Insurance and reinsurance law
i Sources of law
Colombian law is a civilian system with codified laws and a written political constitution.
The courts are subject to codified law but are allowed to use, at their discretion, ancillary tools such as jurisprudence, custom, doctrine, general principles of law and equity.41 Although the lower courts are expected to follow the decisions of higher courts, there is no absolute doctrine of precedent and judges frequently depart from previous rulings on questions of law.
The basic rules of Colombian contract law are set out in the Civil Code and those that are specific to insurance law are contained in the Commercial Code.42 The law has been supplemented by consumer protection legislation, some of which is specific to insurance contracts and some of which is of a more general nature.43
ii Making the contractEssential ingredients of an insurance contract
The essential elements of a valid insurance contract are as follows:
- an insurable interest, namely any lawful interest that can be subject to pecuniary valuation;44 the courts have approached the question of insurable interest by asking whether the insured risk event would directly or indirectly affect the wealth of the policyholder;45
- an insurable risk – non-fortuitous or impossible events do not constitute risks and are therefore uninsurable;46 wilful misconduct, gross negligence47 and deliberate acts of the beneficiary are also uninsurable;48
- the agreement on the part of the insured to pay a premium in exchange for the transfer of risk to the insurer; and
- the agreement on the part of the insurer to pay an indemnity upon the occurrence of an insured event.
Utmost good faith
Insurance contracts are subject to the duty of utmost good faith at inception. The insured is obliged to declare sincerely all facts and circumstances that are material to the risk.49 Material facts are those that, if known to the insurer, would have prevented it from entering the contract or caused it to apply more onerous terms.
The duty of disclosure applies in all cases. However, the insurer’s remedy depends upon whether a proposal form is used – if it is, any incomplete or inaccurate answers result in the policy becoming voidable. If no proposal form is used, the policy is voidable if the insured gives incomplete or inaccurate information by reason of negligence or fraud. If the insured acts innocently, the policy is not voidable but a proportional remedy applies. In other words, if the misrepresentation or non-disclosure leads to the insured paying only 50 per cent of the correct premium, the insurer is required to pay only 50 per cent of the claim.
The law is silent on the question of severability. Directors’ and officers’ (D&O) insurers are therefore free to include severability provisions to address non-disclosure or misrepresentation on the part of individual directors. Provided the declarations are made on their own behalf and not on behalf of the company, there is no reason to prevent insurers from pursuing the partial avoidance of the policy.
No remedy will be granted if the undisclosed or misrepresented facts were known to the insurer, or ought to have been known to the insurer, at the date of inception. Courts are increasingly requiring insurers to take active measures to request information from their insureds, arguing that insurers are in better legal, technical and organisational conditions to verify the information provided by insureds.50
The duty of good faith continues throughout the duration of the contract. The insured must notify the insurer in writing of any material increase in risk, whereupon the insurer may cancel the policy or vary its terms.51 If the risk has decreased, the insurer is legally obliged to reduce the premium.52 If no notification is made, the contract is terminated automatically upon the increase in risk.
Recording of the contract
Insurers must issue written policy documentation within 15 days of concluding the agreement.53 In the absence of any express terms and conditions, the standard wording that the insurer has deposited with the FS will be deemed to apply.54
The proposal form and any attachments to it are considered part of the policy.55
Consumer insurance policies are subject to a series of formal requirements. The policy document must be written using plain language and a clear typeface. In addition to the policy documents, the consumer must also be given a clear explanation of the cover. Exclusions must be clearly identified in the first page of the policy.56 Failure to comply with these requirements is considered an abusive practice and may result in sanctions and penalties being imposed by the FS.57
iii Interpreting the contractGeneral rules of interpretation
Insurance contracts are subject to the rules of interpretation set out in Articles 1618 to 1624 of the Civil Code, which apply to contracts generally.58 The law operates even-handedly between the insurer and the insured: if the parties are of equal commercial strength they are treated as equal before the law.
The overriding principle is that the intention of the parties, when clearly known, will prevail over the literal meaning of the words in the contract.59 Therefore, a high degree of emphasis is placed upon the evidence of those involved in the contracting process and the correspondence exchanged at the time of contracting. The parties’ prior conduct may also be taken into account if they have entered into similar contracts or acted in a manner that is relevant to the contract under review.
The contract is interpreted in its entirety, such that each clause will be given the meaning that is most appropriate for the functioning of the contract as a whole. There is a presumption against any part of the contract being redundant, so preference is given to interpretations that produce effect.
Ambiguous clauses are interpreted contra proferentem,60 a principle that is applied rigorously in the context of consumer insurance.61
The interpretation of the above principles might differ depending on the forum in which the claim is being heard. For instance, an insurance dispute might be heard before the administrative courts where principles of public law will be read into the contract. Equally, regulators such as the Office of the Controller General (the Controller’s Office),62 a public body with discretion to commence quasi-judicial proceedings against private and public officials or entities involved in the management of public funds, might join their liability and bond insurers on the basis of inapplicable wording or multiple policy periods.
The parties to an insurance contract enjoy relatively wide freedom to set the terms of the agreement, subject to the limits of public policy and the mandatory rules of Colombian law.63 Colombian law recognises two types of mandatory rule: those from which no departure is allowed and those that can be modified only in the insured’s favour. A contract term that violates a mandatory rule will be declared void.64
The list of mandatory rules is not closed. A rule may be declared mandatory either because it is expressed to be mandatory or a mandatory nature may be inferred from the general character of the rule.
The most important mandatory rules at the pre-contractual stage are as follows:
- the insured is under a general duty of good faith in the manner set out above;65
- if a policy is issued for the benefit of multiple insured parties with different interests (e.g., a D&O policy), non-disclosure by one insured party will not affect the validity of the coverage issued to others;66 and
- if the insured purchases a limit of indemnity in excess of its real interest, with a view to defrauding insurers, the policy is void.67
The most important mandatory rules affecting the operation of a policy are as follows:
- a policy (other than a life policy) may provide for automatic termination in the event that premiums are paid late. In these cases, the insurer is entitled to claim from the insured the amount of premium for the risk incurred, together with its expenses and interest at a punitive ‘moratorium’ rate;68
- the insured is under a continuing duty to inform the insurer of any material increases in risk and the insurer is obliged to reduce the premium if the insured gives notice of a reduction in the risk;69
- the insured is under a duty to inform the insurer of any double insurance within 10 days of the duplicate cover being taken out. If the insured fails to give notice, the policy will be terminated automatically;70 and
- either party may effect cancellation by giving notice in writing, although, in the case of cancellation by the insurer, 10 days’ notice is required.71 Following cancellation by either party, the insurer must return the unused part of the premium.72
The most important mandatory rules affecting the claims process are as follows:
- the insurer may not characterise any claims condition as a condition precedent to its liability under the policy. The insurer’s only remedy for breach of a claims condition is a claim in damages to the extent that prejudice has been caused;73
- the insurer may not impose a notification requirement that is less than three days from the date on which the insured discovered, or ought reasonably to have discovered, the loss;74
- in the case of double insurance, each insurer is required to pay a rateable proportion if the insured has acted in good faith;75 and
- the insured will forfeit its right to indemnity if it acts in bad faith during the claims process.76
The most important mandatory rules affecting the settlement of claims are as follows:
- the insurer must pay the indemnity within a month of the insured having proved its loss, failing which interest applies at the punitive moratorium rate;77
- if the insured incurs genuine mitigation costs, the insurer is required to pay the costs even if they exceed the sum insured;78 and
- in the case of liability policies, the two-year limitation period that applies to the insured’s claim against the insurer does not begin to run until the third party makes a claim against the insured.79
Colombian law does not use the language of conditions precedent. It neither prohibits nor endorses them. The effect of clauses that are expressed as conditions precedent must therefore be approached on an individual basis, in the context of the mandatory rules explained above.
The law may be summarised as follows:
- Some conditions precedent are prohibited by mandatory rules. For example, there is a general prohibition on expressing claims conditions as conditions precedent to an insurer’s liability. Except in the case of fraud, the only remedy for breach of a claims condition is a claim in damages to the extent that the insurer has suffered prejudice.80
- Some conditions precedent are positively reinforced by mandatory rules. For example, Article 1068 of the CCo contemplates that an insurer may make the payment of premium a condition precedent to its liability.
- Other conditions precedent are not touched upon by the law. If an insurer wishes to impose a condition precedent that does not contravene one of the mandatory rules, Colombian law will not prevent it. An example of a clause falling into this category would be a reasonable precautions clause or an unoccupancy condition.
The law defines a warranty as:
[A] promise by virtue of which the insured is obliged to do or not to do a certain thing, or to comply with a certain requirement, or by which [the insured] confirms or denies the existence of a factual situation.81
To be valid, a warranty must be clearly expressed and indicate an unequivocal intention to impose a strict duty of compliance.
The insurer may rely upon a breach of warranty to terminate the policy from the date of breach, irrespective of its materiality to the risk or the eventual loss.
The integrity of the policy limit
It is important to be aware that claims under insurance policies will often be put at a level that exceeds the limit of indemnity. Two particular arguments are made.
The first is that insureds occasionally seek indexation of the policy limit. For example, if the rate of national inflation is 5 per cent, a policy limit of 500 million Colombian pesos issued in 2014 would have been worth less than 400 million Colombian pesos in ‘real’ terms by 2021. Because litigation can take several years to resolve, the insured will sometimes ask a judge to make an award that reflects the real value of the original policy limit. This is generally regarded as heresy and, in 2009, the Supreme Court held that indexation of a premium would involve an illegitimate re-authoring of the policy. However, insurers and reinsurers should be aware of a small number of cases where Colombian courts have allowed the indexation of limits.
A second argument is that the defence costs of an insured under a liability policy are payable in addition to the limit, regardless of the wording of the policy. As mentioned above, the law requires that insurers pay reasonable mitigation costs in excess of the limit,82 and it is said that the costs of defending a third-party claim may be brought within this rule. The courts have yet to make any authoritative pronouncement on this important question.
iv Intermediaries and the role of the brokerIntermediaries
There are four types of insurance intermediary: agents, brokers, bancassurance and correspondents. Agents are contractors or employees of the insurer and act on the insurer’s behalf. Unless they are especially large, agents are regulated by the FS as part of the insurer for whom they act. Their precise rights and obligations depend upon the extent of their delegated authority, although all agents have power to collect money, inspect the physical risk and assist in arranging the policy. Some agents have delegated underwriting and claims authority. Increased scrutiny has led the regulator to tighten regulation for agents. As of July 2017, all agents are required to register with the Insurance Intermediaries Registry83 and undertake a training course before they are allowed to offer their services to the public.84
A broker, on the other hand, is formally independent of either party to the transaction. Their role is defined in the following terms:
A broker is a person who, by reason of his special knowledge of the markets, operates as an independent intermediary for the purpose of bringing together two or more persons to enter a commercial contract, without being linked to the parties by way of collaboration, dependency, mandate or representation.85
As a result of this privileged legal status, claims against brokers are rare. Only reinsurance brokers are required to carry professional indemnity insurance.86
Most recently, the FS promoted alternative intermediation methods, including bancassurance, to increase the availability of insurance in the mass market. It also extends to other retailers acting as correspondents with allowances to offer consumer products, such as mandatory vehicle insurance or basic life insurance.87 FS issued revised rules on the allowed sales channels to include new correspondents and online and digital sales. The FS also clarified the types of products that could be made available through these channels to include third-party liability, life, vehicle, earthquake, bonds, transport, loss of profit and credit insurance.88
Code of conduct
All brokers and agents are subject to the same code of conduct that applies to regulated entities in general.89 The specific duties of intermediaries include prohibitions on:
- misrepresenting the scope of cover or the terms of the contract;
- paying commission to the insured;
- interfering with the business of other brokers;
- competing unfairly; and
- acting without instructions.90
A sufficiently serious breach of the code of conduct may result in the intermediary’s authorisation being withdrawn.
In exchange for the services rendered, the broker is entitled to a commission, which will be freely determined between the parties and paid by the insurer.91 The commission falls due as soon as the insurance contract is signed.92
The parties to an insurance contract may agree upon whichever rules of notification they choose, subject to two mandatory rules as set out above. First, an insured must be given at least three days from the date of discovery to notify a loss.93 Second, duties of notification cannot be made conditions precedent to an insurer’s liability.94
The general limitation period for a claim by an insured against an insurer is two years from the date on which the insured knew or ought to have discovered the facts giving rise to the claim, up to a maximum of five years from the date when the cause of action arose.95 The Controller’s Office applies a 10-year limitation period based on its own procedural rules.
Good faith and the claims process
The duty of good faith subsists throughout the contract. In the claims context, the duty of good faith is reflected in Articles 1074 and 1079 of the CCo, which oblige the insured to mitigate loss96 and oblige the insurer to meet the reasonable costs of mitigation, even if they exceed the eventual limit of indemnity.97 Save in the case of subrogation,98 the law does not impose on the insured any specific duties to cooperate with their insurers in the defence or adjustment of claims.
In practice, these rules can leave insurers with only limited control of claims. However, if an insured acts in bad faith in the claims process, it will forfeit the right to indemnity.99
Claims by parties other than the insured
A liability insurer may be drawn into underlying proceedings in one of two ways. Either a third party with a claim against the insured may bring direct proceedings against the insurer,100 or the insured or a regulator may bring the insurer into litigation by issuing a form of third-party notice known as a ‘call-in-warranty’. The Controller’s Office has the discretion to draw liability and bond insurers into a form of recovery proceedings as guarantors of their insured’s potential liabilities.
In contrast, a reinsurer can be sued only by the reinsured: it is not legitimate for a third party or an original insured or a regulator to bring proceedings directly against a reinsurer.101
Payment of indemnity
After receiving proof of loss, the insurer is legally required to pay the indemnity within a month, failing which interest applies at the punitive moratorium rate.102
However, for policies with a sum insured in excess of a determined threshold (currently US$3.9 million) the payment period can be extended by agreement up to 60 working days.103 If the insurer fails to make payment within the appropriate time, liability for interest is extremely onerous. The moratorium rate is 150 per cent of the commercial lending rate and is sometimes assessed on a compound basis.
Insurers and reinsurers benefit from a general right of subrogation, supported by a positive duty that is imposed on the insured to assist the insurer in pursuing its rights of recovery.104 However, the law imposes certain limitations upon the scope of subrogation rights arising from personal lines insurance. For example, an insurer is not entitled to subrogate against relatives of the insured.105