Lima, Peru: 1930s bank façade on Miró Quesada st. – photo by M.Torres
On 16 September 2021, the Third Chamber of the so-called “Court of Contracts” of the Peruvian State issued Resolution 02815-2021-TCE-S3.
The Resolution imposes sanctions on La Positiva Seguros y Reaseguros and Rímac Seguros y Reaseguros (members of the La Positiva Rímac Consortium), disabling them from participating in tenders to contract with the Peruvian State for four months. However, it is important to note that these sanctions do not affect the capacity of either La Positiva Seguros nor Rimac as insurance or reinsurance companies in the Peruvian market.
The Court determined that there were inaccuracies in the documentation submitted by the consortium to qualify for Public Tender 101-2016-SEDAPAL.
Following a review, SEDAPAL (Servicio de Agua Potable y Alcantarillado de Lima) allegedly found inconsistencies in the work certificates provided by La Positiva Seguros, specifically that one of their employees did not have the required five years’ experience. In this regard, La Positiva Seguros argues that it was simply an immaterial error on the dates specified in the work certificate.
The effects of the Resolution have been suspended in respect of La Positiva Seguros whilst an appeal they have lodged is considered.
Rímac did not participate in the sanctioning procedure since it was not duly notified. However, it has also been sanctioned as a member of the consortium. Rimac has filed a court injunction for not being notified correctly and are now awaiting a decision on this.
Sanctioning a consortium of reputable insurers for information that did not seek to obtain a benefit (even if it may have contained errors), and was seemingly compliant with the requirement of five years’ experience, represents a clear threat and risk for markets willing to participate in these type of tenders.
Punishing long-standing carriers for apparent technicalities may do more damage than good to the State tender process in Peru and its ability to find reputable insurance capacity.
Without a doubt, this story will continue to unfold. We will keep you informed.
Authors: Alex Guillamont, Head of Latin America and Caribbean; Marco Rivera, Partner; Lorena Avila and Noriko Hasegawa, Senior Associates at Kennedys.
In this post-pandemic time, a major concern of the (re) insurance market is the massive volume of claims that have arisen as a result of Covid-19. As it is surely the same in other jurisdictions, in the US most of the claims that have arisen from Covid-19 come from policyholders having Property policies that cover BI, who allege that this coverage should be applicable due to quarantine orders established by their governments. Contrary to the jurisprudence that has been established in the UK and Europe, most US courts have taken the position that direct physical damage is required to trigger this BI coverage. Below we will mention some specific relevant cases.
The first BI case related to Covid-19 that was decided in the US was Gavrilides Management Company, LLC v. Michigan Insurance Co. The judge’s decision, dated July 1, 2020, specifically denies the insured’s claim for lack of physical damage. According to the judge, physical loss or damage, under its most common definitions and according to federal jurisprudence, requires a physical alteration of the property. However, the judge mentioned in his ruling that there could be a distinction if the insured property was indeed infected with Covid-19. Following Gavrilides’s reasoning, on May 4, 2020, the courts of Washington D.C. granted their judgment in Rose’s 1, LLC, et. Al v. Erie Insurance Exchange. Although not a class action, this case was brought by ten owners of restaurants or commercial properties in Washington. In this case, the court ruled that there was no coverage for the plaintiffs, reaffirming that “the physical integrity of the property” had to be affected in order for BI coverage to be triggered.
Another relevant case comes from Texas, Diesel Barbershop, LLC, et. to v. State Farm Lloyds. Diesel’s policy had a clause covering losses from civil orders. Naturally, following an order in Texas stating that businesses should not operate between March 24, 2020, and April 9, 2020, Diesel filed a claim for loss of income due to this civil quarantine order. The court denied this claim, ruling that coverage for civil orders was intended to cover situations where there is BI that arises from a civil order issued because of physical damage to the premises in proximity to the insured’s property. In this case, there was not the required physical damage. Furthermore, the policy had an exclusion for losses caused by viruses.
However, there have been some cases where the court has not accepted Motions to Dismiss (MTD) reasoning that BI coverage is not triggered by lack of physical damage. In Studio 417 v. Cincinnati Insurance Co., insurers in Missouri filed an MTD arguing that, because the claimants did not allege physical damage, their claim should be dismissed. In this case, the claimant submitted his claim under an all-risk policy. The court rejected the insurer’s MTD, finding that the claimants did claim physical damage when they claimed that Covid-19 is a physical substance that is emitted into the air and that was attached and deprived claimants of their property, rendering it unusable. Another example of a claim surviving an MTD arguing lack of physical harm is Derek Scott Williams PLLC et al. v. Cincinnati Insurance Co., a class action filed in Illinois. However, we must note that these results do not carry much jurisprudential weight since it only rejects the insurer’s MTD, which means that the claimant presented his claim fulfilling all the procedural requirements. The merits of these cases have not been considered.
Finally, we must highlight the only case, that we know of, where the court ruled on the merits of the case against the insurer. In North State Deli LLC et al. v. Cincinnati Insurance Co. et al., The court in North Carolina reasons that BI coverage requires a direct physical loss and found that the term “direct physical loss” includes the “inability to use… something in the real world, material, or bodily resulting from a given cause.” For this reason, the court ordered insurers to pay for BI losses suffered by the insured. We note that this decision was immediately appealed by the insurer and we expect to have the decision of the appellate court within six months to one year.
As you may see, this last decision has proven to be the exception to the rule established by the courts throughout the US requiring physical damage in order to trigger BI coverage in policyholders’ policies. We look forward to the results of the appeal in the North State Deli case. However, it is clear that in the US, unlike the decisions granted in Europe, current jurisprudence overwhelmingly favors insurers.
Spain**
Traditionally in Spain, the existence of prior material damage has been a requirement to trigger the Loss of Profits guarantee on a damages policy. Jurisprudence has determined the concept of pecuniary damage requiring tangible, physical damage.
At the same time, under Spanish law there is a distinction between clauses delimiting the risk and clauses limiting the rights of the insured. The first ones define the covered risk, and once the risk is defined, the latter limit the rights of the insured, typically through exclusions. Spain’s Insurance Contract Law establishes, in Article 3, the requirements needed for limiting clauses to be valid, which must be highlighted (underlined, and/or highlighted in bold), and must be specifically accepted in writing (signed), even though these requirements do not apply to large risks, which is basically defined depending on the insured company’s business size/volume. Based on this distinction, the concept of a limiting clause has been extended by jurisprudence to “surprise” clauses, these being those that do not correspond to the reasonable expectations of the insured.
Within this legal framework, it has traditionally been admitted by the Courts that the Loss of Benefits would not be covered in the absence of prior material damage.
However, with the arrival of the Covid-19 pandemic, certain Spanish Courts have adopted a “creative” solution to cover said Loss of Profits without material damage, as follows:
i. Judgment by the Provincial Court of Gerona of February 3rd, 2021. A pizza restaurant claimed € 6,000 from its insurer for loss of benefits suffered during lockdown. The policy covered loss of benefits as a result of a claim covered by the policy according to the definition of “damage coverage” included in the General Conditions, also including an exclusion in the General Conditions for damages or losses caused by organisms or public authorities. Since the General Conditions had not been signed by the insured, the Court found that the exclusion is not applicable. Furthermore, the Court understands that the insured could reasonably have expected the loss of benefits to be covered by the payment of the premium. It is interesting that the question of whether or not there is pecuniary damage has not been raised by the insurer’s lawyers, so there is no pronouncement on the matter, when it is actually the most anticipated question by the Spanish insurance market.
ii. Judgment by the Provincial Court of Gerona of June 16, 2021. In this case also, a restaurant claimed € 18,000 for loss of profits during the lockdown. The insured claimed that he was not knowledgeable and that he never received a copy of the General Conditions, which established the conditions of coverage. The Court ruled in favor of the insured on the same basis as the previous judgment: if the General Conditions are not signed (and in this case are not even known) by the insured, the insurer cannot invoke them.
iii. Judgment by the Court of First Instance of Granada of July 21st, 2021. In this case again, a restaurant claimed € 80,000 from its insurer for loss of profits. The Court again refers to the doctrine of limiting and delimiting clauses, and the need for the limiting clauses to be accepted (signed) by the insured. The problem in the present case was that it was a multi-risk insurance, and that apparently the coverage for loss of benefits was described as “loss of benefits derived from any claim”. The Court decided that, since it is a multi-risk policy, the Loss of Benefits coverage, even derived from the pandemic, falls within the reasonable expectations of the insured, for which it condemned the insurer to pay compensation.
In any case, the following must be taken into account regarding these three judicial pronouncements:
None of them have binding effects or constitute jurisprudence (for this, two judgments of the Supreme Court are required in the same sense), depending on the specific circumstances of the case, and on the wording of the policy in question.
None of them are large risks. The requirement of knowledge and acceptance of the limiting clauses is not applicable to large risks.
So far there is no judicial pronouncement on the substantive question: Can the pandemic be considered damage in the context of a damage policy?
*This section was developed by Kennedys Miami regional hub for Latin America and the Caribbean. Alex Guillamont, partner, Head for Latin America and the Caribbean and Javier Vijil, Senior Associate, Javier is qualified in New York and Florida. ** This section was developed by Kennedys office in Madrid: Olivia Delagrange, partner and Javier Montero, Senior Associate.
Arbitration provisions under contracts for insurance can often provide for a more expeditious and confidential (although not necessarily cheaper) settlement of disputes than passage through the courts. These provisions can either be mandatory or voluntary to the insured (or cedant) and insurer (or reinsurer) bound by the contract.
Furthermore, the procedural rules by which the arbitration will be governed tend to be agile, and usually involve a third party arbitration service (e.g. the International Chamber of Commerce, the Jamaica International Arbitration Centre, the Arbitration and Mediation Court of the Caribbean in Barbados, or the Centro de Arbitragem e Mediação da Câmara de Comércio Brasil-Canadá in Sao Paulo and Rio de Janeiro).
Several government and consumer agencies in the US, Latin America and the Caribbean region, criticise the presence of mandatory arbitral provisions such as the suppression of the consumers’ pursuit of remedies. In observance of such concerns, Brazilian courts for instance will usually invalidate commercial agreements to arbitrate where there is imbalance of economic power between the parties and where there was no option to amend or review the contractual terms and conditions.
However, while there may be regulatory push-back against mandatory provisions to arbitrate, jurisdictions in the region such as Jamaica, Barbados, and Brazil recognize the use of arbitration in insurance contracts.
II. Cayman Enforcement of Brazilian ICC Award
The recent decision of the Caymanian Court of Appeal in the matter of Gol and MP Funds regarding a 2007 Brazilian ICC Arbitral Award in favor of Gol has strong implications for the importation and enforcement of arbitral awards among various countries and between contrasting legal systems. Thus, because of the Cayman decision, it is conceivable that an insurer who receives a favorable arbitral decision in a civil law jurisdiction, for example, can have that award enforced both under the English common law system as well as within the Caribbean Commonwealth to the extent that the relevant jurisdiction has adopted English law and reasoning. Of course, the insured who receives a favorable award will, also, have a broader jurisdictional reach within which to enforce their rights.
In this case, MP Funds essentially challenged the jurisdiction of the arbitral tribunal and the validity of the award on grounds allowed under Section 7(2) of the Caymanian Foreign Arbitral Awards Enforcement Law (1997 Revision) (“FAAE”) which is similar to Article V of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”). Namely, Section 7(2) challenges failings in the application of arbitration rules and procedure by allowing for the refusal of recognition and enforcement of a foreign arbitral award on these bases. Both Brazil and Cayman have acceded to the New York Convention and have promulgated laws that import the principles of the Convention into their respective legal systems. In Brazil’s case, it is the Brazilian Arbitration Act (Law 9,307/1996) (hereinafter, “BAA”) and in Cayman it is the FAAE.
The Court of Appeal found in favor of Gol and against MP Fund’s arguments by determining that the Brazilian arbitral award is recognizable and enforceable in Cayman. The Court reached its reasoning based in large part on the principles underpinning Article III of the Convention which states: “[e]ach Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon…” It reasoned, applying the English and Caymanian jurisprudential principles, such as those related to due process determinations, public policy and the doctrine of estoppel, that the matters before it were the same matters that had been addressed in the Brazilian local court judgments regarding the ICC award.
As such, English and Caymanian jurisprudence (inclusive of the principles within the Convention) mandated that the Court should follow the decision of the Brazilian courts on matters decided according to its own law rather than re-interpreting Brazilian law in Cayman courts. It recognized and acknowledged that civil law concepts (e.g. iura novit curia[1] which has no equivalent under the common law) were applicable to the decision in Cayman courts.
Within the civil law jurisdiction of Brazil, arbitral awards have the same legal status as court judgments and can be enforced by the courts. Brazilian courts are increasingly friendly towards arbitration and, as such, they try to limit their intervention in arbitral proceedings to a minimum. In 2018, the Brazilian Superior Court (Superior Tribunal de Justiça – STJ) issued the decision REsp1.550.260, wherein it was decided that agreements to arbitrate entail recognition of the jurisdiction of the arbitral tribunal over the Brazilian Courts. The contractual clauses related to arbitration as the primary mechanism by which to solve any disputes between the parties is widely respected by the Brazilian courts. The courts tend to amend it only when an element to create a binding contract is absent or when a substantial issue with the contractual parties is identified. In that sense, one of the judges that voted in the decision REsp 1.550.260 emphasized the following:
“Arbitration Act allows capable people of contracting to submit the disputes that may arise to the arbitral tribunal, by means of an arbitration agreement, inserting arbitration clause or arbitration commitment into the contract. In doing so, the jurisdiction of the arbitral tribunal, as a rule, precedes the Court’s jurisdictional action to settle disputes relating to available rights. The arbitral award produces the same effects between the parties involved and, in case of an indemnity award, the award can be executed in the same way as a court decision. Furthermore, only after an award issued by the Arbitration Tribunal, the Court can act to eventually annul it, under the terms of articles 31, 32 and 33 of Law 9,307/1996.”
Brazilian arbitral awards are not subject to appeal, unless so agreed by the parties, which is not common. Nonetheless, an arbitral award can be set aside by the Brazilian courts within a 90-day period from the notification of the award per Art.33(1) of the BAA. According to art.32 of the BAA, the grounds for an award to be set aside are as follows: (1) the arbitration agreement is null and void; (2) the award was rendered by someone who could not serve as an arbitrator; (3) the award does not meet the BAA’s mandatory requirements for an award; (4) the award exceeded the scope of the arbitration agreement; (5) the award does not decide the entirety of the dispute; (6) the award was rendered in the presence of nonfeasance, extortion, or passive corruption; (7) the award was not rendered within the term established by the parties or within six months, if no other term was stipulated, from the initiation of the arbitration proceeding; or (8) due process was not observed. However, the courts do not review the merits of the case and it has been their consistent trend to recognize awards and avoid intervention of any form.
Thus, this is the rubric inherited by the Caymanian courts via Article III of the Convention. The Court of Appeal’s reasoning presents an example of the seamless convergence of various systems of law (i.e. arbitration v. traditional courts and civil law jurisdictions v. common law jurisdictions), as guided by the Convention, resulting in the potential for broad international enforcement of arbitral awards throughout a multiplicity of jurisdictions.
III. Regional Foreign Arbitral Awards Enforcement Law
The likelihood of decisions similar to the Cayman Court of Appeal’s decision being found throughout Latin America the Commonwealth Caribbean is strong given the common law principle of precedent as well as the principle of reciprocity, applicable to both common and civil law jurisdictions as established under the Convention. Additionally, one important innovation introduced by the Convention is the exclusion of the “double exequatur” requirement—the party seeking enforcement of an arbitral award had to prove that the award was final and un-appealable in the country of the seat of the arbitration and in the country where the award was to be enforced.
Barbados and Jamaica, both seats of arbitration in the Caribbean, as parties to the Convention, have local laws like the FAAE that import the Convention’s principles into their respective domestic legal systems. In Barbados, it is the Arbitration (Foreign Arbitral Awards)(Cap. 110A)(Foreign Arbitral Awards Act). In Jamaica, it is the Arbitration (Recognition and Enforcement of Foreign Awards) Act 2001. The Jamaican law recites the Convention’s articles within its texts and the Barbados law contains sections similar to both the Convention and the Cayman law such as Section 6(3) which refers to public policy as a basis for refusing to recognize and enforce foreign arbitral awards. Similarly, Brazil, also a party to the Convention, has the BAA. However, per Art. 35, an award by a foreign arbitral tribunal must be recognized by the Brazilian Superior Court (“STJ”).
Jamaica’s seat of arbitration, the Jamaica International Arbitration Centre (“JAIAC”) and Barbados’ seat of arbitration, the Arbitration and Mediation Court of the Caribbean (“AMCC”) both have rules and procedures based on the UNCITRAL Rules. Each nation’s courts are also subject to their respective, aforementioned laws on foreign arbitral award enforcement. Further, both have inherited the English common law as prototypes for their respective legal systems with Jamaica still giving heavily persuasive value to the decisions of British courts (the Privy Council still maintaining precedential value) and both Jamaica and Barbados allotting persuasive value to the decisions of courts throughout the Commonwealth, at large. Therefore, the reasoning employed in the Cayman decision and the similarity of its laws to those of Barbados and Jamaica, as well as the Commonwealth Caribbean region, make it highly likely that similar decisions will be made on the recognition and enforcement of foreign arbitral tribunal awards.
Although, it should be noted that uniform implementation of the New York Convention by member states is not a foregone conclusion. Members are allowed to limit the application of the Convention, such as adoption of the reciprocity reservation or the commercial reservation (wherein the application of the Convention is limited to commercial matters only). Thus, the lack of uniformity may be a hindrance to the enforcement of foreign arbitral awards and the development of a cohesive international arbitration system.
IV. Implications for Enforcement of Foreign Arbitral Awards Under Insurance Contracts in the Region
Insurers who may want to have a foreign arbitral award awarded in a civil law jurisdiction enforced in a Commonwealth Caribbean jurisdiction subject to the Convention and with foreign award laws similar to Cayman, Barbados, and Jamaica should apply to the local courts for recognition and enforcement and supply, per Article IV of the Convention: (1) a duly authenticated original award or a duly certified copy and (2) the original or duly certified copy of the agreement under which the parties have undertaken to submit to arbitration all or any differences which have arisen or may arise between them under the insurance contract. It is the same process for those insurers with awards in common law jurisdictions who would want to have their awards enforced in civil law jurisdictions such as Brazil.
It should be reiterated that insureds will also have the facility to reach a multinational insurer for the enforcement of a foreign arbitral award, in a jurisdiction subject to the Convention and relevant domestic laws.
Thus, notwithstanding the caveats regarding inconsistent adoption of the Convention’s principles by member states, the Cayman decision showcases that Civil Law, as represented by Brazil, and English Common Law, as represented by the Commonwealth Caribbean, legal systems can be complimentary when enforcing arbitral awards.
[1] I.e. “the judge knows the law” or, rather, it is the role of the parties to a legal dispute to the adduce the facts, they need not plead or prove the law. It is for the court to apply the law.
Authors: Isadora Talamo, Kennedys Associate; Danielle Benjamin, Kennedys Law Clerk; Alex Guillamont, Kennedys Head of Latin America and Caribbean; Fabio Torres, Kennedys partner in Brazil.
(re) Insurance Professionals Miami (Latin America & Caribbean) 