October 8th, 2009

Continental European Legal Update: When is the Late Payment of Insurance Claims Justified in Spain?

Posted at 12:15 AM ET

recentlegislationDavid Lewin, Managing Director

In the previous issue of Recent Legislative and Judicial Developments in Continental Europe Affecting the Casualty Insurance Industry (Fall 2008), we dealt with the punitive interest that insurers must pay if a delay in settling claims is unjustified. At the time, we said that the Supreme Court had fixed certain guidelines for ascertaining when an insurer’s delay may be deemed justified. Since then, the Supreme Court has had the chance to address the issue on various occasions, the last in April 2009, and the guidelines may now be regarded as consistent doctrine.

By way of review, an insurer is liable for any delay in settling a claim that exceeds the time limits established by the Insurance Contract Act of 1980. Failure to pay will result in the levying of a special interest rate, which is punitive in nature as it is unrelated to the actual market cost of money. The amount of the special interest rate is calculated at 150 percent of the annual legal interest rate for each of the first two years payment is in arrears, and at no less than 20 percent each year thereafter. To be released from paying punitive interest, the insurer must prove that there were justified causes that prevented a more timely settlement of the insured’s claim.

The criteria and guidelines set forth by the recent judgments of the Supreme Court1 can be summarized as follows:

  • The special interest rate is punitive in nature to encourage the quick settlement of claims. Consequently, the date of accrual is the date of loss, not of the judgment or any other date.
  • Fault of the insurer is required; hence, this liability is not strict.
  • Whether the delay in settling the claim is justified is a factual question to be resolved on a case-by-case basis.
  • The delay is justified - and, therefore, the insurer will not be held liable to pay the punitive interest - if the discussion is centered not so much on the exact amount of the indemnity as on the coverage of the loss, provided there are sound reasons to question it.
  • Discussion about the amount of the indemnity can also justify the delay, although in this case, the criteria for such a justification are much more limited, and rarely will the questioning of the amount release the insurer. This is because, firstly, the insurer must pay within a certain very tight timetable what he believes to be the minimum amount to be paid, and secondly, because the mere illiquidity of the indemnity is no longer a valid reason to delay payment.
  • It follows that the sheer existence of a judicial controversy wherein the insurer acts as a claimant or defendant does not per se justify the delay in settling the claim.

In a recent case, the defense lawyer based his strategy on the incorrect notion that the illiquidity of the indemnity would release the insurer from paying the punitive interest, and thus, exhausted all alternatives in the expectation of tiring the claimant and reaching a convenient settlement. As a result the insurer had to pay a staggering amount of interest.

Auditors’ Liability

The market is following attentively the ongoing discussions between the government, the auditors’ supervisory authority, and the different auditors’ associations. At the top of the agenda is the auditors’ liability, which under the current law is unlimited.

Needless to say, a consensus to limit auditors’ liability may have a substantial impact on errors and omissions (E&O) policies and broader attitudes regarding litigation against auditors.

Finally, recent judgments from the Supreme Court have also laid down causation criteria in liability cases involving auditors. Hopefully, this topic will be dealt with in a following issue.

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  1. Decisions of July 1, 2008 (RJ 20083318); October 16, 2008 (RJ 20085694); February 12, 2009 (RJ 20091288); and April 6, 2009 (RJ 20091760).
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