The Insurance Disputes Law Review: Spain
Spain is a civil law country. Therefore, most regulation is legislative.
Spanish insurance law is constantly undergoing a process of progressive improvement and adaptation to European Union law.
Since the covid-19 pandemic hit the planet, both Spain and the European Union have suffered its consequences, one of which has been the slowing down of governmental and political procedures, with a corresponding lessening of general regulatory activity. The most recent substantial regulatory change to affect the insurance sector directly was Royal Decree-Law 3/2020 of 4 February 2020, which incorporated the EU Insurance Distribution Directive2 into national law.
However, now that the world seems to be heading towards a new normality, the Permanent Representatives Committee of the European Council has given the go-ahead to the European Parliament's proposal regarding the amendment of the Motor Insurance Directive to strengthen the protection of injured parties in motor accidents and improve the rights of policyholders.
In terms of litigation in the past 12 months, disputes arising from insurance contracts have been focused in various main areas, such as:
- effects of limitation and delimitation clauses;
- compensation for loss of profits caused by business interruption due to covid-19 or the measures taken by the government to tackle the pandemic;
- wilful misconduct;
- large risks insurance contracts; and
- negligence in the health sector.
The legal framework
i Sources of insurance law and regulation
Spanish regulation in relation to insurance is very extensive, comprising both national legislation and the abundant regulation of the European Union in this field.
While Law 50/1980 of 8 October on Insurance Contracts (the Insurance Contract Law) continues to be the heart of this regulatory regime, other laws and royal decrees complement and regulate specific aspects of insurance law, including, but not limited to, the following:
- vehicle and traffic insurance:
- Royal Decree 1507/2008 of 12 September, approving the Regulation on Compulsory Insurance against Civil Liability in respect of the Movement of Motor Vehicles;
- boat and aviation insurance:
- Law 14/2014 of 24 July, also known as the Maritime Navigation Law;
- Royal Decree 1616/2011 of 14 November, regulating the insurance of owners of civil vessels for maritime law claims;
- Royal Decree 607/1999 of 16 April, regarding compulsory insurance for recreational craft;
- Regulation (EC) No. 785/2004 of 21 April on insurance requirements for air carriers and aircraft operators;
- Law 48/1960 of 21 July, also known as the Air Navigation Law; and
- Royal Decree No. 37/2001of 19 January, updating the indemnity amounts for losses provided in the Air Navigation Law;
- civil liability insurance for insolvency administrators:
- Royal Decree 1333/2012 of 21 September, regulating civil liability insurance and the equivalent guarantee for insolvency administrators; and
- accident insurance (life, health, death, etc.):
- Law 20/2005 of 14 November on the Creation of the Register of Insurance Contracts for Death Cover.
Rules governing access to the market and insurance activities
There have not been any substantial changes in the applicable regulations regarding entering the insurance market and carrying out activities as an insurance or reinsurance entity since 2015. The following two pieces of legislation are specifically noteworthy: (1) Law 20/2015 of 14 July on the Management, Supervision and Solvency of Insurance and Reinsurance Companies (Article 34 of which was recently amended by Royal Decree 288/2021 of 20 April); and (2) Royal Decree 1060/2015 of 20 November, on the management, supervision and solvency of insurance and reinsurance companies, which implements the aforementioned Law.
Rules governing the mediation and distribution of insurance
In relation to the rules governing the mediation and distribution of insurance, there have been some significant changes. In February 2020, Law 26/2006 of 17 July on Private Insurance and Reinsurance Mediation was repealed by Royal Decree-Law 3/2020 of 4 February.
This derogation simplifies the regulation of private insurance and reinsurance intermediaries.
However, until the implementing regulation for Royal Decree Law 3/2020 is approved, Royal Decree 764/2010 of 11 June and the Resolution of 18 February 2011 of the Directorate General of Insurance and Pension Funds, on related matters, will remain in force.
The main new features introduced by Royal Decree-Law 3/2020 are as follows:
- the duty to inform the customer;
- definition of the concepts of linked and combined sales;
- insurance intermediaries that use websites or other remote communication techniques to offer or compare insurance products must draw up written policies that guarantee the transparency of their services and products;
- the requirement for insurance company employees to undergo continuous training courses;
- clarification of the concept of repeated infringement, establishing that a repeated infringement occurs when it is not dealt with within the period stipulated by the Directorate General of Insurance and Pension Funds or, failing that, within one month; and
- the wording of the precepts relating to data protection is adapted to the provisions of the EU General Data Protection Regulation.3
Rules governing insurance contracts, in their various forms
The regulation of insurance contracts is effected by the Insurance Contract Law. This Law consists of general provisions (e.g., definitions and obligations of the parties) and more specific regulations regarding both insurance against damage and insurance in relation to persons.
ii Specific provisions on applicable law
Article 107 (on private international law) of the Insurance Contract Law regulates the determination of the applicable law. According to Article 107, the Insurance Contract Law will be applicable when it relates to risks that are located on Spanish territory and where the policyholder is an individual the policyholder has his or her habitual residence in Spain or, where the policyholder is an entity, it has its registered office or place of business and management in Spain; or when the contract is concluded in compliance with an insurance obligation imposed by Spanish law.
In the particular case of insurance contracts for large risks, the parties will be free to choose the applicable law.
When neither of the above cases apply, the following rules shall apply to determine the law applicable to damage insurance contracts:
- where the insurance concerns risks located on Spanish territory and the policyholder does not have his, her or its habitual residence, registered office or place of business in Spain, the parties may choose between the application of Spanish law or the law of the state in which the policyholder is resident or has its registered office or effective centre of management;
- where the policyholder is an entrepreneur or a professional and the contract covers risks relating to activities in different states of the European Economic Area, the parties may choose between the law of any state in which the risks are situated or the law of the state in which the policyholder is resident or has its registered office or place of business and management; and
- when the cover for risks located on Spanish territory is limited to claims that may occur in a Member State of the European Economic Area other than Spain, the parties may choose the law of that state.
The above rules on applicable law have remained unchanged since the entry into force of the Insurance Contract Law in 1981.
iii Insurable risk
Although Spanish regulations do not provide an express definition of the risks that are insurable and those that are not, there is a practical distinction between the two that proves their existence and allows the identification of certain features of non-insurable risks. For a risk to be considered an insurable risk, it must be uncertain, possible, lawful and future. It must also be concrete and have an economic content.
In general terms, we could define non-insurable risk as any risk that, because of its characteristics, is abstract, namely in those cases where it is not possible to calculate or estimate the possibilities of a future loss (i.e., the risk and insurance premium cannot be measured).
The definition of an insurable risk has remained unchanged in the past 12 months.
iv Fora and dispute resolution mechanisms
The parties to an insurance contract are given the freedom to choose the means of conflict resolution that they consider most appropriate (e.g., mediation or arbitration). However, claims are usually referred to the courts. According to Article 24 of the Insurance Contract Law, the competent court to decide actions arising from an insurance contract is that of the domicile of the insured and any agreement to the contrary will be considered null and void.
Furthermore, Article 76 of the Insurance Contract Law recognises the direct action of offended third parties against the insurer.
Finally, for disputes exclusively related to the valuation of an insured object, Article 38 of the Insurance Contract Law states that insurer and insured must reach an agreement within 40 days of the date the claim is made; if this is not the case, both parties will appoint their own experts and if these experts do not reach an agreement, the parties shall appoint an umpire expert. To appoint an umpire expert, a claim may be filed in voluntary jurisdiction law or following the notary legislation. The opinion of the experts, unanimously or by majority, will be notified to the parties immediately and will be binding on them unless this joint opinion is challenged in court within a period of 30 days for the insurer and a period of 180 days for the insured, as recently confirmed by the Supreme Court judgment of 26 July 2021. This judgment also confirms that if the decision is not challenged, it is binding as to the quantum of damages but not to determine the scope of the insurance contract.
Title 2, Section 4 of Royal Decree 3/20204 establishes conflict resolution mechanisms, such as the figure of the 'client's defender', who must attend to and resolve the complaints and claims submitted to him or her. The decision of the client's defender will not be an obstacle to applying for judicial protection, appeal or other mechanisms for conflict resolution, but its dictamen might avoid unnecessary litigation.
The alternative procedures to pursue an insurance claim are:
- file a complaint with the insurance intermediary (broker or agent);
- file a written complaint or claim with the insurance company;
- raise the matter with the ombudsman for the insured (free complaint);
- file a complaint with the Directorate General of Insurance and Pension Funds or the relevant autonomous body (commissioner for the defence of the client of the Directorate General of Insurance and Pension Funds)
- raise the claim through consumer associations;
- use arbitration systems – the request for arbitration must be submitted in writing to the consumer information offices in the community; and
- via the courts.
In the past 12 months, Spanish Courts have focused on various major insurance-related issues, including the following:
- limitation and delimitation clauses in an insurance contract;
- compensation for loss of profits caused by business interruption due to covid-19;
- wilful misconduct;
- large risks insurance contracts; and
- negligence in the health sector.
Covid-19 will probably give rise to claims against the health authorities and their insurance companies in the near future. In those claims, to determine the possible existence of negligence, courts will apply criteria that include both the relevant scientific knowledge and an assessment of the reasonable precautionary measures taken, and damages will be calculated based on the principle of loss of opportunity.
i Limitation and delimitation clauses in an insurance contract
Perhaps one of the major issues in insurance dispute litigation is the distinction between limitation and delimitation clauses in a contract, as limitation clauses have stringent validity and admissibility requirements.
The Supreme Court, in a judgment of 26 July 2021, revisited the definition of limitation and delimitation clauses in the context of, for example, a claim by the insured against its insurance company for damage to a vehicle in a road accident. The insurance company of the other vehicle involved in the accident was not included in the claim. The claimant sued not only for the damage to the vehicle, but also for loss of profit. The insurance company claimed that the general conditions of the policy (which did not expressly include loss of profit) did not limit the extent of the coverage of the contract but merely defined the risk insured. The Supreme Court, citing previous case law, found in favour of the insurance company, agreeing that the clause only defined the extent of the cover. Limitation clauses restrict, condition or modify the right of the insured to be indemnified once the risk has materialised, hence these clauses need to be highlighted and expressly accepted to be contractually valid, as explained below.
ii Compensation for loss of profits caused by business interruption due to covid-19 or the state of emergency
As a result of the governmental restrictions introduced in Royal Decree 463/2020 of 14 March, issued in response to the covid-19 pandemic and by virtue of which the activity of various businesses was totally paralysed and the population confined, we have seen an increase in claims for business interruption.
There are various judgments that have recently decided business interruption claims in Spain, such as judgment No. 166/2021 of 21 July 2021 of the First Instance Court of Granada; and judgments Nos. 254/2021 of 16 June 2021, 137/2021 of 3 February and 59/2021 of 3 February 2021, all of the Provincial Court of Girona.
The judgments cited above found in favour of the insured and limited the debate to the legal interpretation of the dispute.
The four judgments were based on the determination of whether the arguments put forward by the insurers for rejecting coverage under the 'interruption of activity' clause were limiting or delimiting (or defining) of the rights of the insured person.
As explained previously, limitation or exemption clauses are terms and conditions that exonerate the insurance company from having to pay the insured when the risk defined in the policy materialises. In other words, this type of clause is aimed at setting conditions or modifying the rights of the insured under the insurance contract. To determine whether a clause is limiting in nature in this context, the case law of the Supreme Court refers to the concepts of the 'natural content of the contract' and the 'reasonable expectations of the insured'.
In this respect, the aforementioned judgment No. 59/2021 of the Provincial Court of Girona in its third legal reasoning establishes that:
When, in the general conditions, 'paralysis due to governmental resolution in the event of a pandemic' is not an expressly contemplated section, and such a claim by the insured is opposed by the insurer, we find ourselves faced with a clear limitation of the rights of the insured in a contract of adhesion, and therefore its validity and opposability would be conditional upon the fulfilment of the specific requirement that the clause appears specially highlighted in the policy and is specifically accepted in writing, pursuant to Article 3 of the Insurance Contract Law.
Article 3 of the Insurance Contract law establishes a dual requirement for the validity of these limitation clauses:
The general conditions, which under no circumstances may be detrimental to the insured, must be included by the insurer in the insurance proposal if there is one and necessarily in the contract policy or in a complementary document, which will be signed by the insured, and to whom a copy will be given. The general and specific conditions shall be drafted clearly and precisely. Special emphasis shall be placed on the clauses limiting the rights of the insured, which must be specifically accepted in writing.
The general conditions of the contract shall be subject to the supervision of the public administration under the terms provided for by law.
If the Supreme Court declares any of the clauses of the general conditions of a contract to be null and void, the competent public administration will oblige the insurers to modify the identical clauses contained in their policies.
Moreover, if there is any doubt about the interpretation of a clause, the doctrine of the Supreme Court set out in the judgment of 4 July 1997 will be applicable. This doctrine states:
In 'adhesion' contracts, among which insurance contracts stand out, the jurisprudence of this Supreme Court has established that where doubts arise as to the meaning of clauses, these must be interpreted in accordance with Article 1288 of the Civil Code, in the way most favourable to the insured, because once clauses have been drafted by one of the contracting parties, their lack of clarity cannot favour the party that caused the obscurity
To date, this Supreme Court doctrine has been followed by the courts for the interpretation of any exclusion with respect to the interruption of business operations caused by Royal Decree 463/2020 of 14 March, issued in response to the covid-19 pandemic. Furthermore, unless such an exclusion was individually negotiated and expressly accepted by the insured, it will be interpreted as limiting the rights of the insured and therefore unenforceable against the latter.
iii Wilful misconduct
There have also been developments in Spanish case law regarding interpretation of what constitutes wilful misconduct. For example, a judgment of the Murcia Provincial Court of 26 April 2021 established the legal framework for what may be considered a fraudulent act by a company manager in a claim against an insurance company in relation to the consequences of negligent management. This judgment establishes that the Insurance Contract Law expressly excludes cover in the event of bad faith or wilful misconduct. It also establishes that failure to keep accounting books, or to provide the insolvency administration with delivery notes, invoices, orders, bank details or any other documents on which the accounting should be based, is not merely an act of negligent management, but also an intentional omission and an act of civil malice.
In conclusion, any action that is conscious and voluntary, and not merely negligent, will be excluded from insurance cover when damage is suffered by the insured.
In contrast, however, in a judgment of 24 May 2021, the Supreme Court assessed a claim by an insured against his insurance company for injuries suffered as a result of an accident in which it had been established that the insured had been driving while intoxicated (DWI). The company submitted that the claim had to be dismissed as the accident was caused by the wilful misconduct of the insured. However, the Supreme Court found that the policy did not expressly exclude cover in cases of DWI, and argued that DWI did not equate to intentionally causing the accident and, thus, the Court found in favour of the insured.
In cases of obligatory insurance in road accidents, however, when there is wilful misconduct by the insured but the damage is suffered by a third party, the insurance company will have to indemnify the losses of the third party but will have recourse to a reimbursement action against the insured, as confirmed by the judgment of the Provincial Court of Navarra of 19 February 2021 in application of Article 10 of the Law on Civil Liability and Insurance in the Circulation of Motor Vehicles.5
iv Large risks insurance contracts
The determination of the scope of 'large risks' can be found in Article 11 of Law 20/2015 of 14 July on the Management, Supervision and Solvency of Insurance and Reinsurance Companies. This Law considers such companies to include, among others, 'those of railway vehicles, air vehicles, maritime vehicles, credit and surety (in the professional sphere), as well as certain risks where the policyholder exceeds certain set limits (referring to parameters such as the turnover, balance sheet or number of employees)'. The scope established in this Law has recently been confirmed by judgment No. 59/2021 of 3 February 2021 of the Provincial Court of Girona.
Supreme Court judgments Nos. 545/2020 of 20 October 2020, 117/2019 of 22 February 2019 and 78/2014 of 3 March 2014 provide that the following are consequences of classifying an insurance contract as a large risks insurance policy:
- Article 2 of the Insurance Contract Law is not applicable; in other words, the imperative nature of general insurance law is not applicable to these risks; and
- these contracts are governed in accordance with the principle of freedom of choice of the parties and by the provisions of the particular and general clauses of the insurance policy contract, and only in a supplementary manner by the provisions of the Insurance Contract Law.
In large risks insurance contracts, the parties are considered to have the capacity to negotiate the policy conditions on an equal footing.
Therefore, to avoid future disputes, the parties to large risks insurance contracts must give careful consideration to:
- clauses that may be detrimental to the insured;
- clauses delimiting the risk; and
- limitation clauses.
In summary, by prioritising the principle of freedom of choice, a large risks insurance contract gives the contracting parties greater freedom to regulate the contract. However, this does not mean that the articles of the contract should not be clear nor leave any doubt as to the intention of the contracting parties, as was established by Supreme Court judgment No. 78/2014 of 3 March 2014. When it is not possible to ascertain the true intention of the contracting parties through literal interpretation of the clauses, Article 1288 of the Civil Code will apply, according to which the clauses of a contract must not in any case favour the party that caused the obscurity.
v Negligence in health insurance contracts
Medical negligence continues to be a source of litigation, and decisions such as the Supreme Court judgment of 19 July 2021 have confirmed previous precedents (e.g., the Supreme Court judgment of 2 September 2018 establishing that health insurance companies are jointly and severally liable for medical malpractice together with the doctor on their roster responsible for the damage, pursuant to Article 105 of the Insurance Contract Act).
The international arena
It is very common to find international elements in insurance contract claims.
In any dispute with international elements, there are three aspects that must be taken into consideration before initiating a claim: the law applicable to the dispute; the competent jurisdiction; and the procedure for the enforcement of a future decision.
i Applicable law
Knowing which legal regime is applicable to an insurance claim is essential to assess the claim properly. To determine the applicable law, it is necessary to check whether there are any applicable international treaties or regulations governing the dispute. For example, if the subjects affected by the dispute are Spanish and French, the Rome I Regulation (Rome I)6 determines the law applicable to contractual obligations.
Pursuant to the erga omnes or universal application provided for in Article 2 of Rome I, the legal system of either a Member State or a third non-EU state may be applicable to the dispute. Commencing court proceedings before the court of any Member State will trigger the application of Rome I to determine the law of the contracts in dispute. In other words, if the action is brought before a Rome I Member State, the law applicable to the dispute will be determined by Rome I, even where that law is not the law of a Member State.
Article 7 of Rome I regulates the law applicable to insurance-related claims. This Article establishes that the parties will be free to choose the law applicable to the contract when the contract covers large risks. In the absence of an agreement between the parties, large risks insurance contracts will be governed by the law of the country where the insurer has its habitual residence. If, however, it appears from the circumstances as a whole that the contract is more closely connected with another country, the law of that other country shall apply.
For insurance contracts covering risks not considered to be large risks, Article 7 limits the freedom of choice of the parties to the laws of the following:
- the Member State where the risk is situated at the time of the contract;
- the Member State where the policyholder has his or her habitual residence;
- the Member State where the policyholder is nationalised in the case of life insurance contracts;
- the Member State where the events occur in events-occurring policies; and
- the Member State where the policyholder develops his or her professional activities if at least two of the risks covered relate to that professional activity.
If the parties do not choose any of the applicable laws, the law of the Member State in which the risk is located will be applicable.
In addition, in relation to compulsory insurance, Article 4 of Rome I provides other alternatives among which the law of the Member State that imposes the obligation to insure is prevalent.7
ii Competent jurisdiction
Another important issue in litigation is determining the relevant courts or tribunals in which to resolve an insurance dispute. A claim presented before a court that does not have jurisdiction over the matter may be dismissed for this reason following an application from the respondent, and this could result in the claimant losing time and money, and in the claim being time-barred.
Articles 10 to 16 of the Brussels I Regulation8 determine which court has jurisdiction in Spain in relation to insurance contracts.
Pursuant to the Brussels I Regulation, insurance contract disputes are subject to the jurisdiction of the following courts:
- the courts of the Member State in which the defendant is resident;
- the courts of the Member State where the claimant is resident, provided that the claimant is the insured, beneficiary or policyholder in the dispute; and
- for co-insurers, the courts of the Member State in which proceedings are brought against the leading insurer.
Note that even if the insurer is not domiciled in a Member State but has an agency or branch in a Member State, the claimant shall be deemed to be a resident of that Member State.
In addition, the insurer may also be sued at the place where the harmful event occurred (for liability insurance or insurance relating to real estate property).
It should also be noted that the insurer's action may be only brought in the courts of the Member State in which the defendant is resident, whether that person is the policyholder, the insured or the beneficiary of the disputed policy.
However, when an arbitration clause is validly incorporated into the insurance contract, the claim must be addressed to the chosen arbitral tribunal under the applicable arbitration rules. If a claim is submitted to a Spanish court regardless of the arbitration clause, the court can decline jurisdiction for the claim, following an application made by the respondent.
iii Recognition and enforcement
The procedure for the enforcement of a foreign judgment or arbitral award in Spain is regulated by the following legislation:
- Spanish Law 29/2015 on International Judicial Cooperation in Civil Matters is applicable unless there is another provision expressly applicable to the matter.
- The enforcement of judgments issued by EU Member State courts is regulated by the Brussels I Regulation.
- The New York Convention9 and the Spanish Law 60/2003 on Arbitration apply to the recognition and enforcement of foreign arbitral awards.
The foreign judgment or arbitration award procedure consists mainly of two stages. The first is the recognition or exequatur of the judgment or arbitral award. Here, the Spanish courts will ensure that the judgment or arbitration award to be recognised has been issued in accordance with public order provisions and other international regulations. The second stage consists in the enforcement of that decision: basically, obtaining a judicial payment order, seizure of assets and public sale of those assets. Depending of the type of insurance contract, the competent court will be either the first instance court or the mercantile court of the place of domicile of the party against which recognition and enforcement is sought. Mercantile courts, for example, will be competent for marine insurance claims. Recognition and enforcement can be applied for jointly or separately, but enforcement itself will not take place until the exequatur is obtained.
This procedure has remained unchanged in the past 12 months.
Note that on 1 January 2021 the United Kingdom ceased to be part of the European Union. This exit is significant insofar as many international contracts incorporate UK jurisdiction clauses for the resolution of disputes.
Accordingly, the Brussels I Regulation will not apply to proceedings initiated after 1 January 2021 and the recognition and enforcement of UK judgments will be based on Spain's Law 29/2015 on International Judicial Cooperation in Civil Matters, which requires an approval or exequatur procedure for the foreign decision before any enforcement proceedings can be initiated. The party favoured by a court decision issued in the United Kingdom must therefore first go through an exequatur procedure before the Spanish courts, and only once the validity of the decision has been recognised will it be possible to demand compliance with or enforcement of the judgment.
Trends and outlook
The more traditional insurance policies, such as home insurance, life insurance, car insurance or death insurance, among others, are still very important today.
As part of any assessment of these traditional policies, the latest annual report10 of the Complaints Service of the Directorate General of Insurance and Pension Funds is of particular note, highlighting the historic moment of the covid-19 pandemic experienced in 2020, and the resulting general shutdown of society.
In March, April and May 2020, the volume of insurance claims fell by two-thirds from the number of claims initiated in the years 2018 and 2019, with the most significant drop being in April, down from 973 claims filed previously to just 222 in 2020.
The most common insurance policies continue to be for multi-risk, vehicle, transport, health and life insurance.
However, these are not the only types of insurance policies and over the past few years we have also observed an upward trend in insurance covering technological advances, such as those concerning cybersecurity, new means of urban transport and unmanned vehicles. We expect that the increasing reliance on new technologies (e.g., blockchain and artificial intelligence) will contribute to maintaining growth in the insurance market as risks increase.
1 Verónica Meana and Mikel Garteiz-Goxeaskoa are partners at Aiyon Abogados SLP.
2 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast).
3 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation).
4 Articles 166–168.
5 Enacted by Royal Legislative Decree 8/2004 of 29 October 2004 approving the recast text of the Law on Civil Liability and Insurance in the Circulation of Motor Vehicles.
6 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).
7 ibid., Article 4, Applicable law in the absence of choice.
8 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
9 The New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).
10 Report of the Complaints Service of the Directorate General of Insurance and Pension Funds 2020.