How sure is surety in Latin America?

Overhead view of construction workers and engineers at construction site

It pays to be sophisticated when it comes to surety in the construction industry in Latin America. For anyone familiar with the surety business in LATAM, especially those who have been stung, they will understand.

A surety bond is an ancillary contract to a building contract, whereby the surety guarantees to the beneficiary that the contractor will meet his obligations under the underlying building contract. They are most commonly seen in very high value construction projects, especially in publicly procured infrastructure projects, where the local authority/government would have the benefit of the bond. Historically, it would be common to see a surety bond for around 10% of the value of the works, but more recently we are seeing bonds for up to 50% of the project in Latin America. Many insurers pass over the opportunity to become a surety because the premiums are not attractive enough to justify taking on this level of exposure, they are not skilled enough in construction matters and/or they simply would not be able to access that sort of money in the short window afforded after a bond is triggered.

Most countries in Latin America have their own unique laws and regulations in addition to the terms of the surety bond itself. It is also important to know that in some countries, a failure to pay/pay on time can be a criminal offence. For example, in El Salvador, the window can be as short as 10 days for an on demand bond (i.e. where time runs from the moment the bond call is made). In an “on demand” jurisdiction, such as this, there is no time for, let alone opportunity, to challenge the validity of the justification of the trigger.

For those that venture into this world, and there are good commercial reasons for doing so, they will know that they need to keep on top of the progress of the project they are guaranteeing. A prudent surety will surround himself with an experienced professional team who can foresee issues timeously, is able to monitor progress and seek to rectify concerns by commercial agreement before time expires. Whereas in other regions, bonds are most commonly triggered when the contractor falls insolvent and thus cannot complete the works, in LATAM, this is not the picture we regularly see. Sometimes, we hear threats of a bond call simply as an additional bargaining tool where the contractor and developer are:

  • Unable to reach an agreement on changes to be made to the works.
  • Hit delays from events of force majeure.
  • Are unable to accelerate completion of the project on time and have run out of money.
  • Cannot agree on who will pay for the extensions of time.

They therefore look to their cash rich surety (usually outside of LATAM), especially if they are operating in an on demand jurisdiction. However, a skilled surety and its experienced team will act quickly and negotiate an agreed extension to the bond for an additional premium. Where bonds are conditional, the surety may challenge a call for the full amount of the bond where it does not meet the conditions. Time does not run until all conditions have been met. Therefore, it is critical to ensure that the surety team has construction expertise.

Alternatively, a surety can also step into the shoes of the contractor and complete the project. This is rare as most corporate sureties are probably not permitted to undertake construction activities. For those that can sub-contract this to another contractor, it may be a better option to do so when the project is almost complete (rather than paying over the full value of the bond which would constitute a disproportionate sum when compared with the remainder of the works).

Following the Lava Jato scandal, the largest, most skilled contractors in Latin America are often no longer legally permitted to operate in certain countries.  Consequently, completing the project on the sureties’ behalf may not be an option due to a lack of choice of local contractors with the same skills and professional capabilities to handle complex infrastructure projects of this nature.

Instead, we are seeing an influx of Asian contractors winning large, publicly procured projects such as the new metro rail in Colombia and Panama. It remains to be seen whether these contractors are prepared to step into the shoes of the local Latin American contractor half way through the works and whether the surety would want to be in that position.

Furthermore, we are commonly seeing a lack of clarity or failure to define the duration the bond following post-handover of the works and whether the full sum of the bond is reduced, commensurate with the stage of the works and post completion.

In summary and to avoid these situations, we would advise addressing these issues when the wording of the bond is being agreed and safeguarding the risk of no collateral warranty at the time of underwriting.

Author: Anna Weiss, Partner. Head of Construction for Latin America & Caribbean at Kennedys.

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Brazil’s Data protection Law will transform risk landscape

Electronic Data Theft

In 2018, the Brazilian Data protection law (Lei Geral de Proteção de Dados – LGPD) passed by the legislature and, in August 2018, the former Brazilian President – Michel Temer – assented to this law.

The articles concerning the creation of a National Data Protection Authority (Autoridade Nacional de Proteção de Dados – ANPD) and the National Council for Privacy and Data Protection came into force on 28 December 2018, but all other articles of the LGPD are going to come into force on 20 August 2020.

This new legislation is extremely important to Brazil as it creates legal certainty, establishing rules that all type and size of companies should adhere to, and face sanctions in case of breach. There are important terms defined by LGPD, as personal data, sensitive personal data, controller, and so on. Moreover, having a National Authority for Data Protection allows Brazil to be considered adequate for cross-jurisdiction commercial agreements, and it is an important step towards the possibility of including Brazil in the OECD.

Although the articles concerning the creation of the ANPD came into force in December 2018, another law was approved by the current President of Brazil, which modified the original project of the LGPD.

Originally, the intention of the legislative project was the creation of an autonomous agency responding directly to a Ministry. However, the law 13852/2019, that amended the LGPD, ruled that the ANPD should be part of the direct public administration, reporting direct to the Brazilian Executive/President. The possibility of converting the ANPD into an Autarchy is still stated under the LGPD, and according to art 55-A, paragraph 2, if the intention is to do so, such conversion should be taken place within 2 years from the moment that the formal regime of the ANPD came into force.

ANPD appointments

Following the amendments inserted into the LGPD, the President of Brazil must appoint the five members of the Board of the ANPD, and such appointments must be approved by the Brazilian Senate. Since LGPD will enter into force on 20 August 2020, it is expected that such appointments and approvals will happen prior to this date.

The creation and establishment of the Authority is a vital element of the new system under the LGPD, since various of its articles depend upon secondary regulation that should be issued by ANPD. One of the examples are articles 48 and 49, as follows:

“Art 48. The controller must communicate the National Authority and the owner of the data the occurrence of a security incident that could cause risk or relevant damage to the owner of the data.

1st Paragraph – The communication must be made within a reasonable deadline, as defined by the National Authority (…)

2nd Paragraph – The National Authority must consider the seriousness of the incident and can, if necessary, oblige the controller to adopt specific measures (…)

Art 49. The systems used to storage/deal with the personal data must be developed taking into consideration the security requirements, the good practice standards and the general principles stated in this Law and additional regulatory norms”

Regarding the administrative proceedings that should be conducted by the ANPD, art 52, 1st paragraph, states that the administrative proceedings should allow the implicated companies/individuals to submit their defences and arguments prior to the imposition of any sanctions. The procedural rules of such administrative proceedings still need to be properly regulated by ANPD.

Another point that is still grey is how the ANPD will work together with other Authorities, including the Consumer Watchdog. The application of the sanctions stated under the LGPD is a monopoly of the ANPD and, in dealing with personal data and potential breaches of the LGPD, the legitimacy to deal with the issue lays on the ANPD.

The Brazilian Consumer Code codified minimum guarantees for the consumers, and article 43 establishes consumer’s rights in accessing his/her personal data stored by a company. However, it is important to consider that such code dates back to 1990, and therefore relevant provisions and definitions are not considered under this code, although the principles are general enough to be adapted to the modern B2C relationship.

Anyhow, it is important to take into consideration that the Consumer Code regulates the B2C relationship and the powers to impose sanctions are not as effective as the sanctions detailed under the LGPD.

The idea is that LGPD will complement the Consumer Code, but the respective Authorities must exercise their powers according to the limits established by the law. Furthermore, in  Regulated Activities, such as Oil & Gas, the regulations applicable to the specific industry should be considered. Thus, it is expected that ANPD officers will be able to deal with complex matters affecting many different types of regulations and regulators with whom cooperation will be key.

Data protection cases

Whilst many of the relevant articles of the LGPD depend on further regulation, relevant cases concerning data protection are hitting the doors of companies stablished in Brazil and with cross-border exposure. Such cases are normally connected with hackers and niche publications that publicise how vulnerable the servers are and how exposed the personal data stored by these companies can be. The fact that the LGPD is not yet in force provides  temporary protection to such companies, as they cannot be implicated in any administrative proceeding nor be sanctioned until the law comes into effect, but it shows how educative the new legislation will be as there is clearly a need for better data protection, and adaptation by Brazilian companies to a more demanding environment.

It is clear that further regulation is necessary in order to instil the principles of certainty and responsibility that the LGPD intends to bring, but the impression is that the process to have the ANPD duly set up and running by 20 August 2020 is not a priority for the Brazilian Government as there is no clear plan being executed, and considering the layers of bureaucracy that proper implementation of the law will take, it is likely that additional time will be required for a proper set up.

Authors: Alex Guillamont, Head of Latin America and Caribbean at Kennedys and Isadora Talamo, Associate (Foreign qualified lawyer Brazil) at Kennedys.

This article was first published by Insurance Day on 4 March 2020.

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2020 Miami Latin American Claims (Re)Insurance Forum – Registration is open, come and join us!

Forum2020_header_blog-01

Kennedys and QLDG are pleased to announce the 6th edition of the annual Miami Latin American Claims (Re)Insurance Forum, the event of choice for the insurance industry in the region.

For the first time, in addition to the popular involvement of International and local CEOs, executives working in the region will discuss Innovation that makes their operation more efficient. A significant few risk managers will also join the event.

The Forum will be held at the Four Seasons Miami, in the heart of Brickell, downtown Miami’s financial and cultural center, from June 16 (Welcome Cocktail) to June 19 2020.

The Forum will bring together key international and Latin American industry experts who will be analyzing top issues and developments in Latin America and the Caribbean. Topics and case studies are carefully chosen based on current affairs and the feedback received by professionals from the (re)insurance industry.

You can find the program HERE including speakers from over 30 carriers and international reinsurance brokers.

Thank you to our sponsors Advanta, Crawford, Envista Forensics, IRB Brasil Re, McLarens, Rimac, R&G Espinosa and Sedgwick for their support.

This is an exclusive event and attendance is by invitation only, as places are limited.

Registration is now open.

To register, please click HERE and use the code FORUM2020 (case sensitive)

Simultaneous translation in Spanish and English available.

For information, please contact:
Juan E. Lopez-Santini: jlopez@qldg.com
Alex Guillamont: alex.guillamont@kennedyslaw.com
Hilda Welcker: hilda.welcker@kennedyslaw.com

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Important precedent for the (re)insurance market in Colombia

Waving Colombian Flag National Capitol in Bogota, Clolombia

Just a week after the second of our articles relating to fiscal liability proceedings in Colombia, the Comptroller General or Contraloría (CGR) have agreed with our direct revocation request in the Institute for Urban Development (IDU) matter.

The strategy of providing full coverage considerations with the revocation request worked. The CGR let itself be educated on insurance issues and, for the first time, agreed that fiscal proceedings and insurance contracts may be interrelated, but should be approached differently. The CGR admitted that their previous analysis was incomplete, and concluded correctly that the policy in effect when the investigation commenced in 2014 is the only one that should respond in observance of “claims made” underwriting principles.

The CGR expressly recognized that their decisions now being revoked were unduly detrimental to the insurers previously condemned and has ordered the full return of funds.

The CGR decision is final as no appeal is allowed. It remains to be seen whether the CGR will apply the reasoning behind the revocation in similar investigations, whether they involve civil servant or more standard D&O wordings.

Authors: Monica Tocarruncho, Partner in Kennedys Colombia and Alex Guillamont, Head of Latin America and Caribbean at Kennedys.

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Update: Fiscal liability proceedings in Colombia

Waving Colombian Flag National Capitol in Bogota, Clolombia

In our previous article, Fiscal liability proceedings in Colombia, we discussed how the recent decisions of the office of the Comptroller General or Contraloría (CGR), the autonomous governmental agency in charge of monitoring public fund use, have caused great concern among (re)insurers globally due to their departure of long established market principles.

The CGR investigates and issues administrative decisions on publicly-sponsored projects that have gone wrong, and they also hear the first appeal before the matter goes to judicial courts. In this article, we discuss a recent CGR decision which has renewed controversy and concern among (re)insurers.

The CGR investigation commenced on 15 September 2014 and was related to the third extension of the urban public transportation system of Bogotá, known as Transmilenio. The Institute for Urban Development (IDU) was charged with double paying preliminary studies and design models for the work.

The CGR also concluded that several IDU officers got ahead of themselves by approving work to commence before the design had been finalised, and then incurring unnecessary expense in getting the detailed design done, which modified the initial design parameters.

The CGR sought to collect COP 5,567,141,588 (approximately US$ 1,622,69306). On 8 April 2019, the CGR issued the accusation writ (indictment) against three IDU officers and of their D&O (directors and office liability) insurers. On 12 June 2019, the CGR issued the first instance decision against the IDU officers and insurers, ordering the joint and several payments to the State as compensation for the damage caused, i.e. the unnecessary fees paid in consulting and design fees. On 15 August 2019, the Head of the CGR issued the second instance decision confirming liability.

The reasons why this decision has caused so much controversy within the (re)insurance market include those that were advanced in our previous article, but also confuses the application of deductibles. In summary:

  • The CGR disregarded the application of claims made clauses because, they say, claims made clauses are not applicable within fiscal liability proceedings since the civil and commercial rules to trigger the policies differ from the ones applicable to fiscal liability proceedings and the “occurrence” underwriting model should apply.
  • The CGR asserts that multiple and subsequent acts and omissions caused the damage. The CGR does not aggregate the loss as such but considers this is a continuous event, even though all of those acts or omissions are related. Therefore, the loss is not allocated in accordance with the rule of Article 1073 of the Commercial Code – that says that if a loss starts during the policy term and continues after its expiration, the policy in force at the outset responds – but rather concluded that all the policies in effect during the years that the loss ensued, from 2004 to 2011, should contribute to the indemnity to be received by the CGR.
  • The CGR expressly states that Title V of the Colombian Commercial Code, which regulates the insurance contract, is not applicable within fiscal liability proceedings. The CGR read the Constitution and Law 610 of 2000, which regulates fiscal proceedings, as somehow precluding the application of insurance principles. In a dangerous move, the CGR considers that procedural aspects of how a fiscal investigation should be progressed prevail over substantive regulation of the insurance contract.
  • The CGR ignores the applicable deductibles: the CGR states that within the fiscal liability proceeding, insurers would be held liable up to the net value of the damage caused in each particular case. Once again, perhaps unconsciously, the CGR applies the “procedure comes first” approach to state that any petition regarding the application of deductibles shall be raised during enforcement proceedings.

Insurers agreed with us that addressing these excesses required a new approach. Having exhausted the available administrative remedies, Kennedys on behalf of one of the insurers filed a pioneering request for direct revocation of the GCR’s decision before the CGR, allowing the CGR to overturn the decision before starting an administrative Court Proceeding.

We argued that the CGR decision is against the public and social interest of the country and that, if it becomes final, unjustified detriment will be caused to the insurer. Within the request there is a detailed explanation about claims made clauses, what should be considered as a claim, their history, how Public Officers D&O policies are usually drafted, why insurance is a business concerned with the public interest and the possible consequences that decisions like this one would have for the country as (re)insurance capacity may disappear. Furthermore, as the biggest concern of the CGR was that according to the defence arguments no policy would ever respond, we decided to present a different approach than the traditional litigation position, which was to run a coverage analysis of the case in terms of policy period.

Regarding the possible consequence that the CGR decisions might have for the country, it is also of importance to highlight the award dated 27 August 2019 of the International Centre for Settlement of Investments Disputes (ICSID) in the arbitration proceeding between Glencore International A.G. and C.I. Prodeco S.A. v the Republic of Colombia. The arbitration Tribunal ordered the Republic of Colombia to refund to C.I. Prodeco S.A. the amount awarded during fiscal liability proceedings, with interest. The Arbitration Tribunal argued that the determination of the existence and quantum of damages made by the CGR was biased, contrary to basic principles of legal reasoning and financial logic, and incompatible with the standard of conduct that Colombia undertook to provide to protect Swiss investors under the 17 May 2006 Agreement – for the Promotion and Reciprocal Protection of Investment.

The CGR decision is awaited. If the revocation is accepted, it will become precedent for similar proceedings affecting the market.

Finally, the Constitutional Amendment mentioned in our previous article was approved on 11 September 2019. Congress shall enact the laws to implement the preventive controls, to regulate the ex-post judicial controls regarding fiscal liability administrative acts, the General Comptroller’s Office prevalent jurisdiction, the General Comptroller’s judicial policing powers and the regional control exerted by the CGR.

Dialogue between (re)insurers and several government agencies continues.

Authors: Monica Tocarruncho, Partner, Kennedys in Colombia; Catalina Botero, Senior Associate, Kennedys in Colombia and Alex Guillamont, Head of Latin America and Caribbean practice at Kennedys.

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Join us tomorrow for the next Women in (Re)insurance event

Women in reinsurance Nov 13 2019

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Chile: Civil commotion or something else?

Santiago de Chile  Cathedral

The protests that have taken place in Chile, sparked by the rise of subway fares in the capital Santiago, have been well documented in the press. Those protests and riots have been often violent with regrettable loss of human life and instances of damage, sometimes severe, to public and private property. Instances of looting and vandalism were widely reported. Many businesses decided to stop production and send workers some to avoid being the subject of aggression.

A state of emergency was declared by President Piñera which enables the government to restrict freedom of movement and assembly, for 15 renewable days. Under the Constitution, serious alteration of the public order or damage (or threat of) to the Nation´s safety and security are the required triggers. A night curfew was in place as well, lifted very recently.

Although the unrest continues, it appears the worst has now passed, with centre-right Piñera having replaced relevant cabinet members and promised the left-wing protesters a series of measures minimum wage, pensions, and health insurance cover improvements. Interestingly, the President has conceded that “Chile has changed and the government also has to change to deal with these new challenges and times[…]”our government has listened to the clear and strong message sent by Chileans, who demand and deserve a more just and supportive country with more opportunities and less privilege” [1]. We discuss what this means for insurance below.

Many insurers have been considering how to apply these events to specific coverages, or exclusions, that may have application. Whilst the protests in Chile were unexpected, this is nothing new for the market. Lloyd´s for instance has insured riots and civil commotion in Latin American since 1910[2]. There are several variations of strikes, riots, and civil commotion (SRCC) cover. Under the classic LMA 3092 clause[3], property policies respond to physical damage to, or loss of, tangible property caused, amongst others, by civil commotion, malicious damage, riot, sabotage, and strike. Interestingly, whereas Civil Commotion only requires a “common purpose or intent” of a “substantial violent uprising” and Riot adds that the common purpose “threaten the public peace”, neither go into the perpetrator’s underlying motives, which are irrelevant as long as such motives do not infringe with exclusionary language.

In contrast Sabotage and Terrorism policies are sometimes written as stand-alone cover. Here the underlying motives are the cornerstone of the cover the language often referencing political, religious, ideological or similar purposes including the intention to influence or overthrow any government. Governments are often swift to categorise events as terrorist in nature[4] in deflecting attention from the underlying economic conditions which have led to protest but ultimately the issue is one of fact to be determined in every case.

Whilst conceptualising political violence along a spectrum starting with riot, civil commotion, terrorism can sometimes assist the reality is that such clear demarcations are often illusory. Such perils often overlap in certain respects and there is no short cut to an analytical approach.

Property policies may exclude Sabotage and Terrorism, and Terrorism and Political Violence policies tend to cover SRCC, Sabotage and Terrorism but exclude common theft or looting. There are combinations of Political Risk, Political Violence, and Property Terrorism policies out there and as always, what is actually covered is down to the specific wording.

Grey areas will surface around the “number of occurrences” (application of deductibles [possibly the incorporation of 72 -hour clauses] and limits), whether Business Interruption cover has been triggered in instances of wide area damage, whether policies incorporate non damage extensions for denial of access/loss of attraction—loss of revenue due to potential customers staying away from businesses subsequent to the event—and if so whether such extensions (often heavily sub-limited) are nevertheless caught by relevant exclusions.

What is certain, from previous experience, is that as soon as things start to normalise the insurance regulator in Chile will be asking insurers to be proactive in adjusting declared losses, of which there will be many. A swift determination of the facts and how policy language applies to those facts will therefore be the primary objective against the backdrop of the strict regulatory regime which applies to the adjustment process in Chile.

We will continue updating the market as developments unfold.

Authors: Alex Guillamont, Head of Latin America and Caribbean at Kennedys and Mario Diemoz, partner in Kennedys Chile.

[1] https://www.bbc.com/news/world-latin-america-50207883?intlink_from_url=https://www.bbc.com/news/topics/cvenzmgyg45t/chile&link_location=live-reporting-story

[2] https://www.lloyds.com/about-lloyds/history/innovation-and-unusual-risks/pioneers-of-travel

[3] http://www.lmalloyds.com/LMA/Wordings/LMA3092.aspx

[4] https://www.theguardian.com/commentisfree/2019/oct/24/democracy-chile-protesters-pinera-pinochet

 

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