New Insurance Law in Chile

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Chile’s new insurance law came in to force on 1 December 2013. The new rules amend the Chilean Code of Commerce, including rules deriving from the 1865 Civil Code. We have summarised some of the features of the new law.

The changes to the code form part of a package of revisions to Chilean insurance and reinsurance law. New claims adjustment rules also came into force in 2013.

Recognition of Modern Classes of Cover

The old law formally recognised only the concept of insurance over cosas (goods or objects), although in practice, a broader range of coverage has been available for many years. The new law expressly recognises that insurance can cover a wide range of risks and addresses some specific concepts, including insurance for civil liability, loss of profits, credit, life, health, and reinsurance.

Civil Liability Insurance

The concept of civil liability insurance is set out in the new article 570 of the Chilean Code of Commerce (the new law). Unsurprisingly, the new law confirms that civil liability insurance concerns the insurer’s obligation to indemnify the insured for loss and damage caused to third parties.

Article 574 forbids the insured from accepting or settling a third-party claim without the insurer’s approval. Breach of this obligation exempts the insurer from the obligation to indemnify.

What is surprising is that the new law seems to envisage a form of direct relationship between the insurer and the third party. Article 513 introduces the concept of a “Beneficiary” defined as: “the subject who, without being insured, is entitled to indemnity if an accident occurs.” Article 570 provides that:

In civil liability insurance, the insurer will pay the indemnity to the third party damages by virtue of a definitive judgment or an out-of-court settlement concluded by the insured with its consent.

Historically, third parties had no direct cause of action against insurers. Although the new position is unclear, it is possible that third parties may now try to argue that they can directly sue civil liability insurers.

Some jurisdictions do allow third parties to pursue insurers directly, in limited circumstances. For example, the English Third Parties (Rights Against Insurers) Act 2010 will (when in force) allow an injured third party to claim against an insurer, where the insured has become insolvent. The new Chilean rules seem to go further than that, in that an insolvency event is not stated to be a prerequisite to the right of action.

Proof of Insurance

The new law states that an insurance contract is consensual, that is to say, it exists as soon as there is an oral agreement between the insurer and the insured. The contract’s existence and terms may be proved by “all legal means,” provided that the agreement is recorded, either on paper or electronically.

Limitation Period

The new law has reduced the standard limitation period for claiming against insurers to four years. Time runs from the point at which the claim becomes actionable against the insurer. The running of time against the insured is interrupted when it reports the incident to the insurer. Time recommences running when the insurer advises of its decision.

The statute of limitations period may not be reduced by agreement between the parties.

The limitation period regarding claims under civil liability policies cannot be less than the period in which an injured third party has to claim against the insured.

Two or More Causes of Loss

The new law states: “if the accident originated owing to various causes, the insurer will answer for the loss if any of the causes reflects a risk covered by the policy ….”

A similar principle applies in English law: where there are two proximate causes, one of which is covered, and one of which is not, the insured can recover on the basis that one of the causes was an insured peril (The Miss Jay Jay). On the other hand, if there are two proximate causes, one of which is covered, and one of which is specifically excluded, the insured cannot recover (Wayne Tank and Pump v Employers’ Liability Assurance). The new Chilean rules have not specifically addressed this latter question.

Extension of Meaning of “Marine Insurance”

Marine insurance is now deemed to include: “installations and machinery geared to perform loading, unloading, stowage and the care of ships and any other property that the parties believe is exposed to risks associated with the sea.”

Traditionally, only cargo insurance, hull and machinery, loss of hire, and owner’s/carriers’ liability insurances were considered to be marine insurance and therefore subject to average. Now that the definition has been expanded, it would seem to follow that the new categories of marine insurance should also be subject to average, although it is not clear if the draftsman intended this.

Dispute Resolution

Under the new law, disputes between the insured, or beneficiary, and the insurer “will be resolved by an arbitrating referee, nominated by mutual accord by the parties when the dispute arises.” If the parties cannot agree to a referee, the court will nominate a referee who will then “have the powers of an arbitrator,” and who should “pronounce a verdict according to the law.” In cases of very low quantum, an insured may still elect to sue via the court.

Such arbitrators can consider “any” categories of evidence and can decide “in any phase of the proceedings, the means of gathering evidence it feels are appropriate, summoning the parties.” Arbitrators’ powers as to the collection of evidence are therefore very broad indeed.

The change to mandatory arbitration should lead to the creation of a corpus of  specialist insurance arbitrators.

Claim Notification

The new law provides that, in the context of liability policies, the insured should inform the insurer “in reasonable time” of any fact or circumstance that could lead to a claim against it. The consequence of late notification is not spelled out in the new law. Also the provision deals only with liability insurance. (In first party policies, the policies often contain express time periods for notification.)

Reinsurance

The new law contains a general definition of reinsurance and contains a number of particular provisions as to its operation. The general definition states:

the reinsurer is obliged to indemnify the reinsured, within the limits and forms fixed in the contract, for the liabilities that affect its wealth and capital as a result of the obligations into which it entered into one or more contracts of insurance or reinsurance.

Interestingly, it is also stated that: “international standard practices and customs over reinsurance will serve to interpret the parties’ will.” This provision might be welcomed by international reinsurers who so far have had to operate in something of a legal vacuum regarding reinsurance law in Chile. On the other hand, this provision also gives rise to uncertainty because it is questionable if there is such a thing as “international standard practice” at all. Furthermore it is not clear what will occur where a relevant international standard practice comes into conflict with substantive provisions of Chilean law.

It will be interesting to see if tribunals will de facto adopt principles of English law, by dint of reference to London market practices. That would seem to be appropriate where such reinsurances are negotiated and placed in the London market, but are subject to Chilean law. Certainly, English law cases can provide guidance regarding many perennial reinsurance issues, including the meaning of claims control/co-operation clauses, the effect of follow the settlements clauses, aggregation of losses and so on.

Article 585 makes clear that reinsurance is independent of insurance, stating: “In no way does the reinsurance alter the contract of insurance. The insurer cannot postpone the payment of the indemnity for an accident to the insured on the basis of reinsurance.” This provision should go some way to addressing an issue that sometimes arises in which local cedants refuse to settle an inwards claim because they are mere fronting companies.

Article 586 says that:

reinsurance does not grant a direct action to the insured against the reinsurer, unless the contract of reinsurance establishes that payments due to the insured for accidents will be paid directly by the reinsurer to the insured or, if the accident has happened, the direct insurer assigns to the insured the rights that arise from the contract of reinsurance to collect them from the insurer.

The clause appears to recognise cut through clauses, which although widely used in facultative contracts, were of questionable value in the event of the insolvency of the insurer. It is not clear how this provision will be applied in practice. Logically, there is no reason why an insured cutting through to a reinsurer should be put in any better position than a cedant would have been. If that is correct, a reinsurer should be able to rely upon all of the defences that would have been available to it in an action brought against it by the cedant.

International reinsurers that remain uncomfortable with the rules regarding reinsurance should consider using English (or some other) choice of law and jurisdiction, at least on the outwards facultative contract.