Insurance Litigation in Latin America

Insurance Litigation in Latin America: What lawyers need to know?
When industries suffer large-scale accidents and the production losses are estimated in hundreds of millions of dollars the insurance market is seen as the remedy when an event of this nature takes place. Learning about how insurance mechanisms operate is increasingly important, not only for the companies involved in the claim but also for the public, press and the companies’ advisers: including, of course, the attorneys of all of those involved in the accident.
Attorneys can face questions on the sense and scope of exclusions in policies, limits and sub-limits of coverage, how the reinsurance sales systems work and particularly the content of the contracts between the insurer, assignor and reinsurer – as well as the implications that these contracts may have for the company and for the claim which they may eventually face.
The expansion of the Latin American economy over the last years has been driven by the strong demand for raw materials, especially from Asian countries.
It is well known that since 2004, China in particular has become the exporting countries of Latin –America’s biggest customer. The increase in demand from such a large country has driven the price of some raw material to prices never seen before. As the Economic Commission for Latin America and the Caribbean (CEPAL in Spanish) has pointed out, world economic growth and the increasing participation of China, India and other Asian economies has boosted trade for South American countries by 31 per cent since the 1990s.
The same organisation has also pointed out that manufactured goods coming from some Latin American countries have shown a sustained growth reaching almost 20 per cent in 2005. For example, in Brazil, exports of manufactured goods currently represent 56 per cent of the country’s total.
Many of these Latin American companies, either private or state, are coping with this high demand by working at the top of their productive capacity. Some trade on their future assets and most sell practically all the commodities – unimproved raw materials which require short transformation processes as metals, energy, food and consumables – they produce daily.
With companies producing high commercial value goods at a pace never seen before, with a secured demand and sales with amazing profit margins, it’s not hard to imagine how catastrophic any event which might totally or partially paralyse this production would be.
Thus, in the case of a mining company which produces three million dollars in copper a day, or in the case of an oil company which could produce twice that, interrupting their operations could cost them several hundred million dollars. In high price periods such as now, two or three months of discontinuance would have a severe impact on a company, even when all necessary measures have been taken to mitigate the losses.
It is then that all thoughts turn to insurance, particularly those policies which cover loss for business interruption and which indemnify damages for discontinuance of production. Increasingly, insurance programmes to protect physical goods and contracting are just a small chapter in the complex insurance process of big businesses. Precisely due to the high daily production level, insurance for protection from loss for damages for business interruption has become these businesses’ risk managers’ greatest worry nowadays.
The policy Contract
The value of the amounts insured and the technicality of their structure make these policies especially complex, not only in their design but also in their interpretation. This complexity is added to by the re-sale mechanism of insurance companies, which is often unfamiliar not only to the companies but also to their lawyers. This re-sale occurs because in business interruption insurance for big companies in mining, oil, energy, manufacture and even in-bond assembly of various goods, the insured amounts are usually so huge that it is impossible for the local insurance companies to take the risk by themselves. They must resort to the coinsurance mechanism, through which they share the risk with other local insurance companies, and more importantly they resort to reinsurance, a mechanism through which they assign part of the risk to foreign reinsurance companies which generally operate from the sophisticated European and American markets.
The participation of these entities in the insurance chain makes insurance contracts more complicated for the companies’ legal counsel, especially when clauses which establish deductibles, sub limits, exclusions, coverage conditions and specific mechanisms for the calculation of loss are incorporated in these contracts. If a serious event affects the operation of such a mega-business, not only are the insured company’s own mechanisms for these contingencies activated, but also the mechanisms of local insurance companies. Legal counsel will also quite certainly be expected to consider the procedures that the reinsurer in London, Zurich or New York has established for such great claims of policyholders with operations in Latin American countries.
The risks are usually so big that the number of reinsurers intervening in the sale of reinsurance of just one company can add up to 10 or even more. Each one has not only its own contingency policy and specific procedures but also its own language and ruling law, making claim management many times more difficult than at first may seem.
Once a claim of this kind occurs, it is not only the law firms advising the insured companies for whom the scenario is particularly complex. Reinsurers’ lawyers often lack knowledge of the regulation of Latin American markets, and this ignorance of insurance law of each country can mislead them. For example, when interpreting local insurance contracts, it is natural for reinsurers’ lawyers to apply reasoning using their own legislation, which sometimes opposes the regulatory processes of the local markets.
There is another layer of dissociation between the company making the claim and the reinsurers. The local insurance companies which take this kind of risk are usually international companies, with strong technical support and well constituted procedures. They are cautious in selling on reinsurance contracts, since the seriousness and solvency of the reinsurer is their guarantee of payment. Many productive companies trust this process, and contract their insurance through brokers or examine only the primary policy without worrying very much about what happens further on in the reinsurance contract. However, this may be where the final fate of their claim will be seen.
Negotiating the maze
What should a lawyer focus on when faced with a difference of opinion between policyholder and insurer, and the negotiations this kind of problem implies, or a possible insurance lawsuit?
First, it is fundamental to know and completely understand the insurance policy under which the claimed risk is covered. This, which at the beginning seems elementary, does not turn out to be simple when there are differences in the interpretation of a word, a number, a paragraph or exclusion. Such a difference could mean the policy is no longer self-sufficient, and lawyers will need to go back to its history, to its underwriting process and to the record of negotiation among those who participated in its emission and contracting. In this regard, the broker’s responsibility turns out to be particularly relevant since, especially in Latin American countries, they usually act as sole connection between insurer and policyholder.
In such cases, lawyers must also be apprised of the particular laws on insurance contracts, as well as some special civil laws of each country which go further than insurance matters and which regulate, for example, the way to construe contracts. Familiarity with local insurance regulators’ administrative regulations, many of which monitor the detail of contracts and the mechanisms for entering into an insurance contract, is also essential.. But this analysis of these layers of regulation related to the link between policyholder and insurer does not end in the direct insurance contract when dealing with million-dollar claims and great risks. The terms of the reinsurance contracts between the local insurer and the reinsurer will be the determining factor in deciding the claim. Every lawyer for a claimant in such a case must know the laws regulating the contracting of reinsurances, as well as the reinsurance mechanism applied to the specific risk about which the law firm is advising.
In general, in Latin American countries, reinsurance does not alter anything in the contract the direct insurer and the policyholder, and the claim payment may not be deferred because of reinsurance. Strictly speaking, reinsurance keeps obligations between local insurer and policyholder inalterable. However, modern reinsurance contracting practices often makes the role of the reinsurer in the claim payment decision fundamental - and even beyond that which local legislation allows. This is mainly due to the inclusion of Claim Control Clauses and Claim Cooperation Clauses in reinsurance contracts.
The Claim Control Clause establishes as a precondition to coverage that the local insurer get written authorisation from the reinsurer to make any payment or to even reach any agreement regarding a payment which may affect its responsibility. For this reason, if there is a complaint on the policy, the direct insurer must usually submit to the guidelines the reinsurer lays down regarding the adjustment and payment process of the claim.
The Claim Cooperation Clauses are less restrictive for the direct insurers. They do not impose direct control over the pay-off process, since the condition of requiring written authorisation is eliminated. Simple notices or information relay is all that is required. Some clauses are stricter than others, depending on the requirements imposed by the reinsurer.
Both of these clauses, which are part of every modern reinsurance contract, force the local insurer to be very careful in managing the claim. Reinsurers can refuse indemnification payment, and this has a direct effect on the policyholder. This situation is even more complex for the insurance company and its lawyers when, for the same risk, there are two or more different reinsurers, or when foreign legislations and jurisdictions come into play - or even a mix of both.
Neither the lawyer of a policyholder nor the lawyer who in each country is advising the reinsurers should or may remain indifferent to the contracting mechanisms of reinsurance. Much less can they disregard the reinsured-reinsurer conflict or its effects on the company which has contracted the insurance and which has suffered the claim. There is absolutely no doubt that some of the insurance mechanisms and the reinsurers’ support allow these productive Latin American companies to concentrate their effort on the development of their business, knowing that their assets and products are backed by sound and well structured insurance contracts. Equally, it is important to accept that just as the world of business in general is not exempt from conflicts; neither does the world of insurance lack them. Quite often lawyers are required to guide their clients through these difficulties in the best way possible.
Whether your client is in the energy, mining, or agriculture sectors, or one whose line of business is to award insurance or reinsurance, the lawyer who defends a client in an insurance conflict will sooner rather than later realise that it’s an exciting world where there also is a lot lo learn.