intermediaries and the role of the broker

Chilean law regulates the activities of insurance and reinsurance brokers, sales agents of insurers and loss adjusters. Their main licensing requirements can be summarised as follows.

Sales agents

To act as a sales agent, the person or entity in question must first be registered in the special sales agent registry that will be kept by each insurer, which will contain certain minimum information required by Chilean regulations.

Insurance brokers

Insurance brokers are defined as natural persons or legal entities who have been registered as brokers with the CMF and who act as independent intermediaries in the contracting of insurance policies with any insurer.²²

According to Chilean regulations, insurance brokers must provide information to all their clients on the diversification of their businesses and on the companies with which they work, in the manner determined by the CMF. In addition, insurance brokers are subject to a duty of providing information and must notify the CMF of any change of their address registered with the CMF, any amendment to the partnership agreement and any changes in managers, general representatives, directors or other administrators. They must also provide a summary of their operations in the manner and on the dates determined in a general rule issued by the CMF. Insurance brokers who become disqualified or whose circumstances are incompatible with their position or who do not provide proof that they have contracted an insurance policy in the time and form required for their job will be eliminated from the registry and may not work again as brokers. This notwithstanding, they will continue to be obligated and liable to the insured for the brokerage they have already made. Insurance brokers must be registered in the Insurance Trade Auxiliaries Registry maintained by the CMF and must comply with various requirements to conduct their activity, including establishing a guarantee, either through a bank bond or insurance policy, as determined by the CMF, which cannot be less than 500UF or 30 per cent of the net premiums of the insurance contracts brokered in the immediately preceding year (whichever is the higher), limited to 60,000UF to cover liability for correct and complete compliance with all obligations arising from their activity and particularly for damage that they might cause to the insureds who contract through them.²³ In addition, legal entities must be legally incorporated in Chile. Managers, legal representatives or employees of the legal entity may not engage independently in insurance brokering or work for an insurance company or for another person engaged in insurance brokering.

Reinsurance brokers

Reinsurance brokers are subject to specific rules contained in SVS General Rule No. 139/2002. In general, they have to be registered in the special Registry of Reinsurance Brokers kept currently by the CMF (and formerly by the SVS) and must comply with the following requirements:²⁴

1. they cannot be registered as insurance brokers;
2. they must establish a liability insurance policy for no less than 20,000UF or one-third of the premiums intermediated in the immediately preceding year, whichever is higher (the policy must not be subject to any deductibles); and
3. foreign reinsurance brokers must be legal entities and must certify that they have been legally incorporated abroad and are entitled to intermediate risks ceded from abroad. In addition, foreign reinsurance brokers must designate an attorney with a broad range of faculties to act on their behalf in Chile, including the power to serve and be served with court proceedings.

Loss adjusters

Unlike in many jurisdictions, the loss adjuster is appointed to act as an impartial claims specialist who must be licensed and supervised by the CMF. The loss adjuster's role is to investigate and review the circumstances of the loss or damage and to report on the validity of the policy coverage in respect of the claim. The adjuster's report is released to both the insured and the insurer.

Agencies and contracting

As regards agency issues, intermediaries are subject to the general agency provisions of both the Civil Code and the Commercial Code.

v ClaimsNotification

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. The insured must also take all necessary measures for saving or recovering the subject insured or for keeping its remains.

Good faith and claims

Chilean criminal law forbids the fraudulent collection of insurance.

Set-off and funding

Under the New Insurance Law, there are specific provisions for bankruptcy. If the insurer goes bankrupt, the insured has the right to terminate the contract and request a proportional return of premiums. On the other hand, the insurer has the same option if the insured bankrupts before payment of the total premiums.

Dispute resolution clauses

Under the New Insurance Law, there is no need for dispute resolution clauses as insurance disputes are now subject to arbitration. Nevertheless, an insured has the right to make a claim in the local courts where the sum in dispute is less than 10,000UF. In this respect, the arbitrator has to be appointed when the dispute arises.