The Spanish Law on Insurance Contracts defines civil liability insurance as that for which the insurer is obliged to cover, within the limits of the law and the policy, the risk of the birth of the obligation of the assured, arising from a legal liability, to indemnify a third party.
This definition raises a traditional question in the context of Insurance Law regarding the moment in which it is considered that the loss has occurred; Does the loss correspond to the occurrence of the harmful event, to the third party's claim or to the payment of compensation by the assured?
The Supreme Court settled this issue in 1991 by establishing that in civil liability insurance, the loss was the occurrence of the harmful event. This interpretation was justified by referring to the text of Law on Insurance Contracts article 73, insofar as if the risk assumed by the insurer is the birth of the obligation to indemnify by the assured, then the moment of the materialization of said risk is necessarily the occurrence of the harmful event.
Therefore, and following the interpretation of the Supreme Court, civil liability insurance covers all the harmful events that occur while the policy is in force following the occurrence basis principle regardless of when the claim of the third party is made.
The immediate consequence of this interpretation, as it was decided also by the Supreme Court in 1991, is that all the clauses introduced in policies of civil liability in order to exclude or to limit the claims submitted to the assured after the termination of the contract, would be considered as harmful and, therefore, illegal.
This scenario placed Spanish insurers in a situation of great legal uncertainty given that they faced a potential liability that extended over time well beyond the termination of the policy. However, in 1995 the Spanish legislator took action on the matter and modified the Law on Insurance Contracts in order to expressly recognize the validity of claims made clauses in civil liability insurance, although with some caveats:
- That two types of claims made clauses will be valid:
- Those for subsequent coverage, under which the losses occurred during the period of validity of the policy will be covered as far as the claim of the third party takes place during the period of the policy or, at least, one year from the termination of the contract or its extensions.
- Those of retroactive or previous coverage by virtue of which the losses occurred prior to at least one year from the entry into force of the policy, would be always covered when the third party’s claim is received during the contract’s period. All this regardless of whether the contract is renewed.
- That said clauses restrict of the rights of the insured and therefore, their validity will depend on their compliance with the requirements established in Spanish Law on Insurance Contracts art. 3; they must be highlighted from the rest of the clauses and must be expressly accepted in writing by the assured.
However, this legislative reform created a new controversy as the wording passed in 1995 introduces new doubts; Is the Law imposing a double track clause with previous and subsequent coverage, or would it suffice to cover one of these tracks?
This controversy resolved this year by the Supreme Court in full session in a ruling dated April 26th in a case involving the declaratory proceedings filed by a quantity surveyor against his civil liability insurer was decided. The Plaintiff alleged that the claims made clause included in the policy was null and void since, although it covered all the claims made during the term of the contract, regardless of when the damage occurred, the clause expressly excluded the claims filed subsequently. In other words, the clause in dispute fully complied with the retroactive coverage requirements included in the Law on Insurance Contracts, but not with those of subsequent coverage.
The Court of First Instance considered that, in effect, the claims made clause in dispute did not comply with the provisions of the Insurance Contract Law and this resolution was fully confirmed by the Appeal Court.
These two judgments were appealed by the insurer before the Supreme Court that, in the afore mentioned judgment of April 26th, article 73 of the Insurance Contract Law regulates two different scenarios for claims made clauses, each with its own requirements for the time of the coverage. So, for the validity of the subsequent coverage, retrospective coverage is not required and vice versa. That is, the Supreme Court understands that the two tracks of coverage in time referred to in article 73 of the Law on Insurance Contracts are not cumulative and that it would be sufficient to include one of the two tracks in a policy to meet the requirements of validity established in said article.
This ruling, issued by the Supreme Court in full session, definitively resolves the issue, at least with respect to the relationship between assured and insurer. Well, we will have to wait and see if the Supreme Court maintains this same position also in cases of direct action filed by a third party against the civil liability insurer.