The Insurance Disputes Law Review: Brazil
Considering its continental dimensions and its almost 212 million inhabitants, Brazil is the second-largest insurance market in Latin America and one of the largest in the world. The Brazilian insurance market includes 122 general insurers (life and non-life) and 133 reinsurers, which are responsible for 170,000 direct jobs in Brazil and hold risk guarantees in excess of 1.2 trillion reais.
In 2020, the sector had growth of 1.3 per cent over the previous year, a result positively influenced by December of that year, which showed growth of 15.4 per cent over the same month in 2019. The annual revenue totalled 273.7 billion reais. The technical provisions, which represent the amount insurers require to guarantee the risks of the system, reached the historic figure of 1,202 trillion reais, an increase of 7.5 per cent compared with the 2019 fiscal year. The indemnities, benefits, redemptions and prize draws sector totalled 151 billion reais, with an increase of 8.3 per cent over 2019, which is, therefore, higher than the premiums collected.
Local insurers are subject to specific legal requirements, which are defined based on aspects of the organisational structure of the project, the group and its operational qualifications. The National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP) are the government agencies responsible for: (1) the adoption of rules for standardisation and control of the Brazilian market for products and agents; (2) ensuring that companies have liquidity and solvency in the market; (3) monitoring and conducting routine inspections and disciplinary procedures; and (4) ensuring balance in consumer relations, especially in the mass-marketing of products.
The legal framework
i Sources of insurance law and regulation
The insurance sector in Brazil is a highly regulated environment, governed by the laws that make up the Brazilian legal system and regulate insurance contracts, and by regulations periodically issued by the CNSP and SUSEP in the form of resolutions and circulars respectively (and in addition to the aforementioned legal system).
In Brazil, there is no one specific law for insurance contracts, therefore they are governed by the Commercial Code2 (for marine insurance), Decree-Law No. 73,3 the Civil Code4 and the Consumer Protection Code,5 with the latter specifically governing products the marketing of which falls within the scope of consumer relations.
Decree-Law No. 73/1966 created the National Private Insurance System, composed of the CNSP, SUSEP, reinsurers, companies authorised to operate in private insurance, and duly qualified brokers. It also provided the basic rules for the development of the insurance market.
The Civil Code has a chapter entirely dedicated to insurance contracts,6 with well-defined provisions and principles for the relationships involving insurance law. Notable among these are the principle of good faith, which is provided for in Article 765 and must be observed by the parties during the execution of the insurance contract, and the principle of predetermination of risks, provided for in Article 757, which states that 'by means of the insurance contract, the insurer undertakes, upon payment of the premiums, to ensure the legitimate interest of the insured, related to the person or thing, against predetermined risks'.
In addition, the insured has the duty to disclose to the insurer any and all relevant information during the negotiation phase of the insurance contract, for the correct pricing of the premiums and analysis of the risk; and the duty, throughout the term of the contract, to communicate to the insurer all the facts that aggravate – or have the potential to aggravate – the risk originally assumed, under penalty of loss of the right to the indemnity, in compliance with the rules and deadlines stipulated in the contract by the insurer and governing the termination of the contract.
In the context of mass-market insurance in particular, Brazilian courts understand that the technical, economic and legal vulnerability of the insured means that the latter does not have specific knowledge to determine what information is important during the contracting, or what can constitute an increase in the risk, so the courts tend to adopt a 'pro-insured' position in their decision-making.
In this regard, any dubious, obscure or contradictory provisions are normally interpreted in favour of the insured, thereby applying a pro-adherent interpretation to the insurance relationship, (i.e., as the contractual provisions are, more often than not, drawn up unilaterally by the insurer, any dubiety, obscurities or contradictions must be resolved in favour of the insured in the event of dispute).7
These interventions by the judiciary result in constant updates of (1) the wording of the policies marketed in Brazil, and (2) the rules issued by the competent regulatory agencies, to clarify the issues most frequently discussed in the courts.
The tendency of the courts to favour pro-insured solutions can be mitigated by demonstrating that the insured is not a vulnerable party either in relation to the insurer (e.g., because of the size of the company or because expert advisers were used when contracting and executing the contract) or in relation to provisions inserted in the policy as a result of negotiations between the parties (commonly referred to as 'particular conditions').
ii Insurable risks
In Brazil, the contracting of certain lines of insurance, especially civil liability, is mandatory and the subject of express legal provision, as provided for in Article 20 of Decree-Law No. 73/1966. However, obligations of this kind need to be expressly provided for in legislation and a mandatory requirement for insurance is an exception.
As previously discussed, pursuant to Article 757 of the Civil Code, the subject matter of the insurance contract is the insured interest. As in other jurisdictions, insurable interest is defined in Brazil as 'the lawful relationship between the insured or beneficiary and an asset or a person who is subject to a risk determined in the insurance contract'.8 In this regard, Brazilian law expressly states that the insurable interest must be lawful (i.e., it must be in accordance with the legal system) and it must be subject to a risk. Thus, if the contract is intended to cover a risk arising from an intentional act of the insured, the beneficiary or the insured's or beneficiary's representative, it will be null and void.9
Furthermore, in Brazil, the 'indemnity principle' is adopted, in the sense that the indemnification cannot exceed the amount of the insured interest at the time of the occurrence of the claim, and it cannot exceed the maximum limit of the guarantee fixed in the policy, except in cases of the insurer's late payment.10 In contrast, the risk will include all the losses resulting or arising therefrom, such as the costs of any damage resulting from attempts to prevent the occurrence of the insured risk or to reduce the damage, or save the thing; however, sub-limits applicable to these expenses are permitted.11
With regard to the regulation of insurable risk, despite legislation prohibiting coverage for illicit purposes, SUSEP allows general civil liability insurance and allows coverage for civil and administrative penalties to which policyholders in general could be subject (such as directors, officers and employees with managerial functions – namely directors and officers liability insurance (D&O)).
In Brazil, the risk should be a future risk, but the commercialisation of claims-made policies (with or without a notification clause) and the contracting of retroactive periods by the policyholders or insured are, in fact, permitted.
The Brazilian courts apply the maximum limits for deductibles and for liability (except when non-contractual losses arise – e.g., for a loss adjustment procedure proven to have been conducted in bad faith by the insurer). In any case, Brazilian law does not allow punitive or exemplary damages.
iii Fora and dispute resolution mechanisms
Disputes regarding insurance in Brazil are heard by judicial or arbitral courts.
Judicial courts are divided into federal and state courts in accordance with the applicable jurisdiction. The federal courts have jurisdiction to settle cases involving the federal government, governmental companies or public entities, and the state courts hear all other cases that do not fall within the jurisdiction of the federal courts.
The Brazilian judicial system has, as a rule, two instances where the technical-probative issues of a dispute are examined: at first instance, disputes are examined by a single judge and, at second instance, appeals against decisions issued at first instance are analysed by collegiate bodies. Judges and collegiate bodies are obliged to provide grounds for their reasoning and to assess all the points raised in the dispute before them.
Appeals against second instance decisions may be brought before the Superior Court of Justice or the Supreme Federal Court, as defined by the Constitution. Thus, if the decision issued by the second instance violates a provision of federal law or is contrary to the decision given by another court (i.e., when there is a jurisprudential disagreement), it may be questioned by means of a special appeal to the Superior Court of Justice; violations of the Constitution may be the subject of an extraordinary appeal to the Supreme Federal Court.
In summary, therefore, the Superior Court of Justice is restricted to assessing questions of law in appeals against decisions of second instance courts that have violated federal law or have given the federal law a different interpretation from that of another second instance court. The Supreme Federal Court usually decides appeals against decisions of second instance courts that have violated the Constitution. The admissibility of these types of appeals is quite restricted for both higher courts.
In addition, arbitration has been adopted in Brazil and is increasingly seen as a feasible method of alternative dispute resolution in the context of insurance contracts. Recent decisions in the Brazilian courts have supported the binding nature of arbitral awards, offering a safe and favourable environment for their adoption. National arbitral awards are considered final and binding on the parties, and do not require recognition or confirmation by a court to be enforced immediately by the parties.
The Superior Court of Justice has established that the deadline for the submission of disputes is one year counting from the date of the insured's knowledge of an insurer's decision (following a loss adjustment procedure) that is contrary to the insured's interests; for example, if the insurer issues a denial of coverage or agrees to an indemnity payment for an amount lower than the claimed amount.12 This deadline may be interrupted by, among other things, a challenge that interrupts the statute of limitations.
In Brazil, unlike in other jurisdictions, there is no stipulated deadline for the submission of a claim notice. Article 771 of the Civil Code only establishes that the insured must, under penalty of losing the right to indemnification, communicate the claim to the insurer, 'as soon as they become aware of the claim', and should take immediate steps to mitigate any consequences of the insured risk. When a delay in the notification of the claim is unjustified or in bad faith, or even when the delay results in a concrete loss to the insurer, the claim may be considered untimely – leading to the loss of the right to indemnification.
In recent years, corruption scandals in Brazil have dominated the national and international news, resulting in, among other things, the adaptation of companies' D&O policies in respect of the individuals who exercise, or will exercise, or who have held, executive positions in those companies or their subsidiaries.
Principal among these corruption scandals, Operation Car Wash broke on 17 March 2014 as a result of investigations into irregularities concerning Petrobras and large contracts (such as the construction of the Angra 3 nuclear power plant), in which a complex scheme was discovered involving public agents, business persons and black-market dealers.
Although the investigations began in Curitiba, the widespread extent of the scheme meant that new investigative fronts were soon opened throughout the country, such as in São Paulo, Rio de Janeiro and Brasília.
Since its inception, Operation Car Wash has gone through 80 phases, resulting in the arrest and conviction of more than 100 people, including important politicians, major business persons and public figures.
According to the Federal Prosecutor's Office website, Operation Car Wash has resulted in 4.3 billion reais being returned to public coffers, with 2.1 billion reais expected from compensatory fines resulting from cooperation agreements, and 12.7 billion reais expected from compensatory fines arising from leniency agreements. A total of 14.7 billion reais is expected to be recovered, in addition to 111.5 million reais in voluntary relinquishments by the defendants.
In the post-Operation Car Wash period, D&O policies were adapted to exclude insurance coverage for (1) claims based on, attributed to or related to Operation Car Wash, and (2) claims based on, attributed to, the result of or related to corrupt conduct.
By way of background information, the insurance coverage analysis was initially prompted by the commencement of a proceeding before the Brazilian Securities and Exchange Commission (CVM). The CVM proceeding had been commenced to assess whether there had been an omission in the disclosure of relevant facts regarding the ratification of the company's executives turning state's evidence in Operation Car Wash in view of the fact that pursuant to Article 6, Sole Paragraph of CVM Instruction 358/02 it is incumbent upon administrators or controllers:
directly or through the Investor Relations Officer, to immediately disclose the relevant act or fact, in the event that the information becomes public or if there is an atypical fluctuation in the quotation, price or negotiated quantities of the securities issued by publicly held companies or those related to them.
The coverage assessment was completed in 2018 and coverage was denied.
In 2019, because of dissatisfaction with the denial of coverage, the insured and the company filed a lawsuit requesting reimbursement of their defence costs, incurred in contracting lawyers because of facts involved in the sanctioning administrative proceeding. In the dispute, the insurer defended the maintenance of the coverage denial, since defence costs came under the exclusion provided in the 'endorsement of exclusion of a specific subject – Operation Car Wash' and in the 'endorsement of exclusion of a specific subject – acts of corruption'.
The judge, in summarising, stated that 'the disagreement arises as to the exclusion or not of the fact discussed in the records by the endorsements related to Operation Car Wash and acts of corruption', and concluded that 'these endorsements excluded defence costs related to Operation Car Wash or acts of corruption from the coverage', therefore the court did not grant their request.
The plaintiffs then proceeded with an appeal before the Court of Justice of the State of São Paulo, which upheld the ruling, on the grounds that (1) the claim is 'based on, attributed to, consequent of or related to acts of corruption', (2) 'the link between Operation Car Wash and the expenses spent on the defence' was undeniable, and (3) one cannot claim 'any exploitation arising from the contract: it is an instrument executed between equally competent legal entities, who could have discussed the terms before agreeing to them and, also, the company could have opted not to contract the policy. The exclusion endorsement is evidently valid therefore, without any exploitation or nullity.'
Although still under review by the Superior Court of Justice, some important observations are relevant from a legal standpoint, since the reason for the coverage exclusions for claims based on, attributed to, consequent of or related to Operation Car Wash and corrupt conduct basically consists in: (1) limiting, in accordance with Article 757 of the Civil Code, the scope of the insurance coverage to liability arising from 'management acts' themselves; (2) preventing the use of D&O insurance from encouraging practices that contravene public order; and (3) eliminating catastrophic risks, considering the magnitude of the investigations ongoing in Operation Car Wash.
Given the current scenario, it must be concluded that claims arising from Operation Car Wash and acts of corruption constitute risks expressly excluded under D&O insurance, thus serving as a disincentive to reckless conduct, since the policyholder or the insured will need to bear any associated defence costs themselves.
The international arena
i Application of foreign law to insurance disputes in Brazil
Because IRB Brasil RE13 had a monopoly in the Brazilian reinsurance market until 2007, the Brazilian legal and regulatory system is still very restricted and there are still numerous constraints on contracting insurance abroad, which ultimately reduces the chances of any disputes regarding the application of foreign law in insurance disputes that occur in Brazil, as insurance policies issued locally are governed by Brazilian law.
Pursuant to Article 19 of Complementary Law No. 126/2007, the following will generally be contracted exclusively in Brazil:14 mandatory insurance; and non-mandatory insurance contracted by natural persons residing in the country or by legal entities domiciled in the national territory to guarantee risks in the country. Therefore, as a rule, mandatory and optional insurance for risks located in Brazil (contracted by people domiciled in the country) must be insured by local insurers.
There is a view that, in very exceptional situations, a global insurance contract could be subject to foreign law, even if the risk is located in Brazil, provided that the contracting party is not domiciled in the country. However, the most cautious approach assumes that, for insurance contracts in general, the place of risk determines the applicable rule of public order, and the fact that the rule of public order is so central to Brazil's legal system would prevent the application of foreign law in Brazil.
If Bill No. 29/201715 is enacted, the insurance market will be governed by a new law requiring the application of Brazilian law to all contracts (including, but not limited to, reinsurance contracts) and disputes (in the judicial system and arbitration tribunals) related to insurance contracted in Brazil. This Bill is currently pending in the National Congress.
ii Enforcement of foreign arbitral awards
Partial or provisional arbitral awards issued by arbitrators outside the Brazilian jurisdiction are enforceable in Brazilian courts.
In accordance with Article 35 of Law 9,307/96, to be recognised or executed in Brazil, a foreign arbitral award is subject only to approval by the Superior Court of Justice.
The ratification of the award should be requested by the interested party and the request must be submitted with the original arbitral award or a copy certified by the Brazilian consulate accompanied by a sworn translation, and with the original arbitration agreement or a certified copy accompanied by a sworn translation.16
The Superior Court of Justice may refuse to ratify the award only when the defendant demonstrates that: (1) the parties executing the award were incompetent; (2) the arbitration agreement was not valid in accordance with the law to which the parties submitted it or, in the absence of an indication of the applicable law, by virtue of the law of the country where the arbitral award was issued; (3) the appointment of the arbitrator or the arbitration procedure was not notified, or there was a contravention of the adversarial proceedings; (4) the arbitral award was issued outside the limits of the applicable arbitration agreement; (5) the commencement of the arbitration was not in accordance with the arbitration agreement or the arbitration clause; or (6) the arbitral award is not yet binding on the parties, or has been annulled or suspended by a judicial body of the country where it was issued.
Furthermore, the ratification can also be refused if the Superior Court of Justice verifies that, according to Brazilian law, the subject matter of the dispute is not capable of being resolved by arbitration or the foreign arbitral award offends against Brazilian public order.17
In this regard, the summons carried out in the arbitration agreement or the procedural law of the country where the arbitration took place is not considered an offence against national public policy, provided that the Brazilian party is granted enough time to exercise its right to a defence. The Superior Court of Justice has already stated that it does not consider the fact that the arbitral award establishes the value of the conviction in foreign currency to be an offence against public order, and the appropriate conversion to the national currency should be carried out for the realisation of payment in Brazil.
Furthermore, if the ratification of the foreign arbitral award is refused because of formal defects, the interested party may renew the request when the defect in question has been resolved.18
Lastly, in the process of ratification of a foreign ruling, there is no analysis of the merits or even analysis of possible injustice of the decision, therefore the Superior Court of Justice will examine only the formal requirements provided for in Brazilian law.
Trends and outlook
i Public Procurement Law
Notable among innovations introduced by the new Public Procurement Law19 is the change regarding contracts considered to be of great value (contracts with a value greater than 200 million reais), in which 'the provision of a guarantee may be required, as surety, with a resumption clause provided for in Article 102 of this Law, in a percentage equivalent to up to 30 per cent of the initial value of the contract'.
With the formal introduction of the resumption clause in this legislative reform, the insurer, in addition to appearing as a consenting intervening party in the guaranteed contract and having the power or duty to closely monitor the execution or supervision of the contract, should, in the event of occurrence of a claim, execute and complete the subject of the contract (i.e., 'step in') or pay the full insured amount indicated in the policy, if it does not intend to assume the execution of the guaranteed contract.
Since this is a recent measure, the market is still adapting to this new step-in mechanism, given the need to update affected products and improve the insurers' teams to enable the monitoring, supervision or execution of the subject of the guaranteed contract.
ii Impact of the covid-19 pandemic
Brazil, like all nations and territories around the world, has suffered from the health and economic impacts of the covid-19 pandemic.
Initially, at the transnational level, the importance of the public declarations by the World Health Organization (WHO) – on 11 March 2020 of a pandemic in relation to the novel coronavirus (covid‐19), and on 30 January 2020 of a Public Health Emergency of International Concern – should be emphasised.
Considering that the covid‐19 pandemic triggered the enactment of a state of public catastrophe at national level and involving all federative entities, and also taking into account that similar restrictions were or will be adopted in other countries, with repercussions in Brazil, claims have been assessed on the basis of the possibility of the characterisation of the effects of the pandemic as force majeure events, because, as a rule, the disputed policies usually foresee the loss of the right to indemnification by the insured following an unforeseen or force majeure event.
Unforeseen events and force majeure are contained in Article 393 of the Civil Code, according to which 'the debtor does not answer for the damage resulting from an unforeseen event or force majeure if the debtor is not expressly liable for it [the unforeseen event or force majeure]'. In this context, the Civil Code provides that the unforeseen event or force majeure is characterised by the lack of the possibility of avoiding or preventing the effects of the event.
From readings of the aforementioned numerous legal, legislative and executive statements declaring the state of public calamity and establishing measures seriously restricting rights, we consider that the covid‐19 pandemic may, at least in theory, constitute an event of force majeure capable of exonerating debtors from responsibility for non-compliance with their obligations, including for the purposes of characterisation of the 'loss of rights' provided for in surety policies – although without losing sight of the necessary existence of a causal link between the covid-19 pandemic and the claimed damages.
iii Brazilian General Data Protection Law
With the entry into force of the Brazilian General Data Protection Law (LGPD)20 after the vacatio legis period, coupled with the growing number of cyberattacks on companies in all sectors of the Brazilian economy, the interest in cyber risk insurance is growing exponentially.
The LGPD establishes important and mandatory guidelines for the collection, processing and storage of personal data. It was inspired by the EU General Data Protection Regulation, which entered into force in 2018 with a significant impact for both businesses and consumers.
The legislation is based on several values and has as its main purposes: (1) to ensure the right to privacy and protection of users' personal data; (2) to provide clear rules on the processing of personal data; and (3) to strengthen the security of legal relations and the owners' trust in the processing of their personal data.
While still in the process of consolidation in the country, cyber insurance has seen an increase in demand of almost 85 per cent in 2020 compared with 2019, largely because of the LGPD and large data leaks, such as the one that occurred in January 2021, exposing Individual Taxpayer Registry-related data for almost the entire Brazilian population.
In 2020, the collection of premiums represented 41 million reais; however, the number of claims also increased, indemnities for which in 2020 represented 60 per cent of the collection of premiums.
iv Regulatory efforts
Although the number of premiums in Brazil is significant, the number of insurance policies sold and the volume of premiums earned remain low, so SUSEP has taken active measures to increase acceptance and uptake in the sector, and facilitate the entry of new participants.
The economic and administrative reforms initiated by the government last year (the economic stabilisation plan, deregulation process, opening of markets to foreign insurers, and privatisation programmes) have had a significant impact on the insurance market and, in this context, SUSEP, the CVM and the Central Bank have also begun a programme of financial data sharing and the adoption of 'open insurance', linked to the establishment of rules for a regulatory sandbox (an experimental environment), and we are also seeing the relaxation of the rules for the preparation of contractual conditions for products aimed at major risks and non-vulnerable insureds.
1 Bruno Melo, Dennys Zimmermann, Felipe Reis, Felipe Rosa and Nicole Priuli are partners at RPZ Advogados.
2 Enacted in 1850.
3 Enacted in 1966, with force of law.
4 Law No. 10,406 of 10 January 2002 (the Civil Code).
5 Law No. 8,078/1990.
6 Chapter XV, Articles 757 to 802.
7 Article 423 of the Civil Code.
8 Oliveira, Celso Marcelo de. Teoria Geral dos Contratos de Seguros (General Theory of Insurance Contracts). Campinas: LZN Publishing House, 2005, p. 66.
9 Article 762 of the Civil Code.
10 Article 783 of the Civil Code.
11 Article 779 of the Civil Code.
12 Article 206, Section 1, II(a) and (b) of the Civil Code.
13 Formerly the Reinsurance Institute of Brazil.
14 Exceptions are provided in Article 20 of Complementary Law No. 126/2007.
15 Bill No. 29/2017 provides for private insurance rules, revokes provisions of the Civil Code and contains other provisions.
16 Law No. 9,307/96, Article 37.
17 Law No. 9,307/96, Article 39.
18 Law No. 9,307/96, Article 40.
19 Law No. 14,133/2021.
20 Law No. 13,709/18.