Forced liquidation: Article 42 and its implications on the earthquake in Ecuador

On 16 April 2016, a devastating earthquake of 7.8 magnitude struck Ecuador. The coastal towns of Muisne and Pedernales were hit hardest by the earthquake, with the capital city Quito, over 170 km away, also feeling its effects strongly.  The regions of Manta, Pedernales, and Portoviejo accounted for over 70% of total casualties, while widespread property damage has occurred throughout the country. As of 23 April 2016, there have been over 650 people killed and over 16,500 people injured.

Given the extensive amounts of reported property damage, it is expected that the effects of this earthquake will ripple throughout the (re) insurance industry in Latin America and abroad. It is therefore pertinent to discuss Article 42 of the Ecuadorian Insurance Law, which gives the Ecuadorian Banks, Securities, and Insurance Superintendence (SCVS) the power to forcibly liquidate insurance companies for failure to pay any claim it is ordered to pay by the Superintendence.

As our past experience has shown, the Superintendence is not shy in applying its Article 42 liquidation powers. The following are important practical considerations that we have gleaned from our experience.

  • It is imperative that should the insurer choose to deny a claim, they provide the insured with a detailed letter listing each and every reason for which the claim is being denied. Should the insurer omit an argument from their denial letter, the insurer will not be permitted to present this argument to the Superintendence as it will view that the insurer has waived this argument by not presenting it in its initial denial letter.
  • It is important that when an insurer is presenting its defense before the Superintendence, it submit all technical information available that was taken into consideration to reject the claim in order to help the Superintendence on the specialized and technical aspects of the claim.
  • Should the Superintendence find for the insured, then it will order the insurer to pay the claim with interest at the highest conventional rate according to law within 10 additional days. Today, this interest rate is approximately 9.33% per annum, to be calculated as of when the initial 30-day period for payment of claim elapsed.

Let us now delve into Article 42 with particularity. The Article states that (re) insurers have the obligation to pay duly backed claims within 30 days from the date that they were presented with the claim along with the necessary supporting documents. The 30-day period is suspended every time the insurer requests documents necessary to adjust the loss. The insurer cannot request any document but only those expressly indicated in the policy. Within this 30 day period, a (re)insurer may object to the payment of the claim. If the insured acquiesces to the insurer’s objections, then the agreed-to payment of the claim is due immediately.


However, if the insured objects to the insurer’s denial, the insured may present the claim to the Superintendence in order to initiate a proceeding where the insurer must justify its reasons for the denial of the payment within five days. Within 30 days of the insured’s filing of the claim to the Superintendence, the Superintendence must rule on the claim; should it find for the insured, the insurer must pay the claim within 10 days of the ruling. The insurer may appeal this order. However, the appeal does not suspend the effects of the Superintendence’s order to pay. Should the insurer fail to pay the claim as ordered, Article 42 gives the Superintendence the power to forcibly liquidate the insurer. While the insurer may challenge the liquidation, it is required to pay the claim before submitting the challenge.

As you may tell, the broad powers given to the Superintendence under Article 42, and the administrative recourse insurers have to challenge denied claims, are quite unique when compared to other jurisdictions in Latin America. Given the massive property damage suffered in Ecuador, it is important that (re)insurers keep the repercussions of Article 42 in mind when dealing with the claims that will undoubtedly emerge from this tragedy.

Javier Vijil baja

JAVIER VIJIL. Associate Kennedys Americas.

A graduate of the University of Miami Law School, Javier specialized his academic career in international law. This led Javier to spend time at the Instituto de Empresa in Madrid, Spain, where he took part in the LL.M. program in International Corporate Law.

Javier has worked in a number of firms in Miami, New York, Panama, and Madrid, gaining experience in areas ranging from insurance coverage defense to intellectual property to medical malpractice defense. He is currently assisting on coverage issues related to a major corruption scandal in Brazil from a D&O perspective and assisting with several property and liability reinsurance matters in Ecuador.

 Alex Guillamont

ALEX GUILLAMONT. Head of Latin America & Caribbean Practice.

Alex Guillamont is the head of the Latin America 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. Also, Alex has been awarded as Insurance & Reinsurance Attorney of the Year in Latin America 2014 by Global Law Experts. His team in Miami has been awarded the 2013, 2014 and 2015 Reactions Latin America Awards for best reinsurance Law Firm.

Alex is involved in complex losses on major environmental and natural disasters, contractors all risk, political and trade risk, financial institutions and D&O claims, energy losses, regulatory compliance and third party administration schemes and political risk in the entire region—most recently in Argentina, Bolivia, Bahamas, Brazil, Chile, Central America, Colombia, Costa Rica, Ecuador, Haiti, Mexico, Panama, Peru and Venezuela. He and his team advise carriers on regulatory issues and strategic deployment of offices, wordings and claims handling procedures, audits of ceding companies and underwriting agents.

About Kennedys

Kennedys’ Americas office is based in Miami to help international insurers and reinsurers manage claims and non-contentious issues across the region. The dedicated multilingual team is highly experienced in supporting our clients, and we also draw on the skills and expertise of Kennedys globally.

The LatAm and Caribbean unit works with a network of Latin American and Caribbean law firms. Kennedys has associated offices in Brazil, Argentina, Chile, Colombia and Mexico as well as maintaining long-standing relationships with leading insurance and reinsurance law firms in the rest of the region.

Numer OneAfter decades working for international carriers on Latin American & Caribbean claims from London and Madrid, Kennedys was the first international insurance law firm to open a boutique office in Miami, in 2010, as a hub to manage claims, regulatory issues, policy analyses and audits across the region.

According to independent Gracechurch Report, Kennedys is the number one law firm in terms of value for money.

The Latin America & Caribbean Business Unit in Miami is a team of expert insurance lawyers from Argentina, Brazil, Peru, Mexico, Colombia, Panama and Venezuela.

In addition, the new US Business Unit is headed by Neil Bayer, a lawyer who has extensive litigation experience working for the London Market in maritime-related areas. Mr. Bayer has a background in fine arts, species and aviation cases. The US Business Unit also includes Dan Sanders, who offers 25 years of experience investigating, evaluating, and negotiating contractual and extra-contractual obligations of insurers and the underlying exposures of complex commercial litigation: balancing stakeholders’ expectations with strategic resolution of conflict.

The lawyers in Miami are also supported by the 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.

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