In Part I of this article we explained the latest economic growth and legislation tendencies in Peru that are transforming the country in the next “go-to” market for multinational insurance and reinsurance companies. In this article we will cover in detail the legal innovations brought in the 2013 Insurance Contract Law.
In May of 2013 the new Insurance Contract Law came into force. The main purpose of the act is to create a leveled playing field somewhat in favor of insureds. Unless it can be shown that the insurance contract was negotiated between the parties, it is assumed under the new law that the insured adhered to ready-made clauses proposed by insurers, against which the insured should be protected in the event of a dispute.
Similarly, the General Law governing the financial system and the Office of the Superintendent of financial institutions, insurance, and administration of pension funds (SBSA) provides that it is the SBSA’s responsibility to identify abusive clauses, and to prohibit the use of policies that contain clauses that do not abide by this law.
The new Insurance Contract Law entitles the SBSA to scrutinize the way that insurance companies in the country are being handled. The SBSA will have to approve the minimum conditions for compulsory, personal, and mass insurance policies so that parting from these minimum conditions all insurance companies may freely compete with each other.
The principal contributions of the 2013 Insurance Contract Law are the following:
- The insurance contract is deemed valid by the consent of the parties even if the policy has not been issued and the premium has not been paid. The insurance application/proposal must be at the applicant’s disposal. The applicant, except in the case of insurance contracts agreed online or over the phone must sign the insurance proposal. The insurance proposal does not bind the parties. In this respect, after a contract has been accepted by the insured through the internet or phone, the insurer has 15 calendar days to send all the policy documents to the insured. If the policy is sent to the insured electronically, it should be electronically signed. If the insurer decides to reject the contract based on the information provided by the applicant then the insurer’s decision must be communicated to the applicant within 15 calendar days from the day the insurer received the acceptance of the offer.
- The insurance contract is automatically renewed with the same conditions and term as the previous contract if agreed. When insurers want to modify terms for the renewal, they must send a written communication to the insured 45 days before the contract’s expiration; the modification must be rejected in 30 days, otherwise it is presumed accepted. The policy will be renewed automatically for an indefinite period of time until the parties dispose otherwise.
- The misrepresentation and/or inaccurate statements of relevant known circumstances given by the insured, that would have prevented the contract or would have modified its conditions if the insurer would have been informed of the actual risk, makes the contract void if the insured gave those statements willingly or gross negligently. The insurer has 30 days to invoke the nullity of the contract based on misrepresentation or inaccurate statements from the time that the insurer knows of such misrepresentation. Insurers’ intentions and reasons for voiding the contract must be duly notified through a reliable channel. If the inaccurate statements were given deliberately or gross negligently then the contract will be void ab initio (has no legal effect from the date of the contract’s inception).
This point is important because the law provides that if the insured’s misrepresentation was not wilful or grossly negligent and it is established prior to the occurrence of the loss then the insurer has 30 days from the time that the misrepresentation is established to send a notice of review of the contract to the insured. The notice of review of the contract must contain a premium and/or coverage adjustment and give the insured 10 days to accept or reject the contract review. If the review is accepted by the insured then the Premium adjustment is paid as agreed. If there is no express approval of the adjustments within the 10 day period, the insurer may terminate the contract through a communication addressed to the insured within 30 days from the expiration of the insured’s prior 10 days deadline to accept or reject the contract review. If the misrepresentation is established after a loss the indemnity is proportionally reduced to the difference between the initial premium and the premium that would have been charged by the insurer if the real risk had been known.
- Non-payment of premium by the insured according to the terms of the contract will automatically suspend coverage after 30 days from the payment’s due date if no payment extensions have been agreed. For this to take effect the insurer must communicate to the insured of the premium non-payment, its consequences, and indicate how many days the insured has to make the payment before the suspension of coverage. The insurer will not be responsible for the losses that may occur during the time of coverage suspension.
Suspension of coverage will not be applicable if the insured has proportionally paid a premium that is equal or higher than the contract period that has already ran. If the insurer does not claim the premium payment within 90 days following the payment deadline’s expiration date, it is understood that the contract has been extinguished.
The insurance coverage reinstatement will not be retroactive and the insured must pay all overdue premium instalments. Coverage will begin to have effect at 12 am of the next day following the payment of all overdue premium.
The policy may be reinstated at the insured’s option only if the insured has not expressed in writing his decision to cancel the contract. If coverage is suspended for failure to pay premium, the insurer may cancel the contract and will not be responsible for any losses occurred in those circumstances. The insurance contract will be considered cancelled after 30 days from the day that the insured receives a written communication from the insured of the cancelation of the contract.
- Insurers have the liberty to fix the content of their policies as long as they contain the minimum conditions in article 26 of the Insurance Law. Personal, compulsory, and mass insurance policies must contain the minimum conditions and/or clauses that will be approved by a decision of the SBSA.
The SBSA will prohibit the use of policies that not abide by the law or the approved minimum conditions, and if such policies are used the SBSA will apply the corresponding sanctions. The SBSA will also order the inclusion of clauses or conditions in the policies that promote the reinforcement of the insurance’s technical and economic foundations and the protection of the insured.
Any clauses that revoke the rights of the insured, contained in general conditions or annexes that are not printed or in a notorious manner that would make it stand out from the rest of the Policy text, are void. If warranty clauses that condition the coverage are imposed then the existence of those clauses must be highlighted in the front of the policy.
- According to the law, abusive clauses are any stipulations that have not been negotiated and even when they have not been scrutinized by the SBSA they cause, to the insured’s detriment, important imbalance in the parties’ contractual rights and obligations. A non-negotiated clause is one in which the insured has had no influence in its content. The abusive nature of a clause persists even when the insured has approved it in writing. Also, abusive clauses do not cease to be abusive just because an insurance broker participated in the contract’s execution.
Some of the forbidden stipulations that will be considered void are the ones that waive the jurisdiction or laws that favour the insured, that establish statute of limitations that are shorter than the limitations established by law, that establish expiration or loss of the insured’s rights when there is breach of duties that are excessively difficult or impossible to be executed, or the prohibition or restriction of the insured’s right to seek judicial relief.
- The law provides that the parties may freely agree to submit their differences to arbitration as long as it is agreed after the loss occurs and that the quantum exceeds 20 Tax Units (approximately USD28,000). If the quantum does not exceed 20 Tax Units the parties will have to submit their differences to a mandatory mediation and if no agreement is reached, to the jurisdiction of the Commercial Court of the insured’s domicile.
- The insured, beneficiary or third party will report the occurrence of a loss to insurers within the periods of time established by the SBSA according to the nature or type of insurance. For instance, for property insurances the insured or beneficiary has no more than 3 calendar days to communicate the occurrence to the insured unless the policy provides a longer period of time; and for life and health insurances the period of time established to communicate the occurrence is of 7 calendar days from the day after the occurrence or the benefits is known to the insured or beneficiary. Nevertheless, the insured or beneficiary must surrender, at the insurer’s petition, the true, reasonable and necessary information to verify the loss and allow the necessary investigations for that end.
When the insured breaches his obligation to provide timely notice of a loss, due to minor negligence, and this causes a detriment to the insurer, the latter has the right to reduce the indemnity up to the amount that covers its detriment, except if the failure to give timely notice had no consequences in the verification or determination of the loss.
Coverage subsists if the insured proves his lack of negligence, unforeseeable circumstances, force majeure or impossibility. If the insured’s breach is premeditated then he will lose his right of indemnity. If the breach is a result of the insured’s inexcusable negligence he will lose his right to indemnity, except if the failure to provide timely notice of the loss did not influence in the verification or determination of the loss. This sanction will not take effect if it is proven that the insurer had knowledge of the loss or its circumstances by other means. The insured loses its right to indemnity if he acts fraudulently, exaggerates its damages or uses false means to prove its damages.
- The payment of the indemnity directly to the insured or beneficiaries must be done in a period of time no longer than 30 days from the following day of the consent of the loss.
The loss is consented when the insurer approves or does not reject the adjustment agreement signed by the insured in a period no longer than 10 days from the time the insurer is served with the agreement. If the insurer is not in agreement with the adjustment it may request a new adjustment within 30 days, determine an alternative indemnity amount or propose an arbitration or civil trial. If the insured does not agree with the adjustment, he may request a new adjustment to the insurer or submit the dispute to the courts subject to a 10 year statute of limitations from the date of loss.
When there is no adjustment agreement because the participation of an adjuster has not been requested or the adjuster has not finalized its report, the loss will be deemed consented when the insurer has not made any statements about the claimed amount in a period not exceeding 30 days from the date of delivery of all the documentation required by the policy for the payment of the loss.
- When adjusters require a longer period of time to conclude their report he may present a duly supported request to the SBSA stating the technical reasons and the time required. The SBSA will answer the request in a period no longer than 30 days. If the SBSA does not issue a decision within 30 days the request will be presumed approved.
The law provides that in case that the insurance company delays payment it will pay an annual interest of 1.5 times the average rate for active operations in Peru (which at the moment are 18.71% in local currency and 7.34% in foreign currency), in the currency expressed in the insurance contract for the time of the delay.
The above framework is fairly new as the act has only been in effect for 25 months and there is not much judicial guidance yet. However, the coming of age of the Peruvian economy with the arrival of multinationals, and the increased awareness of risk exposures, coupled with the arrival of foreign carriers, makes of Peru an interesting jurisdiction with growing relevance regionally.
 SBS Ordinance: Rules of Insurance Commercialization
 According to article 26 of the Insurance Contract Law, each insurance contract should contain the following minimum conditions:
- Full style of all parties to the contract (insurers, co-insurers, main insureds, additional insureds, and beneficiaries or loss payees if applicable)
- Insuring Clause and main description of assets or business insured.
- Specific risks covered and exclusions.
- Contract date and period of insurance.
- Premium amount, recharges and applicable taxes; along with its payment method, expiration dates and, when applicable, the criteria and procedures for premium adjustment.
- Declared values, sum insured, applicable sub limits and, when applicable, the criteria for the updating of these values.
- Franchises and deductibles convened.
- When applicable, official registration number of the broker and his commission; as well as the commission of the sale through insurance-banking, commerce or others.
- If the premium is to be divided into instalments, a chronogram of the instalments including the applicable interest rate so it reflects the financial cost to the insured.
- In life insurance and personal accidents insurance with decease or accidental death coverage, an statement that the policy is part of the National Information Registry of Life Insurance and Accident with Decease or Accidental Death Coverage Registry.
- Any particular condition of the policy, including its annexes.
- Any other determined by the SBS
 SBSA 2013 Ordinance: Management and Payment of Losses Regulation – Article 3
Jorge Mere is a Lawyer qualified in Peru with 8 years of experience in civil litigation and insurance law. He has successfully earned his masters degree in U.S. and Transnational law from the University of Miami and he has worked as a litigator for a top tier Peruvian law firm, as a member of their civil litigation team. While working as Peruvian counsel for different US law firms and as an adjuster for one of the largest insurance companies in the world, he has gained substantial experience in policy analysis, negotiations, dispute resolutions, and insurance law.
He is currently handling reinsurance disputes in respect of product liability, architect + engineers professional indemnity and property/mining disputes. Jorge is also working on qualifying as a US lawyer. Jorge is a native Spanish speaker and is fluent in English.
ALEX GUILLAMONT. Director at Kennedys Latin America & Caribbean
Alex Guillamont is the director of Kennedys Latin America and leads the Latin American and Caribbean practice at Kennedys. He handles disputes on behalf of leading international insurers and reinsurers, having represented clients across the region. With 15 years of experience, Alex is an acknowledged leading expert on insurance and reinsurance matters regionally. After serving the market with claims in Iberia from our London and Madrid offices, he relocated permanently to Miami in June 2010. The industry has voted him year on year into the LATAMIR Power 50 list, Latin American insurance sector most influential professionals. His team in Miami has been awarded the 2013 and 2014 Reactions Latin America Awards for best Law Firm.
Kennedys’ Latin America and Caribbean office is based in Miami to help international insurers and reinsurers manage claims and non-contentious issues across the region. Our dedicated multilingual team is well placed to support our clients, and we also draw on the skills and experience of Kennedys globally.
The Miami team works with our network of Latin American and Caribbean law firms. Kennedys have associated offices in Brazil, Chile, Colombia, Chile and Mexico and long-standing relationships with leading insurance and reinsurance law firms in the rest of the region.
Our lawyers in Miami are also supported by our international insurance team, including the London Market division and other offices around the world who handle some of the most significant insurance and reinsurance matters worldwide.
After being recognized as the market’s choice in 2013, Kennedys Latin America has once again been voted by industry leaders as Best Latin America (re) insurance law firm for 2014 by Reactions Magazine.