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Recent cases

One of the most relevant recent insurance disputes in Brazil involves (1) the attachment of the shares of a major airline company to guarantee the reimbursement of a hefty indemnification, and (2) the debate about the subrogation of the insurer to the arbitration clause in the insured’s contract.

A performance bond was issued to insure the losses arising from the failure of a company in complying with its obligations under shipbuilding contracts. After the payment of the indemnification, the insurers filed a collection lawsuit with the State Court of São Paulo against the principal and guarantors, who are the shareholders of a famous airline company.

Owing to the proof of commingling of assets and misuse of legal entities, the State Court of São Paulo granted a request to pierce the guarantors’ corporate veil and for the provisional attachment of their respective assets to ensure the reimbursement of the indemnification. As a result, around 200 million shares of the famous airline were attached.

In response to the attachment, the guarantors argued that the State Court of São Paulo lacked jurisdiction to adjudicate the dispute between the insurers, principals and guarantors owing to the parties’ subrogation in the arbitration clause, established only in the secured contracts entered into between the policyholder and the insured.

According to the guarantors, the insurers were subrogated to all obligations provided in the agreement entered into by the insured. As a result, the insurers would be obligated to comply with all clauses established in the contracts between the policyholder and the insured, including the arbitration clause.

Furthermore, in order to defend this argument, the guarantors brought an action before the State Court of Rio de Janeiro requesting a provisional injunction to revoke the attachment order granted by the State Court of São Paulo, based on the latter’s lack of jurisdiction. Subsequently, the guarantors filed a statement of claim requiring the commencement of arbitration based on the arbitration clause established solely in the secured contracts between the policyholder and the insured.

The injunction was granted by the State Court of Rio de Janeiro and, subsequently, the guarantors raised a conflict-of-jurisdiction lawsuit before the Superior Court of Justice. However, in a preliminary decision, the Superior Court of Justice recognised that the insurers were not subject to the arbitration clause and, therefore, the State Court of São Paulo maintained jurisdiction to decide the case. Although a final and binding decision has not yet been issued, the state courts and the judge-rapporteur for the proceedings have issued statements recognising that under Section 786 of the Brazilian Civil Code the insurer’s subrogation is limited to the right of reimbursement and is not subject to procedural issues such as the arbitration clause or the forum-selection clause of the agreements entered into by and between the parties. Therefore, unless there is a specific provision in the insurance bond subjecting the principal policyholder, guarantors and insurers to arbitration, conflicts between the parties must be ruled on by the judiciary system.

In addition, the State Court of Rio de Janeiro granted an interlocutory appeal filed by the insurers, overcoming the injunction that had been granted and dismissing the argument that the State Court of Rio de Janeiro had jurisdiction. In turn, the arbitral court dismissed the guarantors’ claim for lack of jurisdiction, meaning that the judiciary system has the jurisdiction to decide the case.

Although there has been no final decision by the Superior Court of Justice on the conflict of jurisdiction, all the courts involved have already decided that the insurers are not subject to the arbitration clause.

Another recent relevant dispute involves the discussion concerning judicial bonds and judicial reorganisation. Judicial bonds were issued on behalf of one of the largest telecommunication operators in Brazil to insure the payment of labour and civil debts collected in court. In the course of these lawsuits, the policyholder filed for a judicial reorganisation before a bankruptcy court and, under the Brazilian Bankruptcy Law, the enforcement procedures against the telecommunication company for collection of the debts were immediately stayed for 180 days (tax credits are not subject to these procedures).

Furthermore, the bankruptcy court issued an order suspending any payment under the judicial bonds presented in labour and civil lawsuits, as the credits would be paid according to the company’s reorganisation plan. However, the bankruptcy court decision was not taken into consideration and the courts in charge of the enforcement procedures determined that payment of the indemnities was in order.

Because of the conflicting decisions, the insurer filed for proceedings before the Superior Court of Justice to decide the conflict of jurisdiction between the labour and civil courts, and the bankruptcy court. The Supreme Court of Justice has not decided the conflict of jurisdiction yet, but the judge-rapporteur for the proceedings granted a preliminary order recognising the bankruptcy court’s jurisdiction to decide on the payment of the bonds until a final decision is rendered.

The issues under discussion may be summarised as follows: (1) after the approval of the reorganisation plan the debts are novated and the judicial bonds cannot be enforced, as the creditors must be paid under the reorganisation plan terms; and (2) the judicial bonds are a distinct payment obligation and are not subject to the novation effects, and as a result they cannot be enforced and must be terminated.

The judge-rapporteur ratified the preliminary injunction and no further appeal was filed. Therefore, this decision has become res judicata. Despite the fact that there are still two jurisdiction conflict lawsuits to be decided by the Superior Court of Justice, which can be analysed by the judge-rapporteur or a panel of justices, it is unlikely that a different outcome could be expected.

Trends and outlook

Among the trends of the local insurance market, we highlight the following.

i D&O demand and increasing loss ratios

Law No. 13506, enacted on 13 November 2017, significantly increased the limit of the sum of fines that may be applied by the Central Bank of Brazil (BCB) and the Securities and Exchange Commission (CVM). Now the BCB may impose fines of up to 2 billion reais on financial institutions (and their officers and directors), and the CVM may impose fines of up to 50 million reais on publicly held companies (and other entities the CVM regulates, and their respective officers and directors).

This automatically triggered a steep increase in the demand for D&O coverage (taking out such coverage has become, in some cases, a condition for individuals being invested as directors and officers of certain companies), since local products of this nature can cover the payments of fines imposed on directors and officers by governmental authorities, with due regard to the limitations set out by each insurer offering such coverage.

In recent years, D&O insurance claims have risen as a result of a significant increase in federal investigations scrutinising public contracts, which led to an unprecedented increase in the public auditing of public administration activities and tenders. Most of the large corporations operating in energy, civil construction and engineering in Brazil have been retained in public bids to deliver infrastructure works in recent events such as the 2014 FIFA World Cup, the 2016 Summer Olympics in Rio de Janeiro, besides regular projected works in all administration levels (federal, state and municipal).

Public contracts are scrutinised by federal and state audit courts, the Public Prosecutor’s Office and civil associations, which may bring claims against the private counterparties involved in the bids in respect of any irregularities. As a result of large federal probes over corruption in public bids (among which, Operation Car Wash is the most prominent), D&O insurance claims amounted to over 500 million reais in 2017, and these claims stemmed from matters ranging from investigations by public bodies to judicial claims associated with securities litigation, tax debts, corporate disputes, contractual breaches and bankruptcy law.

ii Surety bond demand and increasing loss ratios

The Code of Civil Procedure has expressly established the right to offer judicial bonds to secure payments of judicial debts. As a result, judicial bonds have become widely accepted by courts and the market is experiencing a vertiginous expansion. Consequently, some local insurance businesses are totally dedicated to surety and judicial bonds.

The surety business has also been a frequent source of claims owing to the economic recession Brazil has experienced since late 2015, which has led to the suspension of many public contracts. Payments in these contracts were stalled while corruption and money laundering investigations were carried out, ensuing a steep increase in the number of claims associated with performance bonds.

Petrobras, the Brazilian state-owned oil giant, was at the centre of the corruption investigations of Operation Car Wash and the interruption of payments within its contracts triggered low liquidity in construction and oil sectors, leading many contractors to submit requests for judicial reorganisation or even bankruptcy. This in turn resulted in numerous claims in the sureties market for breach of contract, contributing to the demand for performance bonds and construction-related insurance.

iii Bill of Law No. 29/2017

Intended to become the ‘New Brazilian Insurance Law’, Bill of Law No. 29/2017 introduced various innovations that will significantly alter the way insurers do business, leading to adaptations to operational aspects (e.g., the requirement to obtain the insureds’ prior consent to implement certain transactions, such as portfolio transfers), changes in the wording of insurance policies and modification of loss adjustment procedures. In February 2019, the Bill of Law was submitted for scrutiny by the Senate’s Constitution, Justice and Citizenship Committee.

iv Provisional Measure No. 881/2019

On 30 April 2019, the Brazilian President executed and published Provisional Measure No. 881/2019, also dubbed the ‘Provisional Measure of Economic Freedom’. Applicable to entrepreneurs who do (or would like to do) business in Brazil, and in relation to contracts and civil and business obligations, the Provisional Measure establishes principles and general guidelines that are mandatory for the government regarding economic activities, namely (1) the presumption of freedom in the exercise of economic activities; (2) the presumption of good faith on the part of private enterprises; (3) subsidiary, minimum and exceptional intervention of the state in the exercise of economic activities; and (4) vulnerability of people before the state. As regards its impact in the insurance sector, this Provisional Measure (1) ensures equal treatment by public administration bodies; (2) reinforces the prevalence of the free will of the parties and the principle of venire contra factum proprium; (3) encourages innovation if regulation is outdated in relation to technology being used in the market; (4) forbids governmental authorities from adopting contradictory approaches on issues or with different players in the same regulated markets, ensuring equal treatment for local and foreign players; (5) sets forth a fixed term for public authorities to approve or deny a specific request made by private parties (whenever law or regulation has not already established a fixed term) and that such request will be deemed approved if the public authority has not positioned itself within such term; and (6) allows digital storage of documents. The Provisional Measure was approved, with some amendments thereto, by the National Congress and was sanctioned by the President on 20 September 2019, becoming Law No. 13874/2019.

v Bill of Law No. 1292/1995

Currently, in Brazil, performance bond limits range from 5 per cent to 10 per cent of the contract amount and there is lack of a legal framework for step-in rights, in view of a scenario where more than 14,000 public works are paralysed. If approved, this Bill of Law, regarded as the ‘New Public Procurement Law’, would change the guarantee limits as follows:

  1. public works, services and supply contracts of up to 100 million reais (guarantees are not mandatory): a guarantee limit of 5 per cent of the initial contract amount, which may be increased to a maximum of 10 per cent depending on the complexity of the project and the risks involved;
  2. public works, services and supply contracts above 100 million reais (guarantees are not mandatory): a guarantee limit of 10 per cent of the initial contract amount, which may be increased to a maximum of 20 per cent depending on the complexity of the project and the risks involved;
  3. engineering contracts ranging in value from 100 million to 200 million reais (guarantees are mandatory): a guarantee limit of 10 per cent of the initial contract amount, which may be increased to a maximum of 20 per cent depending on the complexity of the project and the risks involved; and
  4. engineering contracts of over 200 million reais, or ‘contratos de grande vulto’ (major contracts) (performance bonds are mandatory): a guarantee limit of 30 per cent of the initial contract amount, which may be reduced to a minimum of 10 per cent (as a minimum mandatory percentage) if the 30 per cent requirement (1) unreasonably restricts the competitiveness of the bid, (2) leads to an unjustified increase in the constructor’s profit, or (3) allows the constructor to abuse its dominant market position.

If the bidding documents establish that in the event of default the insurer must take over and finish the project (step-in obligation), the insurer shall execute the underlying contract and relevant amendments, as intervening party, and will be able to:

  1. freely access the construction facilities;
  2. supervise the performance of the underlying contract;
  3. have access to technical and accounting audits; and
  4. request clarifications from the technical team responsible for the works.

In the event of breach by the principal (triggering the bond), the following alternatives will be available for the insurer:

  1. the insurer may step in, exempted from the obligation to indemnify losses and penalties arising from the principal’s default; or
  2. the insurer may decide not to step in, and will have to (1) pay contractual penalties of up to 15 per cent of the contract’s value, and (2) pay for losses and damages or excess costs (overcharges) resulting from the contracting of a new player, provided, however, that the sum of items (1) and (2) above is capped at the policy limit.

In the step-in scenario, the insurer will be able to subcontract, in whole or in part, third parties to finish the works.

The Bill of Law is currently under scrutiny by the National Congress and does not apply to concessions of public services. The next steps are approval by the House of Representatives (Câmara dos Deputados) and subsequently ratification by the Senate (Senado); following approval by the Senate, the Bill of Law may be enacted by the President, who has the power to veto provisions.

vi Regulatory flexibility

In March 2019, SUSEP’s chairman and main internal decision-making team were replaced by more business-oriented individuals who seek to make the regulatory environment less bureaucratic and time-consuming, to harmonise legislation with technological advances, and to stimulate growth of the insurance, reinsurance, private pensions and capitalisation market and its participation in the Brazilian GDP. This new administration is working together with the BCB and the CVM to innovate within the securities market, and an example is the Special Committee on Innovation and Insurtech. The federal government has already stated its intention to merge SUSEP with the Brazilian Public Pension Plan Authority (PREVIC), which regulates closed-end pension plans. Nevertheless, to date, no specific bill of law or provisional measure has been issued in this regard.