In many Latin American jurisdictions, late payment of an insurance claim can have serious consequences for local insurers, ranging from punitive interest rates to business closure. These consequences can also potentially affect reinsurers’ exposure. This article describes the regulations applicable in certain key Latin American jurisdictions and provides a comparison with the current English regime.
Late Payment in Key Latin American Countries
In Latin America, insurance regulations are usually found in either the country’s Commercial Code or specific insurance laws. The majority of these laws are pro-insured and often contain clauses that impose serious penalties on insurers for late payment and/or alleged mishandling of valid insurance claims. The table here provides examples of these regulations in certain key jurisdictions.
As seen in the table, the time frames within which local insurers must respond to a claim are very short – ranging from 15 to 45 days. The consequences for non-payment or late payment of an insurance claim can vary significantly from country to country. It is therefore important to be familiar with the rules applicable in each jurisdiction.
In Ecuador, for example, the National Superintendent of Banks and Insurance has the authority to intervene and order the immediate and full payment of a claim up to the value of US$100m or alternatively impose stringent sanctions on the insurer for non-payment, including placing the company into administration. Increasingly, the Superintendent in Ecuador has chosen to exercise his powers in favour of the insured (which may be a state owned enterprise) by effectively acting as a court of law, ruling against the insurer on reasons given for not paying a claim and ordering the local insurer to pay the claim within 15 days, despite having minimal documentation. Following such an order by the Superintendent, the insurer inevitably turns to its reinsurers to accept the Superintendent’s decision and to pay their reinsured share - often 99% of the claim. The alternative faced by the insurer is that it could be closed down by the Superintendent.
In many jurisdictions, late payment fees are applied automatically after the lapse of the statutory term, regardless of whether the insurer had reasonable grounds to challenge the claim or simply denied coverage in bad faith. Accordingly, local insurers and their reinsurers are put in a difficult position as they need to assess and decide claims in a short period of time or otherwise be subject to severe penalties.
It is of paramount importance that insurers notify reinsurers promptly so that reinsurers can direct or cooperate with the insurer (if they so decide) regarding the appropriate response. A typical claims control or claims cooperation clause used in London Market reinsurance contracts requires that the insurer notifies its reinsurers of a claim within 14 days. In practical terms, two weeks will have already elapsed before reinsurers are even advised of a claim; given the short time frames imposed on insurers, reinsurers often have very little time to decide or consult with its reinsurer regarding how the claim should be handled. In certain Latin American countries where the time frames for payment of a claim are particularly short reinsurers might only have a day or certainly less than a week to direct or liaise with the insurer regarding how best to respond to the claim. There are limited opportunities to obtain extensions of these tight time limits and reinsurers need to consider carefully how the claim should be managed locally.
It is an unresolved question as to whether punitive interest imposed on a local insurer by a local statute or court is recoverable under the corresponding reinsurance contract. This liability is arguably extra-contractual, in the absence of an express clause which allows recovery of punitives. Where reinsurers are liable for such punitive interest, reinsurers should check their retrocession arrangements to ascertain whether recovery can in turn be made from their retrocessionaires.
Late Payment under English Law
Under English law, the position on late payment is rather different from Latin America although this may soon change. There is at present no statutory time frame within which insurers must respond to a claim. The insured has no contractual right to recover interest on its claim, absent express wording in the insurance policy. However, the English court or an arbitral tribunal has the discretionary power to award interest as a matter of statute.1 This discretion to award interest is almost always exercised where the insured has been successful in its claim and the delay in payment is the fault of insurers. However, it is worth noting that the insured does not have a claim for interest unless legal proceedings are brought, and otherwise does not have a claim for damages for late payment of an insurance claim. The insurer’s duty is simply to hold the insured harmless,2 and under English law there can be no damages for late payment of the claim in circumstances where the insured has e.g. sustained additional losses to its business as a result of late payment.3
The leading case on this point is Sprung v. Royal Insurance where the Court of Appeal endorsed the trial court’s decision and held “there is no cause of action in damages for late payment of what may be held due as damages.”4 However, Lord Justice Beldman, reluctantly agreeing with the dismissal of the appeal, admitted with regard to the late payment of insurance claims that “there will be many who share Mr Sprung’s view that in cases such as this such an award is inadequate to compensate him or any other assured who may have had to abandon his business as a result of insurers’ failure to pay, and that early consideration should be given to reform of the law in similar cases.”
The Law Commission of England and Wales, a governmental body which considers and makes recommendations as to whether changes to English law should be made, has been reviewing the issue of late payment of insurance claims. It has concluded that changes are urgently needed. The Issues Paper analyzed whether an insurer should be liable for the loss (e.g. interest) suffered by a policyholder as a result of a late payment or non-payment of an insurance claim.
On 20 December 2011, the Law Commission published a second joint consultation entitled “Insurance Contract Law: Post Contract Duties and Other Issues” 5 covering post contractual issues, including damages for late payment of an insurance claim.6 The Law Commission took the view that the current position as seen in Sprung and other related cases is “unduly technical” and that the law should provide for an effective remedy more in line with the remedies provided by general contract law. It was noted that the current rule is out of line “with ordinary contract principles on damages” 7 and “thought to be unprincipled and unfair and risked bringing the English law into disrepute.” 8
As a result, the Law Commission suggests that changes should be made through legislative reform rather than waiting for the English Courts to reverse Sprung as this may take too long. The Commission’s proposal is to “re-characterize the insurer’s primary obligation as a duty not to prevent loss but to pay valid claims after a reasonable time.” 9
A key question that would need to be addressed is what would be considered a “reasonable time.” There should not be a “one size fits all” answer to this question as some claims are complex and require thorough investigation whereas there are other types of claims which are straightforward and can be dealt with promptly. Factors that should be taken into consideration to evaluate the complexity of a claim could include the type of insurance involved, location of the claim, market practice, amount of the claim, etc. Whatever the case, it is crucial that insurers (and their reinsurers) are given enough time to investigate claims in a proper manner, to make reasonable inquiries and to challenge them, if necessary.
It should be noted that in some jurisdictions, the period within which the claim must be paid does not start running until the insured has submitted all the required documents to the insurer to avoid penalizing the insurer for the lack of information. However, once all the required documents are submitted, the period within which to respond starts to run and there are no extensions of time, unless the parties agree otherwise. The Law Commission agrees with a staggered approach so that there is sufficient time for insurers to investigate the claim and a separate period within which to assess the information provided and to make a decision on coverage. This multi-stage process might provide a favourable solution for all the parties involved.
It remains to be seen whether England will follow the approach in civil law jurisdictions, including many Latin American countries, by imposing interest for late payment. Even if such measures are adopted here, it is unlikely that punitive rates of interest will be imposed in England.