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Iberian and Latin American legal news in
brief
Brought to you by Kennedys' London and Madrid offices,
its associated offices in Chile and Portugal and its network of specialist
insurance/reinsurance lawyers throughout Latin America.
Spain
Maintenance duties in property
policies
Historically, the
insured’s obligation to keep the insured property in good condition, along
with the pre-contractual duty of disclosure of the true extent of the
risk, was regulated in the Code of Commerce. Under the Code, insurers had
the ability to decline claims more easily as even innocent
missrepresentations gave insurers a defence to
coverage.
Nowadays the Insurance Contract Act states
the insured’s duty to notify the insurer of any changes that affect the
risk such as those that arise from lack of proper maintenance. Conflicts
arise when a claim is made and the insurers' appointed experts or
adjusters reveal that the condition of the risk changed after inception
and the insured failed to report such change to the
insurers.
The existing caselaw is pro-insured as the onus of
proof is on insurers to establish that the insured failed to keep the
property in the same or better condition that was reported before
inception. Expert and adjusters' reports become crucial in such
circumstances. When addressing lack of maintenance disputes, the courts
have based their rulings on the insured’s obligation to disclose the true
extent of the risk at inception which is not necessarily the same as the
duty to maintain the risk properly albeit both are
related.
The case law produced by the appellate courts and
shared by the Supreme Court is to the effect that the lack of maintenance
by the insured must be made in bad faith or resultant from wilful
misconduct to allow coverage to be rejected. This is extremely difficult
to prove before the courts, albeit a focused investigation in this area,
yielding positive results for insurers, can be used in negotiation to
reduce the insured's expectations.
There is an added
difficulty for insurers to reject coverage on lack of maintenance grounds.
Part of the judiciary considers that any exclusion based on lack of
maintenance is a limitative clause, thus, it needs to be specifically
agreed by the insured in the policy contract. Unfortunately there are many
policies that are issued without documented proof of the insured’s
agreement, which is best achieved by having the insured sign on each page
of the policy.
Applying proportional underinsurance rules is
allowed by the Insurance Contract Act, however, the parties may agree to
waive the application of the average rule. The burden of proving whether
the property was underinsured falls on the insurer.
If in the
normal course of business and before a claim is made, the insurers detect
any modification of the circumstances affecting the risk, regardless of
whether the insured had anything to do with the change, insurers can
terminate the contract by serving written notice on the insured within one
month of discovery. Alternatively, insurers may propose new terms to the
insured to continue with the contract, by serving notice within two
months. Insurers are entitled to keep the premium related to the period
before the alteration in the risk was discovered. Should a loss take
place before insurers find out about the lack of maintenance or other
conditions worsening the risk as declared, the indemnity due to the
insured would be proportional to the difference between the premium paid
and that premium the insured would have been asked to pay had the true
entity of the risk been known at inception. Insurers are entitled to
rescind the policy only if the insured acte d in bad faith.
In the
case of special risks as defined in the Insurance Contract Act, usually in
connection with high quantum projects or extraordinary insurance lines,
the parties are allowed to choose the law applicable to the resolution of
disputes. However, most policies subsidiarily apply Spanish law in
any event.
Chile
Duty of maintenance in the context of
property policies
Risk is an
essential aspect of insurance, and we must bear in mind that insurance is
designed to transfer risks to the insurer in exchange for a premium. In
order for the insurer to validly insure the risk, it is necessary that all
circumstances of the risk are disclosed by the insured prior to the issue
of the policy.
Once the insurer has accepted the risk it seems
logical that it cannot be increased during the period insured. Changes to
the risk imply changes to the conditions of the original
contract.
The Commerce Code prescribes that the insured is not
allowed to alter the location or any other relevant circumstance that the
insurer had used to evaluate the risk. In case the insured makes any
changes without the insurer’s prior agreement, the insurer will be
entitled to cancel the contract.
In addition to the above, the
Commerce Code also determines that the insured must take care of the
insured property with the diligence of a good family man.
If the
risk is increased without the insurer’s prior consent and a loss occurs,
the insurer will be at liberty to ask for the cancellation of the
contract. However, such cancellation must be ordered by a judge after
evaluating the evidence available.
Some learned authors understand
that unsuitable maintenance of the insured property can automatically lead
the insurer to reject coverage without the need to go to court to declare
the cancellation of the contract.
Most fire insurance policies in
Chile establish that coverage will be suspended if the risk is increased
and the insurer is not notified of the new circumstances.
As per
the above, the increase of the insured risk without agreement from
insurers will lead to the declinature of coverage for the claim and
possibly cancellation of the contract. The rule of average will not assist
the insured in these situations. 
Portugal
The insured’s duty of maintenance of insured
property
The insured must
report to insurers any modification to the particular circumstances of the
insured property after the initial declaration of risk.
If a loss
arises from a defect in the insured property that was known by the insured
at the time the policy was issued, but not declared to the insurer, the
situation can be solved as
follows:
I. Cover the risk in case the insured notified the modifications before
the loss and within 14 days after acknowledging the
modifications.
II. If the modifications are not notified to the insurer, the insured is
entitled to reduce the indemnity in proportion to effectively paid premium
and the real premium in case the insurer had been aware of the increase on
the risk
insured.
III. Reject coverage in cases where the insured had acted in bad faith
trying to obtain an unlawful benefit. In this scenario the insurer is
entitled to keep the premium paid up to the loss.
In I and II
above, the insurer will be released from their duty to compensate the
insured if evidence is provided to the effect that the real or increased
risk was not within insurers' underwriting parameters and hence would not
have been insured in any event.
If a loss occurs the policyholder
or insured must try to minimise the damages with all means available.
Failure to comply with such requirement can lead to a substantial decrease
in the indemnity payable or even to reject coverage in cases where the
insured acted in bad faith causing significant damage to the insurer. As
an exception, it should be noted that insurers are not allowed to reject
coverage for insured’s bad faith in mandatory civil liability
policies. In these cases insurers are required to pay the indemnity
to the affected third party and recover from the insured once compensation
has been paid.
It is common in the market that policies include
exclusions in relation to inappropriate maintenance by the insured of the
insured property. In such cases the insurer is allowed to reject coverage
if it is evidenced that the insured did not comply with its
duty.
Amendments to
the subscription process of motor insurance
The Insurance Supervisor recently released
new rules that must be observed when issuing temporary insurance
certificates and/or international insurance certificates such as green
cards. Under the new regulation insurers must ascertain that the premium
is paid prior to issue of any certificate. The payment will be verified
through complex and rigorous policy issue control
protocols.
The green card must be valid within the same
period that the premium is paid. Those companies that have already issued
temporary certificates are not entitled to reject coverage based on the
existence of outstanding premiums. 
Argentina
The insured’s duty to keep the insured
property in good condition
The Insurance Act
determines the insured’s duty to keep the insured property in good
condition and communicate to insurers any relevant situation that affects
the risk. Further to these duties, the mentioned regulation lays down the
insured’s duty to disclose all relevant circumstances to the insurer, in
case relevant circumstances are not disclosed by the insured, insurers may
terminate the contract.
Are insurers allowed to reject
cover?
The Insurance Act allows the insurer to
reject coverage in case the insured did not properly notify the
circumstances that increased the insured risk. Insurers will be at risk in
those cases where the insured’s lack of notification was not caused by
negligence or where the insurer was aware of the relevant circumstances,
making notification by the insured superfluous.
If the risk is
increased by the insured, the coverage is suspended from the time the
insurer is aware of such circumstance. The insurer has the duty of
notifying the insured the decision of cancelling the policy within seven
days after the circumstance is found.
In case the increase in the
risk was not caused by the insured but by an external factor, the insurer
must notify the decision of terminating the policy within 30 days of
becoming aware of the relevant circumstances and give seven days notice
prior to the final cancellation.
In cases where the policy is
cancelled due to the increase in the risk, the insurer is entitled to
receive the applicable portion of the premium if the increase in the risk
was properly notified or keep the full premium in cases where the insured
did not report the situation.
Another option for the insurer is to
continue insuring the risk but recalculate the premium according to the
new scenario and applicable underwriting scheme.
Is
underinsurance applicable to these cases?
In
cases where the claim has not been rejected by the insurer and the insurer
did not receive the applicable portion of premium or did not recalculate
the premium, the insurer is allowed to apply the rule of average and
declare underinsurance, if applicable unless the contract provides
otherwise.
This helps keep a proper proportion between the
indemnity the insureds receive and the premium they pay, as the insurers
are not required to pay in excess of the value declared in the policy,
even if at the time of the loss, that value has increased. 
Bolivia
International insurance law conference
In December, the
AIDA (French for International Association of Insurance Law) section in
Bolivia held the Second International Insurance Conference in Santa Cruz.
The organisation of the event was shared with the Santa Cruz Cainco
Chamber of Commerce.
The conference included speeches on crucial
insurance topics such as: D&O, coverage issues in respect of property
affected by sabotage, strikes, riots, alternative dispute resolution
mechanisms, health insurance in Latin America and many other relevant
topics.
The conference received positive remarks from all the
attendants and sponsors.
The insured’s duty to keep the insured property in good
condition
The insurance
contract is based on risk and the Commerce Code determines that the
insurer covers all risk associated with the insured property, unless
otherwise established in the contract. These exclusions cannot restrict
coverage in such a way that makes the policy unsuitable for its
purpose.
The Law determines that wilful misconduct is not
insurable.
The Commerce Code states the insured’s obligation to
duly keep the insured property in good condition. Hence, any alteration to
the property caused by the insured must be notified in writing to the
insurer prior, to the alteration being made. In case the alteration is not
caused by the insured, it must be notified to the insurer within eight
days after discovery. If such notification is not made, the insurer’s duty
to indemnify is suspended. The burden of evidence is on
insurers.
Once the increase in the policy risk is notified, the
insurer can terminate the contract or recalculate the premium according to
the new conditions within 15 days after the notification. The insurance
policy is not annulled until eight days have elapsed, from the insurer’s
notification to the insured of the policy’s annulment. The duty to
disclose these alterations in the insured risk is not applied to life
insurance.
The intent of the Commerce Code is that a relevant
alteration in the risk is caused whenever such an alteration would lead
the insurer to refuse issuing the policy or issue the policy subject to
different conditions.
The mentioned legal provisions do not prevent
the insertion of exclusions in the wordings to reject all claims arising
from inappropriate maintenance of the insured property.
The Law
authorises applying the proportional or average rule wherever there is
underinsurance or over insurance. In such situations the indemnity is
recalculated according to the actual insured amount and taking in to
consideration the real quantum of the damage.
It must be pointed
out that pre-arranged value provisions are allowed under Bolivian Law.
Hence, insurer and insured can freely agree the insured amount. If the
insured agrees, the insurer can reserve it’s right to evidence that the
insured amount greatly exceeds the real value of the insured property and
have the indemnity reduced accordingly.
The above shows that the
insured has the duty of keeping the property in good condition, and the
insurer will be entitled to reject coverage where the property has not
been duly maintained, or alternatively annul the contract as per the
contract, otherwise by operation of the Code of Commerce. 
Brasil
Insurance in Brazil: the duty of the
insured to properly maintain the insured property while the policy is in
effect
In Brazil, utmost
good-faith of the parties is an essential of the contracting and
performance of insurance agreements. The duty of good faith implies the
proper maintenance of the insured property whilst the policy is in effect,
supplying accurate, complete and reliable information to the insurance
company, amongst others.
Failure to comply with the maintenance
requirements of the insured property may lead to different effects:
I. In the case of intentional or malicious failure to correctly maintain
the insured object e.g. the property, the insured loses the right to
indemnity under the
policy.
II. In case the risks are not intentionally increased, but arise only from
improper maintenance, local law and regulations provide that the insurance
company has the right to terminate the contract, or with prior written
consent of the insured, reduce the coverage or to adjust the premium
according to the new situation.
The consent of
the insured is necessary for the insurance company to modify the premium
and/or the conditions of coverage, re-establishing the technical-actuarial
balance of the policy. Such consent may be previously obtained in the
insurance agreement. 
Colombia
The insured’s duty to keep the insured property in good
condition
The duty of the
insured to properly maintain the insured property is usually established
within the policy wording. The Commerce Code allows the insurer to cancel
the contract if this duty is not fulfilled and reimburse the unused
portion of premium.
The insured has a duty to correctly maintain
the property, not doing so can imply an increased risk for the insured.
The insured has an obligation of notifying the insurer of any relevant
circumstances that may affect the risk within 10 days after discovery.
Once the insurer has been notified they can chose to cancel the contract
or recalculate the premium according to the new circumstances.
If
the notification is not made to the insured in a timely and correct
manner, the insurance contract comes to an end. Therefore, any loss
occurred after the insured risk was altered will not be
covered.
Underinsurance is not applied to this particular case.
There is no special requirement to develop underinsurance provisions in
the policy because they are expressly regulated by the Commerce
Code.
First risk provisions are also allowed in Colombia. In this
scenario parties agree that if a partial loss occurs the proportional rule
will not be applied, however, the insurer will pay a pre-determined
amount.
On the other hand, overinsurance could be applied if the
value of the insured property decreased at the time of the loss due to
unsuitable maintenance. If there is not bad faith on the insured’s behalf
any of the parties can request a reduction in the sum insured and the
premium.
If the parties had not agreed, in the contract, a
reduction of the sum insured in these circumstances and a loss occurred,
the insurer’s duty to compensate would be limited to the real value of the
insured property. 
Mexico
Maintenance of the insured
property
Most material
damage policies include provisions that require the insured to maintain
the insured property in good condition. This is particularly common in the
so-called machinery all risks insurance. The reasoning for these
provisions is that maintenance is crucial to the good functioning of the
property. Unsuitable maintenance may lead to a greater loss
ratio.
The duty of the insured usually includes an obligation to
perform proper maintenance of the property. They are also obliged to
ensure that maintenance contracts are up to date with the manufacturers or
distributors of the insured equipment. If the insured does not fulfil the
maintenance duty then the insurer is released of their duty to indemnify
the insured in the event of loss.
No specific provisions regulate
the duty of maintenance under Mexican Law. However, the Insurance Contract
Act (ICA) states that the insured has the duty of not aggravating the risk
and minimising the loss if a covered incident occurs. The insurer is
entitled to reduce the indemnity to the amount that would have been
indemnified if the insured had fulfilled its duty with diligence.
However, if it can be established that the insured acted in bad faith the
insurer is entitled to reject coverage.
It should be noted that
given the ICA does not regulate the duty of maintenance expressly, much
will depend on what has been agreed under the contract of insurance. The
policies must expressly mention this obligation in order for it to be
enforceable against the insured. If the policy does not include these
provisions, there is an alternative for the insurer may reject coverage
through proving that the insured did not perform the maintenance commonly
required in the industry. However, there is no applicable case law
on this subject.
The ICA states that it is the duty of the insured
to notify the insurer of any relevant circumstances that can affect the
risk. Such circumstances may be caused by the insured or third parties.
Therefore, the insured has a duty to notify the inaccurate maintenance of
the insured goods. If it can be established that the insured risk has
greatly increased, due to the insured’s lack of maintenance, insurers
would be released of their duty to indemnify the insured.
Detailed
regulation of this situation within the policy terms is crucial to
minimise controversies between the parties. 
Peru
The insured’s duty to properly maintain the insured
property in damages policies
There are no
specific legal provisions that determine it is the duty of the insured to
maintain the insured property in good condition while the policy is in
effect. However, this duty can be extracted from the general principle of
good faith that must guide all commercial contracts and is protected in
the Code of Commerce. In fact most property policies have provisions
that include the insured’s duty to maintain the insured property in good
condition, and this would be respected by the courts in the context of the
parties having freely negotiated a commercial contract.
The lack of
maintenance leading to an increase in the risk insured can lead to a
declinature of coverage, if the lack of maintenance is proved to be the
ultimate cause of the loss.
There is no case law on this subject,
but it is our opinion that judicial and arbitration courts would likely
rule in favour of the insured and make the insurer indemnify the loss,
unless the insurer can provide evidence that the lack of maintenance was
the main cause of the loss. In cases where the lack of maintenance has a
collateral impact on the occurrence or extent of the loss, it may be
possible for insurers to reduce the indemnity based on certain provisions
of the Civil Code, according to which parties must bear the consequences
of its own negligent behaviour.
The local market offers first risk
policies and also contracts that set out the application of underinsurance
rules. Both options are accepted and widely used in the local
market.
The Code of Commerce allows the application of the
proportional or average rule where the real value of the insured property
exceeds the sum insured (underinsurance). However, the Code is silent as
to the consequences of the property insured depreciating in value since
inception of the policy and up to the loss. It is common practice,
adopted from motor insurance policies, that the parties will agree, in the
contract, that the indemnity shall be based on market value i.e. the
market price of the insured property at the time of the loss. In such
cases, insurers will be entitled to take into account the maintenance of
the property, or lack thereof, when determining the market price at the
time of the loss. 
Venezuela
The insured’s duty to properly maintain
the insured property in damages policies
The Insurance
Contract Act (ICA) states that an insured is obliged to act with the
diligence of a good family man, in maintaining the insured property in
good condition and preventing the occurrence of any
loss.
Throughout the duration of the policy the insured, policy
holder and beneficiary are required to notify any modification of the
insured risk within five days after discovery. These modifications must
affect the risk so that the insurer would have changed the insurance
conditions,or not accepted coverage.
Once the insurer is notified
of the changes to the insured property, it has 15 days to establish new
conditions or to cancel the contract. Afterwards, the insured will have 15
days to accept the new conditions. If 15 days elapse and the insured has
not accepted the new conditions, the policy is
cancelled.
Is the insurer allowed to reject coverage for
lack of maintenance?
The insurer is released of its
obligations only in cases where the insured acts in bad faith, or with
severe negligence in not notifying the insurer of new
circumstances.
Is the insurer allowed to cancel the policy
when it finds out that the insured risk has suffered
modifications?
The ICA
determines that coverage is suspended in cases where the insured does not
fulfill the obligations set by the insurer for cases where the insured
risk is modified.
As a general rule, the ICA establishes that
unless otherwise stated in the policy, the insurer is released of its duty
to compensate the insured in cases where the policy holder, insured and/or
beneficiary act with negligence.
The ICA does not regulate this
situation, however if general principles of law are applied to this case
the insurer could be entitled to cancel the contract based on the
existence of a breach of an essential condition. This position is based on
scholar opinions that may be refuted.
Is underinsurance
rule applied to these cases?
Underinsurance (which is the
term given to the situation whereby the sum insured exceeds the real value
of the property insured) and in the event of a partial loss, insurers only
indemnify the insured proportionally to the missmatch between sum insured
and the real value, will rarely feature in a lack of maintenance
situation. If anything, insurers could face an overinsurance of the
risk, whereby, perhaps due to the lack of maintenance, the real value of
the property has fallen below the sum for which it was insured. If
the insured has acted in bad faith, insurers will be entitled to rescind
the contract and sue the insured for damages resulting from the attempted
fraud. In the absence of bad faith, the contract will stand, but the
indemnity due will not exceed the real value of the insured
property. Insurers will be required to return the overpremium
charged, but only for the policy period not yet incurred.
The
provisions as to overinsurance are mandatory, whereby the ICA allows the
parties to disregard the rule of underinsurance if agreed in the
contract. |
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