Brazil is the fifth most densely populated country2 and among the biggest countries in the world in terms of territory. These facts speak for themselves, making Brazil one of the most promising insurance markets of the globe, especially when we consider the percentage of Brazilian Gross Domestic Product (GDP) represented by its insurance market (close to 4 per cent, as per recent surveys conducted by the Brazilian Private Insurance Authority (SUSEP)3).
Hence, there is plenty of room for growth when compared to other markets. In addition to the above, new legislation enacted by National Congress, such as the Brazilian Data Protection Law (Law No. 13709/18) and the Brazilian Code of Civil Procedure of 2015, as well as Bill of Law No. 29/2017 (designated by market experts and scholars as the New Brazilian Insurance Law), certainly anticipate significant changes in the manner in which local and foreign accredited players of the Brazilian insurance market do business.
II THE LEGAL FRAMEWORK
i Sources of insurance law and regulation
Unlike some other countries in Latin America, Brazil has a highly regulated insurance sector. Basic insurance legislation is composed of several laws, as well as regulations enacted by the following federal authorities: the National Council of Private Insurance (CNSP) and SUSEP.
Decree-Law No. 73/1966, known as the Brazilian Insurance Law, created the Brazilian Private Insurance System (SNSP), which is formed by CNSP, SUSEP, accredited reinsurance and insurance companies, open private pension entities and capitalisation entities, as well as insurance and reinsurance brokers. Open private pension entities are subject to the provisions of Supplementary Law No. 109/2001, whereas capitalisation entities are governed by Decree-Law No. 261/1967.
The SNSP is composed of two governmental authorities, both of which are part of the Ministry of Finance. While CNSP has the authority to set forth the general guidelines and rules of the Brazilian local insurance and reinsurance market, SUSEP has oversight over the activities of all players belonging to this market, monitoring their respective businesses and, when applicable, giving prior approval to certain transactions involving regulated entities.
Reinsurers are classified into: (1) local (headquartered in Brazil) – such as IRB Brasil Resseguros SA (IRB); (2) admitted (headquartered abroad, but with a representative office in Brazil); and (3) occasional (headquartered abroad, without any representative office in Brazil). Insurance companies must be duly authorised to operate by SUSEP.
Insurance and reinsurance brokers must be duly enrolled as such with SUSEP before intermediating the sale of any insurance policy or conducting the intermediation of reinsurance treaties or contracts. In addition, reinsurance brokers' corporate purpose must be exclusive, meaning that they cannot conduct any activity other than acting as a reinsurance broker.
It is also worth stressing the following laws, which – in one way or another – either apply directly to the entities that are part of the SNSP or otherwise have an impact on them:
- Supplementary Law No. 126/2007, which dismantled the IRB's monopoly of the reinsurance market, sets forth the ground rules that must be met by each type of reinsurer (as previously explained), as well as for the taking out of insurance abroad by residents in Brazil and companies headquartered in the country;
- the Brazilian Civil Code (Law No. 10406/2002) (BCC), which dedicates an entire chapter to insurance contracts and the main principles that regulate the insured–insurer relationship;
- the Brazilian Consumer Protection Code (Law No. 8078/1990), since the insured is considered as a 'consumer' for legal purposes;
- the Brazilian Code of Civil Procedure of 2015 (Law No. 13105/2015), which attempts to make litigation less time-consuming by developing and enhancing the rules related to alternative dispute resolution mechanisms (especially arbitration and mediation), rendering former court decisions by the superior courts binding, and making a decision in a single case the model or precedent for other similar cases. Its rules are starting to be tested now, since it only became effective in March 2016;
- the Brazilian Data Protection Law, which regulates the use of personal data of a given individual or legal entity in Brazil. Its impacts are still being assessed by companies that handle this data, but it certainly will influence and dramatically change the manner of 'doing business' in the insurance and reinsurance market; and
- Bill of Law No. 29/2017 (still under examination by National Congress), which sets out a whole new legal framework for SNSP players, triggering the need of new regulation to be enacted by the CNSP and SUSEP. The analysis of this bill by the National Congress was, up until recently, being made at a very fast pace, but, given the presidential elections and the new legislature, it is unclear as to whether it will eventually be approved by the new government in the short (or even long) term.
ii Insurable risk
Section 757 of the BCC defines 'insurable risk' as the legitimate interest of the insured of protecting a given asset, object or right against predetermined risks.
The legitimate interest must: (1) be licit, since the BCC prohibits any transaction (including, but not limited to, agreements of any nature) concerning illicit purposes;4 (2) be economic, since a given value must be attributed by the person retaining insurance to the object of the insurance coverage, either limited to the sum of the insured object, asset or right (when dealing with non-life insurance), or freely established pursuant to the will of the insured (when dealing with life insurance);5 and (3) precede the contract and remain effective throughout its term of effectiveness.6
As a result of the requirements pending over the legitimate interest, illicit activities are not insurable and, as such, wilful misconduct or unlawful enrichment are standard excluded risks to all life and non-life products (BCC, Section 762). Regarding liability insurance, there is no concept of punitive damages in Brazil, since the BCC limits compensation in tort to the extent of actual damages inflicted on the victim (BCC, Section 944).
In terms of regulation, in spite of legislation prohibiting coverage for illicit purposes, SUSEP allows coverage of civil and administrative sanctions in directors' and officers' (D&O) insurance (SUSEP Circular No. 553/2017). By 'civil' and 'administrative' sanctions, regulation means any penalty except for those arising from criminal offences (such as imprisonment). There is no restriction for anticipating defence costs in this type of insurance with litigation in criminal cases, which is common and widely used. SUSEP has also stated that coverage for ransom does not breach applicable law, as long as the insurance product is previously approved by SUSEP (per SUSEP DETEC Letter No. 07/2008).
iii Fora and dispute resolution mechanisms
Insurance disputes in Brazil are heard before ordinary courts of the judiciary system or arbitration courts.
The judiciary system is divided into specialised courts and ordinary courts. Specialised courts include military, electoral and labour courts, while ordinary courts have jurisdiction to adjudicate all the remaining issues. Since specialised courts do not include insurance matters, ordinary courts have jurisdiction over insurance disputes.
The ordinary courts are subdivided into federal and state courts. The jurisdiction to hear insurance disputes depends on the involved parties: federal courts have jurisdiction to hear cases involving the government and government-controlled corporations, and state courts adjudicate cases that do not fall within the jurisdiction of federal courts.
It is important to consider that both federal and state courts have two levels: (1) trial, where cases are filed and ruled by a single judge; and (2) appellate, where appeals are taken by panels usually comprising up to three justices, who are free to assess matters of fact and law.
Trial judges take office after passing a public examination. Justices are appointed to appellate courts based on criteria such as merit and length of service. One-fifth of appellate court seats are mandatorily fulfilled by members of the public prosecutor's office and practising attorneys.
There are 27 state appellate courts (one for each state and the federal district) and five federal appellate courts in Brazil. Appeals against appellate court decisions may be filed with the Superior Court of Justice or the Federal Supreme Court, or both. If an appellate court decision arguably violates the federal law or the Federal Constitution, it may be challenged by appeals filed before the Superior Court of Justice or the Supreme Court.
The Superior Court of Justice is restricted to evaluating matters of law and it rules appeals against appellate court decisions that have arguably violated federal law or have given federal law an interpretation that differs from that handed down by another appellate court.
The Superior Court of Justice comprises 33 justices who are appointed by the President upon approval by the Senate, observing the following rules: (1) one-third of the justices must come from federal appellate courts; (2) one-third of the justices must come from state appellate courts; and (3) one-third of the justices must be private practitioners or public prosecutors.
The Supreme Court rules appeals against appellate court decisions that have arguably violated the Federal Constitution and the appellant is required to provide evidence that the constitutional issues addressed in the appeal have widespread repercussions in order to be given leave to appeal.
The Supreme Court comprises 11 justices appointed by the President upon approval by the Senate.
It should be noted that Brazilian civil courts do not hold jury trials, as juries are only permitted in specific criminal proceedings, so insurance disputes are not subject to juries. Insurance disputes may be also subject to arbitration procedure, as it involves rights that can be the object of a transaction (Section 1 of the Brazilian Arbitration Law).
The Brazilian Arbitration Law was inspired by the UNCITRAL Model Law, adopting a favourable regime to arbitration following international standards, such as the separability of the arbitration agreement, the Kompetenz-Kompetenz principle, and the impossibility of reviewing the arbitral award in the merits. Also, Brazilian courts have been very supportive to arbitration, offering a safe and favourable environment to its adoption. Domestic arbitral awards are considered final and binding on the parties and do not require recognition or confirmation by a court to be immediately enforced by the parties.
The annulment of domestic awards may be sought under very limited circumstances, within 90 days following the receipt of an award or a decision clarifying the award. Among the reasons for annulment or setting aside an arbitral award, we highlight:
- the arbitration agreement is null and void;
- the award is rendered by a biased arbitrator;
- the award exceeds the limits of the arbitration agreement;
- the award was rendered under nonfeasance, extortion or corruption;
- the award was rendered after the time limit; and
- due process was not observed during the arbitral proceeding.
Therefore, arbitration in Brazil is a dispute resolution method compatible with insurance disputes that has been increasingly adopted.
Besides the judicial claims, there are administrative insurance disputes pending before regulatory agencies, such as SUSEP and the Consumer Protection Office (PROCON). These agencies are responsible for reviewing administrative procedures concerning the breach of their respective regulation by insurers, reinsurers and brokers triggering the imposition of penalties and other sanctions.
III RECENT CASES
One of the most relevant recent insurance disputes in Brazil involves (1) the attachment of the shares of a major airline company's to guarantee the reimbursement of a hefty indemnification, and (2) the discussion about the subrogation of the insurer to the arbitration clause in the insured contract.
A performance bond was issued to insure the losses arising from the failure of a company in complying with its obligations under shipbuilding contracts. After the payment of the indemnification, the insurers filed a collection lawsuit before the State Court of São Paulo against the principal and guarantors, who are the shareholders of a famous airline company.
Owing to the proofs of commingling of assets and misuse of legal entity, the State Court of São Paulo granted the request for piercing the guarantors' corporate veil and the provisional attachment of their respective assets to ensure the reimbursement of the indemnification. As a result, around 200 million shares of the famous airline were attached.
In response to the attachment, the guarantors argued that the State Court of São Paulo suffers from lack of jurisdiction to rule the dispute between the insurers, principals and guarantors owing to the parties' subrogation in the arbitration clause established only in the secured contracts entered into between the policyholder and the insured.
According to the guarantors, the payment of the indemnity subrogated the insurers in all rights of the insured. As a result, the insurers would be obligated to comply with all clauses established in the contracts entered between the policyholder and insured, including the arbitration clause.
Furthermore, the guarantors filed an action requesting a provisional remedy to revoke the attachment order granted by the State Court of São Paulo based on the lack of jurisdiction of this Court. Later, the guarantors filed a statement of claim requiring the commencement of the arbitration based on the arbitration clause established solely in the secured contracts entered by the policyholder and insured.
Because of the actions filed by the guarantors, a conflict of jurisdiction was established in the Superior Court of Justice. Although a final and binding decision has not yet been issued, the state courts and the judge-rapporteur of the proceeding have issued statements recognising that under Section 786 of the Brazilian Civil Code the insurer's subrogation is limited to the right of reimbursement and is not subject to procedural issues such as the arbitration clause or the forum-selection clause of the agreements entered into by and between the parties.
Therefore, unless there is a specific provision in the insurance bonds subjecting the principal, guarantors and insurers to arbitration, the conflicts between the parties must be ruled by the judiciary system. The final decision rendered by the Superior Court of Justice in the conflict of jurisdiction will influence all the future decisions from state courts in Brazil.
Another recent relevant dispute involves the discussion concerning judicial bonds and judicial reorganisation. Judicial bonds were issued on behalf of one of the largest telecommunication operators in Brazil to insure the payment of labour and civil debts collected in court.
In the course of these lawsuits, the policyholder filed for a judicial reorganisation before a bankruptcy court and, under the Brazilian Bankruptcy Law (Law No. 11101/2005), the enforcement procedures filed to collect the debts against the telecommunication company were immediately stayed for 180 days (tax credits are not subject to the proceeding).
Furthermore, the Bankruptcy Court issued an order suspending any payment under the judicial bonds posted under labour and civil lawsuits, as the credits would be paid according to the company's reorganisation plan. However, the Bankruptcy Court decision was ignored and the courts responsible for the enforcement procedures determined the payment of the indemnities.
Because of the conflicting decisions, the insurer filed a proceeding of conflict of jurisdiction between labour and civil courts, and the Bankruptcy Court, before the Superior Court of Justice. The Supreme Court of Justice has not decided the conflict of jurisdiction yet, but the judge-rapporteur of the proceeding granted a preliminary order recognising the Bankruptcy Court jurisdiction to decide on the payment of the bonds until a final decision is rendered.
The issues under discussion may be summarised as follows: (1) after the approval of the reorganisation plan the debts are novated and the judicial bonds cannot be enforced, as the creditors must be paid under the reorganisation plan terms; (2) the judicial bonds are an autonomous obligation of payment and are not subject to the novation effects and, as a result, cannot be enforced and must be terminated.
The final decision rendered by the Superior Court of Justice in the conflict of jurisdiction will also influence all future decisions from state courts in Brazil.
IV THE INTERNATIONAL ARENA
Two main issues stand out in the international arena: (1) the application of foreign law to insurance disputes in Brazil and (2) the enforcement of foreign arbitral awards in Brazil.
i Application of foreign law to insurance disputes in Brazil
First, it is worth stressing that Brazilian insurance law and regulation have a very paternalistic approach when it comes to the possibility of residents in Brazil or companies headquartered in the country reaching out to the international insurance market for purposes of taking out insurance products. The motto was to restrict this as much as possible to prevent the local market being emptied by foreign competitors.
This was the main reason justifying IRB's monopoly in the reinsurance market between 1939 and 2007. Even though this monopoly ceased to exist upon the enactment of Supplementary Law No. 126/2007, there still are numerous restrictions for taking out insurance abroad, which ultimately significantly reduce the chances of any controversy regarding the application of foreign law to insurance disputes that take place in Brazil, since insurance policies issued locally are governed by Brazilian law.
This matter becomes more of a debate when it comes to reinsurance agreements and treaties. According to the Law of Introduction to the Brazilian Civil Code (Decree-Law No. 4657/1942), obligations to be met in Brazil are subject to Brazilian law, and, therefore, reinsurance obligations would be subject to Brazilian law. On the other hand, CNSP Resolution No. 168/2007 provides that the reinsurance contracts related to risks in Brazil must establish a clause granting jurisdiction to Brazilian courts to decide disputes under Brazilian law, except when the parties to such contract agree to submit the dispute to arbitration.
It is worth mentioning that if Bill of Law No. 29/2017 is enacted, the insurance market in Brazil will be governed by a new law that requires the application of Brazilian law to all contracts (including, but not limited to, reinsurance contracts) and disputes (in the judiciary system or arbitration courts) related to insurance in Brazil.
Many scholars and experts argue that reinsurance agreements or treaties have to be governed by Brazilian law, since all undertakings set forth therein are bound to insurance policies or bonds issued by a local accredited insurer and governed by local law. This debacle will only increase upon the enactment of the Bill of Law No. 29/2017, which is being closely followed by many reinsurers that do business in Brazil.
ii Enforcement of foreign arbitral awards
Regarding the enforcement of foreign arbitral awards, the Brazilian Arbitration Law distinguishes between two types of arbitral awards: domestic and foreign.
Foreign arbitral awards are those rendered outside Brazil that require recognition before enforcement in Brazil. Domestic arbitral awards are those rendered in Brazil that can be enforced as a domestic court judgment without the need of any court confirmation. Therefore, for the purposes of recognition of foreign awards, the seat of arbitration plays an important role in defining where the award is rendered and whether it needs confirmation before enforcement.
To enforce a foreign arbitral award in Brazil, it must first be submitted to a recognition procedure before the Superior Court of Justice. Furthermore, the applicant must present evidence that the award:
- was issued by a competent authority;
- was issued only after the parties to the proceedings had been duly summoned, or with proof that a default judgment was the only option; and
- has become final and definitive, not being subject to any appeal.
Brazilian law limits the grounds that can be raised by a respondent against whom recognition is sought. The respondent will only be able to raise a limited range of defence arguments to object recognition and prevent it from being granted.
The defence arguments that can be raised do not include whether the merits of the arbitral award are correct. The Superior Court of Justice will not discuss whether the arbitral tribunal has reached an adequate decision on matters of law and facts. In fact, the Superior Court of Justice has been very careful in not making an analysis or revision of the merits of the decision.
Therefore, the arbitral award may be challenged only if:
- there is a lack of standing of the parties to the arbitration agreement;
- the arbitration agreement is not valid;
- the respondent was not given notice of the appointment of the arbitrator or of the arbitral proceedings;
- the respondent was not able to present its case;
- the award deals with a dispute outside the scope agreed by the parties;
- the arbitral tribunal was not composed according to the parties' agreement or the applicable law;
- the arbitral procedure did not observe the parties' agreement or the applicable law;
- the arbitral award is not binding on the parties, or it was set aside or suspended;
- the subject matter of the dispute cannot be resolved by arbitration under Brazilian law; or
- recognition or enforcement of the arbitral award is contrary to national sovereignty, human dignity or Brazilian public policy.
If the application for recognition is presented with all the required documents and no objection is raised, the recognition procedure should take from six months to a year. If an objection is raised, or there are missing documents, this could be expanded to more than two years, depending on the complexity of the case and the Superior Court of Justice's agenda.
Once recognised by the Superior Court of Justice, the award becomes a judgment with enforceable title in Brazil. After that, any party may seek enforcement with the competent federal court, which, as a general rule, is the court with jurisdiction over the place where the award debtor has its place of business.
An enforcement procedure typically takes up to two years if there is opposition to it. This may vary a great deal depending on the difficulties in summoning the debtor and finding enough assets to satisfy the debt if the debtor does not respond immediately.
V TRENDS AND OUTLOOK
Among the trends of the local insurance market, we highlight the following.
i D&O demand and increasing loss ratios
Law No. 13506, enacted on 13 November 2017, significantly increased the limit of the sum of fines that may be applied by the Brazilian Central Bank (BCB) and the Securities and Exchange Commission (CVM). Now the BCB may impose fines to financial institutions (and its officers and directors) whose sum may reach 2 billion reais, and the CVM may impose fines on publicly held companies (and other entities it regulates, and respective directors and officers) whose sum may reach 50 million reais.
This automatically triggered a steep increase in the demand for D&O coverage (taking out such insurance has become, in some cases, a condition for individuals to be invested in the positions of directors and officers of such companies), since local products of this nature can cover the payments of fines imposed on such directors and officers by governmental authorities, with due regard to the limitations set forth by each insurer that offers such coverage.
In recent years, D&O insurance claims have risen as a result of a significant increase of federal investigations scrutinising public contracts, which led to an unprecedented increase in the public auditing of public administration activities and biddings. Most of the large corporations operating in energy, civil construction and engineering in Brazil have been retained in public bids to deliver infrastructure works in recent events such as the 2014 FIFA World Cup, the 2016 Summer Olympics in Rio de Janeiro, besides regular projected works in all administration levels (federal, state and municipal).
Public contracts are scrutinised by federal and state audit courts, the Public Prosecutor's Office, and civil associations, which might bring claims upon irregularities against the private counterparts involved in the bids. As a result of large federal probes over corruption in public bids (among which, Operation Car Wash is the most prominent), D&O insurance claims amounted to over 500 million reais in 2017, and these ranged from investigations by public bodies to judicial claims associated with securities litigation, tax debts, corporate disputes, contractual breaches and bankruptcy law.
ii Surety bonds demand and increasing loss ratios
The Brazilian Code of Civil Procedure of 2015 has expressly established the right to offer judicial bonds to secure the payments of judicial debts. As a result, judicial bonds have become widely accepted by courts and the market is experiencing a vertiginous expansion. Consequently, some local insurance businesses are totally dedicated to surety and judicial bonds.
The surety business has also been a frequent source of claims owing to the economic recession Brazil has experienced since late 2015, which has led to the suspension of many public contracts. Payments in these contracts were stalled while corruption and money laundering investigations were carried out, ensuing a steep increase in the number of claims associated with performance bonds.
Petrobras, the Brazilian state-owned oil giant, was at the centre of the corruption investigations of Operation Car Wash and the interruption of payments within its contracts triggered low liquidity in construction and oil sectors, leading many contractors to submit requests for judicial reorganisation or even bankruptcy, which entailed numerous claims in the sureties market for breach of contracts, bringing up the search for performance bonds and construction-related insurance.
iii Bill of Law No. 29/2017
Intended to become the 'New Brazilian Insurance Law', Bill of Law No. 29/2017 brings with it various innovations that will significantly alter the way insurers do business, leading to the adaptation of operational aspects (such as the need of insureds' prior consent in order to implement certain transactions – e.g., portfolio transfers), changes in the wording of insurance policies and modification of loss adjustment procedures.
1 Cassio Amaral and Thomaz Kastrup are partners and Anthony Novaes, Stefano Motta and Thales Dominguez are associates at Mattos Filho, Veiga Filho, Marrey Jr and Quiroga Advogados.
2 U.S. Census Bureau, 2018.
3 6th Analysis and Monitoring of Supervised Markets Report, SUSEP, 2018.
4 Brazilian Civil Code. Section 104. The requirements for the validity of a juridical transaction are: I – a capable agent; II – a licit, possible and determined or determinable object; III – a form that is prescribed or not prohibited by law.
5 Tzirulnik, Ernesto. The insurance contract according to the Brazilian civil code. 3rd Edition. São Paulo. Roncarati, 2016, p. 53.
6 Franco, Vera Helena de Mello. Contracts: civil and corporate law. 5th Edition. São Paulo. Revista dos Tribunais. 2014, p. 340.