October 7th, 2010

Continental European Legislative and Judicial Trends: The Supreme Court Rules on the Initial and Final Date for the Calculation of the Special Default Interest in Spain

Posted at 1:00 AM ET

2010_legislative_thumb-2David Lewin, Managing Director
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In previous issues of this publication in 2008 and 2009 we dealt with the punitive interest that insurers must pay if they delay the settlement of claims without justified cause pursuant to the provisions of Section 20 of the Spanish Insurance Contract Act 1980 (ICA). On those occasions, we advised that the Spanish Supreme Court had fixed the method to calculate it and provided certain guidelines for ascertaining when an insurer’s delay in settling claims may be justified.

In a decision dated April 9, 2010 (JUR\2010\131423), the Supreme Court has clarified the starting and final dates for the calculation of the default interest rate.

Background
During a cycling race one of the participants ran over a worker in charge of pointing out road detours to the cyclists. The worker fell to the ground, hit his head and died. The accident took place on August 10, 1999. His widow, acting on behalf and representation of his children, sued both the organizer of the race and the third party liability insurer.

Court Decisions
The First Instance Court found in favor of the claimant, ordering the organizer of the race and the insurer to pay jointly and severally a certain compensation. The Court also ordered the insurer to pay the special default interest accrued from the date of the loss (August 10, 1999) until the date of the deposit in the Court’s bank account of the amount of payment the insurer considered appropriate under the circumstances known to it (May 7, 2002).

The claimant, the insurer and the organizer of the race appealed. For purposes of this commentary, we will just refer to the positions sustained by the claimant and the insurer in respect of which should be the initial and final dates for the calculation of the default interest.

The Court of Appeal (Audiencia Provincial of Madrid) dismissed the insurer’s appeal and confirmed that the special default interest was to be paid from the date of the loss (the accident) as the insurer had not proved, according to Section
20.6 of ICA, that it was not aware of the loss before the third party’s claim reached it. This section provides that where the injured third party or his heirs are concerned, the default interest accrues from the date of loss, save that the insurer proves that he was not aware of the loss before the claim was reported or the direct action, which injured third parties may bring against insurers, was filed in court. In these events, the default interest will accrue from the date of the claim or the filing of the direct action in court. Obviously this nuance can mean a significant difference in the amount to be paid, particularly if two years have elapsed and the insurer is ordered to pay interest at the rate of 20 percent per annum. The Court dismissed the insurer’s alleged ignorance of the accident on the basis that the race had been broadcast on television in the course of which the images of the accident had been shown.

The Court of Appeal also held that the final day cannot be the date of the deposit in the Court’s bank account of the amount that the insurer considered appropriate to pay under the circumstances because it did not express its intent to pay.

Accordingly, the Court partially reversed the First Instance Court decision and ruled that the final day for the calculation of the special default interest rate is the date on which the insurer effectively pays to the claimant the compensation awarded by the First Instance Court.

The insurer appealed to the Supreme Court arguing, in summary, (i) that the TV broadcasting of the cycling race did not prove that it had actual knowledge of the loss and, (ii) that the special default interest should accrue from the date of the notification of the claim, when it knew for the first time about the loss, while the final term shall be the date of the deposit.

The Supreme Court dismissed the appeal. The Court first established that the insurer’s knowledge of the circumstances and consequences of the loss may come from the information provided by the third party or by the insured or from its own sources. Based on Section 20.6 of ICA, the Court rejected the insurer’s arguments and ruled that the insurer cannot expect that the default interest will accrue from the date of claim when it has not proved that it had no knowledge of the loss prior to the claim. This is the only event, continues the Court, in which the default interest will not accrue from the date of loss.
Further, the Supreme Court declared that the insurer was in default because it did not pay the full indemnity within three months from the loss, nor did it pay within 40 days of notification of the loss at least the minimum amount it understood it had to pay under the circumstances known to it as required by Section 18 of ICA. The Court also confirmed that the final day for the calculation of the default interest cannot be the date of the deposit because the insurer did not express its intent to pay.

It is clear from this judgment that the insurer will face substantial difficulties in proving that it did not have knowledge of the loss prior to the claim or the court action. This is a sort of probatio diabolica which consequences insurers must consider carefully when dealing with a loss.

Amendment of the Spanish Accounts Audit Act
In our report published in April of 2010, we referred to the potential impact on professional indemnity policies of the Draft Bill on the amendment of the Spanish Accounts Audit Act (AAA). At the time we said that one of the most significant proposed changes was the introduction of a new paragraph 2 in Section 11 of the AAA concerning the limitation of the civil liability of statutory auditors and audit firms. The proposed reform provided that both the auditor and the audit firm would only be jointly and severally liable where the cause of the damage could not be individualized or the degree of contribution to the harmful result of the agents involved could not be established precisely.

During the legislative process several amendments to the Draft Bill were included, among others, the suppression of the joint and several liability rule in Section 11.2, being its final wording as follows: “The liability of auditors and audit firms shall be enforceable in proportion to the direct liability for the damages and loss of profits they could cause by their professional activity. The liability of an auditor or of the audit firm shall be enforceable on a personal and individualized basis, excluding any damage caused by the audited company itself or a third party.”

Law 12/2010 of June 30, amending the Accounts Audit Act (approved by Law 19/1988 of July 12), was published on July 1, 2010, and took effect on July 2, 2010.

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