Brazil, the largest South American economy, has been an important market for international insurers and reinsurers for many years. At the same time, Brazil presents major property risks for underwriters. Companies covering first-party risks in the country, and particularly international reinsurers operating via fronting arrangements, need to be aware of several critical claim-handling issues and the country’s general legal framework governing insurers and reinsurers.
Brazilian Insurance and Reinsurance Systems
The Superintendence of Private Insurance ("SUSEP") is the primary regulator of Brazil’s insurance industry. SUSEP monitors and implements the guidelines and rules issued by the National Council of Private Insurance ("CNSP"), the insurance system’s governing body. SUSEP is also responsible for supervising and controlling the creation and operation of insurance and reinsurance companies (except health insurers).
The Brazilian Institute of Reinsurance, formerly a state-controlled company, had a monopoly in reinsurance until 2007, when the market opened to private companies, including international reinsurers. There are three kinds of reinsurance companies authorized to do business in Brazil: (1) local reinsurers, headquartered in Brazil; (2) admitted reinsurers, with a representative office in the country; and (3) occasional reinsurers, operating from abroad but registered with SUSEP. Generally, the international market provides coverage for major property risks in Brazil through policies issued by local insurers through a fronting arrangement with facultative reinsurance companies.
Legal Framework of Coverage Disputes
Brazil has a civil law system, and the substantive rules governing insurance and reinsurance contracts are contained in the civil (general provisions for insurance) and commercial (marine insurance) codes, as well as specific statutes and regulations. Insurance and reinsurance disputes involving risks located in Brazil are subject to the jurisdiction of Brazilian state courts and the application of Brazilian law is mandatory.
Notwithstanding the mandatory application of Brazilian law and jurisdiction in the insurance and reinsurance industries, insurance and reinsurance contracts may include arbitration agreements. While the enforceability of arbitration agreements in insurance contracts demands the fulfillment of several statutory/regulatory requirements to demonstrate clear acceptance by the insured to this alternative dispute resolution method, arbitration agreements are more easily enforceable and often included in Brazilian reinsurance contracts. Further, according to Resolution CNSP 168/2007, the parties can agree to arbitrate reinsurance disputes in a foreign jurisdiction and to have foreign law govern their dispute. By agreeing to arbitrate, the parties can have their disputes resolved by industry experts and avoid the extensive delays in the Brazilian court system due to a major backlog of cases. Perhaps more importantly, arbitration avoids local courts which, for the policyholder, cedent and reinsurer, may not be the best forum to resolve complex high-value coverage disputes.
Underwriting Risks in Brazil: Critical Industries
Brazil is South America’s leading economic power. The country has been one of the fastest-growing economies in the world and, while there has been a recent slowdown, the economy still grew by 2.3 percent in 2013.
Several sectors of the growing Brazilian economy are of particular importance to international underwriters because of the magnitude of claims that may arise from industries such as: (1) infrastructure, which has received large investments as a result of the government’s Growth Acceleration Program, and the FIFA World Cup and 2016 Olympics in Rio de Janeiro; (2) oil and gas, primarily produced in the offshore Campos and Santos basins, and with potential to significantly expand due to the recent discoveries of vast offshore presalt oil and natural gas fields; (3) electricity, with hydropower generating 80 percent of the country’s electricity in massive plants like the Itaipu Dam and new Belo Monte Dam, and with the fast growth of alternative power sources such as wind farms; and (4) mining, benefiting from Brazil’s vast mineral deposits and experiencing significant growth.
Handling Claims in Brazil: Key Issues
First-party losses in the above industries often result in highly complex insurance claims, with significant technical components and involve large amounts of money, particularly with respect to business interruption coverage. For example, some major recent claims have arisen out of the following events: machinery breakdown at a steel plant; failures in an iron ore conveyor system; the collapse of ship unloader cranes at a port terminal; and workers’ protests at a hydroelectric dam that was still under construction.
In handling these types of claims, it is critical to work with experts with local experience (e.g., adjusters, engineers, lawyers, accountants, etc.,) to obtain advice on cause and origin, underwriting and coverage aspects and other relevant issues. The assistance of these experts becomes all the more important because Brazil does not have a developed body of law regarding issues like business interruption and, in the absence of legal precedent, the analysis of the evidence by these experts is likely to become the basis for the resolution of the claim.
It is also important to be aware of the key rules governing the adjustment of insurance claims in Brazil. A particularly significant requirement established in the regulations is that insurers must adjust losses and pay claims within 30 days from the date the policyholder submits the documents required by the policy to substantiate the claim — failure to do so may result in the imposition of a monetary inflation adjustment and interest penalties. The 30-day period will be suspended if the insurer requests additional documents from the policyholder. Because many large first-party risks in Brazil are reinsured by the international insurance market through fronting arrangements with local direct insurers, and in light of these time constraints, international underwriters should become involved in the process as soon as a claim is received, particularly if there is a “follow-the-settlements” clause in the reinsurance contracts.
If a claim ends up in litigation, some relevant features of Brazilian civil procedure are: (1) there is no pretrial discovery or duty of disclosure, although the parties may eventually request the disclosure of specifically identified documents provided some specific requirements are met; (2) the trial court usually appoints its own technical expert if necessary, and the parties may appoint their own experts to assist; (3) cases are decided by a judge or panel of judges, because there are no civil jury trials in Brazil; (4) although previously decided cases play a significant role in the adjudication of disputes, these cases are not binding on the courts except for some specific rulings from the Supreme Federal Court on constitutional matters; and (5) the losing party must pay the prevailing party’s attorneys’ fees (limited to 20 percent of the updated value of the claim) and litigation costs.
International reinsurers are underwriting the major first-party property risks in Brazil via fronting arrangements. Therefore, their direct participation in the adjustment of losses is of paramount importance, particularly when local retention is reduced and the reinsurance contracts contain “follow-the-settlements” clauses.
Some critical measures to be adopted by those underwriters to properly evaluate and reduce their exposure, as demonstrated by large claims submitted in recent years, are: instructing experts as soon as practically possible to investigate the matter (including site surveys if necessary); determining all the necessary documents to be requested from the insured as soon as possible; establishing proper communication channels with the cedent to guarantee full cooperation; obtaining legal advice on relevant aspects (coverage, subrogation, gaps in cover, etc.,); and establishing accurate reserves.
Pablo Hanna also contributed to this article.
Insurance Law360 - August 14, 2014