The coronavirus pandemic has affected certain areas of the regional re/insurance market more than others, with construction insurers and reinsurers particularly exposed.
Covid-19 has had an impact on the regional insurance market in Latin America in various ways. For example, in terms of coverage disputes, there has been a notable acceleration in settlement agreements in the region being reached (and paid) by the market to provide certainty and funds in the pocket of insureds. Matters already entrenched and in litigation or arbitration have normally seen a stay of procedural time periods, giving the parties more time to prepare submissions and expert reports, but also creating opportunities to reflect and start dialogue.
Insurance markets in the region are monitoring the UK Financial Conduct Authority’s “test case” of the validity of business interruption claims in the UK with great interest. While the outcome of the court action will not have any jurisprudential effect in Latin America, the decision will certainly be illustrative throughout the region.
There has been a slowdown in expected legislation as a result of the pandemic. With regard to cyber, for instance, the enforcement of the much-expected data protection legislation in Brazil has now been postponed until 2021, with re/insurers adapting their risk perception accordingly.
We have also seen an uptake in client requests in the region with regard to specific legislation/regulation on a wide array of industries ranging from hotels to ports, airports and the Panama Canal, whether on very local issues or international trade alike, in anticipation of conversations with global insureds about how to adapt to the new landscape.
There is no escaping the negative impact of the pandemic on the construction industry in Latin America, both on existing projects and future potential. Each government in Latin America has taken the precautions it has deemed necessary. Some jurisdictions, like Panama, suspended all construction works with few exceptions; others, like Brazil, deemed construction works essential activities and allowed them to continue.
For all projects, nonetheless, there will have been complications: delay in obtaining materials, reduced workforce, slowdown in permits, reduced funding, insolvencies and so on, to mention just a few. Undoubtedly most projects will have suffered a delay.
Will the additional time being granted under construction all-risks (CAR) policies following an extension of time granted under the underlying construction contract constitute an aggravation of risk requiring an underwriting consideration beyond additional premium? The cost of pandemic-related delays may be unallocated and to the extent it is not prescribed in the underlying building contract, there is a concern CAR policies may respond or pass the risk on to the surety.
There is notable interest, therefore, in surety bonds, which are (usually) ancillary to the underlying construction contract and how they will respond to the ongoing pandemic. It is important to point out surety bonds in LatAm have some particular risks associated with them, which are now exacerbated. Their high risk value for one thing: 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 value of projects in Latin America. Are all sureties skilled enough in construction matters to understand whether the trigger of their bond is genuine or they have become the “pandemic bank”? Can they challenge the demand? And can the surety access the huge sums of money needed at short notice to make their payment?
Most countries in Latin America have their own unique laws and regulations in addition to the terms of the surety bond itself. The reason for their concern about payment time is real: in some countries, a failure to pay can be a criminal offence. In an “on-demand” jurisdiction, there is no time (let alone opportunity) to challenge the validity of the call.
Sureties need to arm themselves with information on how the works were right before the pandemic and keep abreast of developments. A prudent surety will surround himself with an experienced professional team that can address issues timeously, is able to monitor progress and seeks to rectify concerns by commercial agreement before time expires.
In LatAm, 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 and have run out of money; and cannot agree on who will pay for the extensions of time.
The parties therefore look to their cash-rich surety (usually outside the LatAm region), especially if they are operating in an on-demand jurisdiction. A lot hangs on how the region considers an event of force majeure and whether that defence can be carried over to the surety, as well as to the underlying contract.
Fortunately, there is some light at the end of the tunnel. The legal doctrines of force majeure and act of God may provide respite for concerned re/insurers acting as guarantors under these surety bonds. While each jurisdiction in Latin America interprets these doctrines in their own way, we will focus on the commonalities linking these doctrines throughout the region.
The majority of jurisdictions in Latin America define force majeure and the closely related doctrine of act of God as an unforeseen event that is impossible to resist. Most jurisdictions distinguish between the two by the type of event: if it is a natural event (such as a hurricane or earthquake) it is an act of God; if the event is man-made (such as a government order or imprisonment) it is force majeure. Interestingly, in Brazil the inverse is true; natural events are considered force majeure, while man-driven events are considered fortuitous events.
It is important to bear in mind these doctrines are legal justifications for the breach of contractual obligations; however, in most cases, these do not rescind the contractual obligations in their entirety. For example, art 956 of the Argentine Civil & Commercial Code says when the impossibility to fulfil the contractual obligation is temporary, the underlying obligation will only be extinguished in cases where time is of the essence.
We have found there are two common requirements to apply these doctrines throughout the region: inevitability and unforeseeability. In general, an event can be said to be unforeseeable when the contracting parties could not have reasonably anticipated or prevented the occurrence of the event during the execution of their obligations. As such, unforeseeability, from a legal perspective, is an event that although it may have been imagined, is sudden or unexpected and despite the diligence and care taken to avoid it, still occurred.
An event is inevitable when whomever suffers it cannot reasonably avoid its consequences. It is important to clarify it is not the event itself that needs to be inevitable, but the consequences or damages of that event that should be inevitable. We also highlight that demonstrating i) a causal link between the force majeure/act of God event and the breach of the obligation; and ii) that the force majeure/act of God event cannot be attributable to the breaching party are also common requirements seen across the region.
The legal doctrines of force majeure and act of God may provide respite for concerned re/insurers acting as guarantors under the surety bonds
Moving these concepts into the realm of surety, we point out the majority of jurisdictions in Latin America consider surety bonds ancillary to their underlying construction contracts. As such, any breach in the underlying contract excused via force majeure would also excuse breaches under the ancillary surety bond, unless the bond had provisions that say otherwise. A notable outlier to this line of jurisprudence is Colombia, which does not consider surety contracts to be ancillary to their underlying construction contracts. For this reason, it is a common practice in Colombia to include force majeure exclusions in surety contracts.
It is, however, important to undertake an analysis of the application of force majeure/act of God on an ad hoc basis. Finally, the possibility always exists the underlying parties decide not to invoke force majeure or act of God and the consequences that come from these doctrines as a defence to their contractual obligations. As such, a lot will depend on the parties’ intentions.
Generally speaking, insurance activities (including adjustments) have been considered essential activities, so adjusters have continued operating but cannot visit sites, posing complications in a region where insurers have specific time periods to respond to claims. Silence deems acceptance (Peru, for example). While orders were issued in light of Covid-19 extending time periods, we advise caution as the orders did not specifically address the laws that established these periods, therefore it would be prudent to meet them.
The insurance market in LatAm faces an undoubtedly challenging time now and in the months to come, with no real jurisprudence to follow and different regulations/positions taken in each country. How a claim will be analysed will depend on the facts of each claim set against the legal landscape in which the claim is made. Force majeure may offer some comfort where it applies. Only time will tell.
Authors: Anna Weiss, Head of Construction for Latin America and the Caribbean, Alex Guillamont, Head of Latin America and Caribbean and Javier Vijil associate in the Miami hub for Latin American and Caribbean at Kennedys.
This article was first published by Insurance Day on June 22nd 2020