The Mexican regulator, the CNSF, asked Lloyd’s to confirm that Lloyd’s underwriters will comply with a local jurisdiction requirement as established under the ‘Rules Governing the General Registry of Foreign Reinsurers for the Assumption of Reinsurance and Rebonding in Mexico’ (the ‘Rules’) 26 July 1996. Under the Rules, Lloyd’s is required to declare that underwriters unconditionally subject themselves to the laws and authorities of Mexico with regard to legal actions that take effect in the country and in which foreign entities take part. Failure by underwriters to comply with the requirement could result in the withdrawal of Lloyd’s registered status.
Lloyd’s also issued a Market Bulletin in July 2003 to advise the market that all reinsurance contracts with Mexican cedants are subject to Mexican law and jurisdiction. In addition, that Mexican contracts must either explicitly refer to Mexican law and jurisdiction or include a Mexican jurisdiction clause, subject to the type of slip adopted.
Mexican insurance/ reinsurance law
Mexican insurance law is codified in the Law of Insurance Contracts (LIC) which was originally passed in 1935. The provisions of the LIC cannot be overridden by the agreement of the parties to the insurance (and therefore the cedant will not be able to avoid its application).
There is no specific reinsurance law in Mexico and, in the absence of settled authority on the point, it is unclear whether the LIC applies at the reinsurance level. However, where a reinsurance slip states that the reinsurance is to follow the terms and conditions of the original policy then arguably the LIC is applicable to that reinsurance.
It is also worth noting that where the Mexican court considers the intention of the parties to be unclear (having applied all other rules of interpretation), the court will interpret the contract so that it provides the greatest degree of “reciprocity” between the parties. This is usually understood to mean that if insured has paid a premium then the insurer should honour its obligations under that contract to pay the claim. This rule of interpretation does not necessarily apply at the reinsurance level, although reinsurers may wish to have this in mind in developing claims handling strategies with its cedants.
Some of the nuances of Mexican law are summarised below:
(i) Non-disclosure/ Misrepresentation (Articles 8, 47, 48)
Whilst the principle of good faith exists under Mexican law it is not as wide as under the English doctrine in that there is no positive duty of disclosure. This area is governed by Articles 8, 47 and 48 of the LIC. Based upon these statutory provisions and the Mexican case precedents, insurers would need to prove four things to rely upon a nondisclosure/ misrepresentation:
(1) That the insured was requested to provide certain information through answers to a proposal form
(2) That there is evidence to show that the information provided in the proposal is incorrect
(3) That the non-disclosure/ misrepresentation refers to information that was material to the insurer when evaluating the risk and that it affected the terms of the contract and
(4) That the insured knew or ought to have known that the information provided was not correct.
In addition, the insurer must give written notice of rescission to the insured within 30 days from the time at which the insurer had knowledge of the misrepresentation. Afailure to do so may mean that the insured has waived the right to rescind the contract in the future. There is no need to tender return of premium.
If the Mexican court were to reach the view that the LIC is not applicable at the reinsurance level, then arguably, there is no rescission defence under Mexican law. In these circumstances, reinsurers may need to look to the civil remedy of Mistake which would be based upon the fact that the cedant provided erroneous material information at the time the reinsurance was placed. Mistake carries a higher burden of proof than rescission under Mexican law, but if proven will allow reinsurers to treat the policy as null and void (subject to returning the premium).
(ii) Claims notification (Article 67 and 68)
Under Article 67 of the LIC, the insured must notify the loss to insurers within a period of five days (from the date of acquiring knowledge). A failure to do so will give the insurer the right to reduce the indemnity that would have been paid had the notification been made on time. Furthermore, pursuant to Article 68, the insured may lose the right to an indemnity if the insured’s failure to notify is designed to prevent the insurer from investigating the loss. However, in practice, it is often difficult for the cedant to reject a claim on this basis as it would have to demonstrate an element of bad faith on the part of the insured.
(iii) Enforcement: Time Limitation Clauses (Articles 81 - 83)
Articles 81 and 82 of the LIC, provide that an insured shall have two years from the time at which it becomes aware of the existence of the circumstances which allow it to exercise its rights of action against the insurer. However, the two year limitation may be stayed where the loss is subject to an ongoing adjustment. In addition, in the case of an affected third party, to which the LIC grants a direct right of action against the insurer, the period is two years from the date it becomes aware of its right to claim under the policy. Apolicy which seeks to impose a more restrictive provision, may be rendered null and void under Article 83.
The Mexican courts have yet to fully address whether the LIC applies to disputes arising under reinsurance contracts. It is clear however that Mexican cedants will have to comply with its principles and so reinsurers should at least have these in mind when formulating claims handling strategies.