Brazil’s legal system is based on civil law. Therefore, its legal framework consists of various codes and laws. The Brazilian insurance market is mainly regulated by the following legal documents:
In addition, the interpretation of insurance policies may also be subject to the very protective Consumer Protection Code, enacted by Law 8,078 of 1990, should a consumer be the insured or beneficiary of the coverage.
As for the procedural regime, insurance disputes are generally subject to the judicial courts, where the New Civil Procedure Code rules will apply (enacted by Law 13,105 of 2015). An arbitration procedure is also possible for the resolution of insurance matters, provided that the arbitration procedure is expressly agreed upon by the parties of the relevant insurance contract.
The Brazilian litigation system has three instances:
While the first instance has the evidentiary stage and different manifestations of the parties in order to convince the judge, the other instances are not designed for the production of evidence, but for the re-examination of the main arguments of the case.
Insurance disputes may be time consuming if the parties refuse to accept the first-instance judgment. The New Civil Procedure Code attempts to make litigation less time consuming by developing and enhancing the rules concerning alternative dispute resolution mechanisms (especially arbitration and mediation), and rendering certain decisions by the superior courts binding and making a decision in a single case the model for court decisions in cases that are similar (similar to precedents in the United States).
A one-year statute of limitation applies for most insurance-related matters, and a three-year term will apply for some limited situations. The triggering of those terms is one of the main issues disputed in court, varying on a case-by-case basis for several matters.
Arbitration is the most popular ADR method for relevant amount matters, subject to prior express acceptance in insurance-related matters.
Consensual extrajudicial mediation may also be agreed upon by the parties, and specific legislation has been enacted on the subject but it has not yet gained as much momentum as that seen with regard to arbitration (Law 13,140 of 2015).
The New Civil Procedure Code and the judiciary (National Council of Justice Resolution 125 of 2010) have made relevant developments in the use of ADR methods, such as mediation and conciliation. According to the New Civil Procedure Code, a mandatory conciliation/mediation hearing shall be scheduled prior to the presentation of the defendant’s answer. Judges are encouraged to try to make the parties reach an agreement, and additional mediation/conciliation hearings may be held during the proceedings, including on appeal.
The Law of Introduction to the Rules of Brazilian Law (Law 13.655/2018, based on Decree-Law No 4,657/1942, as amended, or LIRBL) brought into the Brazilian legal system the basic principles of private international law. The Law provides guidance on the effectiveness, applicability and interpretation of Brazilian law and sets out conflict of laws rules.
Regarding governing law, the LIRBL provides that the law of the country where agreements are executed or the proponent’s residing country should govern such agreements. However, this legal provision does not exclude the contractual freedom of the parties to elect the law that will govern their rights and obligations under international agreements. This contractual freedom would be more limited if the dispute is subject to Brazilian courts; the local court will assess whether there is a link between the chosen governing law and the underlying transaction. It is broader if the dispute is subject to arbitration, because arbitration law expressly allows parties to choose the governing law and rules.
Regarding jurisdiction, as a general rule, Brazilian jurisdiction is determined by the respondent domicile and whether the obligation has to be fulfilled in the country. Such jurisdiction rule is also subject to the parties’ agreement as provided in the relevant contract, and may vary on a case-by-case basis; they can negotiate an exclusive forum clause.
For the consumer-insurance relationship, the jurisdiction is mandatorily the place of residence of the consumer (Consumer Protection Code, Law No 8,078, Article 101.I).
Finally, with respect to reinsurance contracts, Resolution CNSP 168/2007 establishes that a reinsurance contract will set forth Brazilian governing law and jurisdiction for contracts involving local risks; an exception is made for contracts providing for an arbitration procedure, although such provision in a regulatory rule is highly debated. Such limitation of rights posed by a mere resolution may be disputed; such type of regulation should not limit the material rights of the parties.
Foreign judgments can be enforced by or against insurers in Brazil, upon being recognised by means of a homologation procedure.
Whether it is a judicial or arbitral foreign judgement, the motion requesting the homologation of the foreign decision and its enforcement must be filed before the SCJ, which will analyse whether the decision:
Besides that proceeding, a letter of request (rogatory letter) determining an order to be enforced in Brazil must also pass through the SCJ for exequatur. Both proceedings are regulated by the New Civil Procedure Code (ratification of the foreign decision – Articles 960 to 965), the SCJ’s internal regulation (Articles 216-A to 216-N) and the Law of Introduction to the Rules of Brazilian Law (Article 15).
After those proceedings, the decision is enforceable in Brazil.
As mentioned in 1.2 Litigation Process and Rules on Limitation and 6.1 Right of Action to Recover Sums from Third Parties, insurers must be aware of the statute of limitation period applied to their right of being reimbursed by the one who caused the insured risk.
Insurers have a legal right of subrogation following the payment of a claim in most cases and have to file a suit before the liable third party within the applicable limitation period. If the insurer fails to file a suit before the limitation period elapses, the claim becomes time-barred.
Under the Brazilian Arbitral Law (BAL), enacted by Law 9,307 of 1996, the matters that are generally arbitrable refer to freely disposable property rights, which include insurance and reinsurance contracts. Also, as the Law incorporated the competence-competence principle, arbitrators should issue a decision regarding their own jurisdiction before the courts.
However, parties should pay attention to certain particularities of the arbitration clause, since insurance and reinsurance contracts are qualified in some cases as adhesion contracts and are regulated by SUSEP provisions.
In view of all the above, the arbitration clause should mention that:
If those requirements are not met, a court may declare an arbitration clause null prima facie.
Brazil has ratified the New York Convention (Decree 4,311 of 2002) and the grounds set out in Article V to deny recognition are mirrored in Articles 38 and 39 of the BAL. Following the recognition of the award by the SCJ, as described in 2.2 Enforcement of Foreign Judgments, enforcement proceedings may be initiated before lower federal courts.
In Brazil, arbitration is generally more attractive in certain cases rather than ordinary court procedures, especially when the matter in dispute is marked by its complexity and specificity, because of some particular characteristics:
In fact, SUSEP has encouraged insurance policies involving big risk portfolios to add arbitration clauses in their contracts.
As for the lines of business within insurance arbitration, disputes about coverage and the relationship between the insurers and reinsurers generally attract more attention to establish an arbitration clause in the contracts.
The choice of law needs to be respected, but national arbitrations usually use Brazilian insurance law, described in 1.1 Statutory and Procedural Regime, to govern the arbitration proceeding.
In matters of insurance dispute, arbitration is private and, under the BAR, the award given in an arbitration proceeding cannot be appealed before an arbitration tribunal. The defeated party can only request the annulment of the arbitration award before a judicial court under specific and restricted circumstances, provided in Article 32 of the BAL.
Although there are no implied terms in a contract of insurance, which has its rules defined in the terms and conditions of the insurance policy, adhesion contracts (common on insurance policies) tend to have an interpretation that is more pro-insured, especially if the insured is considered a consumer (under the Consumer Protection Code).
Insureds must comply with the duty of utmost good faith, disclosing all material facts and acting honestly towards the insurance companies, in such a way that the insurance company has sufficient information about the circumstances involving the acceptance of the risk.
As provided by the Civil Code, insureds must disclose all the relevant information upon contracting the policy and notify the insurer if the risk is aggravated. Nonetheless, courts generally impose on insurers the obligation to ask for all relevant information from insureds, mostly because insureds may not have the specialised knowledge of what would aggravate their risks – such assumption would be relativised under complex risks insurance.
Should the insured party fail to provide the requested information (or omit relevant data), the insurance company may (i) increase the premium or terminate the policy, if the omission was not in bad faith; or (ii) refuse to cover any claims that would otherwise be covered under the terms and conditions of the policy issued to the insured party, which may result in the partial or total refusal of the coverage, if the omission was in bad faith.
In most cases, Brazilian courts require evidence that the insured has engaged in intentional wrongdoing. Brazilian courts also generally require a direct connection between the cause of the loss and the missing information relevant to the insurer, although such causal relation is not expressly provided for in Brazilian law.
As mentioned in 7.1 Type and Amount of Litigation, in the past 12 months there have been significant trends in disputes involving directors' and officers' (D&O), rental and credit insurances, as well as business interruption due to the increase of such policies during the COVID-19 pandemic.
Insurance coverage disputes are usually resolved (i) on internal administrative negotiations between the insurer and the insured, and (ii) on judicial procedures as an ordinary lawsuit. Insurance coverage disputes may also be submitted to arbitration, although arbitration is a less common type of resolution of an insurance dispute when compared to judicial litigation, since it usually involves more complex situations and demands more resources from the parties.
With regard to reinsurance contracts, arbitration procedures are more frequently chosen by the contracting parties due to the amounts and complexity in the disputes, even though there is no specific rule providing for the submission of reinsurance disputes to arbitration.
When the insured party is considered a consumer, some particularities must be noted. The consumer has a special protection provided by the Consumer Protection Code. Therefore, contracts that involve a consumer and an insurer have a different interpretation. On those types of contracts, there is an obligation for the insurer to provide all the information in a clear and adequate way, informing the insured of all their rights and risks, and answering all the possible questions regarding the insurance contract. In addition, the interpretation of insurance contracts when the requirements of a consumer relationship are met, in the event that any provisions are ambiguous or contradictory, is in favour of the party who adhered to such contract.
For consumer contracts, the jurisdiction is mandatorily the place of residence of the consumer, according to the Consumer Protection Code.
As a general rule, a third party is not able to enforce an insurance contract or to sue an insurer in connection with an insurance contract. In civil liability cases, the third party will present a lawsuit against the person/company who caused the casualty. Should such liable person/entity have insurance cover, they/it will have the right to trigger the insurance policy.
An exception is made in insurance policies contracted in benefit of third parties for complying with a legal or contractual obligation (ie, mandatory insurance), whether such party is a nominated beneficiary formally indicated in the insurance policy or not.
The Brazilian legal system mentions the effect of bad faith, but does not have a particular provision defining it.
According to Article 422 of the Brazilian Civil Code, the parties are obliged to act in good faith in the execution and performance of contracts. Therefore, parties must collaborate and may not act in order to create an unjustified benefit or perform any other kind of bad faith action, such as:
In Brazil, the regulations set forth that a solution for a claim must finish within a 30-day deadline, counted after the delivery of the necessary documents by the insured to the insurer to properly assess the insured's claim. On the elapse of such 30-day term, insurance indemnification will be accrued by the inflation rate and default interest. However, there is no legislation providing for the payment of fines or punitive damages as a result of failing to meet the aforementioned deadline.
The question of whether an insured is bound by representations made by its broker may vary on a case-by-case basis, but in most cases, the insured is not bound by the broker’s representations, considering that Brazilian law does not provide that brokers act as representatives of either the insurer or the insured, and as long as there is no evidence that the broker has acted under the insured’s instructions on how and what to inform. The broker is an intermediary between the insurer and the insured who, according to SUSEP, acts by approximating the interest of the parties, handling communication and documentation exchanged between the insurer and the insured.
The Brazilian legal system allows delegated underwriting or claims handling authority arrangements.
In Brazil, defence costs are commonly covered by insurance products. The main cases in the corporate area are (i) construction, (ii) D&O, (iii) errors and omissions (E&O) and (iv) car insurance.
There are no relevant changes expected for litigation, although several changes are being implemented and are expected for products, corporate and surveillance matters.
There have been no noteworthy trends in terms of the cost or complexity of litigation in the past few years.
There is no legal prohibition on buying protection against costs risks in connection with claims.
Usually, those protections are already included in the insurance products, and clauses may be negotiated for coverage extension or limitation in that regard.
Defence costs are generally covered under liability insurances, provided that the main issue claimed is also subject to coverage.
Costs with posting bonds as a guarantee are, in some cases, also covered.
Insurers in Brazil have, in most cases, a legal right of subrogation following the payment of a claim and up to the amount of the indemnification paid by the insurers to the insured/beneficiary, as established in the Civil Code.
The right of subrogation is not applicable to life insurance. Furthermore, a number of legal scholars understand that rights of a strictly personal nature, such as that to a moral damages plea, cannot be transferred from the insured to the insurer, but this matter is disputable as there is no specific provision in law for that.
Insurers have the right to pursue third parties in the case of subrogation and, in some very limited cases, to protect the imminent subrogation right.
The right of subrogation arises pursuant to the Brazilian Civil Code (Article 786) and is reassured by guiding precedent 188 of the SFC.
If subrogation occurs while there is a dispute between an insured and a third party, the claim insured tends to remain in the case and the insurer may join litigation.
If subrogation occurs before litigation is started against the third party, the insurer will be entitled to file the suit in its own name.
The COVID-19 pandemic has not affected the type or amount of insurance-related litigation.
And no legislative changes to insurance rules have been made due to the COVID-19 pandemic. It is worth mentioning that there is a bill of law under discussion in the Brazilian Congress for mandatory coverage under health and life insurances for COVID-19-related risks. Nonetheless, for commercial reasons, insurers volunteered to cover insureds' deaths due to COVID-19, mitigating the potential litigation risk derived therefrom.
Also, demand for certain types of policies – such as D&O, rental and credit insurance – has increased due to the COVID-19 pandemic and companies have been facing higher premiums and restricting the room for coverage negotiation due to hard market conditions. Therefore, an increase in potential litigation involving these policies is expected.
Due to the economic perspective for the next 12 months, considering the impact of the pandemic, no significant change in the demand for certain policies and their pricing is expected in the short run.
For business interruption coverage, considering that Brazilian damages insurance policies are designed to cover business interruption events as a consequence of material/physical damages to insured proprieties/sites, the COVID-19 pandemic has not given rise to coverage issues.
As for life insurance in Brazil, most policies consider pandemics an excluded risk. However, many insurance companies proactively announced assuring coverage for COVID-19 deaths and are experiencing a hard hit in their financials.
For car insurance, on the other hand, the lack of mobility made claims figures plunge, granting insurers a relevant margin for the time being.
At the time of writing, there is a legislative bill under discussion that intends to oblige insurers to cover all life, health and invalidity losses incurred due to the COVID-19 pandemic. So far, no law or regulation has obliged any insurer to cover deaths due to COVID-19.
Concerning appetites for risk, companies are interested in broader business interruption coverage and the authors have noticed a harder market for risks such as D&O insurances, due to economic events.
Climate change is affecting business and practices all around the world. In Brazil, the agriculture sector is suffering different types of losses derived from climate change. In response to those losses, parametric insurances are being developed. This kind of insurance links the coverage of the insurance with the parameters of an occurrence of natural events. Therefore, depending on the stipulated parameter (eg, an excessive amount, or absence, of rain), the insurance would cover the damages or pay an amount as an indemnification, in some cases with a very simplified loss adjustment procedure.
In the past year, there have been regulatory developments in relation to deregulating insurance products and other initiatives on the agenda of SUSEP; for instance, opening new agendas for sandbox regulations for insurtechs, providing more freedom to parties to agree on contractual terms of complex risk insurances and others, but not regarding, or directly impacting, coverage, litigation or claims.
Introduction: Reaching Adulthood
A little over a decade has passed since the most relevant revolution in the Brazilian insurance market: the breaking of the monopoly of Instituto de Resseguros do Brasil (IRB), the Brazilian state-owned reinsurance company, that happened on 15 January 2007.
Since then, the market has grown more and more dynamic, a constant evolution that has stemmed from new players blowing fresh air into the system. There has been progressive development of new products and increased capacity for risk taking, which surely – albeit timidly – brought Brazil closer to international market standards.
Now, a new revolution is ongoing following the publication in March 2021 of Resolution No 407 (the "Resolution") by Conselho Nacional de Seguros Privados (CNSP), the superior normative body of the Brazilian insurance regulatory system, aimed at fostering economic freedom.
The Resolution is the keystone of Brazilian insurance deregulation, as it gives the parties of "large risks non-life insurance" free rein over the terms and conditions of the contract. The new guiding principle is "broad contractual freedom" for large risk policies, with "minimal and subsidiary state intervention" (Article 4 of the Resolution).
"Large risks" status was attributed by the Resolution to a range of contracts elected according to two criteria: complexity and size (of the parties or policy), in both cases combined with the voluntary decision of the policyholder to adhere to the Resolution framework instead of the general, consumer-driven rules.
Complex – thus, large risk – insurance contracts are those belonging to branches of oil, named or operational perils (fire, liability, etc; or RNO), banks, aeronautical, maritime, nuclear, business loans and/or export credit for legal entities.
Additionally, from an economic perspective, large risks insurances are those bought by policyholders that, in the previous corporate year, had:
Likewise, any insurance policy with over a BRL15 million guarantee is elective to become large risk, which contributes to significantly broadening the reach of the Resolution.
The new regulation reinforces the constitutional principle of free enterprise (Section 170, caput, of the Brazilian Federal Constitution) that was ratified by Federal Act No 13.874 of 20 September 2019 – the Economic Freedom Act. For the insurance market, it means the first true step away from the model of government-directed contracts that prevailed for over half a century.
Due to the paradigm shifting, at least in the market of large risks, the predominant objective of protecting an idealised consumer that, by definition, was considered lacking in comprehension and skill cedes the spotlight to focus on the necessities of the insured.
The development of tailor-made contracts for particular risks is finally replacing the standardised products created over the years by Superintendência de Seguros Privados (SUSEP), the Brazilian insurance agency (that had a penchant for contract drafting). Indeed, a policyholder will no longer have to bow before a policy that has little to no resemblance to its activity or, sometimes worse, butcher it through innumerable particular clauses that turn the contract into an incomprehensible mishmash, a veritable "Frankenstein".
Notwithstanding these changes, the consumer protection remains unscathed. To the core distinction of insurance contracts between life and non-life, another one of stark practical effect is added: the distinction of large and mass risks insurances.
This new dichotomy highlights the consumer as deserving of state protection, precisely because it differentiates it from the large risks policyholders. Only the latter ones will, with legal entitlement, negotiate directly with the insurers, in equal conditions, thus incurring the pros and cons inherent to a parity contract.
But the Resolution was not the only change in the Brazilian regulatory framework; far from it! New norms include Circular No 621, published on 17 February 2021, which sets the ground rules for mass risks (that is, all not within the scope of the Resolution), and Circular No 637, published on 28 July 2021, which consolidated rules of liability insurance branches.
Also in the pipeline, the draft of a circular to regulate surety bonds proposes deep, structural changes in this so far conservative branch. Once published – if the text remains mostly unchanged from the public consultation procedure held last July – the Brazilian surety market will be much closer to the international one and far more insured-friendly, as the insurer will be back-to-back bound to the terms of the underlying contract that it agreed to guarantee.
Unforeseen to many, the Brazilian judiciary is at the eye of this hurricane of changes promoted by SUSEP and the Brazilian legislators. It will play a fundamental role in safeguarding freedom of contract by interpreting insurance policies in accordance with the parties' will, guided mainly by Sections 421 and 421-A of the Brazilian Civil Code.
It is the twilight of a system marked by inappropriate predetermined insurance products and the dawn of creativity and innovation, leading to renewed interest in Brazil as a developing market. Finally, adulthood!
Immediate Consequences: Focus on Contract Design
There is no dispute that the changes in regulation highlighted above will send ripples across the Brazilian insurance market and act as a catalyst for a shift in business perspective.
The first (and foremost) target of insurers is contract design. Products that were created over the past couple of decades, mostly reflecting mandatory state guidelines or standardised policies, will be reviewed; preferably rebuilt from scratch, lest old habits undermine the purpose.
Strategic litigation planning is an indispensable part of this process.
For too long the judge was a mere afterthought in the insurer's mind, paling against the looming threat of the Brazilian Consumer Protection Code and the overwhelming regulation, themselves enough to repel any innovative ideas. However, they have now become a key variable in the bottom-line equation.
A legitimate solution is to avoid meeting the judge altogether or, at the very least, postpone the unpleasant meeting as much as possible. Alternative dispute resolution (ADR) methods are a noteworthy tool in that respect.
Arbitration naturally comes to mind: the thought of placing the case in the hands of a neutral third party with expert knowledge of insurance is a soothing one.
Once the contracts reveal more closely the parties’ interests under the new paradigm, technical insurance solutions arising from expert arbitrators seem to be much more adequate.
Costs aside – and one has to remember that large risk policyholders are often large entities themselves – there are undeniable advantages to this well-known method of ADR that make it a staple in the biggest venues.
Mediation and conciliation, however, should not be overlooked. There is a strong synergy between these consensus-focused ADR methods and the bilateral, parity nature of large risk policies. Taking a step back and looking at the problem from a different angle might be – hopefully – all the parties need to untie the knot.
That said, there are unavoidable circumstances in which a judge (and their peers in the courts) will be called upon to decide in binding fashion, and the parties must be ready for it.
A step in the right direction is understanding that a policy, as much as it is proof of an agreement between an insurer and the insured, is also a letter of intent directed at the judge, who will interpret that contract in the event of a dispute between the parties. Thus, it must be written in clear, unambiguous terms, to assist in the difficult task of "teaching" Brazilian courts the new lay of the land, still unfamiliar to them.
For this reason, large risk insurance contracts tend to become more direct: overdue is the abolition of book-length policies; tiresome exclusion lists, completed by indecipherable carve backs; and the confusing layered structure of general, special and particular clauses. Removing these issues that plagued insureds for years will contribute immensely to more effective litigation and assertive case law.
The strategic drafting of contractual instruments, in any case, will allow parties to make efficient decisions to avoid the transaction costs of negotiating policy provisions for all foreseeable contingencies. The trade-off between ex ante costs of negotiation with the ex post costs of litigation, which is the hallmark of rational contracting, is likely to give rise to new contractual language to be shared in the Brazilian insurance market, including both principle-based standards and clear-cut rules; to the extent that, under a newly gained freedom of contract, each of those clauses could meet the concrete interests and economic expectations of insurers and policyholders alike.
Another tool that can help guiding a lawsuit to a fair result is the "procedural contract" that is set forth in Sections 190 and 191 of the Civil Procedure Code of 2015 and that has, so far, seen very few uses, particularly in insurance litigation.
Through a "procedural contract", the insurer and insured may establish a reasonable framework of procedural rules that better match their strengths and weaknesses, somewhat preventing or mitigating the volatile nature of the Brazilian judiciary.
Conclusion: Trends and Developments
Brazil is in the midst of a tearing down of its insurance regulatory framework, which is being rebuilt oriented towards freedom of contract and minimal state intervention. Though still largely unmapped, the impact of these changes in insurance litigation will be huge.
Insurers will undoubtedly review the terms and conditions of their products considering the many differences between the rules applying to mass risks (protective of the consumer) and large risks (grounded in parity of the parties).
An integral part of said review will be finding ways to ensure the insurance contract is interpreted in accordance with the parties' will. Among the tools available are ADR methods, which are aimed at evading the Brazilian judiciary, and contract structure and language, which are aimed at taming it. However, none is as relevant or as powerful as the paradigm shift introduced by the Economic Freedom Act.