Insurance Law360
June 18, 2018
The 2018 Atlantic Hurricane Season began on June 1 and ends on Nov. 30. This year, the season began with concerns about what is yet to come — particularly in light of the passing of Subtropical Storm Alberto through the Gulf of Mexico — and the lingering impact of the last hurricane season. This is particularly true in Puerto Rico. The 2017 Atlantic Hurricane Season was unkind to “La Isla del Encanto.”
In 2017, Hurricanes Irma and Maria delivered a one-two punch within a span of weeks. While the 2017 Atlantic Hurricane Season has been dubbed the most expensive hurricane season in history, with early tabulations indicating approximately $200 billion in damage,[1] indemnity payments in Puerto Rico are still the subject of measurement and quantification challenges today. In the course of adjusting last year’s CAT losses in Puerto Rico, a number of insurance- and reinsurance-related issues were exposed. From widespread issues with underinsurance, to the lack of qualified claims consultants equipped with the necessary tools (in some instances language being the primary barrier), to the failure to understand the functions and requirements of local insurance law and regulations, last season is turning out to be a very costly lesson in many ways.
When catastrophic storms like Maria leave contested insurance claims in their wake, both insureds and insurers understandably seek an efficient, cost-effective way toward resolution. For instance, the parties may seek to expedite the claim process and avoid costly litigation by engaging in various methods of alternative dispute resolution, including arbitration or appraisal. While parties to disputed claims in Puerto Rico may be asking themselves whether arbitration or appraisal could help them resolve Maria claims more efficiently, the answer to that question is, unfortunately, “no.”
Chapter 26, Section 1119 of Puerto Rico’s Insurance Code, provides as follows:
(1) No policy delivered or issued for delivery in Puerto Rico and covering a subject of insurance resident, located, or to be performed in Puerto Rico, shall contain any condition, stipulation, or agreement:
(a) Depriving the insured of right of access to the courts for determination of his rights under the policy in event of dispute.
(b) Depriving the courts of Puerto Rico of jurisdiction of action against the insurer.
(c) Limiting right to institute action against the insurer to a period of less than one year from date cause of action accrues in connection with all insurances other than property and marine and transportation insurances; in property and marine and transportation policies such right shall not be limited to a period of less than one year from the date of occurrence of the event resulting in the loss.
(d) Requiring that the policy be governed by the laws of any other jurisdiction except as necessary to meet the requirements of motor vehicle financial responsibility laws or compulsory disability benefit laws of such other jurisdiction.
(2) Any condition, stipulation, or agreement in violation of this section shall be void, but such voidance shall not affect the validity of the other provisions of the policy.[2]
The code’s prohibition against contractual agreement to an extrajudicial, alternative form of dispute resolution was at the center of the decision in Agustin Berrocales Gomez v. Tribunal Superior de Puerto Rico.[3] The facts in Berrocales involve the consumer purchase of a vehicle wherein the contract for $34,809.20 included the sale of an insurance policy issued by American Motorists Insurance Co. of Chicago for a premium of $2,054.00. Subsequent to the purchase, Berrocales sustained a loss to the insured vehicle and submitted a claim for said loss the value of which had been the subject of contention resulting in the filing of lawsuit against the carrier.
The carrier filed a motion, which was granted by the court of first instance, effectively abating the court proceeding and compelling Berrocales to participate in “forced arbitration against his wishes.” The specific provision analyzed by the Supreme Tribunal of Puerto Rico in the cert petition read as follows:
If the insured and the company fail to agree as to the amount of loss, either way, within 60 days after proof of loss is filed, demand an appraisal of the loss. In such event the insured and the company shall each select a competent appraiser, and the appraisers shall select a competent and disinterested umpire. The appraisers shall state separately the actual cash value and the amount of loss and failing to agree shall submit their differences to the umpire. An award in writing of any two shall determine the amount of loss. The insured and the company shall each pay his chosen appraiser and shall bear equally the other expenses of the appraisal and umpire. The company shall not be held to have waived any of its rights by any act relating to appraisal.[5]
You may recognize this language as standard appraisal language, which is commonly given effect in most jurisdictions. But not in Puerto Rico. The Supreme Court of Puerto Rico reasoned, through a series of syllogisms, that compulsory appraisal or arbitration was void as a matter of law. The court’s conclusion was likely the result of a careful navigation of the tension between a judicial dislike of appraisal clauses such as the one at issue in Berrocales and public policy favoring arbitration as a viable alternative dispute mechanism in commercial law, as codified in Puerto Rico’s Law of Arbitration.[6]
First, the court determined that the Civil Code prohibits parties from contracting in contravention of the laws of the Commonwealth.[7] Second, the court noted that the Insurance Code was enacted on June 19, 1957, postdating the enactment of the Law of Arbitration, enacted May 8, 1951. Additionally, the court noted that the Insurance Code governed a very specific area — insurance — which was the basis for concluding that the Insurance Code controlled (even above the Law of Arbitration) in the dispute brought by Berrocales. With this rationale in place, the Supreme Court of Puerto Rico vacated the lower tribunal’s decision to compel arbitration, remanded the dispute to the lower tribunal with instructions to proceed in litigation consistent with the Supreme Court’s opinion.
Another interesting aspect of this decision lies in the dicta explaining the controlling order of each respective portion of codified law in Puerto Rico. The opinion contains a brief sentence wherein the Supreme Court of Puerto Rico explains that even a mutual agreement to arbitrate would be in violation of the law.[8]
With regard to mediation, courts in Puerto Rico have taken a balanced approach. Admittedly mediation is also a method of alternative dispute resolution; however, the analysis focuses on the inherent distinctions between mediation and arbitration or appraisal. For instance, in the case of Massó-Torrellas v. Municipality of Toa Alta,[9] the court explains that usual meaning of arbitration is that the dispute resolution is binding and final. See Fit Tech Inc. v. Bally Total Fitness Holding Corp.[10] It goes on to explain that the usual meaning of mediation is that the dispute resolution is non-binding.[11] Based upon both state and federal decisions issued in Puerto Rico, it appears that nonbinding mediation would not be deemed violative of the Insurance Code in Puerto Rico.[12]
To the extent that insurers and insureds are caught in the chaos of the claims left behind by the 2017 Atlantic Hurricane season in Puerto Rico, even an agreement to arbitrate or appraise claims with the aim of a more expeditious resolution would violate the Insurance Code and therefore offer no real closure or ability to avoid litigation. The Insurance Code in Puerto Rico has been interpreted as providing a singular path to resolving contentious insurance claims: the judicial system. So, when it comes to insurance disputes, keep in mind “No Appraisal or Arbitration in PR.”
[1] https://www.bloomberg.com/news/articles/2017-11-26/the-most-expensive-u-s-hurricane-season-ever-by-the-numbers
[2] See 26 LPRA §1119.
[3] Case number O-73-419, 102 D.P.R. 224 (1974).
[4] Berrocales, 102 D.P.R. at 225.
[5] Berrocales, 102 D.P.R. at 225 n. 1.
[6] See 32 LPRA §§3201 et seq.
[7] See 31 LRPA §3372.
[8] See Berrocales, 102 D.P.R. at 227 (holding that “the parties would not have been able to agree to voluntary arbitration because it too would be in contravention of the Insurance Code.”).
[9] 845 F.3d 461, 465 (1st Cir. 2017)
[10] 374 F.3d 1, 7 (1st Cir. 2004)
[11] See Massó-Torrellas, 845 F.3d at 465 citing In re Atlantic Pipe Corp., 304 F.3d 135, 141 (1st Cir. 2002).
[12] See e.g. Am. Intern. Ins. Co. of PR v. Thames Dick Superacueduct Partners, Inc., KAC2001-2818(901), 2003 WL 23324493, at *7 (P.R. Cir. Dec. 15, 2003) (referencing parties having participated in “proceso de mediación” in a matter that also included coverage disputes over professional negligence associated with an aqueduct project); In re A. Pipe Corp., 304 F.3d 135, 139 (1st Cir. 2002)(court decision finding that mediation likely to conserve judicial resources and therefore to the extent that a court is able to incorporate the appropriate safeguards to protect the rights of the parties, it is a desirable step in resolving disputes without any prejudice to the parties’ positions vis-à-vis the litigation as a whole).
