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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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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