Insurance Litigation Trends in Spain

The insurance sector in Spain is highly sophisticated, given the complexity and variety of the seemingly infinite subjects it covers. Insurance law is probably the aspect of law that has to evolve the fastest in order to adapt to and regulate the reality that surrounds us (from a pandemic in which citizens are confined to their homes, to a natural disaster that freezes the streets of the country’s capital).

In any case, whether they are more or less novel, losses occur and from these, claims are derived – judicial or out of court, between the insured and the insurer, or between the insurer and the party causing the damage.

To this exciting scenario are added the rules of Spain’s civil procedure law, which make the judicial procedures that arise in the insurance field more attractive, and clarify the conflicts between the different agents in the sector.

We address here some of the recent trends in the Spanish courts arising from this variety and wealth of cases.

Can irrevocable beneficiary status on a life insurance policy be revoked?

An interesting modification was introduced in the Spanish Wealth Tax by Law 11/2021 of 9 July 2023 on measures to prevent and combat tax fraud. It transposes Council Directive (EU) 2016/1164 of 12 July 2016, laying down rules against tax avoidance practices that directly affect the functioning of the internal market, amending other tax rules and regulating gambling.

In particular, it concerns the amendment made by Law 11/2021 to Article 17 of Law 19/1991, of 6 June, on Wealth Tax. This new amendment means that policyholders, even if they have designated an irrevocable beneficiary in the life insurance policy taken out, are now obliged to declare the mathematical provision of said insurance in the taxable base for Wealth Tax, which simply means paying more tax.

As a consequence of the above, several insurance companies are receiving requests from irrevocable beneficiaries to renounce their status in life insurance.

Let us consider whether, on the one hand, the policyholder of a life insurance policy can revoke the designation of an irrevocable beneficiary and, on the other hand, whether the irrevocable beneficiary can renounce their status.

Regarding the first option, that the policyholder revokes the designation of an irrevocable beneficiary, Article 87 of Law 50/1980 of 8 October 1980 on Insurance Contracts provides that the policyholder may indeed revoke the designation of the beneficiary at any time, provided that the policyholder has not expressly waived this right in writing.

Therefore, as the very word “irrevocable” indicates, when the policyholder has designated a beneficiary of a life insurance policy as expressly irrevocable, the policyholder will not have the legal capacity to revoke this designation. This is because, if the policyholder designates the policy initially as irrevocable, they are clearly renouncing ab initio the possibility of revoking the designation at a later date.

So can the irrevocable beneficiary themselves renounce such a condition?

It should be noted that the irrevocable beneficiary has a full right to obtain the sum insured (a credit right), which is only subject to the occurrence of a loss indicated in the policy. As they are fully entitled to the sum insured, they can assign this right to third parties (eg, the beneficiary could pass it on to their heirs).

Without prejudice to the fact that this possible waiver is not regulated in positive law, it is addressed by the doctrine which points out, in general terms, that in all legal systems the beneficiary is recognised as having the right to waive, its justification being the principle that no one is obliged to accept a benefit that they do not want. The waiver makes it possible to respect the independence of the third party, if that is their will, and is understood as the power of the beneficiary in any contract in their favour.

How is this to be done if the waiver occurs after the irrevocable beneficiary has accepted? In this case, the general requirements for waiving a right will apply, but this will need to be viewed in light of Article 6.2 of the Civil Code, which indicates that the waiver of a right will only be valid if it is not contrary to the public interest or public order and does not prejudice third parties.

Assuming that the irrevocable waiver of the beneficiary’s status would not be contrary to the public interest or public policy and would not cause prejudice to third parties outside the scope of the waiver, it is understood that such a waiver is valid from a substantive legal point of view.

Although Spanish law does not determine the formal requirements for waiving a right, case law and doctrine indicate that, in order for the waiver to be valid, it must be clear and indisputable, and without conditions. The waiver must also be undertaken by the irrevocable beneficiary or their voluntary or legal representative (ie, it must be personal), unequivocal, recognised by the insurer, carried out by adults with full legal capacity and, evidently, undertaken before the insured event occurs.

In short, it seems that the modification of Article 17 of the Wealth Tax Law has brought (and will continue to bring) numerous requests for waiver by the irrevocable beneficiaries of life insurance policies. Such requests will have to be made by the beneficiary themselves and the insurer will have to accept such requests if they fulfil the requirements set out above for them to be valid.

Contradiction over the concepts covered by compensable damage

The professional liability of tax advisers is a subject that has been written about on many occasions: whether to define the legal regulation of this figure, to specify the requirements that must be met for the existence of civil liability to be established, or to analyse the effects of any possible negligent conduct of a tax adviser.

In relation to this last point the concept of “compensable damage” is an issue of great interest and about which there is a great deal of controversy in Spanish courts. Thus, we find resolutions that, analysing practically identical factual cases, disagree as to which concepts are covered by the compensable damage (tax liability, late payment interest and penalties imposed by the tax administration). In this way, depending on the court that judges the case, the tax adviser – and possibly, their D&O insurer – may have to bear some pecuniary consequences.

The courts agree that the concept of compensable damage includes the penalties or surcharges that may be imposed by the tax administration (on the logical ground that if the advice had been given correctly, it would not have given rise to the penalty). However, this is not the case with other concepts such as late payment interest or tax liability.

In relation to late payment interest, there are courts that understand that this is not penalty interest to be borne by the tax adviser for their negligence, but rather, it is interest derived from capital that should have been paid and which has remained in the hands of the taxpayer, so it must be the one who bears it (see, among others, the Judgment of the Provincial Court of Asturias, 5th Section, 30 December 2021, or the Judgment of the Provincial Court of Jaén, 1st Section, 1 March 2021, in the case of the Provincial Court of Jaén, 1st Section, 30 December 2021). Contrary to this trend, many courts conclude that late payment interest is included in the concept of compensable damage, since the taxpayer would not have been obliged to pay it if the assessor had acted with diligence (see, among others, the Judgment of the Provincial Court of Asturias, 5th Section, 22 December 2022, or the Judgment of the Provincial Court of Madrid, 14th Section, 16 December 2022).

With regard to the tax liability (ie, the difference between what the taxpayer paid and what would have been paid if the tax advice had been given correctly), some Spanish courts understand that the tax liability is not a compensable concept, since the payment of a tax cannot be understood as an economic loss resulting from the negligent actions of the tax adviser, but rather as the inexcusable legal obligation of anyone who carries out an economic activity, in such a way that compensable damage cannot be confused with compliance with a legal obligation (see, among others, the Judgments of the Provincial Court of Malaga, 4th Section, February 2023 and November 2022, and the Judgments of the Provincial Court of Malaga, 4th Section, 21 February 2023 and 11 November 2022). On the other hand, other courts adopt a completely opposite position, concluding that in so far as there is a causal link between the negligent advice and the payment of the tax liability, this must be included in the compensation payable by the tax adviser (see, among others, the Judgment of the Barcelona Provincial Court, 1st Section, 20 February 2023, or the Judgment of the Barcelona Provincial Court, 17th Section, 1 July 2022).

This evident heterogeneity of criteria from one court to another obliges us to review what the Spanish High Court has said on the matter and, surprisingly, to date no common bases or assumptions have been found that provide a clear position on what is included in the compensable damage in cases of the civil liability of tax advisers, in order to know what to follow in general terms.

There is, therefore, expectation in the insurance industry that the Supreme Court will soon make a decision, avoiding the “case by case” approach (the factual assumptions in these types of proceedings are very similar) and clarifying which concepts can be claimed from a tax adviser (and eventually from their insurer) in cases of professional liability.

Article 10 of the Insurance Contract Act: the obligation to declare the risk according to recent case law

Article 10 of the Insurance Contract Act (ICA) establishes the conditions for compliance with the obligation to declare the risk. According to the wording of the article, compliance with the obligation to declare the risk is subject to two conditions:

• The insurer should submit a complete and detailed, but not exhaustive, questionnaire covering all relevant questions to assess the risk. The particularities that have been analysed in specific cases of insurance contracts linked to loans must be taken into account to determine if the insurer has acted with due diligence.
• The wilful or grossly negligent behaviour of the policyholder in failing to answer or in intentionally providing inaccurate data in a clearly and completely drafted questionnaire, which the policyholder knew to be relevant for assessing the risk.

The non-fulfilment of the duty to declare the risk shall only be considered if both circumstances concur. In such a case, the insurer may exercise their right to cancel the insurance contract, which will result in the release or exoneration from payment of the corresponding indemnity.

As summarised in Ruling No 681/2023 of 8 May, handed down by the Spanish Supreme Court, the case law has already defined the concept of the obligation to declare the risk and has established that:

• there is an obligation to answer or respond to the insurer’s questions, and the consequences of omitting the questionnaire or submitting an incomplete questionnaire that is too generic or ambiguous, with clearly stereotyped questions on the insured’s general health that do not allow the insured to link this history with the illness that caused the claim, are applicable to the insurer;
• the insured cannot justify the breach of their obligation by the mere circumstance that the questionnaire is filled in or materially completed by the personnel of the insurer or of the entity acting on behalf of the insurer, provided that it is proved that it was the insured who provided the answers to the questions about their health formulated by such personnel; and
• that what the Supreme Court must examine is whether the type of questions asked of the insured were conducive to the insured being able to represent what health history they knew or might have known about, ie, whether the questions allowed the insured to be aware that, by not mentioning their pathologies, they were concealing or silencing relevant data for an accurate assessment of the risk, and causally related to the claim/accident.

Regarding the formal validity of the questionnaire, case law establishes that the effectiveness of the health questionnaire for the purposes of Article 10 of the ICA does not depend either on the form it takes or on who fills it in materially (policyholder or an employee of the insurer or of the entity acting on its behalf), but on whether the questionnaire is drawn up with the answers provided by the policyholder/insured. Thus, what is really relevant in order to rule out a breach of duty to declare the risk on the part of the policyholder is that, “from the way in which it was completed, it can be concluded that the policyholder was not asked for that relevant information”.

Regarding its material validity, the case law also specifies that what determines the release of the insurer from the payment of the benefit is not the mere inaccuracy of the insured’s answers but fraud or gross negligence, that is to say, “the intentional inaccuracy or [inaccuracy] due to a severe fault or negligence”. The Supreme Court has established that the following requirements must be met in order to determine that the provisions of Article 10 ICA have been breached:

• that a relevant piece of information has been omitted or misreported;
• that this information had been requested by the insurer, by means of the corresponding questionnaire, and in a clear and express manner;
• that the declared risk is different from the real one;
• that the omitted or incorrectly reported information was known or should have been known with a minimum of diligence by the applicant at the time of making the declaration;
• that the information was unknown to the insurer at that time; and
• that there is a causal link between the omitted circumstance and the covered risk.

The aforementioned case law has led the Supreme Court to different solutions, justified in each case by the differences in the content of the declaration-questionnaire, and it should be noted that, depending on the specific circumstances, the Supreme Court has assessed the infringement of the obligation to declare the risk both by virtue of the non-vague nature of the questionnaire – because the insured was directly asked about specific illnesses – and also, despite its generality, by virtue of the existence of “sufficient significant elements that the insured had to represent as objectively influential for the insurer to be able to assess the risk”.

Delimitation of “justified cause” of Rule No 8 of Section 20 of the Insurance Contract Act

It is well known that, in order to reinforce the protection of the insured, Section 20 of the ICA imposes the payment of high punitive interest on those insurers that are in default (ie, who do not comply with their obligations within three months from the occurrence of the loss or who do not pay the minimum amount of what they owe within 40 days from the receipt of the declaration of the loss).

The referred provision establishes that, if the insurer does not comply with the obligations within three months from the occurrence of the loss or does not pay the minimum owed amount within 40 days from the receipt of the declaration of the loss, the indemnity will be adjusted according to the rules set forth in the same section.

Among such rules is No 8, according to which “there shall be no indemnity for delay on the part of the insurer when the failure to pay the indemnity or to pay the minimum amount is based on a justified cause or is not attributable to him”.

The fundamental question, therefore, is to determine when it should be understood that there is justified cause.

Over time, the Supreme Court has been refining its position with respect to the interpretation of the concept of “justified cause” referred to in Rule 8 of Section 20 of the ICA. Thus, it has been consolidating a new orientation that makes it necessary to forget about the scope that had been given to the rule in illiquidis non fit mora and to attend to the “reasonableness of the insurer’s opposition”.

One of the cases most frequently invoked by insurers when availing themselves of Rule 8 of Section 20 of the ICA is the pendency of a legal proceeding on the coverage of the loss.

There are numerous rulings in this regard, but the recent ruling handed down on 6 June 2023 by the Social Chamber of the Supreme Court is particularly explicatory. It upholds the appeals filed by two insurance companies, upholds the appealed ruling and annuls it with respect to the payment of the interests of Section 20 of the ICA to the aforementioned insurers.

In the case analysed, the appellant insurers argued that there was justified cause for not having paid the compensation to the plaintiff until the resolution of the legal dispute, given the existing doubts as to the liability of the company and of the worker himself in causing the accident.

The judgment handed down by the Supreme Court is exemplary and lists in an exhaustive manner the cases in which an insurer’s refusal to pay the compensation claimed while awaiting the outcome of a legal proceeding is justified. Cases that should be kept in mind include:

• when the inclusion of the plaintiff in the policy is disputed;
• when the insurer’s position was supported by the case law interpretation then in force;
• those cases in which the date of the event that determined the validity of the policy was disputed, and was not fixed until the appealed judgment was issued; or
• those cases in which, in a labour accident, the salary that served as the basis for the calculation of the indemnity was disputed.

The cases quoted in the aforementioned resolution are very diverse and the elements to be assessed are very varied. And, although the Supreme Court makes it clear that “case by case” consideration is necessary, it does find the following factors must necessarily be taken into account:

• that the insurer’s default only disappears when an uncertainty arises from the circumstances of the loss or from the text of the policy as to the insurance coverage that makes the intervention of the court necessary to resolve the discrepancy between the parties;
• that the delay is not attributable to the insurer;
• that the judicial process has not been used as an excuse to hinder or delay payment to the injured parties;
• that there is a genuine need to resort to the process to resolve a situation of uncertainty or rational doubt as to the existence of the duty to pay compensation;
• that – as anticipated above – the illiquidity of the indemnity is not a cause justifying the delay in payment; and
• that, on the contrary, it is when the judicial decision is essential to dispel doubts as to the reality of the loss or its coverage, but only when the discussion of the coverage is not attributable to the obscurity of the clauses drafted by the insurer itself.

In short, the recent Supreme Court decision of 6 June 2023 lays a foundation that will surely be useful to justify, even more so, the exception to the rule of Section 20 of the ICA that regulates excessive interest for insurers.