News

Spanish Courts Rule on Late Payment Penalties

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The Civil Division of the Spanish Supreme Court has handed down a significant ruling intended to harmonise the approach of the Spanish courts in respect of the rate at which interest penalties are payable by insurers on the late payment of claims.

In Spain, as is the case in many European jurisdictions, the insured (or a prejudiced third party) is entitled to claim interest for delay if the insurer fails to pay the indemnity within the period provided for in the local mandatory law or under the terms of the policy.

In short, Rule 4 of Article 20 of the Spanish Insurance Contracts Act ("LCS") provides that penalty interest will be payable at the Spanish annual official rate (5% for the year 2007) increased by 50% (i.e. to 7.5%). However, in contrast with other European systems, when two years have elapsed from the date of loss without payment having been made, the annual penalty interest rate will be at least 20%. This is a mandatory rule of Spanish law and will be applied by a Spanish court of its own motion.

Rule 8 of Article 20 of the LCS provides that penalty interest will not be imposed on the insurer when the delay is duly justified (e.g. the cause of the loss or the identity of the party to be indemnified are not clear) or if it is not attributable to the insurer. However, in practice Spanish courts tend to find that delay is not justified and therefore that the insurer must pay penalty interest.

Article 20 of the LCS has been heavily criticised in the insurance sector for the excessive and disproportionate rate of 20%, for its lack of consistency with the economic reality of modern times and for its singularity and lack of equivalence in any other European legal system.

In addition, the drafting of Rule 4 of Article 20 is ambiguous regarding the interest rates prevailing during the first two years from the date of loss. Shortly after the rule came into force two judicial interpretations arose which were radically different in their consequences for insurers:

  1. According to the first interpretation, for the two year period immediately after the loss, annual interest is equal to the Spanish official rate increased by 50%. From the third year after the loss, and only from that date, an interest rate of at least 20% would apply.
  2. According to the second interpretation, once two years from the date of loss has passed, a minimum rate of 20% would apply retroactively from the date of loss for the whole of the initial two year period.

    The second interpretation clearly implied an increase of 25% on the total cost of the loss inc urred by the insurer (i.e. (20% - 7.5%) x 2 years = 25%).

    This lack of clarity regarding the interpretation of Article 20 resulted in contradictory judgments and consequently gave rise to circumstances of legal uncertainty for insurers.
    Conscious of this situation, on 1 March 2007 the Supreme Court ruled that the first interpretation would have judicial effect (i.e. the 20% rate would not apply from the date of loss but from the third year from the date of loss).

    This news is particularly welcome, as it should lead to a significant reduction in the cost of many claims and more generally is indicative of a better understanding by the Supreme Court of the position of insurers. In this context the approach adopted by the Supreme Court is a first step towards a more equitable future regulation of penalty interest in Spain.

EU Issue 5th Directive on Motor Insurance

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The 5th EU Directive on Motor Insurance came was implemented in Spain and Portugal on 11 June 2007. Unlike the 4th Directive, the draft 5th EU Directive on Motor Insurance does not have a single aim; it covers a range of topics and set out below is a list relevant to claims management:

Compensation for victims where vehicles have false or no registration plates

Prior to the 5th Directive, responsibility for dealing with the "uninsured claim" rested on the state bureau of the country which originally validly registered the vehicle. Article 1 now passes responsibility to the Bureau of the country in which the accident takes place.

Increases the minimum  cover for third party personal injury claims and property damage 

A minimum amount of cover of EUR 1 000 000 per victim or EUR 5 000 000 per claim, regardless of the number of victims.

Claims are now to be allowed for property damage in cases of unidentified vehicles causing significant personal injury

This applies to cases where no registration number has been supplied, so no FIVA or MID search would be carried out

Insurance of passengers taking lifts who know the driver was "under the influence" of alcohol or drugs

This provides that the insurer cannot as a mater of contract exclude indemnity for such claims per se but it leaves the issue of liability squarely to domestic law ie based on negligence and contributory negligence.

Liability towards pedestrians and cyclists

This provision is intended to ensure that pedestrians and cyclists always have a right to seek compensation from the insurer in the event of an accident, but does not guarantee it, if, for example they are wholly liable themselves. 

Insurance of vehicles taken overseas

This provision clarifies the fact that insurance for extended stays abroad is available under a normal domestic policy, as long as the vehicle is not “normally based” abroad.

Right to demand statement of previous insurance claims

Policyholders will be able to ask their insurers for a statement of previous claims when changing to another insurer. The insurer will have 15 days to comply.

Injured party may sue liable Insurer in the victim's home Court

It is understood that Article 24 states that the injured victim of an accident occurring overseas may sue the liable insurer (and in such proceedings the policyholder or insured as additional Defendants) in the Claimant's Home Country court. It means for example a Spanish resident injured in an accident whilst in the UK can sue in the Spanish Courts. There is nothing in the Directive itself regarding whether the UK Courts should apply "English Procedure" when quantifying damages or awarding legal costs or deciding limitation issues.

Insurer to give Reasoned Response to a third party claim within 3 month

This extends existing provisions under the 4th Directive which currently only apply to "cross border" accident claims. Injured parties should receive a reasoned offer of compensation or reasoned reply to the points raised in their claim from the insurer or their claims representative within three months of presenting their claim, and where this requirement is not met, interest shall be payable on the amount of compensation offered or awarded.

The full version of the 5th EU Motor Insurance Directive is now available.