In Colombia, there is no special procedural statute for the resolution of insurance disputes. Controversies arising out, or related to, an insurance contract will follow the general legal framework for dispute resolution.
As a civil law system, Colombia’s procedural legal framework is laid down mainly in three statutes:
In addition, there is National Decree 2591 of 1991, which regulates the constitutional action for the protection of constitutional rights, domestically known as tutela.
The applicability of each statute will depend on the jurisdiction where the case is being decided. If the dispute is between private parties, it will belong to the civil jurisdiction and will be governed by the General Code of Procedure, which was enacted in July 2012; however, it entered into force gradually until January 2016, when it became fully in force. Cases initiated prior to July 2012, or during the transition period set forth in the General Code of Procedure, are governed by the Civil Code of Procedure (Decrees 1400 and 2019 of 1970).
If one of the parties is a state entity, the controversy will be resolved by the administrative jurisdiction under the rules of the CPACA. If the parties, either private or public, signed an arbitration agreement, the arbitral proceeding will be regulated by Law 1563 of 2012 and the applicable arbitration rules.
Unlike the Arbitration Statute, the General Code of Procedure and CPACA set forth a detailed regulation on the formalities and stages that a proceeding must follow. There is little room for judicial discretion in the application of procedural law. When there is a legal gap, the General Code of Procedure applies as the default rule.
Authority to Decide Disputes
In Colombia, insurance disputes can be resolved by the judiciary, mediators, conciliators, arbitrators and, in specific cases, by the Jurisdictional Division of Colombia’s financial and insurance regulator, the Superintendency of Finance. Thanks to the financial reform introduced by Law 1328 of 2009, the Superintendency of Finance has the power to decide disputes initiated by “financial consumers” against entities subject to the Superintendency’s oversight, such as insurance companies for breach of contract. "Financial consumers" is understood as “every client, user or potential client” of every financial institution.
The latter are limited to claims by the insured for breach of contract. Currently, consumers prefer to file their claims before the Superintendency for four reasons:
Another important forum for insurance dispute resolution in Colombia is the constitutional jurisdiction, on which any citizen may file a tutela; ie, a constitutional action requesting protection from threats or violations to fundamental rights. It has become common practice to use a tutela as a remedy to challenge final court decisions arguing breaches to the fundamental right to due process. Tutelas can be filed before any court and the final ruling is subject to review by the highest court in the constitutional jurisdiction, the Constitutional Court.
Significant decisions arising out of tutelas have been highly criticised due to their orientation towards the protection of individual rights in disregard to the application of insurance law. This phenomenon is known as the “constitutionalisation of insurance law”.
Aside from the courts and ADR mechanisms, insurance disputes in Colombia are taking place in the context of a special administrative proceeding conducted by the General Comptroller (Contraloría General de la República) called fiscal liability proceedings, which apply in the context of public contracts and government activities and employees. This control entity is the authority that oversees the proper use of public funds and has the power to investigate and sanction any loss of public funding. The General Comptroller may impose fines, order the restitution of funds from the liable agents and impleader the insurance companies of such agents in accordance with a special procedure enshrined in Law 610 of 2000.
The General Comptroller has recently decided the majority of the most-costly insurance claims, involving directors' and officers' (D&O) and banker's blanket bond (BBB) policies issued in favour of public entities and directors, which, in turn, are reinsured by the international market. These decisions have been heavily criticised by insurance practitioners for being wrongly and anti-technically decided.
Sources of Law
The applicable law for insurance disputes in Colombia can be found mainly in the Code of Commerce, along with the general contractual rules of the Civil Code.
Special provisions for insurance policies such as performance bonds for public contracts can be found in the Public Contracts Statute (Law 80 of 1993), Decree 1082 of 2015, and Laws 1150 of 2007 and 1474 of 2011.
Although Colombia is a civil law jurisdiction, judicial decisions (case law) may become legal precedents relevant to the interpretation and application of insurance rules and contracts under Colombian law.
In general, litigation proceedings before the judiciary comprise three stages.
In the judiciary, most cases will be decided by a trial court (Juzgados) and the appeal will be resolved by an appellate court (Tribunales). In cases decided by the Jurisdictional Division of the Superintendency of Finance, the Superintendency acts as a trial court and the appeal will be decided by the judiciary’s appellate court.
When deciding on an appeal, the appellate court will follow the same three stages, but there are limitations to the evidence that can be introduced.
In civil matters, depending on the amount in dispute, an extraordinary appeal (cassation) against the second-instance ruling may be filed before the Supreme Court of Justice, the highest Civil Court in Colombia. In the administrative jurisdiction, the highest court is the Council of State.
There is another extraordinary appeal before the Supreme Court of Justice, or the Council of State respectively: so-called revision. This remedy may be filed whenever documents that could not be presented during the proceedings are brought to light, or when the participation of parties, witnesses, experts or judges in the litigation is irregular or is subject to criminal investigation.
Finally, in administrative disputes, the law establishes the “precedent unification appeal”, to challenge rulings that contradict relevant precedents lacking solid grounds.
Statute of Limitations
The statute of limitations for insurance disputes is governed by Article 1081 of the Code of Commerce, according to which, the limitation period is two years, which runs from the moment when the insured knows (or should have known) about the occurrence of the loss. This is called the ordinary limitation period. Additionally, there is a five-year limitation period that runs from the occurrence of the loss, known as the extraordinary limitation period. Both terms can run simultaneously but the first to elapse extinguishes the right. The statute of limitation applies to any action or claim that arises from the insurance contract.
However, there are particular rules that govern limitation periods, depending on the nature and the jurisdiction competent to rule on the matter. For example, insurance claims under fiscal liability proceedings are ruled by a ten-year limitation that runs from the occurrence of the alleged fiscal loss.
ADR is not prevalent, but it is highly encouraged by Colombian procedural law.
Plaintiffs are required to invite their opposing party to a conciliation hearing before filing a lawsuit. Furthermore, during the proceeding, judges and magistrates are required to encourage the parties to reach a settlement before opening the evidentiary stage.
Arbitration is the most common ADR mechanism in Colombia for insurance disputes. Colombian law allows arbitration clauses in insurance contracts, except for mass-marketed standard-form contracts. The reasoning behind this prohibition is that arbitration clauses must be discussed, negotiated and agreed through particular terms and conditions.
Arbitration in Colombia has a long-standing tradition thanks to the efforts of various arbitration centres of different chambers of commerce.
When the insurance contract is bound to be performed in Colombian territory (ie, when the risk is local to Colombian territory), local law forbids the parties from agreeing upon a different applicable law or a different jurisdiction. In both cases, the parties must apply the Colombian law and jurisdiction, as these are provisions of mandatory character (public order laws).
Nonetheless, in contracts that are bound to be performed in different jurisdictions, such as reinsurance contracts, international arbitration is allowed, and, hence, parties are free to choose the law and jurisdiction.
Foreign judgments can be enforced in Colombia through an exequatur proceeding before the Supreme Court of Justice. The interested party must provide a copy of the foreign ruling that is intended to be enforced in Colombia and comply with other requirements set forth in the procedural law (Article 607 of the General Code of Procedure).
In order for the recognition and enforcement to be successful, the law also requires the foreign ruling to be originated in a country that has a treaty with Colombia for such purposes.
Litigation in Colombia is characterised by a regulated, highly formal and technical procedure that combines oral and written stages. In addition to the two instances rule that governs all proceedings, the law also provides extraordinary remedies, depending on the jurisdiction, matter and amount in dispute.
A feature that stands out, and must be carefully considered, is the use of the constitutional protection action, acción de tutela, by which even judicial rulings may be questioned when they are in violation of fundamental (constitutional) rights; eg, the right to due process.
It is also important to bear in mind that, despite the existence of legal rules that promote a swift resolution of legal procedures, real-life experience shows that the length of a lawsuit in Colombia spans several years. The judicial system backlog is so high that a lawsuit can take up to ten years before reaching a final judgment.
Following the Colombian Arbitration Law (Law 1563 of 2012), which grants jurisdiction to the arbitrators, Colombian courts are respectful of arbitration clauses agreed in insurance and reinsurance contracts.
Nevertheless, if a party decides to present its claim before the judiciary despite having an arbitration agreement, and the defendant does not plead lack of jurisdiction due to the existence of an arbitration clause, such omission is tantamount to a waiver to the arbitral clause.
Colombia enacted the New York Convention through Law No 37 of 1979, which was later declared unconstitutional by the Supreme Court of Justice. Nevertheless, the Convention was never denounced. Afterwards, Law No 39 of 1990, now fully enforced, re-implemented the Convention. Colombia has also ratified the Panama and Montevideo conventions, which shows a clear decision of accepting and enforcing foreign awards.
Moreover, Articles 111 to 116 of the Arbitral Statute (Law 1563 of 2012), which follows the UNCITRAL Model Law, establishes the special proceeding for the recognition and enforcement of awards handed down in foreign jurisdictions. These articles practically reproduce the New York Convention guidelines in this respect.
The Supreme Court of Justice is the domestic authority with the responsibility of resolving petitions of recognition and enforcement of foreign awards. Nevertheless, if a Colombian public entity is party to the arbitration, such role is played by the Council of State (Article 68 of Law 1563 of 2012).
Despite the applicability of the New York Convention, case law previous to the implementation of Law 1563 considered that, besides the requisites established in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it was necessary to fulfil other requisites listed in the Civil Procedural Code, such as reciprocity with the foreign state where the award was rendered, that the claim does not rule over real estate assets located in Colombia, and that the award is final according to the law of its country of origin.
To avoid such situation, Law 1563 of 2012 explicitly established that the only causes for denying recognition of an arbitral award issued abroad are those expressly listed thereto, which are the same as those stated in the New York Convention (Article 108 of Law 1563 of 2012).
The use of arbitration for insurance dispute resolution is fairly significant in the Colombian market, especially for commercial business insurance disputes; eg, technical risks insurance, financial lines and general liability.
There have been discussions regarding the possibility of allowing arbitration clauses in mass-marketed standard-form insurance contracts. The Consumer Protection Act (Law 1480 of 2011) expressively prohibited such types of clauses. But the Arbitration Act (Law 1563 of 2012), which was issued a year later, repealed that prohibition. This apparent contradiction is overcome by interpreting that the arbitration clause cannot be imposed by the insurer in the standard form but can be agreed whenever both parties accept it, case by case, by means of a particular condition.
The culture of arbitration is widespread among legal and academic circles, which has fostered the creation of a community of skilled lawyers that conform to the lists of arbitrators of the main arbitration centres and who are, in general, highly recognised lawyers, and experts in their respective fields.
Arbitration is regulated by the above-mentioned Arbitration Statute, which establishes general rules for national and international arbitration in Colombia. The parties are free to establish the procedural rules or to adopt the rules issued by each of the arbitration centres. The General Code of Procedure is applicable in non-regulated matters. The arbitrators are considered to be performing a public service and their awards have the same binding character as a court ruling.
Exceptionally, awards may be challenged through annulment on formal grounds, such as the validity of the arbitration clause, the composition and competence of the tribunal, the summoning or representation of the parties, and other procedural aspects.
Also, as with any ruling, awards are subject to the extraordinary revision appeal (recurso Extraordinario de Revisión) described above, which, like an annulment, is not intended to permit the revision of the decision on the merits.
The ruling may also be challenged through the constitutional action of tutela, usually under the grounds of lack of due process. Unfortunately, through this path, cases already decided by arbitration can be fully revisited by the ordinary jurisdiction, which is precisely what the parties wanted to prevent when resorting to arbitration.
The Code of Commerce contains the regulation for insurance agreements in Colombia, in Articles 1036 to 1162, which enshrine a detailed and vast regulation of life and non-life insurance. This regulation covers every aspect of the insurance contract, defines its essential elements (ie, insurable interest, insurable risk, premium and the insurer’s obligation to pay valid claims) as well as accidental ones, regulates all the duties and rights of both parties (risk representation, timely payment of losses, burdens of the insured in the event of loss), establishes wording requirements, and provides some especial rules for certain lines of insurance.
Many of these rules are implied in every insurance contract and therefore operate even in the absence of contractual regulation. Moreover, an important number of them are mandatory, as stated by Article 1162 and, hence, cannot be overruled by parties’ agreement. Such is the case of the nullity regulation, the legal consequences of late premium payments, and the principle of indemnity in non-life insurance.
Article 1058 of the Colombian Code of Commerce governs the representation of the risk by the insured, based on the principle of good faith and the need for an adequate risk assessment by the insurer, which entails its right to decide, in light of the real conditions of the risk, whether to provide the requested coverage and, if so, on what terms and conditions.
In this sense, the law requires that the insured’s declaration refer to the “facts or circumstances that determine the state of the risk”, regardless of whether it is done through a predesigned questionnaire (ie, a proposal form) or spontaneously.
The declaration must be “sincere” (instead of demanding that it be “correct”), meaning that the insured must declare what they honestly know with respect to the risk. The sanction for misrepresentation or non-disclosure is the possibility for the insurer to void the contract by raising the nullity defence when contesting a claim or actively requesting the annulment before a court of law.
Nevertheless, Article 1058 also states that if the insurer knew, or should have known, the actual state of the risk before the insurance contract was concluded, it cannot later invalidate the contract alleging misrepresentation or non-disclosure.
It is also important to note a relevant trend in insurance disputes regarding the “constitutionalisation of insurance law”, where through constitutional actions, especially when ruling on life and health insurance matters, the courts have effectively reduced the application of the nullity defence by impeding its application under the assumption that a diligent underwriting obliges the insurer to conduct detailed medical exams to discover the exact health situation of the insured.
Based on this reasoning, the courts have concluded that the insured cannot annul the contract, but instead exclude those pre-existing conditions it had expressly listed in the insurance contract. The most worrisome requirement that has been introduced by Constitutional Courts is that insurers are expected to prove not only the misrepresentation or non-disclosure, but also that the insured acted in bad faith, which is a very difficult burden of proof to meet.
One of the most significant trends regarding policy coverage disputes in recent years in Colombia has been the General Comptroller’s interpretation and application of “claims made” clauses in fiscal liability proceedings. The General Comptroller is the authority that oversees the proper use of public funds and has the power to investigate and sanction any loss of public funding. In this regard, the General Comptroller may implead insurers to its investigations when there are policies that may cover the investigated loss.
In the past, the General Comptroller issued several decisions where it simply omitted the application of “claims made” clauses, impleading several policy years and adding up their insured amount. After facing criticism for these decisions, Contraloría decided to issue a general instruction known as Circular 005 dated 19 March 2020, in which it laid out the instructions on how to decide what policy term should cover a loss, when several policy terms are involved. Contraloría clearly stated that the intention of this Circular 005 is “to provide greater clarity regarding the impleader of insurance companies to fiscal liability procedures”.
In this sense, Circular 005 of 2020 has meant a positive breakthrough by clearly stating that the General Comptroller cannot simply add up the insured values of different policy terms, but rather it has to clearly establish the policy term that should cover the loss according to the “claims made” clauses. In this regard, Circular 005 states: "And if the insurance policy includes a "claims made" clause, the policy in force at the time of the issuing of the opening of investigation writ or when the insurer is joined to the investigation must provide coverage".
Nonetheless, this rule has recently led to some questionable decisions by the General Comptroller because the well-intentioned instruction failed to consider special scenarios in which a “claim” against the insured was filed, even by the same General Comptroller, prior to the opening of an investigation writ; ie, in preliminary investigations that expressively accuse the insured.
In another important ruling, in March 2021, an arbitral award declared the nullity of a D&O policy as a sanction for the misrepresentation or non-disclosure of the policyholder when declaring the state of the risk. This decision also highlights the unity of the statement of risk status in the cases of multiple policyholders, where it is understood that the declaration of the state of the risk of one of them affects the totality of the contract.
On the other hand, regarding lease agreements, the Superintendency of Finance released a report in May 2021 in which it pointed out that COVID-19 was not considered as a force majeure circumstance that exempted a tenant’s pecuniary obligation. Hence, the Superintendency remarked that COVID-19 is not a valid reason for insurers to apply the exclusion of liability with regard to lease contracts insurance policies.
In general terms, commercial insurance disputes are resolved by the civil jurisdiction attending the contractual conditions and the legal rules applicable in the absence of contractual provisions, the evidence gathered in the proceedings, and the precedents laid down in similar cases. There is solid case law in insurance matters that – although subject to constant evolution to include new developments, new cases and legal reforms – has a great deal of stability. In respect of the interpretation of contractual provisions, there is a set of rules in Articles 1618 to 1624 of the Civil Code that are tools designed to guide the judges in the task of discerning the parties’ intention. As a last-resort measure, the law orders the application of the contra proferentem clause to ambiguous clauses produced by the insurer.
In general, it is possible to assert that Colombian courts are impartial, and that, provided there is a solid and technical defence, insurance cases conclude with reasonable and sound decisions. Nonetheless, when the matter involves very specialised insurances with little or no precedent, there is a risk that the judges lack the necessary knowledge and issue mistaken decisions, although normally, when cases reach the Supreme Court, it introduces the pertinent corrections. Also, it is undeniable that the proceedings are still very slow, although it is expected that the reforms enacted in recent years will radically reduce their duration, and that the proceedings are subject to many procedural complexities and formalities.
With regard to specialised jurisdiction such as the constitutional one, which resolves actions relating to fundamental rights, the decisions are mainly inspired by the constitutional principles that ensure the protection of individuals in precarious conditions, even disavowing mandatory rules of insurance law. These rulings are very debatable and, in some cases, have posed real threats to the sound development of the industry, like those that practically ignore the relevance of misrepresentations or exclusions in life and healthcare insurances.
Also, the Comptroller General's Office has issued controversial decisions in respect of very large insured sums coverages impleaded on fiscal liability procedures such as BBB and D&O policies, issued in favour of state entities. This is mainly the result of the lack of proper application of “claims made” and “discovery” systems, which has caused the unlawful involvement of all the insurers that have successively issued coverage and ultimately in the wrongful identification of the affected period and even in the duplication of coverage. Both the industry and the Comptroller General's Office have attempted to clarify the correct application of these coverages, and although there have been some important improvements, there is still a long way to go to set, and respect, clear and technical rules that provide insurance and reinsurance companies with the necessary confidence to grant protection in this very important segment of the market.
With regard to reinsurance controversies, the experience of Colombian courts is very limited because reinsurance protection is normally placed abroad. Therefore, contracts were usually ruled by foreign law and jurisdiction, and only in recent years have reinsurers been accepting Colombian law. Nonetheless, there is a tendency to introduce international arbitration clauses. In the few cases resolved by Colombian courts, they have applied the policy conditions and the scarce Code of Commerce rules, some of which are mandatory, such as the “follow the fortune principle”.
In recent decades, as in many countries, consumer protection has been one of the most important trends in the development of Colombian insurance law. This tendency is not only revealed in case law and the administrative decisions of the Superintendency of Finance, but in Financial Consumer Law No 1328 of 2009. This law established a set of rules aimed to promote the transparency of contractual relations, the proscription of abusive behaviours of the dominant party (ie, the insurer), the inclusion of clauses that are deemed abusive and thus invalid, and the insurer's duty to inform and explain to the insured, before concluding the contract, the scope of coverage, exclusions, guaranties (which ought to be shown on the first page of the policy), policyholder duties, and additional terms and conditions, amongst others. Failing to apply these rules normally results not only in penalties and fines but also, if the case is taken to the courts, in rulings against the insurers.
Also, in resolving controversies with insured/consumers, a complementary rule governs, in addition to the interpretation rules mentioned above, known as the pro consumatore rule, meaning that the terms and conditions of the insurance contract must be construed in the most favourable possible way for the consumer.
Although the law defines the consumer as “any client, user or potential client” of an insurance or financial institution, the consumer protection rules, according to case law and doctrine, only apply to relationships of consumption, distinguished by the resulting of mass-marketed standard-form contracts; ie, adhesion contracts, where there is a clear imbalance between parties, which arises from the fact that the insurer is a professional expert who dominates the relationship, disposes of the entire wording of the policy, and decides about premiums and other conditions without room for discussion or negotiation. On the contrary, in insurance agreements where the insured is itself a strong party, an expert in its field, aided by professional brokers, or the owner of an economic position that confers upon it power of negotiation, said rules do not apply in the same manner.
Therefore, whenever the insured is viewed as a consumer, the courts apply all these principles in the definition of insurance controversies.
In Colombian law, the right to claim the payment of the loss corresponds to whomever has been appointed as beneficiary in the policy. This capacity does not necessarily coincide with the insured or policyholder, as this party is free to appoint the beneficiary.
This obviously applies on life insurance policies, in which the duty to pay a claim materialises when the insured dies, but is also applicable to any kind of insurance.
Colombian law also allows third parties in liability cases to sue directly the insurer, arguing in the same legal procedure the insured’s liability but claiming an indemnity payment from the insurer. Article 1127 of the Code of Commerce establishes that in any liability policy, the victim shall be deemed the beneficiary, and Article 1133 goes even further, enshrining the possibility for the victim to direct action against the insurance company for the insured’s liability.
Additionally, in relation to debtor life insurance, where the insured is the debtor and the beneficiary is the bank or creditor, there has been litigation in which the debtor’s heirs file a lawsuit against the insurer in order to obtain a payment. Courts have issued opposite decisions, but they have ultimately stated that the heirs are interested in the payment, and therefore have legal standing to file a claim against the insurer on behalf of the bank, but only if the intention is to clear the debt.
The concept of “good faith” and its opposite, “bad faith”, are cardinal in Colombian law. Good faith is a standard of conduct that has constitutional status and is thus mandatory both to private and public entities. It therefore pervades all areas of legislation, applying both to substantive and procedural matters. Good faith or bad faith is also a criterion to determine the type of consequences arising from unlawful behaviours. The Colombian Constitution also establishes a general presumption of good faith. This presumption is, however, of a legal type, or “juris tantum”, not a “jure et de iure” presumption, and therefore it admits evidence to the contrary.
In procedural matters, bad faith is severely penalised. According to the General Code of Procedure, it is presumed that a party in a legal procedure is acting in bad faith, for example, when its claim evidently lacks legal grounds, or when it uses the proceedings to obtain unlawful or fraudulent results, or obstructs the gathering of evidence, or wilfully makes wrong or inexact quotes. The party acting in such manner can be held liable by the court and be subject to fines or be obliged to compensate the opposing party. Attorneys are also liable for damages and fines and are subject to disciplinary sanctions.
With regard to contracts, civil and commercial law enshrine good faith as one of the main principles that should guide the parties’ behaviour, from the pre-contractual treaties through the execution, and during its performance, and determines the scope of their responsibilities and obligations. Commercial law also introduces a concept of “good faith exempt of fault”, which involves a special requirement that imposes on the parties not only the necessity of acting with total transparency and loyalty, but also demands from them the duty of displaying a positive conduct of diligence and carefulness.
Also, in the matter of contracts, the Code of Commerce reproduces the constitutional principle by which it is presumed that the parties have acted in good faith, which places the burden of proof on the one who accuses the other of acting in bad faith.
Good Faith Requirements in Insurance Contracts
As to the insurance contract, and therefore the reinsurance contract, the requirements of good faith are stronger than in the rest of the contracts. Therefore, judges and authors unanimously describe them as “uberrima fidei”, or utmost good faith contracts, and have also clarified that these demanding standards of good faith and fidelity are compulsory for both parties of the contract, during the pre-contractual and contractual stages.
These are the bases of the insured's obligations, such as declaring honestly and sincerely the true state of the risk (Article 1058), maintaining and notifying alterations thereto (Article 1061), and avoiding supra-insurance (1091) and double insurance (Article 1093); and on the insurer side, the proscription of acting in bad faith is revealed; ie, in the obligation of instructing the insured with regard to the coverage and exclusions (Law 1328 of 2009), or in the proscription of alleging nullity when it was aware of the concealed facts, or having admitted them (Article 1058).
The insurer is, at a certain point, and particularly as to the declaration of the risk and the prevention of losses, “at the mercy” of the insured, who, for deserving such degree of trust, shall behave with absolute loyalty.
But the insurer shall correspond to this same loyalty in the origination and execution of the contract, avoiding harmful clauses for the insured or simply obscure or incompatible with the “exquisite observance of good faith”.
Article 1080 of the Code of Commerce establishes that the insurer shall pay interests if it fails to pay a claim one month after the insured (or beneficiary) demonstrates the occurrence of a covered loss and its amount. The principal amount for this calculation is the amount of the indemnity payment that the insurer should have made. The interest rate is one and a half times the current banking interest (which is the highest permissible legal interest rate).
The main source of dispute related to the interests for late payment is the discussion in respect of the moment when the occurrence of the loss and its amount has been proven. Parties will argue whether or not the documents and information that were provided by the insured were enough to prove the occurrence and the amount of the loss, as required by Article 1077 of the Code of Commerce. This is mainly an evidentiary issue but will sometimes have a substantial impact on the amount of the interest payment.
As stated before, Article 1058 of the Code of Commerce establishes that “the insured is obliged to sincerely declare the facts or circumstances that determine the state of the risk”. Hence, this declaration must be made directly by the insured, and it is not possible for the broker to make representations on behalf of the insured regarding this matter.
Furthermore, given the importance of this obligation and its consequences on the validity of the insurance contract, insurers do not accept declarations that are not made directly by the insured.
The insurance industry is considered to be of public interest by the Colombian Constitution, which means that insurance companies need to obtain the regulator’s authorisation to operate, and do so in a highly regulated environment, with strict and special oversight and control by the Superintendency of Finance.
Therefore, the essential activities of an insurance company cannot be performed by third parties, and they cannot delegate what are known as the core activities of the industry to such third parties. Thus, the underwriting process, understood as the process of determining whether to accept a risk and, if so, what amount of insurance the company will write on the acceptable risk, and at what rate, cannot be delegated. Likewise, the payment decision itself is not possible to be delegated, although this prohibition is not against the common practice of appointing claim adjusters to help in the determination and quantification of losses and provide their recommendations.
On the other hand, there is a growing trend towards automation in the subscription, through mass commerce, e-commerce and bank assurance. Usually, the law requires insurance products to be universal (meaning that every consumer who fits a pre-established condition can acquire them), simple and standard. These conditions imply a previous underwriting process from the insurance company and the delegation only of the issuing of the policy.
According to Article 1128 of the Code of Commerce, insurers are required by law to fund the defence of their insureds, in every liability policy, even in excess of the insured amount. This includes policies such as D&O, professional indemnity (PI) and cyber liability claims brought by any third party. The funding of the insured’s defence includes payment for the attorney defence fees, expert witnesses, sureties to avoid cautionary measures and travel expenses, among other expenses related to the legal procedures.
This article expressly states that: “The insurer shall also be liable, even in excess of the insured sum, for the costs of the proceedings filed by the third-party victim or its heirs against the insurer or the insured”. This rule can be problematic because by stating that the protection for the cost is covered “even in excess of the insured sum”, at least in theory, the amount of the covered costs is unlimited.
Nonetheless, it is common practice to include a clause in liability policies stating that the insured has to request and obtain authorisation from the insurer prior to incurring in the defence costs and highlights the insurer's right to take the defence into its hands.
In spite of these regulations, it is worth mentioning that there are English-based wordings, such as D&O policies, that include defence costs as a specific coverage subject to a sub-limit under the insured sum. This seems to be in conflict with Article 1128’s rule, but so far this way of providing coverage has not been disputed in court. Nonetheless, theoretical discussions regarding whether or not the rule is mandatory remain present and, thus, question the possibility for the insurer to limit or condition the coverage of defence costs.
There is an important precedent, in a case handled by Galvis & Asociados (G&A), regarding a D&O policy that included the defence cost coverage subject to limits and conditions. The Supreme Court upheld G&A's plea, by which, as established in the wording, the coverage does not apply when the insured incurs in defence costs without requesting previous authorisation from the insurance company.
The more relevant change to the defence costs coverage in the near future seems to be the introduction of new “standalone” insurance policies that are specifically designed to cover legal defence costs, but do not condition the coverage to a liability claim, but rather any legal claim or lawsuit against the insured. At the time of writing, two insurers in Colombia offer standalone coverage for legal defence costs.
The introduction of the oral system with the General Code of Procedure has entailed a shift in the culture and tradition of litigation in the country.
Such reform has impacted all areas of the judicial system and has transformed the profile and skills of litigators towards more knowledgeable, experienced, confident and eloquent lawyers able to manage oral proceedings. This has increased the training costs, and sometimes the need to replace or reinforce staff. Moreover, the oral system has had an impact on the number of cases that can be attended simultaneously by a firm or an independent lawyer, taking into account that the pace of the proceedings is much faster and the hearings of different cases may overlap, while most hearings require the full presence of senior lawyers. These circumstances have affected the costs, as law firms need to either hire more expert litigators to manage the same number of cases, which implies increases in fees, or reduce the number of cases and likewise increase fees to maintain the level of income.
Likewise, the implementation of virtual systems in litigation has also entailed profound changes in working methods, which require more sophisticated and skilful teams, and better IT resources, all of which is intensive in cost and time for its implementation.
See the previous responses.
Colombian law enshrines the right for the insured to recover the amount paid due to a covered loss from the “person liable for the loss”. This right is derived from the insured's right and involves a subrogation by law mandate.
The right to pursue third parties is enshrined in Article 1096 of the Code of Commerce, which states that, after paying a covered loss under an insurance policy, the insurer ipso jure occupies the place of the insurer to recover the paid amount from the liable third party.
This means that the insurer will exercise a claim in its own name, against the liable third party, but this claim will have the same legal stance as that of the insured; ie, the same rights and restrictions.
The most affected lines of business in Colombia due to COVID-19 were healthcare, life insurance and rental insurance, the last of which is issued by insurers in favour of the owner of the rented premises, especially for commercial properties. At the beginning of the pandemic, there was an important discussion on whether the mandatory lockdowns constituted a force majeure, which allows the tenant to validly return the property and unilaterally terminate the contract without penalties. That would have resulted in the impossibility of claiming payment from the insurers as the policy only compensates losses when the tenant is liable for the breach of contract.
In order to solve these disputes, the Superintendency of Finance issued an opinion in May 2021 in which it pointed out that COVID-19 could not be considered as a force majeure with regard to the tenant’s obligation to pay the rental fees, given that force majeure only extinguishes obligations to deliver specific goods, but not to pay monetary amounts. Hence, failing to pay such fees should be considered a guilty breach, covered under the rental insurance. Afterwards, and even though the opinion is non-binding, insurers have mostly settled the claims.
COVID-19 has also compromised surety bonds regarding building, supply, transport and other contracts. Thus, performance bond litigation in which COVID-19 and subsequent lockdowns would be alleged as the cause of the breach is very likely to increase in the near future.
The Colombian market does not have policies that provide coverage for non–physical damage business interruption, with the exception of a few policies that are triggered only when access to the insured’s premises has been prevented by the authority due to a risk situation affecting the neighbourhood, such as a fire or a riot. The disputes that have arisen in the Colombian market have mostly been resolved out of court and insurers have argued that the coverage has not been triggered in the absence of “direct physical losses”. Therefore, this is not a stream of disputes, as it has happened throughout North American and European markets.
On another note, during the lockdown, the regulator also issued instructions for auto insurance companies to reduce the price of the premium according to the reduced risk. Companies decided to refund costumers with a percentage of the paid premium or extend their coverage period accordingly without additional charge.
Due to COVID-19, the Colombian market has experienced “pandemic exclusion” or “communicable diseases exclusion” clauses on many of its commercial and personal lines policies. It has so far been worded as an absolute exclusion, but it is expected to be amended and better tailored in the near future.
As vaccination efforts seem to be reaching the vast majority of the population, vaccination requirements are also expected to be seen in order to accept coverage in life, health and some commercial insurances, or at least to impose an extra premium for the insureds that did not receive the vaccine.
Given the length of legal procedures in the Colombian judicial system, so far there has not been any ruling or important decision regarding the matters that may have arisen due to the pandemic, with the exception of the opinion from the Superintendency of Finance of May 2021 regarding rental insurance. Nonetheless, it is important to bear in mind that this opinion is non-binding. Although it is very unlikely, insurers could challenge this opinion by denying coverage, which could result in judicial disputes.
The initial reaction to COVID-19 in the Colombian market may be characterised as one of overcorrection or overreaction. Insurers initially opted to significantly raise insurance rates and included “communicable disease” and “systemic risk” exclusions, trying to compensate for the uncertainty created not only by the pandemic but also by the government’s effort to contain it, as Colombia experienced one of the world’s largest countrywide lockdowns. Now, rates are lower but have not returned to pre-pandemic levels and some exclusions remain common practice in the business commercial insurance market.
Cyber insurance is experiencing maybe its most difficult “hard market” cycle, due to underwriters’ fear of enhanced risk, due to the fact that remote working was widely adopted throughout the country without any meaningful upgrade to cybersecurity efforts.
Likewise, life insurance underwriters have started to be more careful and thorough in reviewing pre-existing conditions, especially with regard to long COVID effects.
As reinsurers see an increase in losses throughout the world due to climate change, the local market has also seen an increase in property insurance rates to reflect the rising cost of reinsurance.
Unfortunately, crop insurance has not been adopted extensively in Colombia. The government has implemented a subvention that covers as much as 50% of the premium, but the cost of the premiums still does not make the insurance a feasible protection for small and medium-sized farms. Also, Colombia has a very mixed topography and an equatorial climate, which hinders the proper assessment of agricultural risks.
Regarding insurance litigation, there have been two important legislative reforms. On one side, the government’s Decree 806 of 2020, issued in the midst of COVID-19 lockdowns, introduced new procedural rules that introduced virtual methods to prevent the interruption of judicial activity. Also, in 2021, Law 2080 was enacted, which amended the CPACA to include new rules on virtual hearings, evidence gathering and competence.
These new rules resulted in a very rapid and positive development of the administration of justice, as courts and litigators have managed to adapt to the new measures, which have generated significant efficiencies and sped up legal proceedings.
With respect to coverage, Congress is currently discussing an amendment to the Seguro Obligatorio de Accidentes de Tránsito (SOAT) regulation. SOAT is a mandatory insurance that covers victims of car accidents, providing compensation for medical expenses, permanent disability and death.
The proposed amendment aims to extend coverage for third-party property physical damage, and to introduce an evaluation of the driver's experience as a factor in the premium determination.
The amendment is yet to be approved by Congress.
As in the rest of the world, the recent two years were a real challenge for the Colombian insurance industry, and for the economy in general. Insurance companies’ solvency and liquidity were put to the test due to increasing losses, a reduction in premium growth or net reductions, and lower performance of investment portfolios.
Administrative and IT structures were stretched to their maximum with the need to face unforeseen scenarios of remote working and providing service to non-presential clients. The resilience of corporate cultures was also proven due to the need to maintain team working bonds in spite of physical distance, fear and the uncertainty of employees.
Nonetheless, as data shows, this complex test was passed with very good marks by the whole industry, as all 33 life and non-life insurance companies in the country continued to be operational and fulfil all regulatory requirements, despite the losses and profit reductions. Moreover, insurance companies have contributed in a very significant manner in supporting their clients and the public in general through the pandemic and its severe physical and economic effects, as shown below.
1. The Contribution of Insurance Companies
1.1 Life insurance
Life insurance claims and payments increased significantly as a consequence of the COVID-19 pandemic. According to the Federation of Colombian Insurers (Fasecolda), insurers have paid nearly USD170 million of claims, from January 2020 to date, of which approximately USD116 million corresponds to COVID, a figure that will likely rise to USD261 million by the end of the pandemic. Therefore, many families have found economic support to face the loss of their parent or relative.
Colombia has a health system that combines a public mandatory medical plan for every citizen, which provides health coverage to 98% of the population as part of the social security system, managed by health companies named “Entidades Promotoras de Salud” (EPS), complemented by private health plans, some of them provided by insurance companies that grant additional services not covered by the public plans of EPS.
Although the public system has endured the biggest part of the pandemic due to its universal nature, private health insurance companies have also greatly contributed to pandemic relief and attention, covering COVID and COVID-related disease that so far has not been excluded from new policies. They have also contributed to the government’s vaccination effort, by assigning staff to this task without charge, and have also implemented prevention programmes and telemedicine systems to facilitate the public's access to health services.
1.3 Labour risk insurance
In Colombia, this risk is covered by specialised insurance companies named ARLs (the Spanish acronym for labour risks administrators) or multi-line insurance companies. The insurance is mandatory and covers the consequences of occupational accidents or diseases, such as healthcare expenses and compensation due to death, or temporary or definitive disability. Premiums are calculated as a percentage of the salary and are collected and partially funded by employers. ARL insurers are also charged with the responsibility of evaluating and promoting occupational risk prevention.
One of the main problems resulting from the pandemic was the severe scarcity of protection items for healthcare workers. Although this was not a responsibility of ARLs according to their legal charter, they undertook the task bestowed upon them by the government of supplying personal protective equipment (PPE) not only to healthcare employees but also to all workers of related activities (administrative, cleaning, surveillance, transportation, etc). These companies displayed enormous efforts, both economic and logistic-wise, to comply with this task, which was crucial to protect medical workers, reduce contagion among the population and ensure care for COVID-19 patients all over the country. Up to date, ARLs have supplied 121 million PPE elements, assuming a cost of around USD55 million.
They also funded diagnostic tests, medical check-ups and prevention, mitigation and decontamination programmes in healthcare facilities. Also, as the government qualified COVID as an occupational disease for workers in these disciplines, they obtained access to all the assistance and compensations granted by the ARL insurance. So far, these companies have paid approximately USD101 million in claims for health assistance or compensation.
1.4 Lease performance bonds
Insurance companies have also helped in mitigating the impact on commercial real estate renting and leasing contracts, derived from the lockdowns and isolation measures taken by the government. Despite the legal discussions regarding whether the pandemic qualifies as a force majeure that justifies the suspension in payments, and therefore whether these breaches entail a covered loss under the contractual bonds, the insurance companies contributed in a very significant manner in promoting and achieving extrajudicial agreements between tenants and owners, and in paying more than USD48 million in losses for the pending rents due to long-term business interruption.
1.5 Premium reimbursement due to risk reduction
Auto and inland marine insurance companies were quick to note that, due to the lockdowns, automobile traffic was greatly reduced, thus significantly diminishing car accidents. In an effort to help alleviate the economic situation of policyholders, many insurers promptly proceeded to offer reimbursements or free-of-charge extensions of the coverage periods to their customers.
Afterwards, in June 2020, the Superintendency of Finance issued an instruction ordering the extension of this practice to other lines where risk reductions have been experienced apart from automobile, such as marine, construction, heavy machinery, aviation and hull insurance. To date, insurance companies have reimbursed clients with more than USD52 million, which has helped them in facing liquidity shortages.
2. The Positive Legacy of COVID
As the saying goes, crises are always sources of opportunities and development. And for insurance companies, the COVID crisis is not an exception, despite the high price they have paid. This hard experience has indeed produced many positive outcomes that are setting the basis for enormous improvements in the industry. Also, the crisis has brought important improvements in the legal scenario where the business is carried out, and conflicts are resolved. Amongst them are the following.
2.1 Efficiencies in the industry
As is widely recognised, the need to adapt to remote activities has produced enhancements in productivity, not only in terms of a reduction in commuting times and an increase in punctuality, but also with regard to a diminution in the enormous areas of premises where insurance companies’ staff used to work. The insurance industry in Colombia had no real experience in virtual work apart from some timid and selective experiences. Therefore, the sudden and forceful adaptation to a new working system that was almost totally remote engendered reductions in very expensive large-area rents, or the liberation of massive funds allocated in illiquid and non-productive real estate assets. This has also produced a relief in solvency ratios affected by the decrease in profits.
2.2 Improvements in IT
Along with the aforementioned efficiencies, the impossibility of face-to-face operations has led to meaningful improvements in the traditional processes carried out by insurance companies through the use of technology. These changes have been put in place at an unprecedented pace.
Loss control divisions implemented virtual inspections of risks, over virtual video chat platforms, and even started using drones. The underwriting process, especially for personal lines, has been enhanced with online quotation systems, which speeds up the brokers’ service. Claim departments have implemented digital files, ceasing to request physical documents or in-person signing of forms, which not only facilitates the procedure, but has also shortened the claim process. There are also significant developments in the payment process, the information and service provided to clients, and the mechanisms to support brokers' activities.
2.3 Unprecedented leap in justice administration operation
Before the pandemic, the Colombian justice administration was affected by a severe delay in the implementation of IT mechanisms. Therefore, the conducting of proceedings was effectively obsolete. In fact, all interchanges of documentation between the parties and the courts were made through physical documents that had to be filed in the courts' premises, with very few exceptions. The files of the cases were therefore kept in paper form, and all the litigations were conducted face to face.
In this state of affairs, the government's lockdown measures brought a halt to the administration of justice. Almost all terms were suspended, with very few exceptions (hearings before criminal courts and actions for the protection of constitutional rights – tutelas), subject to severe social distancing measures. Under such a pressing scenario and after almost three months of total inactivity, the Ministry of Justice and Law took a bold decision towards restoring the justice service. It issued Decree 806, ordering the immediate implementation of technological methods to allow the virtual administration of justice. Surprisingly, at unimagined speed, and, moreover, with practically no economic cost, the courts, and the community of litigators across the country, started to conduct online hearings, and to deliver briefs and decisions by email.
Although the courts already had an electronic platform for information purposes, it was not until Decree 806 that this platform began to formally notify decisions and rulings to parties. A general balance of these measures is highly positive despite the normal hurdles and the limitations to implement them in remote areas of the country lacking internet service, for which special measures have been taken.
These changes not only allowed the reactivation of justice, but have also generated unsuspected efficiencies, that for sure will be kept indefinitely. The speed of the proceedings has increased considerably, punctual attendance at hearings has grown significantly and thus the cancellation of hearings has reduced to minimum levels. These measures have facilitated the administration of proceedings for law firms and lawyers, which previously invested valuable time and costs in the daily commuting of clerks to undertake the physical revision of files to identify new decisions, and to deliver briefs in courts.
The efforts to digitise the files, which commenced years ago with pilot programmes, were accelerated and it is expected, according to the instructions of the Superior Council of Justice, that all active files of all national courts will be digitised by 2022. The next step in this process is the launching of the Integrated System of Judicial Management (SIUGJ) with the help of the World Bank, which will allow access to electronic files and integrate all the judicial activities in a virtual platform.
For now, all the measures taken due to the pandemic have certainly resulted in significant improvements and a simplification of the justice administration, which, in turn, involves an overall reduction in costs, and, ultimately, a better and more accessible service to the public in general.
3. Other Significant Changes
3.1 The statutory reform of justice
After several unsuccessful efforts, Congress finally approved the project of Law No 125 of 2021, by which structural reforms in several aspects of the justice administration will be put in place. Its main aspects are the following.
In sum, this new law addressed many, although not all, of the reforms that are needed to promote the development of the justice administration in the country. Some other projects are now in course in Congress, and it is expected that if they are approved, aspects such as stability in judicial decisions, work overload in courts, and access to justice will be improved.
3.2 Capital market, financial and insurance systems reform
Congress is discussing a new financial reform aimed to promote the modernisation of the capital market, payment systems and the insurance industry through the adoption of science and technology as mechanisms, higher standards in corporate governance and innovative tools for the administration of investment portfolios. The reform, which is in its last stages of the approval process in the Senate, will have a great impact in the insurance industry. The most important changes proposed by the reform are the following.
3.3 Insurtech developments and government vigilance:
Finally, it is worth underlining the efforts by the industry and government to foster new technologies to introduce efficiencies and facilitate and enlarge the insurance market. On the side of the Superintendency of Finance, this trend started in 2017 with the creation of “InnovaSFC”, a work team within the Superintendency focused on financial and technological innovations.
In August 2021, the Superintendency issued Instruction 016, by which it put in place the controlled testing environment (ECP, according to its initials in Spanish), which allows insurers, as well as financial entities, to test their technological developments. This instruction set out the rules, instructions and requisites to enter and make use of this platform. The ECP is the latest strategy from the Superintendency to encourage the development of new fintech and insurtech services, but also clearly reveals the intention of the government to intervene and closely supervise these initiatives in order to verify the transparency and accuracy of the new tools to protect the final consumer.
Even if this is a laudable goal, it undoubtedly presents different challenges, such as those related to the company’s autonomy to select the methods used to conduct its operations, the confidentiality of new strategic projects, the timing required to launch new products or services, and, finally and fundamentally, the definition of the boundaries of the state's supervising powers regarding fintech and insurtech activities conducted by non-insurance companies. The results of this relationship between innovation and control in Colombia are yet to be seen.