Chilean insurance and reinsurance companies can be stock corporations as long as they provide these services only and comply with the special regulations established in the Chilean Corporations Act (companies subject to special regulations).2
The sale of insurance in Chile can be made by a general insurance company (first group) or a life insurance company (second group). The former covers the risk of loss or damage of goods or patrimony. Life insurance companies, on the other hand, cover risks of persons or guarantee, within or upon termination of a certain term, capital, a paid-off policy or a rent for the insured party or its beneficiaries. Exceptionally, personal risk and health can be covered by both types of companies. Risks related to credit can only be insured by general insurance companies having the sole purpose of covering this type of risk, which could also cover surety and fidelity.
Anyone is free to take out insurance in Chile. Taking out insurance abroad is not forbidden, but insured parties are subject to the legislation governing international charges and taxation.3 Insurance and reinsurance companies are allowed to underwrite risks arising abroad. Contracting insurance policies with foreign companies not established in Chile are subject to the same taxes applied to the insurance policies signed locally, notwithstanding other applicable taxes.
As regards reinsurance, this can be contracted with the following entities:
- national corporations whose exclusive scope of business is reinsurance;
- national insurance companies, which can only reinsure risks from the group they are authorised to operate; and
- foreign reinsurance entities, which are classified by risk-classification agencies approved by the regulator, the Commission for the Financial Market (CMF), and ranked at least within the BBB risk category or its equivalent.4
Reinsurance can be provided to the above-mentioned entities either directly or through reinsurance brokers registered in the Registry of Reinsurance Foreign Brokers Registry, which is managed by the CMF.
The foreign entities in (c) above must designate an attorney with broad powers to act on their behalf in Chile, including the power to serve court proceedings. However, it is not necessary to designate an attorney if the reinsurance is made through a reinsurance broker registered with the CMF who is deemed to represent the foreign reinsurance underwriters of the reinsurance contract for all legal purposes.
i The insurance regulator
In Chile, the CMF supervises the solvency and operations of insurance and reinsurance companies, brokers and loss adjusters, and has the power to request balance sheets, financial statements and portfolio information. In addition, the CMF issues general rules relating to intermediation, underwriting, adjustment and policy contracts, which are compulsory for all the companies under its supervision.
ii Position of non-admitted insurers
Foreign insurers that are incorporated in a country that is a party to a free trade agreement (FTA) with Chile may offer and sell direct insurance cover in Chile relating to international marine transportation, international commercial aviation and cargo in international transit as far as is allowed by the FTA, and provided that they comply with all the requirements set forth under the FTA and domestic law.
In addition, in June 2007, Decree No. 251 (DFL 251) was amended to allow companies incorporated abroad to establish branch offices in Chile. These branch offices are subject to the general procedure provided by the Corporations Act for the incorporation of agencies of foreign companies, and must obtain authorisation from the CMF.5 In addition, the branch offices must prove to the CMF that they comply with all requirements established for the authorisation of insurance companies, and need to follow further publication and registration formalities.
iii Requirements for authorisation
There are no requirements or restrictions regarding the financing of the acquisition of an insurance or reinsurance company. In addition, there are no specific requirements or restrictions concerning investment in an insurance or reinsurance company by foreign citizens or companies or foreign governments, except for general provisions relating to foreign investment.
The minimum capital required to be held by a Chilean insurance company is 90,000 Chilean indexation units (UF). In the case of Chilean reinsurance companies, this is 120,000 UF.
To meet the obligations of underwriting insurance and reinsurance business, Chilean-regulated insurers and reinsurers must establish technical reserves in accordance with the current principles, procedures, mortality charts, interest rates and other technical parameters within the time limit and in the format established by the CMF through general rules.
iv Position of brokers
Brokers are regulated under the Regulations Applicable to Insurance Industry Officers (Supreme Decree 1055-2013),6 which regulate the activities of both insurance brokers and adjusters.
v Regulation of individuals employed by insurers
In general, directors of insurance and reinsurance companies must be at least 18 years old and comply with the general requirements that operate in Chile for stock corporations, namely:
- not being a member of a board of directors that was revoked owing to rejection of the company's balance sheet by shareholders;
- not being accused of or charged with the criminal offences indicated in the Corporations Act;
- not being a governmental officer or executive for a state-owned company that exercises supervision or control functions; and
- not holding a public position, which applies to members of Congress, government ministers or undersecretaries, chiefs of public services, CMF employees and stock brokers.
Notwithstanding the above, there are further requirements for directors and officers of companies in the life insurance sector.
vi The distribution of products
Insurance products must be sold mainly in accordance with the CMF regulations and the Consumer Protection Act.
vii Compulsory insurance
Some areas of compulsory insurance cover in Chile are motor liability, employers' liability for occupational accidents and diseases, and brokers' errors and omissions. In addition, Decree-Law 3500 of 1980, which regulates the Chilean pension system, also establishes a compulsory insurance in connection, inter alia, with disability and social security life annuity to be contracted jointly by all the companies authorised to manage the pension funds covering.
III INSURANCE AND REINSURANCE LAW
i Sources of law
The legislative framework applicable to insurance and reinsurance is constructed from various regulations and laws:
- Title VIII of Book II of the Code of Commerce, called 'About Insurance in General and in Particular about Non-marine Insurance' (Article 512 et seq.);
- Title VII of Book III of the Code of Commerce, called 'About Marine Insurance' (Article 1158 et seq.);
- DFL 251, which regulates insurance companies;
- Supreme Decree 1055-2013;
- resolutions issued by the CMF (and previous resolutions issued by the Securities and Insurance Superintendency (SVS)); and
- the general provisions relating to the interpretation of contracts that are found in the Civil Code (Articles 1560 et seq.).
The provisions on general and non-marine insurance contained in the Code of Commerce were enacted almost 140 years ago and have not been revised since, despite numerous industry developments. However, on 9 May 2013, a new law was enacted (Law 20,667 (the New Insurance Law)), which replaced all the former non-marine provisions (contained in Title VIII of Book II of the Code of Commerce) so that Chilean insurance law can finally be updated in line with current trends and market practice. The New Insurance Law also changed certain provisions on marine insurance (contained in Title VII of Book III of the Code of Commerce) and introduced a couple of amendments in DFL 251. The New Insurance Law entered into force in December 2013.
ii Making the contract
Essential ingredients of an insurance contract
Under the New Insurance Law, an insurance contract is an agreement whereby one or more risks are transferred to an insurer, in exchange for a premium, who becomes obliged to indemnify the damage suffered by the insured or to satisfy capital, income or other agreed provisions.
The essential ingredients of an insurance contract are the insured risk, the insurance premium and the insurer's conditional obligation to indemnify. The absence of any of these ingredients renders the contract void.
In addition, the New Insurance Law defines reinsurance as an agreement whereby the reinsurer undertakes to indemnify the reinsured within the limits and modalities set forth in the agreement, for liability affecting its patrimony as a consequence of the obligations it has undertaken in one or more insurance or reinsurance contracts. For construing the will of the parties, the New Insurance Law takes into account international reinsurance practice.
Utmost good faith, disclosure and representations
Chilean law recognises the concept of utmost good faith, and the insured must respond to an insurer's request for information about a risk by honestly disclosing the information requested to allow insurers to identify the object of the insurance and assess the nature of the risk. For these purposes, it suffices that the insured reports exclusively as per the above-mentioned insurer's request.
If the insured provides information that is false, the insurer can avoid the policy and return the premium. The insured must also disclose circumstances that increase the risk during the policy period.
That said, if the insurer fails to request information at the placement stage, the insurer may not then allege any errors, reticence or inaccuracies by the insured, as well as those facts or circumstances that are not included in the request for information.
Recording the contract
Pursuant to the New Insurance Law, the execution of an insurance contract is consensual, and its terms and existence can be proved by all legal means of proof, including but not limited to electronic documents, provided that there is prima facie written evidence arising from a document. In this respect, the insurance policy is defined as the document that justifies the insurance, and once issued, the insurer cannot challenge its terms.
iii Interpreting the contract
General rules of interpretation
As stated in subsection III.i, above, insurance and reinsurance contracts are subject not only to the Code of Commerce, but also to the general provisions relating to the interpretation of contracts in the Civil Code (Article 1560 et seq.) plus certain provisions contained in DFL 251.
The Chilean position can be broadly summarised as follows.
- The provisions of the New Insurance Law are in general mandatory, unless stated to the contrary. However, if a clause is deemed to provide an insured with a greater benefit than is provided under the law generally, the specific terms of a policy will prevail over the Code of Commerce.
- Chilean law considers it of paramount importance to determine the intentions of the parties at the time of contracting and to give effect to those intentions even if they are not reflected in the literal words of the contract.
- A Chilean tribunal will strive to facilitate clauses in contracts with the goal of ensuring that the parties' intentions are fulfilled. Actions can include amending the contract if no provision is made for a given state of affairs.
- Under Chilean law, it is permissible for a tribunal to ascertain the parties' intention by looking outside the contract at, for example, the negotiations between the parties and market practice at the date of contracting.
- In the event of ambiguity in a policy, the interpretation that is more favourable to the insured prevails. Given that DFL 251 Article 3 (E) Paragraph 3 specifically imposes a duty on the insurer to make sure that the wording is clear and understandable, this presumably remains the position even if the insured or the broker has drafted the wording, or if the wording is the result of negotiation between the insurer and insured.
Incorporation of terms
Insurance and reinsurance companies must word their contracts using the models of policies and clauses in the Register of Policies of the CMF. Exceptionally, they are able to use non-registered models when this relates to general insurance, where the insured or the beneficiary are legal entities, and when the annual premium is higher than 200 UF. In addition, non-registered models can also be used for cargo, transport, marine or aircraft hulls, or related insurances.
As regards reinsurers, they are subject to the principle of freedom of contract with a few mandatory restrictions, such as the fact that the reinsurer cannot alter the terms of the insurance contract and that fund provision clauses are not enforceable. Direct actions of the insured against the reinsurer are not valid unless otherwise agreed in the reinsurance contract or as per an assignment of rights after the loss from the reinsured to the insured.
Types of terms in insurance contracts
Under Chilean regulations, insurance policies must contain the following basic provisions and information:
- identity of the insurer, insured and beneficiary (if applicable);
- insured matter;
- insurable interests;
- risks taken by the insurer;
- policy period;
- insured amount;
- value of the insured matter;
- policy date and the insurer's signature; and
- the insured's signature when mandatory by law.
An insurance warranty is defined as 'the requirements aiming to confine or decrease the risk, which are stipulated in the insurance contract as conditions that must be met to allow payment of an indemnity after a loss'.7
In Chile, conditions precedent are not regulated. However, the insurer or reinsurer can achieve similar effects if they are treated as essential conditions of the contract, which are defined by the Civil Code as those without which the contract does not produce effects at all or degenerates into a different contract.
iv Intermediaries and the role of the broker
Chilean law regulates the activities of insurance and reinsurance brokers, sales agents of insurers and loss adjusters. Their main licensing requirements can be summarised as follows.
To act as a sales agent, the person or entity in question must first be registered in the special sales agent registry that will be kept by each insurer, which will contain certain minimum information required by Chilean regulations.
Insurance brokers are defined as natural persons or legal entities who have been registered as such with the CMF and who act as independent intermediaries in the contracting of insurance policies with any insurer.
According to Chilean regulations, insurance brokers must provide information to all their clients on the diversification of their businesses and on the companies with which they work, in the manner determined by the CMF. In addition, insurance brokers are subject to a duty of providing information, and must notify the CMF of any change of their address registered with the CMF, any amendment to the partnership agreement, and any changes in managers, general representatives, directors or other administrators. They must also provide a summary of their operations in the manner and on the dates determined in a general rule issued by the CMF. Insurance brokers who become disqualified or have incompatibilities with their position, or who do not provide proof that they have contracted an insurance policy in the time and form required for their job, will be eliminated from the registry and may not work again as brokers. This notwithstanding, they will continue to be obligated and liable to the insured for the brokerage they have already made. Insurance brokers must be registered in the Insurance Trade Auxiliaries Registry kept by the CMF and comply with different requirements to conduct their activity, including establishing a guarantee, either through a bank bond or insurance policy, as determined by the CMF, which cannot be less than 500 UF or 30 per cent of the net premium of the insurance contracts brokered in the immediately preceding year (whichever is the higher), limited to 60,000 UF to cover liability for correct and complete compliance with all obligations arising from their activity, and particularly for damages that they might cause to the insureds who contract through them.8 In addition, legal entities must be legally incorporated in Chile. Managers, legal representatives or employees of the legal entity may not engage independently in insurance brokering, or work for an insurance company or for another person engaged in insurance brokering.
Reinsurance brokers are subject to specific rules contained in SVS General Rule No. 139/2002. In general, they have to be registered in the special Registry of Reinsurance Brokers kept by the SVS (currently, by the CMF) and comply with the following requirements:
- they cannot be registered as insurance brokers;
- they must establish a liability insurance policy for no less than 20,000 UF or one-third of the premium intermediated in the immediately preceding year, whichever is higher (the policy must not be subject to any deductible); and
- foreign reinsurance brokers must be legal entities, and must certify that they have been legally incorporated abroad and are entitled to intermediate risks ceded from abroad. In addition, foreign reinsurance brokers must designate an attorney with a broad range of faculties to act on their behalf in Chile, including the power to serve and be served with court proceedings.
Unlike in many jurisdictions, the loss adjuster is appointed to act as an impartial claims specialist who must be licensed and supervised by the CMF. The loss adjuster's role is to investigate and review the circumstances of the loss or damage, and to report on the validity of the policy coverage in respect of the claim. The adjuster's report is released to both the insured and the insurer.
Agencies and contracting
As regards agency issues, intermediaries are subject to the general agency provisions of both the Civil and Commercial Codes.
When any event that may constitute a loss occurs, the insured must notify the loss to the insurer or insurers as soon as possible upon becoming aware of the event. The insured must also take all necessary measures for saving or recovering the subject insured or for keeping its remains.
Good faith and claims
Chilean criminal law forbids the fraudulent collection of insurance.
Set-off and funding
Under the New Insurance Law, there are specific provisions for bankruptcy. If the insurer goes bankrupt, the insured has the right to terminate the contract and request a proportional return of the premium. On the other hand, the insurer has the same option if the insured bankrupts before payment of the entire premium.
Dispute resolution clauses
Under the New Insurance Law, there is no need for dispute resolution clauses as insurance disputes are now subject to arbitration. Nevertheless, an insured has the right to make a claim in the local courts where the sum in dispute is less than 10,000 UF. In this respect, the arbitrator has to be appointed when the dispute arises.
IV DISPUTE RESOLUTION
i Jurisdiction, choice of law and arbitration clauses
According to Article 29 of DFL 251, any dispute arising from insurance and reinsurance contracts governed by the law shall come under the jurisdiction of the Chilean courts. This rule is mandatory and cannot be repealed by agreement of the parties. Therefore, although there is contractual freedom to agree on the applicable law, any dispute must be settled in principle in the Chilean courts. Nevertheless, once a reinsurance dispute effectively arises, the parties to the reinsurance policy are entitled to resolve disputes under Chile's international arbitration rules.
Stages of litigation
Generally, in Chile, civil and commercial disputes at first instance comprise three main phases, namely discussion (exchange of pleadings), evidence and issuance of the judgment.
Unless remedies are waived, under Chilean law, the right of appeal arises when the decision of the inferior tribunal causes grievance to one or more parties (there are no specific causes). The appeal remedy is available for most first instance court rulings and is usually heard by a court of appeal. The appeal remedy must comply with basic form requirements. The regular term for appealing is five days but, in the case of final decisions, the period is 10 days counted as of the service of the decision. Depending on the subject of the trial and the type of decision appealed, the processing of an appeal can take up to two years.
Regarding appeal stages, in Chile there is only one appeal stage, and the second instance tribunal is allowed to review both factual and legal issues. Having said this, in Chile it is possible to challenge the decision of a second instance tribunal through exceptional remedies such as cassation (these remedies are heard by the Supreme Court).
There are no discovery obligations in Chile, but the parties are free to submit evidence based on documents, witnesses, parties' confessions, inspections ordered by the court, expert reports and presumptions.
In respect of insurance and reinsurance disputes, under the New Insurance Law, ordinary and arbitration courts are entitled to the following specific faculties relating to evidence issues:
- at the request of a party, to accept additional means of proof to those pointed out above;
- to decree evidentiary measures ex officio at any stage of the trial;
- to request recognition of documents and deal with objections; and
- to assess evidence under the 'sane critic' doctrine.
Except for minor expenses associated with service, paperwork and auxiliary officers, there are no court fees payable in Chile. As to lawyers' fees, they can be recoverable, but only if the judge rules that there was no reasonable basis to litigate.
Format of insurance arbitrations
The Tribunal Code establishes the general rules for arbitration under Chilean law.9 These rules are complemented by the procedural rules contained under the Civil Procedure Code.10 Furthermore, Article 222 of the Tribunal Code establishes that 'arbitrators are the judges appointed by the parties or by a judicial authority for the resolution of a litigious matter.' Article 223 of the Tribunal Code provides that there are three types of arbitrator, as follows: arbitrators at law; arbitrators ex aequo et bono (friendly mediators); and mixed arbitrators.
Arbitrators at law are arbitrators who must render a judgment, in accordance with the positive law. The judgment must fulfil all the formal requirements established for judgments rendered by the ordinary courts. In addition, the procedure through which the matter is resolved must be in accordance with the law that would be applicable to the claim had it been brought before the courts (Article 223(1) of the Tribunal Code). Arbitrators ex aequo et bono are arbitrators who are authorised to resolve a conflict in accordance with what they deem to be prudent and equitable. With respect to the formalities of the judgment and the formalities relative to the procedure, these arbitrators must submit themselves to the procedures agreed by the parties that appointed them (Article 223(2) of the Tribunal Code). Finally, mixed arbitrators must render a judgment according to the positive law, but they may abide by the rules agreed upon by the parties.
It is not necessary to fulfil any special requirements to act as an arbitrator, and only arbitrators at law and mixed arbitrators need be lawyers (Article 225 of the Tribunal Code).
In the context of insurance disputes, where the parties have reached an agreement as to who the arbitrator should be, such arbitrator shall be appointed as an arbitrator ex aequo et bono. If there is no agreement, the appointment must be performed by an ordinary civil court. If so, the formalities commence with a petition to appoint an arbitrator and end with a resolution issued by the aforementioned court appointing the arbitrator as a mixed arbitrator. The procedural rules to be applied during the arbitration are settled in a subsequent hearing before the appointed arbitrator.
Procedure and evidence
Unless the parties agree something different or use institutionalised arbitration, the arbitration procedure is usually based on the Chilean general procedural rules.
Local arbitration centres work based on a public fees scale subject to quantum. Ad hoc arbitrators also negotiate their fees based on quantum, but do not necessarily follow the guidelines of the arbitration centres.
iv Alternative dispute resolution (ADR)
Apart from arbitration, in Chile there are no other industry-specific settlement mechanisms. In addition, ADR is not much used in the context of insurance disputes.
Mediation is not compulsory. However, prior to entering the evidence stage, Chilean courts are obliged to call for a conciliation hearing whose main aim is helping the parties to achieve settlement.
V YEAR IN REVIEW
The CMF was created on March 2017 to replace the former Securities and Insurance Superintendency (SVS).11 Generally speaking, the CMF is vested with broader faculties to supervise the financial market and enforce its regulations.12 The CMF works through a Council comprised of five members known as 'commissioners'. The Council has one president vested with several faculties, including executing and enforcing the regulations and agreements of the Council. In addition, the President represents the CMF. The law that creates the CMF also separates the functions of investigating potential breaches to the law and regulations and imposing sanctions. In this sense, all investigations are now led by a 'prosecutor', while the potential sanctions are determined and decided by the Council.
While the law that creates the CMF implied certain organic changes, there are no substantive changes with regard to the regulation that deals with insurance and reinsurance (including regulations for brokers and loss adjusters). However, the CMF has more faculties than the former SVS in connection with different operational aspects of the companies under its supervision, including requesting financial information in connection to process of mergers, acquisitions, divisions, transformation, liquidation of companies; coordinating and cooperating with other government entities such as the Chilean Internal Revenue Service and the Public Prosecutor's Office; examining specific operations of companies and requesting the corresponding information.
VI OUTLOOK AND CONCLUSIONS
The CMF's main objectives are to continue contributing, including adequate control measures, to maintaining and increasing markets' confidence and providing more efficient tools for their development. The CMF is contemplating important changes with respect to its predecessor. First, it is ruled by a five-member Council, whereas before there was a single supervision system. The CMF has more research tools to prevent and detect specific regulatory breaches. In addition, the investigative and sanctioning processes are separated, which is an important step towards guaranteeing due process in connection with individuals and companies subject to the supervision of the CMF.
1 Ricardo Rozas is a partner at Jorquiera & Rozas Abogados.
2 Title XIII.
3 According to General Rule 197 issued by the former Securities and Insurance Superintendency on 26 May 2006, foreign insurers or brokers may sell direct insurance cover in Chile in connection with international marine carriage, international commercial aviation and goods under international transit provided that they comply with the conditions set forth under the aforementioned rule.
4 According to Article 16 of the Insurance Companies Act (DFL 251), dated 22 May 1931, the London Lloyd's insurance market is expressly recognised as a reinsurance entity.
5 Matter regulated under Title XIII of the Chilean Corporations Act.
6 These regulations were recently amended, and DS 1055-2013 came into force on 1 June 2013.
7 Article 513, Letter 'L' of the Code of Commerce.
8 However, 30 per cent on the first 15,000 UF premiums for annuity insurance will be the percentage that will be used to determine such a sum in the case of the said insurance and only 10 per cent on any excess above that amount.
9 Title IX, Articles 222 to 243.
10 Title VIII of Book III.
11 Law 21,000 published in the Chilean Official Gazette on 23 February 2017. Law Decree No. 3,538 of 1980 that regulated the SVS was also modified to allow the replacement of the latter by the CMF.
12 Transitory Article 4 of Law No. 21,000 established that the CMF would commence to function on 14 December 2017 and that the SVS would cease to exist effectively by 15 January 2018.