Insurance Litigation 2024 Comparisons

The resolution of conflicts in insurance matters has a particularly disjointed regulation, despite the comprehensive intention of Article 543 of the Commercial Code. In principle, the arbitration procedure is subject to mandatory legal arbitration, except when its amount is less than UF10,000 (approximately USD370,000) – UF meaning “Unidad de Fomento” – in which case the insured may optionally submit to ordinary justice.

Regardless of the insured’s choice, the insurance procedure is always subject to certain rules that make the evidencerequirements more flexible and, especially, that subject it to the system of the logical and reasonable rules of evaluation assessment, allowing the judge to decree evidence ex officio and admit means of evidence not contemplated in the Civil Procedural Code.

Notwithstanding the above, it has become common for the ruling on insurance matters to be known and resolved by two types of courts not contemplated in Article 543 of the Commercial Code.

Firstly, there are the Courts of Appeals through Habeas Corpus, especially in matters of health insurance. Secondly, there are the Local Police Courts in cases where the insured asserts their status as a consumer.

Finally, the legal and regulatory statutes applicable in insurance litigation are:

• DFL No 251 of 1931, regarding insurance companies, corporations, and the stock market;
• Commercial Code, Article 512 and what follows;
• Civil Procedural Code;
• Penal Code, Article 470 No 10;
• Supreme Decree 1.055 of 2012; and
• Law No 19.496.

According to the rule of Article 543 of the Commercial Code, the contentious insurance procedure consists of three phases:

• a discussion phase that may or may not include response and reply depending on the amount involved;
• a conciliation phase; and
• a testing phase with a maximum duration of 20 business days, followed by a possible procedure to challenge the evidence, depending on the type of procedure.

Subsequently, the case is ready for a ruling to be issued, for which the court has a period of 60 days, a period that is often not met in ordinary courts. In general, except in arbitrations where remedies have been waived, all ordinary (appeal, annulment in form and substance) and extraordinary (claim) remedies are available in insurance litigation. In arbitrations with rejected appeals, non-waivable remedies (annulment of form due to incompetence and ultra petita, and complaint appeal) continue to be applicable.

Regarding the limitation period, the action derived from the insurance can be executed within four years from the date on which the respective obligation becomes payable (Article 541 of the Commercial Code). This rule has exceptions in the case of life insurance (the term is computed from the moment the beneficiary becomes aware of the existence of his/her right, with a limit of ten years) and in civil liability insurance (the term will never be less than that of the injured third party), as provided in the same provision.

In addition, special attention must be paid to cases regulated by the Consumer Protection Law (No 19,496), which establishes special statute of limitation periods when actions are carried out in accordance with this law, especially infringing actions (Article 26), which expires in two years and serves as a basis for establishing the supplier’s civil liability.

ADR is not yet a prevalent form of dispute resolution in Chile; however, institutional dispute resolution centres – both general and those specialised in insurance – are increasingly promoting these mechanisms, especially mediation.

For instance, both the National Mediation and Arbitration Center of the Santiago Chamber of Commerce (CAM Santiago) and the National Arbitration Center (CNA) have specialised mediation areas and have promoted the use of multi-tiered dispute resolution clauses. Regarding institutional centres specialised in insurance, ARIAS-LATAM has recently also incorporated mediation into its services.

The jurisdiction rule in insurance disputes is, in principle, mandatory. However, in litigation of an amount less than UF10,000 (approximately USD370,000), the insured may optionally submit to ordinary justice, in accordance with the provisions of Article 543 of the Commercial Code. The foregoing is without prejudice to what is stated regarding the jurisdiction of the Courts of Appeal in matters of appeals and the Communal Courts in matters regarding consumer law.

Foreign judgments may be enforced in Chile according to international treaties signed by Chile and the respective country or if, in the absence of a treaty, Chilean judgments are given executive force in the country of origin. The latter is in accordance with the principle of reciprocity.

When the judgment has had enforcement requested, prior notice must be given to the party against whom enforcement is requested. This will have a period equivalent to that for answering claims, and a period of evidence may be opened if the court deems it necessary to decide whether or not to grant the enforcement.

According with the principle of equality before the law (Article 19 Nos 2 and 3, Chilean Magna Carta), there are no differences between Chileans and foreigners under litigation scenarios in Chile.

However, difficulties may arise in rather practical matters related to civil procedure and the means of proof that are limited by the Code of Civil Procedure. For example:

• it does not contemplate the telematic appearance for witnesses or the remote holding of hearings outside of states of emergency;
• it requires the need for translation of documents in a foreign language; and
• it does not regulate the receipt of evidence in other languages.

In this sense, arbitration is a solution to these types of practical problems. It is a procedure that is usually more flexible and the means of proof is more extensive; depositions are recorded, and arbitrators usually speak English as a second language.

Arbitration provisions in insurance and reinsurance contracts are enforceable under Chilean law. Nevertheless, an insured may optionally submit a claim to ordinary justice in cases below UF10,000 (approximately USD370,000).

As indicated in 2.2 Enforcement of Foreign Judgments, foreign judgments may be enforced in Chile in accordance with the international treaties (Article 242 of the Civil Procedure Code). The New York Convention is the most relevant international treaty in force in Chile on this topic.

The use of arbitration is common in property claims with amounts over UF10,000. Likewise, in marine insurance, arbitration is also mandatory.

On the other hand, arbitration is private, and the parties pay the arbitrator’s fees. Awards can be appealed before the respective court of appeal or second-instance arbitration tribunal.

In insurance contracts other than those involving “large risks”, the mandatory nature of the rules of the Commercial Code (Ex-Article 542, paragraph 1) incorporates the sectoral legislation of the Code into insurance contracts, except if the contract is most beneficial for the insured.

The above means, in practical terms, that with respect to the insured who is not included in the second paragraph of Article 542 (damage policies, intermediated by a broker, between legal entities and with an annual premium greater than USD8,500), the rights established in the Commercial Code for the insured are inalienable.

Precontractual risk declaration (Articles 524 and 525 of the Commercial Code) – after the reform of the Commercial Code in December 2013, it has been held that the scope of the insured’s duty to report the risks is delimited by the specific information requested by the insurance company at the time of underwriting the policy and it is not an absolute duty to faithfully and without reluctance declare the risk being transferred. Although the issue is debatable, a conservative interpretation forces this restrictive interpretation of this duty of the insured to be kept in mind.

With this prevention, in the event that there may be an inexcusable error or inexcusable reluctance or inaccuracies, the company may do one of the following.

• If the claim has not occurred:
1. request the nullity of the policy if the errors or reluctance are determining factors of the insured risk; or
2. propose a premium adjustment or modification of coverage to what is not reported if the errors or reluctance are not decisive for the insured risk – if the modification is rejected, it must result in the termination of the insurance.
• If the claim has occurred – excludes or reduces compensation (in proportion with the premium), depending on the severity of the reluctance.

• Regarding all-risk coverage – the grounds for compensation for damages due to stoppage that are not associated with compensable physical damages.
• Regarding first-demand guarantee policies – several issues have been discussed, among which the following are of particular importance:

1. the suspension of collection/enforcement and/or payment of policies that guarantee contracts breached by the debtor company in the context of bankruptcy proceedings;
2. the possibility of requesting background information from the insured and/or guarantor in order to properly exercise the right of reimbursement, without this implying a condition for the policy payment; and
3. the issue of the multiplicity of authorities competent to address a breach when it also constitutes a violation of legal provisions integrated into the contract.
• Regarding to professional liability coverage (medical) – there is a notable increase in the amounts of judgments associated with health conditions requiring ongoing and future care (future consequential damages). This is not a discussion strictly about insurance, but rather one that has a direct impact on insurance coverage.
• The possibility of applying the collective procedure established in the Consumer Rights Protection Law in the field of insurance.

The jurisprudence of the Superior Courts of Justice in Chile resolves cases on a case-by-case basis, that is, according to the specific merits presented by each case, both in law and in the facts that shape it. For this reason, it is not possible to assert that insurance or reinsurance disputes are generally resolved in a specific manner.

A distinct trend can be observed when the insured also qualifies as a consumer, as in such cases the protective provisions of Law No 19,496 apply. This law grants a series of rights that facilitate the exercise of legal action, pre-establishes compensation amounts, imposes fines on the provider, eases the means of evidence, and subjects actions to a special jurisdiction, among other procedural and substantive benefits.

In Chile, direct action is not generally contemplated, which means that accident victims cannot directly sue the company with which the perpetrator of the damage is insured until the liability debt is declared by a judicial ruling. It is only at that moment (or with their agreement) that the victim acquires a right to claim that liability debt from the company. This is explicitly stated in Article 570 of the Commercial Code. However, direct action is one of the issues that generates the most controversy in legal doctrine.

There is no definition of the concept of bad faith in Chilean legislation; rather, it is understood as that which opposes good faith, which in contractual matters is seen as an expectation of good business conduct. Without a doubt, bad faith is a concept that exceeds the mere idea of negligence, and there is no consensus in legal doctrine as to whether it corresponds precisely to the notion of fraud included in the final paragraph of Article 44 of the Civil Code, or whether it also includes fraud scenarios and situations of extreme negligence.

In Chile, the process of notification, settlement and payment of claims is a regulated procedure with established deadlines, whose compliance is subject to the supervision of the Financial Market Commission (Comisión para el Mercado Financiero, also called CMF). The CMF is the authority that, by law, is responsible for ensuring the proper functioning, development, and stability of the financial market. Among its functions, it ensures that individuals or entities under its supervision comply with laws, regulations, statutes, and other provisions governing them, from the beginning of their organisation or activities, as applicable, until the conclusion of their liquidation; it can exercise extensive oversight over all their operations. This is stipulated in Article 1 of Law No 21,000. In exercising these powers, and following the appropriate administrative sanctioning procedure, the CMF can impose any of the penalties established in Title III of Law No 21,000.

An example of the exercise of these powers can be seen in the past 12 months with the increase in penalties applied by the CMF to credit- and guarantee-companies for non-compliance with Articles 582 and 583 of the Commercial Code in the case of first-demand policies.

The insurance broker (independent) is a sui generis agent, as they act in the interests of both the company and the policyholder, aiming to obtain the most beneficial coverage for the latter. In this context, the broker’s liability is subject to the liability statute of agents, which, unless a special statute applies, is governed by the rules contained in the Civil Code that can be summarised as follows.

• The agent only binds the principal to third parties when they act within the limits of their faculties. If the agent exceeds these limits, they do not bind the principal to third parties.
• If the agent exceeds the limits of their faculties, they are generally not liable against third parties but only to the principal. They will only be liable to the principal if:
1. they have not disclosed their faculties; and
2. they have personally obligated themselves.

Nonetheless, the broker’s specific declaration, the nature and circumstances of the advised parties, their context, and the relevance of the declaration in the specific legal transaction being executed will be determinative in constructing – with varying probabilities of success – a binding obligation for the insurance company based on the broker’s action.

Chilean law does not provide for delegation agreements in insurance matters.

The primary area in which insurers finance the defence of insured parties is found in liability insurance policies, where one of the coverages includes what are known as defence costs.

On the other hand, Article 572 of the Commercial Code states that the coverage of such insurance includes indemnification, as well as the expenses and costs of the legal process.

It is important to highlight that, as a general rule, the insurer only finances defence costs in civil proceedings. However, medical malpractice and motor vehicle insurance policies contemplate the possibility of financing the insured’s defence in criminal trials.

The authors do not foresee changes in this trend in the coming years. The liability insurance market is quite established. However, it is possible that sub-limits of coverage could be introduced in areas such as employer’s liability insurance, which would reduce the exposure of insurers to a lesser extent.

There has been an increase in compensation awarded by Chilean courts in the area of civil liability insurance, especially in the area of employment liability, medical malpraxis/mala praxis (malpractice) and vehicle insurance. Particularly important have been those awarded due to pain and suffering and loss of profit.

In Chile, there are no coverages that allow protection against costs with respect to claims.

According to Article 534 of the Commercial Code, upon payment of the compensation, the insurer is subrogated to the rights and actions that the insured has against third parties in relation to the loss.

In such cases, the claim or lawsuit is filed in the name of the insurer, but subrogated to the rights and actions of the insured to whom the compensation from the insurance has been paid.

The pandemic has affected insurance litigation to some extent, as there have been claims from insured parties demanding payment for damages due to business interruptions caused by COVID-19 in sectors such as retail or construction. On the other hand, given the negative effects of the pandemic on the economy, there has also been an increase in litigation arising from coverage denials in surety policies.

It is likely that claims or lawsuits arising from warranty insurance will increase in both frequency and severity. This is because the Financial Market Commission (CMF) estimates that certain types of surety policies must be paid, and then the insurer can claim against the insured if there is any reason for it.

There have been judicial processes aimed at obtaining a judgment from the judiciary regarding damages for business interruptions due to COVID-19. However, the outcomes, for now, have not been favourable for the insured parties.

In the area of surety insurance, there has been a decrease in appetite for this type of risk, due to the strict position of the insurance regulator that such insurance must first indemnify and then discuss the appropriateness of the compensation (“pay first and argue after”).

There has not been a significant impact of ESG factors in the area of underwriting and litigating insurance risks. However, the insurance regulator requires insurers and regulated entities to report aspects related to these factors in their reports.

On 26 August 2024, the National Congress approved new legislation regulating the Protection and Processing of Personal Data, also establishing the Personal Data Protection Agency.

The new legislation introduces substantial modifications to the current Law No 19,628 on the Protection of Privacy, increasing the level of protection in this area, creating a regulatory authority, delimiting the exercise of rights by interested parties, establishing new sources of legality for data processing, regulating international data transfers, and establishing a robust regime of liabilities and sanctions.

On 1 September 2024, Law No 21595 on Economic Crimes came into force, introducing changes to the liability of legal entities. Under it, the list of economic crimes has been expanded, a renewed sanctions regime has been introduced, new criminal figures have been incorporated, and the criminal liability of legal entities has been extended further than what had been previously contemplated by the Chilean legal system.

All of the above may have consequences on D&O coverage that companies demand, because in several cases the payment of criminal defence fees has been included.

On the other hand, on 4 January 2023, Law No 21521 that Promotes Competition and Financial Inclusion through Innovation and Technology in the Provision of Services (Fintech Law) came into force. This piece of legislation recognised parametric (index-based) insurance in Chile. However, the Financial Market Commission must create a regulation that refers to the variables that may trigger this insurance, the insurable risks under this type of insurance and the characteristics of the insurance policies that are registered before the regulator.