- 'Loss' in Translation: Insurers Beware
- April 1, 2015 | Authors: Jason Reeves; Jose M. Umbert
- Law Firms: Zelle Hofmann Voelbel & Mason LLP - Dallas Office ; Zelle Hofmann Voelbel & Mason LLP - San Francisco Office
Some terms frequently found in (re)insurance contracts and statutes have different meanings in common law, English-speaking jurisdictions than they do in civil law, Spanish-speaking countries. It is critical for (re)insurers providing coverage for risks in Latin American jurisdictions, either by reinsuring locally issued policies or participating in global insurance programs, to understand such differences exist and may impact policy interpretation, expectations and dispute resolution. In a perfect world, these differences, when properly understood, would also impact wordings and ratings of Latin American risks. In this article, we review some important terms whose meaning under local law may not be what an international insurer would expect.
Insurance at First Loss
Many local policies covering first-party risks in Latin American countries state that the insurance has been purchased as “seguro a primer riesgo,” or some variation thereof. This Spanish term, which can be translated into English as “insurance at first loss,” is easily overlooked by an underwriter or claims handler based in a common law jurisdiction. It is not a term used in insurance policies issued in those jurisdictions. The expression, however, has a very specific meaning in civil law countries and the characterization of a policy as “seguro a primer riesgo” has important consequences.
The insurance contract acts of a number of Latin American jurisdictions, provided that, in the event the insured’s property - or business income - is underinsured, a “proportional rule” will apply and limit the policyholder’s recovery under the policy. That is, if the insured sum reported by the policyholder is lower than the value of the interest insured, the insurer is only required to pay for that proportion of the loss sustained that the insured sum bears to the value of the interest insured. This concept is analogous to a coinsurance penalty in the U.S. or an average clause in the U.K. but, in Latin America, is typically embedded in local statute.
Importantly, many of these statutes allow the parties to agree in the policy to exclude the application of the proportional rule, and the expression “insurance at first loss” is widely understood to reflect an agreement not to apply said proportional rule. Thus, given the prevalence of underinsurance in Latin America, this term may be of critical importance to the determination of the amount owed under a policy.
It should be kept in mind, however, that a mere reference to “seguro a primer riesgo” in a policy may not be sufficient in and of itself to avoid the application of the general rule - a detailed analysis of the policy provisions and applicable statutory law is still required, as there may be a statute, definitions or other contract terms that lead to the conclusion that the proportional rule would still apply in the event of underinsurance.
Insurance and reinsurance contracts issued in common law countries frequently contain a series of “conditions precedent.” These are acts or events that must exist or occur before a duty to perform under a contract arises. In the insurance context, the failure to satisfy a condition precedent will generally void the policy, and thus release the insurer from any liability.
These are standard terms for many international insurance companies, and they will therefore also include them in contracts subject to unfamiliar jurisdictions/governing law, such as a facultative reinsurance agreement with a cedent in a Latin American jurisdiction. A problem that can then arise is that the governing local law of that jurisdiction may not recognize the concept of “condition precedent” as such. This is the case, for example, in Argentina, Colombia and Peru.
In those countries, the failure to satisfy a condition precedent may be treated as a breach of the policyholder’s contractual obligations, which will bar liability only under some circumstances (e.g., Argentina), or as a breach of warranty, itself with varying consequences, such as allowing the insurer to void the policy (e.g., Colombia), or precluding liability only when compliance with the warranty would have prevented the loss (e.g., Peru). It is therefore important for international insurers and reinsurers doing business in civil law jurisdictions to understand that the legal consequences of the failure to satisfy a term labeled as a “condition precedent” may well differ from what they are accustomed to. Re(insurers) may consider including jurisdiction specific endorsements to achieve contract certainty where common law assumptions and practice may not apply.
Insurance contracts issued in Latin American countries may refer to the insured’s “reticence” (“reticencia”) and attribute certain consequences to it. Those jurisdictions’ insurance statutes also address the impact of the policyholder’s reticence on the insurer’s obligations under the policy. Insurers or reinsurers in common law countries may not be familiar with this term, and its dictionary definition - reserve, restraint or reluctance - does not shed much light in this context.
Under the insurance contract acts of several Latin American jurisdictions, “reticence” means the policyholder’s failure to disclose known facts material to the risk being insured. These statutes generally provide that such reticence allows the insurer to void or rescind the contract and thus be relieved from liability under the policy. In some countries, where the policyholder’s reticence is neither intentional nor the result of inexcusable negligence, the contract remains valid, but the insurer is entitled to reduce its liability under the policy in the proportion that the agreed-upon premium bears to the premium that would have been charged if the insurer had known the true circumstances of the risk.
Reservation of Rights
In common law jurisdictions, insurers frequently issue reservation of rights letters during the claims-adjustment process, giving the policyholder notice that the insurer may contest coverage for the claim, so as not to waive the insurer’s rights to do so. However, in many civil law jurisdictions this concept is not recognized, and issuing a reservation of rights letter will not protect the insurer, indeed it may create a false sense of security and result in an unpleasant surprise for the carrier.
For example, in Argentina, an insurer has 30 days from the date of notice of a claim (or from the receipt of necessary additional information it requests) to accept or deny coverage - failure to do so results in acceptance of the claim. Similarly, under Mexican law, an insurer is required to pay a loss within 30 days from the date it receives information sufficient to understand the basis for the claim. In these and other civil law jurisdictions, an insurer cannot rely on reservations of rights letters; rather, it must pay close attention to the local claims handling requirements and deadlines. Adjusting timelines are a frequent problem in Latin America. Unfortunately, even insurers accustomed to adjusting U.S. claims to timelines are often unfamiliar with similar obligations in Latin America. Insurers should routinely insist their local adjusters advise on the applicable timelines and manage the adjustment in a similar fashion to U.S. claims.
“Without Prejudice” Communications
When attempting to resolve disputed coverage claims, (re)insurers in England and Wales and their attorneys routinely designate communications with policyholders and other third parties as “without prejudice,” to make it clear that the communication is made in an attempt to settle the dispute between the parties and therefore, under English law, cannot be used as evidence in a legal proceeding against the insurer. In the U.S., carriers may label those communications as “confidential settlement communication” or “confidential Rule 408 communication,” in reference to the inadmissibility of evidence of compromise offers and negotiations under Federal Rule of Evidence 408 and its state counterparts.
However, the evidentiary protection reflected in the “without prejudice” or “Rule 408” designations is often not recognized in civil law jurisdictions. Regardless of whether those terms are used, settlement discussions may be introduced into evidence in a legal action. This may be surprising for many re(insurers). But what is, in fact, more surprising is not adapting to conducting business in less familiar civil law jurisdictions. Insurers or reinsurers involved in a coverage dispute that may result in a lawsuit or arbitration proceeding in a Latin American country need to be alert to this possibility when embarking on settlement negotiations and proceed with caution, particularly when writing to an adverse party. The parties may achieve some measure of protection by entering into a confidentiality agreement extending to all settlement discussions.
Reviewing an English translation of a Spanish language policy is simply not enough. And even experienced vendors based in civil law jurisdictions may not appreciate the assumptions of (re)insurers more familiar with common law policies and claim-adjusting expectations. When reviewing a translated policy that contains unfamiliar, but seemingly innocuous, words or phrases, like “reticence” or “insurance at first loss”, it should not be ignored. Policy analysis should confer meaning on every word, phrase, comma and capital letter - particularly where decisions are made based on an imperfect, but sometimes necessary, review of a translated policy.
As the above examples demonstrate, some terms used by insurers and reinsurers in common law jurisdictions have a different meaning - or no meaning at all - in civil law jurisdictions and vice versa. The specific examples included in this article are just a starting point. International insurers need to be aware of these differences and become familiar with the local practice of the jurisdiction where a claim arises.
 See, e.g., Mexican Insurance Contract Act, Art. 92; Argentine Insurance Act, Art. 65; Chilean Commercial Code, Art. 553; Colombian Commercial Code, Art. 1102.
 See Argentine Insurance Act, Art. 36.
 See Colombian Commercial Code, Art. 1061.
 See Peruvian Insurance Contract Act, Title I, Art. IV, para. 11.
 See, e.g., Argentine Insurance Act, Art. 5; Chilean Commercial Code, Art. 525; Colombian Commercial Code, Art. 1058.
 See, e.g., Chilean Commercial Code, Art. 525; Peruvian Insurance Contract Act, Arts. 13-14.
 See Argentine Insurance Act, Art. 56.
 See Mexican Insurance Contract Act, Art. 71.