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By Hermès Marangos, Partner at Signature Litigation

Arguably the unspoken reality in various markets worldwide and certainly in Latin America is the abandonment of the law as a guiding principle so the main challenge is dealing with the challenge to the rules themselves.

Of course, following the scandals in Petrobras, Odebrecht et al, the legal fraternity should be more courageous in highlighting important legal parameters in the industry, since ignoring them not only leads to there being no terms of reference to conduct business in the long-term but also there may be criminal ramifications, something that should concentrate the mind.

The issues are numerous and the historical problems with refusing to abide by claims protocols and maintenance obligations and follow the settlements terms have not gone away.  We have seen in recent years, many parties feeling confident to act with greater impunity even if they fail in their obligations.  We have seen arguments that there are no laws or sanctions locally for failing to comply with one’s substantive obligations but actually this is normally not true.  It may be that for example Colombian or Mexican law does not use the same route to establish a fundamental failure or bad faith but the results can be just as strict.  The problem is that instead of looking to legal guidance or resolution, which can put parties back on the right track in the long term, matters remain on the boil with most disputes ignored, until it is too late.

A few recent matters of concern, mostly in Latin America, are the following:

Punitive damages masquerading as moral damages:  although the former are clearly excluded in many contracts, as they do not tend to be allowed in Latin American regimes, these are not dealt with in many policies.  However, we clearly see a tendency for such claims to be increasing, sometimes to higher levels than some of the United States.

Legal Expenses not being applied to erode insurance covers:        the corollary to this is to request for legal expenses and disbursements when these are not covered or provided for.

Penalties masquerading as settlements:  We continue to see regulator related investigations, especially in the construction industry, producing quick deals that involve payments, which find themselves as payment requests to reinsurers.

Lack of transparency in infrastructure deals and subsequent adjustments:  independent forensic experts are less relied on even in major engineering projects, which leads to formation of contracts that would fail due diligence tests (or obligations to protect state assets a la “patrimonio del estado” provisions) and quantification of claims that may not satisfy traditional proofs of loss.  This, added to inadequate fronting arrangements, could lead to major reinsurance disputes but sometimes do not, but only because those higher up in the chain do not question or undertake full forensic and quantity surveying reports.

Endorsements on long term projects and agency issues:    Agency rules are hammered into you as an English barrister/solicitor as they are also important in identifying responsibility in international contracts and hugely helpful when one has to deal with big parties via brokers.  Partly as a result of cedants not having a defence or monitoring capability, matters are left by agreement in the hands of their brokers but with the cedants then denouncing their brokers and refusing to accept their agency.  Dealing via a broker due to an agreed modus operandi may still lead to an insured refusing to abide by their obligations.

Claims protocols and the role of leaders and dispute resolution:      it is best not to single out any particular jurisdiction but it should be noted that developments in common and civil law mean that the two regimes are not as distant as various parties wish to claim.  In fact the reason why numerous regimes, turn to English law and jurisdiction, is because English law in fact equips itself with rules and provisions which are exactly apt to protect the parties, even when in a multiparty arrangement, most if not all of the parties may not be English.  It is no surprise that well over 80% of litigants in our higher courts are non English.

The convergence in systems makes it even more surprising that practices are followed which in fact do not conform with the legal position, for example in relation to “leader clauses” during a legal dispute.  Parties sometimes operate under a questionable “assumption” that they can bind others.  Similarly, there are countries which fail to enforce arbitration provisions or dispute resolution obligations, on the basis that local “applicable” obligations require that.

Observing the legal road map

Perhaps as a result of a soft market or a tacit understanding, the rules governing the operation of contracts, including in areas where there is moral hazard, are not strictly observed.  The dangers are numerous, once more looking at recent cases in Brazil and across Latin America on third party liability, intellectual property and white collar crime allegations, which in turn lead to some risks becoming uninsurable.  Brokers have already been convicted or fined for failing to observe anti-bribery and money laundering obligations.

A further real danger is that the market is opening itself up to labour, tax and accounting problems every time an insurance arrangement does not take the full obligations into account (in liability contracts this is obvious since ignoring for example the risks of building or pollution codes can lead to exposure with insufficient premium having been charged for it).  Insufficient loss adjustments or forensic investigations also mean that payments which are designed to avoid disputes could in fact create a different dispute involving inadequate steps to protect shareholder value.

One can see that even the above examples which by necessity can only talk in generalities, are of concern.  Surplus lines covers, which are critically needed for infrastructure programmes in many markets and crucial to banking arrangements (funds may not be released without reinsurance) in the long-term have to employ the law and account for legal exposures as the only way to sustain business and rate it properly.

Market overcapacity does not mean that legal obligations no longer exist.  Crucially, erosion in agreements means jurisprudence may lose its efficacy, with the danger that proper market practices may become ineffective.

By way of anecdote, an extreme example of the absurdity of ignoring the law was a recent assertion in relation to “W.P.” negotiations that there is now legal support for the view that “W.P.” in fact could also mean “With Prejudice”, thus introducing a new dimension to the saying that anything goes –  when the rule of law is thrown out of the window, that is.

This article was originally published in Insurance Day and can be found here.