A decision issued by the Brazilian Superior Court of Justice (STJ) on 15 May 2019 represents a shift in the Court’s approach as to whether a subrogated insurer is bound by an arbitration clause in the contract between the insured and a third party.
Previously, where the contract between the insured and the third party contained an arbitration clause, subrogated insurers had the option of pursuing the recovery in arbitration or in court. This was on the basis that subrogated insurers were not bound by the arbitration clause. If the other side contested this, i.e. pushed for the case to be heard in arbitration, courts tended to rule in favour of their own jurisdiction. However, the recent judgment handed down on 15 May 2019 confirms that an insurer is bound by the arbitration clause.
The decision, which has not yet been published in full by the STJ, was issued in a case brought before the Court for the validation of a foreign arbitral award issued by the ICC in New York.
Under Brazilian law, the subrogation rights of the insurer stem from article 786 of the Brazilian Civil Code. Article 786 states that “Once the insurance indemnity is paid, the insurer is subrogated, within the limits of the respective value paid, in all the rights and actions the insured has against the party who caused the damage.” Before the recent decision of the STJ, the prevailing interpretation of this article was that it offered the subrogated insurer the option of resorting to arbitration, at its own discretion, while still leaving open the possibility of seeking recovery in Court.
On the basis of the recent decision, if the underlying contract provides that disputes should be resolved through arbitration, an insurer cannot deviate from this provision and resort to the Courts to pursue recovery. The Court held that since the arbitration clause is binding on the insured, it also binds the insurer in any subrogated claim against a party who caused the damage.
The decision was not unanimous and the judgment transcripts have not yet been made public. While STJ decisions do not have binding precedent value, they are persuasive in forming future case law in Brazil. The clarification provided by this recent judgment needs to be considered by underwriters when assessing the merits of pursuing subrogated actions against third parties.
Authored by Geoffrey Conlin, Partner at HFW and Bernardo de Senna, an associate at the Brazilian law firm, CAL.