This article was published in Insurance Day, 10 August 2017, and can be read here.

While the participation of the London market in Latin America and other emerging markets is well established, there remain several peculiarities of local systems that make the quantification of, and prudent provision for, claims a challenge. One such area is the grounds on which local courts may award moral damages to a claimant over and above material damages, of the type that would be awarded by the English court and with which insurers will be more familiar.

Latin American courts will award moral damages to compensate claimants for what can broadly be described as emotional distress caused by the defendant. As such, moral damages are inherently compensatory, and in theory not exemplary, punitive or “symbolic” damages. A lack of precise guidance to date on moral damages quantification carries the risk of punitive damages masquerading as moral damages.

In Brazil, moral damages are provided for in article 5 of its Federal Constitution, which states: “All persons are… guaranteed… rights… in the following terms: v) the right of reply is ensured, in proportion to the offence, as well as compensation for property or moral damages or for damages to image.” And within article 186 of its civil code, the right of recovery against: “The one that, by action or voluntary omission, negligence or imprudence, violates rights and causes damage to another, even if exclusively moral….”

Brazilian courts are not constrained by the requirement to apply an objective test or standard, neither is the court constrained by any notion of judicial precedent owing to its civil law system. Nonetheless, Brazilian lower courts tend to follow jurisprudence from higher tribunals to avoid appeals. Further, there is no duty on the claimant to specify the amount of moral damages sought from the defendant in its pleadings.

Instead, as in other civil law countries, the Brazilian courts are guided by overarching principles of fairness, prudence and reasonableness, as well as the circumstances of the claim and the economic and social positions of both claimant and defendant. However, despite recent common law type of procedures in Latin America, the awarding of moral damages is at present treated as a matter of judicial discretion, which can make it incredibly challenging for defendants and insurers to predict the amount that might be awarded – particularly in circumstances where a judge is aware of insurers’ involvement and/or in circumstances where a claimant’s livelihood has been particularly adversely effected. A common law approach of identifying parameters that can act as a precedent could be helpful here.

In Brazil, one does not have the institution of punitive damages per se. Jurisprudence establishes that the moral damages have three main functions: compensatory, punitive and deterrent (or preventive). The punitive function is only used as one of the quantification criteria for moral damages. Although there are three functions, the Brazilian judiciary, as with others in civil law, may appreciate that the application of the punitive function of moral damages could result in the creation of a “moral damage industry” like that of the US, so the reasoning on which most awards are based is on compensation and deterrent.

Even if punitive damages as understood in the market may not become a practical problem everywhere in Latin America, reinsurers must be aware of local legal systems’ approach to dealing with punitive damages that are potentially disguised as “moral” damages.

Awards for moral damages in Brazil have been sought or made in cases covering all lines of insurance, including personal injury and fatalities, environmental pollution, corruption and bribery, cyber and trademark disputes.

By comparison, the Mexican civil law system defines moral damages in article 1.916 of its civil code: “the non-physical injury inflicted upon a person’s feelings, affection, beliefs, decorum, honour, reputation, privacy, image and physical appearance, or how that person is being perceived by others. Moral damage is to be presumed when any person’s freedom, or his or her physical or psychological integrity, are illegitimately injured or diminished”.

The Mexican courts’ approach to awarding moral damages is broadly consistent with the approach taken in Brazil. Up to around 2010, Mexican courts had typically made awards of moral damages in the region of $20,000 to $200,000.

However, in 2010 two individuals were electrocuted when falling in water that had become electrified owing to negligent maintenance of pumping equipment. In considering the economic situation of both victims and the insured defendant, the court awarded moral damages in the equivalent of $2.4m. In the context of a more Anglo-Saxon court process this creates the risk of a quasi-punitive damages quantum calculation methodology.

Because the moral damages principles are very similar across Latin American countries, it is not unreasonable any dispute concerning moral damages elsewhere in Latin America would follow a similar approach referred to above and we are already seeing parallel cases in Ecuador, Honduras, Chile and elsewhere. The subjectiveness of the moral damages allows the courts to expand their applicability to more recent subjects, which is the reason why today we can find claims that arise from digital/cyber injury and defamation and bullying.

Recently, we identified a considerable increase both in the amount awarded as moral damages and additional difficulties in bringing claims to an early resolution because of uncertainties in how those involved in disputes approach questions of moral damages. There are, however several practical steps insurers and reinsurers can take to minimise the risk of an unexpected award for moral damages.

At the underwriting level, insurers may opt to price the additional risk of moral damages and impose sub- limits. But in assessing sub-limits, it is important to understand the extent of the exposure in identifying sub-limits. Attention to the currency of the sub-limits is also key. Many contracts sub-limit moral damages in US dollars. However, as most Latin American currencies are weak compared to the dollar, moral damages sub-limits have become higher than the normal damages provisions, fueling the punitive damages masquerading as moral damages concerns.

On notification of a claim, an early awareness of how moral damages may affect quantum is essential to both the development of a defence strategy and to accurately reserving for the claim. In this respect, appointing defence counsel with knowledge and experience of both common law and international principles as well as navigating Latin American courts and claims is essential to best protect the separate interests of International reinsurers. This is particularly true for London-based reinsurers, many of whom carry a substantial portion of the local cedant’s risk, leading to situations where local interests are potentially not geared to properly deal with moral damages, or develop juridical or forensic methodologies to take appropriate steps to evaluate, defend or mitigate exposure.