Financial Crisis: Impact on Casualty Insurance
Claims under credit insurance policies have increased dramatically to the point that it is difficult — if not impossible — to purchase cover in the reinsurance market. For this reason, the Spanish government has authorized the Consorcio de Compensación de Seguros (CCS), a Government-owned insurance entity in charge of compensating carriers for extraordinary risks, to reinsure credit and bond risks covered by local insurers. This demonstrates clearly how seriously the credit crunch has affected trade and real estate business — and consequently the related insurance lines.
The collapse of the real estate market has led to an exponential increase in mortgage foreclosures. Banks now hold thousands of properties. This has compelled banks to review property values … and in turn has triggered claims against valuation service providers. Mortgage lending is legally limited to 80 percent of a property value, although it may be increased to 95 percent if guarantees are provided. Valuations are required from the so-called “valuation societies,” which are regulated and supervised by the Bank of Spain. Valuation societies are required to insure their professional liability with authorized insurance companies, at all times keeping an insured sum of EUR600,000 plus 0.5 percent of the properties valued the preceding year — up to a limit of EUR2.4 million.
Banks are claiming against the valuers’ policies for incorrect — even inflated — valuations used to support loans. In Spain, injured third parties may bring a direct action against the civil liability insurer. Some insurers are resisting these claims on the basis that the valuations were fraudulent and therefore that the bad faith exclusion applies. The outcome of these claims is uncertain but it is likely that a court would endorse the insurers’ position if fraud is proved.
Another significant concern is the potential liability of directors, which may trigger claims under directors and officers (D&O) policies. This is particularly relevant in the context of insolvencies, especially for real estate promoters and developers. From a corporate standpoint, directors may be jointly and severally liable if the company should be closed as set forth by the law and if they fail to convene the shareholders to discuss the dissolution. Liability extends to debts incurred after the cause for dissolution arose. Under certain circumstances the court must qualify the insolvency as fortuitous or guilty. If the insolvency is found to be guilty the court must characterize the actual position of the individuals involved and can order a series of measures — including the forfeiture of any rights directors may have as creditors, payment of any shortfall of creditors’ rights, return of any assets obtained unlawfully, and suppression or reduction of any golden parachutes.
Until November 2005 directors were liable for all existing corporate debts if they failed to convene the shareholders — even if losses pre-dated the cause for dissolution. From that date, they are only liable for debts incurred after the cause for dissolution arose. Also, companies can exclude 2008 and 2009 losses caused by the deterioration of certain balance sheet items (e.g., fixed assets, real estate investments, and stocks) for the purposes of calculating the loss of equity and therefore the need to convene the shareholders in order to decide about the winding-up of the company.
Legal Developments and Case Law
Several laws have been enacted which intend to deal with the financial crisis, among others, the authority to reinsure credit and bond risks given to the CCS and the temporary exclusion of certain losses for the calculation of equity impairment mentioned above.
Likewise, recent case law has clarified (or confirmed): (i) when it is justified for an insurer to delay payment of the relevant indemnity and (ii) causation in the context of auditors’ liability.
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