Sources of Insurance and Bonding Law in Mexico

The main sources in Mexico are legislation and judicial criteria. Insurance law legislation includes:

• the Law of Insurance and Bonding Institutions;
• the Sole Insurance and Bonding Circular;
• the Insurance Contract Law;
• the general insurance provisions issued by the National Commission for the Protection and Defense of Users of Financial Services;
• the Code of Commerce; and
• the Federal Civil Code.

International legislation is used when there is an international contract (reinsurance or insurance), where, depending on the type of insurance, the provisions that will apply may be Mexican or international laws.

In 1996, Mexico ratified the Inter-American Convention on the Law Applicable to International Contracts, which establishes a framework to determine the law applicable to international contracts, such as reinsurance or insurance contracts. For the regulation of international insurance or reinsurance, international conventions or treaties are considered depending on the type of insurance and the insured objects; for example, in air transport insurance, international treaties specialised in aeronautical law are used so that the insurance complies with all the requirements in international matters.

Additionally, there are the jurisprudence and judicial criteria issued by the Supreme Court of Justice and the highest courts in the country. This source of law is very important in the Mexican legal system, since it sets precedents for the resolution of judicial disputes in insurance matters, and is also a guideline for insurers as to the conduct they must adopt in their operations.

Regulation of Insurance and Surety Bonds

The National Insurance and Bonding Commission is the governing body that regulates insurance and bonding companies, from their incorporation to their operation, and at all times ensures that they comply with their obligations under the relevant regulatory framework, including the correct constitution of their corporate governance, solvency capital, the contracts they issue, and the constitution of their technical reserves, among others.

On the other hand, the National Commission for the Protection and Defense of Users of Financial Services is the governing body that oversees that insurance and surety companies provide adequate service to consumers of their products. Likewise, such authority may sanction them when they fail to comply with any administrative provision related to consumers. Among other provisions, it is in charge of ensuring compliance with the Law for the Protection and Defense of Users of Financial Services.

Corporate Insurance and Reinsurance

The authorisation to subscribe insurance and reinsurance for (small- or medium-sized) companies corresponds to those companies that have the respective authorisation from the National Insurance and Bonding Commission to operate as an insurer and that also have permission to distribute the product required by the company – ie, in the life, accident and sickness or damage line of business. There are no specific or differentiated requirements for insurers to operate consumer insurance or business insurance.

In the case of business insurance, adhesion contracts are also used; however, this is not an obstacle for them to be negotiated by the contracting company, in terms of its specific needs. For an insurer to issue an insurance policy to a company, it must verify, at the time of subscription, what is contained in its policies and subscription manuals. Other issues that are contemplated include:

• the objects to be insured;
• risk profile;
• seniority in the market in question; and
• sector of economic activity.

The restriction for insurers at the time of taking out insurance is that they do not exceed the capacity for which they can assume risks; for this purpose, Articles 256 and 257 of the Law of Insurance and Bonding Institutions provide that they must diversify and disperse the risks through coinsurance or reinsurance with foreign companies, specifying that there is no different or specific regulation when it comes to business or consumer insurance.

Details of all the requirements that insurers must comply with to operate consumer and business insurance can be found in the Sole Insurance and Bonding Circular.

The Premium Regime

Under Mexican law, the nature of the premium regime is taxable, since if the contracting party or insured party does not pay the premium within the term established for such purpose, the insurance ceases to be effective. The general rule is that the premium is due in advance; that is, at the beginning of each period of the term of the insurance contract. In some cases, depending on the type of insurance, the premium may be divided and paid in specific periods, but it must be paid in periods of equal duration.

Operation of Foreign Insurance or Reinsurance Companies

The operation of insurance in Mexico is authorised for institutions incorporated under Mexican law. If a foreign company wants to operate in Mexico, it must incorporate an affiliate entity in Mexico to provide insurance services in Mexico.

Regarding the operation of reinsurance, in order to provide this service from Mexico and to hold itself out as a Mexican reinsurer, it is necessary for the company to open an affiliate entity in the country and obtain authorisation from the National Insurance and Bonding Commission. However, if the insurance was granted by a Mexican insurer, the insurer, in order to diversify and disperse the risks and responsibilities it assumed when carrying out this operation, is allowed to contract reinsurance or coinsurance with a foreign company. For an insurer to enter into reinsurance with a foreign company, the latter must be registered in the General Registry of Foreign Reinsurers, which is obtained through the authorisation of the National Insurance and Bonding Commission, which, prior to granting the registration, will review, among other aspects, the solvency and stability requirements to carry out reinsurance operations.

In Mexican legislation, there is no express provision allowing fronting and, in some cases, there are restrictions in that insurance cannot be contracted with foreign companies when the persons or companies to be insured reside in Mexican territory or when the object to be insured is located in Mexican territory or is the property of a person domiciled in Mexico and, in general, in cases where the risks may occur in Mexican territory.

However, as stated in 3.1 Overseas-Based Insurers or Reinsurers, Mexican insurance companies may diversify their risks through reinsurance or coinsurance with foreign companies, and it is in these operations that fronting occurs, since through these operations the insurers that assume the risk transfer it to other insurers or reinsurers.

In this respect, there is no percentage limit for reinsurance or coinsurance, nor is there a minimum retention requirement for the transferor company. On the contrary, Mexican law establishes that an insurer cannot retain all the risk if it exceeds its capacity to mitigate the risk, and what it provides is that the surplus must be diversified in reinsurance. In practice, it is common for the entire risk to be reinsured, so sometimes it is actually the reinsurer who assumes the entire risk; however, it is not the reinsurer but the transferor insurer who will be liable to the insured.

Mergers and acquisitions (M&A) of insurance companies are very common in Mexico, especially when international insurers absorb local insurers, since the absorption facilitates the insurers that arrive, as they already have the authorisation of the Mexican regulatory authority and the permits to operate products. For insurance companies operating in Mexico, M&A activity has become increasingly commonplace in recent years. This trend is underpinned bythe Law of Insurance and Bonding Institutions and the Sole Insurance and Bonding Circular.

The absorbing insurer takes over the portfolio of the absorbed insurance institution and assumes all the risks it had insured, for which it must have a contingency plan in place for all the risk it assumes.

The distribution of insurance and reinsurance products is regulated by the Law of Insurance and Bonding Institutions and by the Sole Insurance and Bonding Circular, and is carried out as follows:

• Direct sales: These sales are made by insurance companies.
• Sales through insurance agents: Insurance agents offer the general public a wide range of insurance with various institutions and products. In order to be able to sell insurance, the individual or legal entity must be authorised by the National Insurance and Bonding Commission and comply with various requirements set forth in the Insurance and Bonding Agents Regulations, including having completed high school or equivalent, having the technical capacity to perform brokerage activities, not being a public servant, not having been convicted of a property crime, and not having been declared bankrupt. Likewise, it is important to point out that agents are also required to contract and maintain civil liability insurance for errors and omissions.
• Sales through digital media: The sale of insurance and reinsurance products through digital media is also regulated by the Sole Insurance and Bonding Circular, particularly with regard to the terms and conditions under which electronic insurance contracts must be made, since Mexican legislation is very specific in that insurers must provide all the information and documentation clearly to the contracting parties or insured parties.
• Bancasurrance: In Mexico, there is the distribution of products through financial institutions, but this model is known as contracting through a legal entity. In order to start with the distribution of insurance, financial institutions must sign a contract with the insurers, which must be authorised and registered before the National Insurance and Bonding Commission. Also, in some cases, before the financial institutions or legal entities distribute the insurance products, they should receive training from the insurance company, or obtain evaluation or certification by the National Insurance and Bonding Commission.

Disclosure of Information about the Risk

In Mexico, as in most jurisdictions, insurance contracts are documents previously drafted by the insurers and in which there is no margin for negotiation by the insured; for this reason they are classified as “adhesion contracts”. Adhesion contracts are characterised by the absence of equal bargaining power or the ability for the parties to engage in mutual compromise or negotiation. Thus, the distinguishing feature of the adhesion contract lies in the fact that the clauses are unilaterally prepared (and at times imposed) by one party upon the other, who can only accept or reject them.

Given the aforementioned circumstances, it falls upon the insured party to fulfil the obligation of providing written declarations to the insurer, as per the relevant questionnaire. These declarations should encompass all facts material for the assessment of the risk that could impact the agreed conditions, known or reasonably expected to be known at the contract’s execution. Notably, there is no onus on the insurer to actively investigate, on behalf of the insured, the material facts that may impact the agreed conditions.

The frequent and growing use of insurance contracts has necessitated the regulation of their execution; legislation which, in view of the advantageous position of insurance companies, has been oriented towards developing consumer protection and transparency rules, obliging insurance contracts to comply with certain standards.

Consequence of Failure to Provide Information in the Subscription of an Insurance Contract

As stated in 6.1 Obligations of the Insured and Insurer, most insurance contracts are non-negotiated contracts or adhesion contracts. The omission or misstatement of any material fact by the insured party that could influence the terms and conditions of the insurance entitles the insurer to consider the insurance contract legally terminated.

Insurance companies act through agents who may be individuals or legal entities that intervene in the contracting of insurance through the exchange of proposals and acceptance of said insurance, through marketing and through the provision of advice to enter into such contracts, and whose activity is subject to the legal framework of the Insurance Contract Law, the Law of Insurance Institutions and Mutual Insurance Companies and the Insurance and Bonding Agents Regulations.

Even though the insurance agent is usually considered an intermediary, under Mexican law they are considered an agent of the company when they act according to its  instructions and under its direction. In such instances, the agent represents the insurer, and their actions bind the insurer in the process of contracting the insurance. However, they have the obligation to provide advice to the insured in relation to the contracting of the insurance.

In terms of applicable legislation, in order to be valid, the insurance contract (as well as its additions and amendments) must be in writing, and it is perfected from the moment in which the insurer is aware of the acceptance of the offer by the insurance-contracting party.

The insurer is obliged to deliver to the contracting party a policy stating the rights and obligations of the parties, which must contain at least the following:

• the names and addresses of the contracting parties and the signature of the insurance company;
• the designation of the insured thing or person;
• the nature of the risks guaranteed;
• the time from which the risk is guaranteed and the duration of this guarantee;
• the amount of the guarantee; and
• the insurance fee or premium.

Beneficiaries of an Insurance Contract

According to Mexican law, it is possible to take out insurance on one’s own behalf or on behalf of another person, even without the designation of the person of the insured third party.

An example of this is D&O liability insurance in which only those persons (without identifying them) who fall within the general conditions of the insurance to be considered as directors and/or officers of a company are established as beneficiaries of the insurance.

The position is no different with regard to consumer contracts or reinsurance.

Alternative risk transfer in insurance refers to non-traditional solutions for transferring risks. In Mexico, this figure has been incorporated in products such as financial guarantee insurance and parametric insurance.

Financial guarantee insurance is regulated in the Law of Financial Institutions and in the Sole Insurance and Bonding Circular, and specific rules for their operation have also been published.

Parametric insurance is gaining traction in the Mexican market, with both private companies and the government embracing its innovative solutions. Initially focused on the agriculture sector, particularly for mitigating drought losses, crop yield decline, and animal mortality, parametric insurance has now expanded to encompass a wider range of sectors. The National Commission for the Protection and Defence of Users of Financial Services (CONDUSEF) currently registers over ten parametric insurance products covering diverse areas like earthquake damage, sports achievements (such as a golf hole-in-one), and event cancellation or postponement (such as weddings).

The Law of Insurance and Bonding Institutions does not specify provisions for ART transactions in other jurisdictions with implications in Mexico. However, there are no explicit bans in this matter.

Whether other jurisdictions celebrate ART transactions that may be validated in Mexico will depend on the specific acts celebrated in the foreign jurisdiction with regard to Mexican insurers.

Where ART transactions signed in other jurisdictions are part of a reinsurance or co-insurance contract with a Mexican insurer, this operation will be considered a reinsurance or co-insurance contract; this applies only where those acts are part of the contract and comply with the requirements of Mexican law for recognition as a reinsurance contract.

Insurance contracts are regulated by the Insurance Contract Law and in a supplementary manner by the rules of construction of contracts contained in the Code of Commerce and the Federal Civil Code.

The Insurance Contract Law provides that the policy conditions, scope, terms, exclusions, limitations, deductibles, and any other modality established in the coverage or plans offered by the insurance company, as well as the rights and obligations of the contracting parties, insured or beneficiaries must be drafted in terms that leave no room for doubt as to the risks covered and those that are excepted, restricted or conditioned in any way.

Regarding the latter, the law is clear in stating that the insurance company must respond to all events that present the nature of risk that has been insured, unless a certain risk or event is expressly excluded, limited, or subordinated in a precise manner.

Consequently, if a risk is not expressly excluded, circumscribed, or reserved from the coverage established in the policy in a clear and precise manner, the insurance company shall have the obligation to respond to it upon the occurrence of the incident, under the terms agreed in the contract.

Insurance contracts are classified as “adhesion contracts”, which are those whose clauses are drafted by only one of the parties, while the other party is limited to accepting or rejecting them, without being able to modify them. That is why there are special rules that differ from those applicable to freely negotiated contracts, namely that any doubt is construed against the stipulating party – ie, the insurer.

Therefore, any obscurity in the clauses in such adhesion contracts must be construed in favour of the insured (consumers), who are not responsible for drafting the contract.

As stated in 8.1 Interpretation of Insurance Contracts and use of Extraneous Evidence, the Insurance Contract Law provides that the policy conditions, scope, terms, exclusions, limitations, deductibles and any other modality established in the coverage or plans offered by the insurance company, as well as the rights and obligations of the contracting parties, insured or beneficiaries must be drafted in terms that leave no room for doubt as to the risks covered and those that are excepted, restricted or conditioned in any way.

Under Mexican law, there is no particular form of words necessary to constitute a warranty, and, in fact, they are generally treated as a condition precedent and are not treated differently from other contractual terms.

As stated 8.2 Warranties, the Insurance Contract Law provides that the policy conditions, scope, terms, exclusions, limitations, deductibles and any other modality established in the coverage or plans offered by the insurance company, as well as the rights and obligations of the contracting parties, insured or beneficiaries must be drafted in terms that leave no room for doubt as to the risks covered and those that are excepted, restricted or conditioned in any way.

The breach of a condition precedent (if material to the loss that arises) will discharge the insurer from liability under the policy as long as it is clear from the content of the policy that such breach constitutes a discharge of liability.

In Mexico, there are two procedures to claim insurance coverage: (i) a conciliatory or mediation procedure before CONDUSEF and (ii) through the competent courts by filing an Ordinary Commercial Trial or Oral Commercial Trial, depending on whether liquid or illiquid benefits are claimed. The filing of the former is not a procedural requirement for the latter.

A claim for the performance of service or consumer contracts can be filed through a conciliatory proceeding before the Federal Consumer Attorney’s Office (PROFECO) or through an Ordinary Commercial Trial or an Oral Commercial Trial.

The timeframe to initiate a lawsuit for the enforcement of an insurance contract is generally two years. However, in the case of life insurance, this period extends to five years. Importantly, initiating a claim with CONDUSEF suspends the timeframe, which only commences again after the day following the conciliation hearing. This applies in scenarios where either no agreement is reached or both parties opt for arbitration.

There are several cases in which an unidentified beneficiary or other third party may claim an insurance payment. An example of this would be in the case of liability insurance where the victim can sue the insurer directly. Another example would be in the case of legal expenses insurance where lawyers could sue the insurer directly for payment of their fees.

In cases of disputes concerning insurance contracts entered into in Mexico by insurance companies duly authorised by Mexican regulatory authorities, the appropriate jurisdiction for legal proceedings shall be the courts of Mexico.

Since insurance contracts are “adhesion contracts”, and in the event that the lawsuit is filed by the insured, the competent courts will be those chosen by the insured, even if the contract has indicated a different court.

Suing for the payment of an insurance indemnity must be carried out by means of an Oral Commercial Trial. A feature of such trials is that ordinary appeals (ie, appeals and/or revocations) are not admitted. Such trials consist of the following stages:

• The lawsuit is filed and evidence presented.
• The summons is issued.
• The insurer responds to the claim and presents their evidence within a stipulated period of nine business day.
• The judge notifies the plaintiff of the defendant’s response within three business days after the claim has been answered.
• Once the notification with the response to the claim has been served, the judge will set a date for the preliminary hearing, which must be held within the following ten business days.
• At the preliminary hearing, the following occurs:
1. The parties are urged to reach an agreement.
2. The undisputed facts are determined.
3. The determination of evidentiary issues takes place.
4. Qualification on the admissibility of evidence is decided.
5. Summons for the trial hearing, set within the following 40 days, is issued.
• At the trial hearing, the presentation of evidence and pleadings take place, and a judgment is issued.

A foreign judgment may be validly enforced in Mexico, provided that this is not contrary to Mexican public policy.

The requirements for enforcing a judgment issued abroad in Mexico are as follows:

• that the requirements set forth in the Federal Code of Civil Procedures regarding letters rogatory are complied with;
• that it is not a real action;
• that the judge had jurisdiction to hear and judge the matter;
• that the defendant was notified or summoned in person;
• that it has the character of res judicata; and
• that the action that gave rise to it is not the subject matter of a lawsuit that is pending between the same parties before a Mexican court and which a Mexican court has previously heard.

As a general rule, in any commercial contract containing an arbitration clause, such a clause is valid and enforceable.

Although it is true that the will of the parties is the supreme law of contracts in commercial matters, including insurance contracts, it is also true that this generic rule in commercial matters is not applicable to the submission agreement when the insured is submitted to the jurisdiction of an arbitration court.

This is because in insurance contracts the aim is to safeguard the rights of the user, and to ensure equity, certainty, and legal security in the relationship between the insurer and the insured. Based on these premises, the arbitration clause agreed in an insurance contract is not valid in the event of a dispute if it is agreed that it be settled through arbitration, and even more so if the place where the arbitration is to be carried out is different from the place where the insured has their usual place of residence.

Being an adhesion contract, its terms are non-negotiable. While the insured has the option to refrain from entering into the contract if they disagree with its stipulations, doing so would mean forgoing the insurance coverage they seek. This underscores that, to avail themselves of the desired insurance, consumers are compelled to subscribe to the adhesion contract on the terms presented and in accordance with the conditions imposed by the insurer.

In this context, it becomes evident that the insured party cannot contest what was stipulated in the contract. Consequently, there is no clear indication that the insured has explicitly expressed their will to submit to an arbitration clause.

Under Mexican law, arbitration awards can be validly enforced in Mexico, necessitating the involvement of the Mexican courts in commercial matters, be it at the local, state, or federal jurisdiction level.

Although Mexico is a party to the New York Convention for the enforcement of arbitration awards rendered abroad, its application is not usually very effective, and even the enforcement of an arbitration award in Mexico is usually at least as time-consuming as the arbitration proceeding itself.

The authority in charge and empowered to carry out a conciliatory procedure between the insured and the insurer is CONDUSEF, and it is also empowered to act as arbitrator.

Despite the existence of alternative justice centres in various states, operating under the jurisdiction of the Superior Courts of Justice, alternative dispute resolution is still little known and underutilised in Mexico. This is particularly true in insurance-related matters, where individuals commonly turn to CONDUSEF and/or the courts to assert and enforce their rights.

Under Mexican law, in the event that the insurers do not comply with the obligations assumed in the insurance contract within the established timeframes, they must pay the creditor an indemnity for late payment.

A recent decision by the Supreme Court of Justice in Mexico has established that courts have the authority to, ex officio (on their own initiative), order an insurance company to pay punitive damages to the insured. Even in situations where the insured has not explicitly claimed damages, if the judge determines that the insurer’s actions were negligent and deems additional punishment necessary, they may impose punitive damages. This precedent is crucial for insurance companies, highlighting the significance of adhering to their obligations and avoiding negligence in their dealings with policyholders.

When an insurer pays indemnity to the insured, it gains the right of subrogation, allowing it to step into the shoes of the insured and pursue all rights and actions against third parties responsible for the damage suffered, up to the amount paid.

The insurer may be released in whole or in part from its obligations if the subrogation is prevented by acts or omissions originating from the insured.

The right of subrogation does not apply in situations where the insured has a close relationship with the responsible party. This includes marital partners, blood relatives or family members by marriage up to the second degree, and individuals in a civil partnership with the responsible party.

The insurance sector in Mexico has witnessed a notable increase in the use of technological means, impacting various aspects such as distribution, marketing, and operational processes. This evolution has led to modifications in the legal framework governing insurance.

In 2018, the introduction of the “New Model” marked a significant development. This model utilises technological tools for the provision of insurance services in ways distinct from traditional methods existing at the time of the authorisation to operate. The authorisation granted under this model is temporary and is regulated by the Law to Regulate Financial Technology Institutions and Chapter 41.3 of the Sole Insurance and Bonding Circular.

To obtain authorisation under this model, companies must meet certain requirements, including:

• The proposed service must be delivered through controlled technological means that demonstrably benefit the client.
• The project must be in a pre-launch stage with immediate startup potential.
• The company must possess sufficient financial resources, insurance coverage, or other mechanisms to compensate clients for any losses incurred during the temporary authorisation period.

This framework allows for a one-year pilot programme, extendable by another year.

Moreover, Mexico’s insurtech landscape is flourishing. The establishment of the Asociacion Insurtech Mexico, and their estimation of at least 43 insurtech startups operating by 2021, are testaments to this thriving ecosystem.

In 2018, the Law to Regulate Financial Technology Institutions was issued, through which the services provided by financial institutions through technological means began to be regulated. For insurance matters, such law is also applicable in conjunction with the provisions of the Sole Insurance and Bonding Circular.

As stated in 10.1 Insurtech Developments, through these provisions, insurtech has begun to be regulated. The introduction of such provisions indicates a clear interest and commitment in Mexico to explore and address issues associated with technological advancements in the insurance sector.

While acknowledging that there is still progress to be made in the realm of insurtech, both legislators and the regulatory entity, the National Insurance and Bonding Commission, have shown a clear commitment to developing policies and provisions aimed at advancing insurtech issues in Mexico.

The insurance landscape in Mexico faces a dynamic array of risks that require attention and strategic planning. Firstly, the lingering effects of the COVID-19 pandemic underscore the significance of public health as a persistent risk. Secondary health consequences continue to emerge, and the insured population remains vulnerable to various health challenges. Outbreaks of diseases such as simian smallpox and infantile hepatitis further contribute to the complexity of public health risks.

Simultaneously, recent social and political events, including hacking incidents, underscore the growing threat of cyberattacks. Insurers must adapt to this vulnerability and develop robust cybersecurity frameworks, while factoring in potential contingencies arising from political matters, such as social movements oror even measures adopted by the government that may affect companies.

Finally, Mexico’s geographical location makes it prone to natural disasters like earthquakes and hurricanes. This necessitates robust catastrophe risk management strategies. Furthermore, the looming risk of climate change adds another layer of complexity, potentially amplifying existing threats and creating new ones across the country.

The impact of the COVID-19 pandemic has prompted noteworthy developments in the Mexican insurance sector. Initially, health insurance policies typically excluded coverage for pandemics or epidemics. However, many insurers deviated from these exclusions during the pandemic, choosing to cover related claims. These modifications to insurance contracts were duly recorded with the National Insurance and Bonding Commission. The regulatory authority further facilitated the adaptation of insurance products to include risks arising from COVID-19.

Mexican insurance companies have also increased the number of products that include political risks.

In recent years, the utilisation of parametric insurance, also known as index insurance, has gained traction. In Mexico this type of insurance is commonly used for natural disasters such as earthquakes and hurricanes. Parametric insurance is often used as a complement to traditional insurance, streamlining the claims process by reducing paperwork and enabling faster payments.

Legislation

In the last year the Sole Insurance and Bonding Circular has been modified with respect to the following:

• Insurance companies should assess the bonding reserve using the paid claims ratios calculated by the National Insurance and Bonding Commission.
• Insurance companies should set up a catastrophic risk reserve to ensure they have sufficient financial resources to effectively address and meet their obligations during catastrophic events.

Judicial Criteria

The highest courts in the country have also addressed significant insurance-related issues in recent rulings:

• The late payment interest provided for in Article 276 of the Law of Insurance and Bonding Institutions is constitutional and does not violate the rights of the insurer, since it is intended to prevent the insurers from defaulting by delaying the fulfilment of their obligations.
• Clarity has been provided on the interpretation of exclusion clauses in insurance contracts. Clauses excluding payment for damages caused intentionally and violently, stemming from unlawful acts, vandalism, or similar stipulations, are to be interpreted such that they apply only when the insured is the cause of the loss. Importantly, these exclusions do not apply if the loss is caused by third parties outside the contractual relationship.