Covid-19: what to be aware of when handling claims in Chile
Jorquiera & Rozas, Santiago, Chile
Chile has been experiencing particularly difficult times over the last 12 months, first due to civil unrest in October 2019 and, more recently, on account of the ongoing Covid-19 pandemic. The spread of coronavirus raises several unique challenges, including the insurance sector’s response to issues including:
- office environments;
- human resources;
- third-party service providers;
- assessing financial condition (investments and liabilities); and
- how the local policies will respond, particularly in relation to business interruption (BI).
The following are some of the highlights of Chile’s insurance law and loss adjustment that reinsurers must bear in mind when dealing with potential Covid-19 claims.
Sources of law
The legislative framework applicable to insurance and reinsurance is constructed from various regulations and laws:
- Title VIII of Book II of the Code of Commerce, called ‘About Insurance in General and in Particular about Non-marine Insurance’ (Article 512 et seq);
- Title VII of Book III of the Code of Commerce, called ‘About Marine Insurance’ (Article 1158 et seq);
- DFL 251, which regulates insurance companies;
- Supreme Decree 1055-2013, which regulates brokers and loss adjustment;
- resolutions issued by the Chilean regulator, the Commission for the Financial Market, also known as CMF, and previous resolutions issued by the Securities and Insurance Superintendency (SVS); and
- general provisions relating to the interpretation of contracts that are found in the Civil Code (Article 1560 et seq).
The provisions on general and non-marine insurance contained in Chile’s Code of Commerce were enacted almost 140 years ago and were not revised for many decades, despite numerous industry developments. However, on 9 May 2013, a new law was enacted (Law 20, 667), which replaced all the former non-marine provisions (contained in Title VIII of Book II of the Code of Commerce) and finally updated insurance legislation in line with current trends and market practice. The New Insurance Law, which came into force in December 2013, also changed certain provisions on marine insurance (contained in Title VII of Book III of the Code of Commerce) and introduced a couple of amendments in DFL 251.
Recording the contract and wordings
The execution of an insurance contract is consensual, and its terms and existence can be proved by all legal means of proof, including but not limited to electronic documents, provided that there is prima facie written evidence arising from a document. In this respect, the insurance policy is defined as the document that justifies the insurance, and once issued, the insurer cannot challenge its terms.
Insurance and reinsurance companies must word their contracts using the models of policies and clauses in the CMF’s Register of Policies. Exceptionally, they are able to use non-registered models when this relates to general insurance, where the insured or the beneficiary are legal entities, and when the annual premium is greater than 200UF (Chile's inflation-indexed currency unit) approximately USD 7,250. In addition, non-registered models can also be used for cargo, transport, marine or aircraft hulls, or related insurances.
As regards reinsurers, they are subject to the principle of freedom of contract with a few mandatory restrictions, such as the fact that the reinsurer cannot alter the terms of the insurance contract and that fund provision clauses are not enforceable. Direct actions of the insured against the reinsurer are not valid unless otherwise agreed in the reinsurance contract or according to an assignment of rights after the loss from the reinsured to the insured.
Interpreting (re)insurance contract
As stated in sources of law (above), insurance and reinsurance contracts are not only subject to the Code of Commerce, but also to the general provisions relating to the interpretation of contracts in the Civil Code (Article 1560 et seq) plus certain provisions contained in DFL 251. The Chilean position can be broadly summarised as follows:
- the provisions on insurance law contained in the Code of Commerce are in general mandatory, unless stated to the contrary. However, if a clause is deemed to provide an insured with a greater benefit than is provided under the law generally, the specific terms of a policy will prevail over the Code of Commerce;
- Chilean law considers it of paramount importance to determine the intentions of the parties at the time of contracting and to give effect to those intentions even if they are not reflected in the literal words of the contract;
- a Chilean tribunal will strive to facilitate clauses in contracts with the goal of ensuring that the parties’ intentions are fulfilled. Actions can include amending the contract if no provision is made for a given situation;
- under Chilean law, it is permissible for a tribunal to ascertain the parties’ intention by looking outside the contract at, for example, the negotiations between the parties and market practice at the date of contracting; and
- in the event of ambiguity in a policy, the interpretation that is more favourable to the insured prevails.
When any event that may constitute a loss occurs, the insured must notify the loss to the insurer or insurers as soon as possible on becoming aware of the event. The insured must also take all necessary measures for saving or recovering the subject insured or for keeping its remains. Furthermore, the insured has to prove the loss occurrence and sincerely state its circumstances and consequences.
The Chilean regulations on claims adjustment contained in Decree Supreme 1055-2013 (DS 1055) provide detailed provisions for the registration adjusters, as well as their obligations and restrictions, and detailed provisions for the notification and adjustment of losses.
The adjustment procedure is consumer-orientated and subject to the following three principles: promptness and procedural economy; objective and technical reporting; and transparency and access.
DS 1055 applies to commercial and personal lines of business alike and does not take in to account the complexity of the loss (other than an increased adjustment period) or the relevance of reinsurances for the payment of some losses.
Unlike in many jurisdictions, the loss adjuster is appointed to act as an impartial claims specialist who must be licensed and supervised by the CMF. The loss adjuster’s role is to investigate and review the circumstances of the loss or damage, and to report on the validity of the policy coverage in respect of the claim. The adjuster’s report is released to both the insured and the insurer.
DS 1055 sets out various time limits for the adjustment and provides the basis on which those periods can be extended.
Jurisdiction, choice of law and arbitration clauses
According to article 29 of DFL 251, any dispute arising from insurance and reinsurance contracts governed by the law shall come under the jurisdiction of Chile’s courts. This rule is mandatory and cannot be repealed by agreement of the parties. Therefore, although there is contractual freedom to agree on the applicable law, in principle any dispute must be settled in principle in the Chilean courts. Nevertheless, once a reinsurance dispute effectively arises, the parties to the reinsurance policy are entitled to resolve disputes under Chile’s international arbitration rules.
Under Chilean insurance law, there is no need for dispute resolution clauses as insurance disputes are subject to arbitration. Nevertheless, an insured has the right to make a claim in the local courts where the sum in dispute is less than 10,000UF. In this respect, the arbitrator has to be appointed when the dispute arises.
Key issues for the international market when handling claims in Chile
It has always been important to be engaged in the adjustment process in Chile. On significant losses, engage your experts and the cedant as soon as possible. Chile’s adjustment regulations are consumer-orientated to ensure transparency and efficiency in the adjustment process. They do not provide a separate framework for complex losses or reinsurance.
The adjuster is required to identify all lines of enquiry and the necessary information as soon as possible and to maintain a record of the information. There is a risk that, if insurers/reinsurers do not engage in the adjustment process at the very outset, then relevant information will not be requested.
Failure to request information may result in the CMF (Chilean regulator) refusing an extension of time for finalising the adjustment, effectively preventing the factual information needed to confirm or deny coverage being produced. The insured may be able to assert that the requests for information are unnecessary, thereby potentially limiting the lines of enquiry and development of potential defences.
In a dispute on complex claims, there is a real risk that sophisticated insureds may seek to use the regulations to limit evidence and coerce adjusters into confirming coverage.
The time to object to a preliminary adjustment report on liability or a final report on quantum and liability are very limited, at five and ten days respectively. The latter can be increased to up to 20 days in case of damage insurance. Reinsurers must ensure that they engage with their cedents and identify all relevant issues in advance of receipt of the reports to have a realistic opportunity of responding to the adjuster within the time limits.
Reinsurers are removed from the adjustment process. Therefore, the existence and execution of specific obligations in the reinsurance contracts, contractual time limits for notifying losses and Claims Cooperation/Claims Control Clauses with a defined sanction (conditions precedent as a term of art have no meaning in Chile and should be replaced by the Chilean/civil law concept of ‘essential term’ of the contract) becomes key.
Reinsurers should seek confirmation as to whether the underlying business they are writing is registered or non-registered. If non-registered (which is likely for complex commercial policies with BI, etc); reinsurers should carefully review the policies wording, and request confirmation that the date for payment of any claim has been extended and/or insert a specific provision into the reinsurance contract.