David Lewin, Managing Director
On April 8, 2010, the Spanish Supreme Court handed down an interesting judgment regarding the simultaneous payment and claims control clauses inserted in the particular conditions of a direct insurance policy and in a reinsurance contract, respectively (JUR\2010\123412).
Reinsurance is lightly regulated in the Insurance Contract Act 1980 (ICA) as a type of casualty insurance. Only three articles deal with reinsurance. Pursuant to the definition contained in Section 77 of ICA, by the contract of reinsurance, the reinsurer undertakes to indemnify the reinsured within the limits set forth in the law and the contract in the amount of the debt that the reinsured has incurred as a consequence of the obligation accepted by the latter in an insurance contract.
Under ICA, the reinsurer is clearly a third party to the insurance contract and thus to the insured. The insured is neither concerned by any arrangements and/or agreements made between the insurer and other insurers/reinsurers (Section 77 of ICA). The insured is not given the ability to sue the reinsurer directly (Section 78 of ICA).
Currently, ICA does not make any reference to simultaneous payment and claims control clauses, nor to others such as cut-through and insolvency clauses that are found in reinsurance contracts, although they have been controversial in the Spanish market.
Spanish case law in reinsurance matters is very scarce. The case law that does exist focuses mainly on the legal autonomy between the underlying insurance contract and the reinsurance contract from the perspective of the insured, who has no right of action against the reinsurer.
Background of the Case
Musini, a local insurer, was sued by Real Sociedad, a football club, which claimed the indemnity agreed to under a policy afforded protection to Real Sociedad in the events of death and/or disability of its players. The policy excluded any pre-existing health condition of the players under the terms described therein. The policy also gave the control of claims to the reinsurers. Musini retained two percent of the risk and ceded the remainder to Lloyd’s and London market reinsurers. One of the players was declared physically disabled for the practice of the game and Real Sociedad claimed the agreed indemnity in the amount of EUR3.6 million. Musini denied the claim based on the pre-existing health condition exclusion.
Musini based its defense in court on three main arguments: firstly, the pre-existing health condition exclusion; secondly, that it had merely fronted for the foreign reinsurers and retained a very small portion of the risk, hence, it was not a contract of reinsurance but of coinsurance; and lastly, that Real Sociedad had accepted a simultaneous payment clause whereby the insurer was bound to pay on or after it had been paid in turn by the reinsurers. In Musini’s view, this last point strengthened its argument that this was a coinsurance and not a reinsurance arrangement. In line with this strategy, Musini raised a procedural defense arguing that the case could only be adjudicated if reinsurers were brought into the proceedings.
The Court of First Instance dismissed all three arguments and the procedural defense and ordered Musini to pay the agreed indemnity plus punitive interest and costs. Both the Court of Appeal (1) and the Supreme Court dismissed the successive appeals lodged by Musini and confirmed the first judgment. (2)
Musini’s defense was dismissed on the following grounds:
- The injury sustained by the player was found to differ from the one suffered before he was incorporated into the policy taken out by Real Sociedad. Consequently, the pre-existing health condition exclusion was not applicable.
- The contract entered into between Musini and the foreign reinsurers was not a coinsurance arrangement but a reinsurance contract proper. The courts reached that conclusion after a detailed analysis of both types of contracts.
- The simultaneous payment clause was not valid since it was not singled out in the particular conditions of the policy and accepted explicitly by the insured as required by Article 3 of ICA. In Article 14 of the general conditions, the explicit acceptance of any limitative terms was referred solely to the special conditions of the policy but not to the particular conditions of the policy where the clause was inserted.
- Further, the court questioned the validity of the clause even if it was singled out and accepted explicitly by the insured. Even if the contract involved a large risk – in which case such clause could have been valid since the parties to an insurance contract involving a large risk are free to depart from the otherwise mandatory
provisions of ICA – Musini did not prove that it was in fact a large risk as defined in ICA.
- The claims control clause inserted in the reinsurance contract only bound the reinsured and the reinsurers but not the insured. Further, even if such clause would have been inserted in the direct insurance contract, it would not be admissible to release the direct insurer from its obligations under the policy and the law pursuant to the mandatory provisions of ICA. Therefore, the insurer could not raise this clause to release itself from the “rigorous” rules that required it to settle the claim adequately and swiftly.
These judgments allow observers to reach some interesting conclusions, both explicit and implicit:
- A simultaneous payment clause, even if singled out and accepted explicitly in the direct insurance contract by the insured, may not be valid. The direct insurer cannot rely on this clause to oppose or delay payment of the claim. However, it may be valid if the insurance contract refers to a large risk, provided the parties have specified this circumstance in the contract.
- A claims control clause inserted in a reinsurance contract is valid. The insurer, however, cannot rely on it, even if accepted by the insured, to release itself from obligations under the insurance contract to settle the claim fairly and quickly. It is unclear if it would be admissible in the event that the insurance involved a large risk.
1. Decision of the Audiencia Provincial of Guipúzcoa of November 15, 2005 (JUR\2006\66548).
2. Please note that the remedy at the Supreme Court is not technically an appeal but a cassation recourse;
“appeal” is used here for explanatory purposes.
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