Primer On Civil And Common Law For The Int’l Insurer
Insurance Law360October 31, 2014
By José M. Umbert and Jason Reeves
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In large, complex coverage disputes, it is common for international insurers and reinsurers based in a common law jurisdiction to get involved in the adjustment and dispute resolution of claims subject to the laws of civil law jurisdictions in Europe and Latin America. The reverse is also true for European insurers and reinsurers underwriting risks in the U.S. There are significant differences between common law and civil law systems, however, that impact how a claim can be adjusted and insurance coverage disputes are handled. This article provides an overview of some of those differences and identifies specific issues that may arise to assist carriers providing coverage for risks in foreign jurisdictions.
Caselaw vs. Codes: Absence of a Developed Body of Law in Some Areas
The common law is derived from judicial decisions. In the U.S., England, Wales and other common law jurisdictions, the rules governing insurance and reinsurance contracts are primarily derived from court rulings. Under the doctrine of precedent, judges must follow decisions issued by higher courts when the same issues arise in subsequent disputes. The reasoning in those decisions can also provide an analytical framework for resolving other cases.
In civil law jurisdictions, on the other hand, insurance and reinsurance contracts are regulated by commercial or civil codes, or insurance contract acts, which set out the applicable rules. Court decisions are not binding on judges, except in limited circumstances. However, previous decisions will generally be persuasive authority for points not addressed in the codes.
Importantly, in many civil law countries, neither the statutes nor the case law address in detail some of the issues that often give rise to insurance disputes. This is particularly true with respect to business interruption and other time element coverages, often the largest component of a complex first-party loss.
In the absence of statutes or judicial decisions construing analogous policy provisions that can guide the parties — and the courts — the specific language in the contract and the factual analyses of adjusters and forensic accountants become even more critical to successfully resolving a dispute.
Contract Interpretation: How to Determine the Intent of Parties
In both common law and civil law jurisdictions, when interpreting an insurance or reinsurance contract, the primary objective is to ascertain and give effect to the intention of the parties. However, the two systems differ significantly as to how they achieve that goal.
In common law countries, as a general rule, the language of the policy must be accepted as the expression of the parties’ intent and will be enforced by the courts as written. The intent is to be determined, if possible, solely from the four corners of the insurance contract using the common and ordinary meaning of the policy terms. Generally, it is only where the contract language is ambiguous that a court may look at other materials (i.e., “extrinsic evidence”) to determine the meaning of the contract. An ambiguity exists in an insurance or reinsurance contract only if it is subject to more than one reasonable interpretation. If an ambiguity persists after examining the plain language of the agreement and relevant extrinsic evidence, then the courts may interpret the ambiguity against the insurer.
In contrast, in some civil law jurisdictions, such as Chile and Colombia, when interpreting a contract the intention of the parties prevails over the terms of the written instrument,[1] and courts may consider extrinsic evidence (i.e., evidence coming from sources other than the face of the contract) to ascertain the parties’ intent in the first instance.
This rule can have significant implications in coverage disputes, as it permits the parties to present evidence of statements or communications between them during the underwriting process, or of the circumstances surrounding the agreement, and the court may take that evidence into consideration to interpret the terms of the insurance or reinsurance contract. Maintaining a detailed file of the negotiation process is, therefore, particularly important for carriers underwriting risks in civil law jurisdictions.
Grounds for Avoidance of Liability Under Contract: Impact of a Breach of Warranty or Condition Precedent
There are also significant differences among jurisdictions with respect to what breaches of duty may allow an insurer or reinsurer to be relieved from liability under the contract.
The impact of a misrepresentation or failure to disclose by the policyholder is similar under the two systems. In both common law and civil law jurisdictions, as a general rule, a misrepresentation or concealment by the insured of a fact material to the risk, if made intentionally or recklessly and relied upon by the insurer, allows the carrier to avoid the contract of insurance in the event of a loss. This is typically a very difficult standard to meet.
The treatment of warranties and conditions precedent, however, differs significantly by jurisdiction. In common law countries, warranties and conditions precedent are generally considered essential to the validity of the contract, and the policyholder’s failure to satisfy a warranty or condition precedent may void the contract and release the insurer from liability.
In contrast, in some civil law nations, such as Peru, a breach of warranty may be grounds for denying liability under the policy only when the breach was a cause of the loss.[2] Further, the concept of condition precedent often does not exist in civil law jurisdictions. These countries’ laws may treat a failure to satisfy a “condition precedent” as a breach of a contractual duty which, depending on the circumstances, may bar liability[3] or, as a breach of warranty, allow the insurer to void the contract.[4] Thus, an insurer or reinsurer considering a defense based on the breach of a warranty or condition precedent in its contract cannot assume that the same result will be obtained in common law and civil law jurisdictions.
Procedural Considerations: Forum, Discovery, Experts, Trial and Costs
If an insurance or reinsurance claim ends up in litigation, there are many differences between the procedural systems of common law and civil law jurisdictions that may be critical to the outcome.
An initial consideration is the validity of the parties’ contractual choice of forum to resolve a dispute. Common law jurisdictions will generally enforce forum selection and arbitration clauses in insurance and reinsurance contracts, although this is not always the case.[5] In civil law countries, it is more frequent to find a requirement that insurance and reinsurance disputes be submitted to local jurisdiction.[6] And, arbitration clauses in insurance contracts are unenforceable in some civil law jurisdictions.[7]
If litigation commences, a significant difference between common law and civil law systems are the mechanisms available to the parties to access evidence to prove their case. The civil procedure rules in state and federal courts in the U.S. provide for extensive discovery of relevant documents and depositions of witnesses, while English rules allow for broad document disclosure and witness evidence.[8] On the other hand, the procedural laws of civil law jurisdictions generally do not provide for any pretrial discovery in the common law sense and parties can only obtain from the other side limited kinds of documents, such as those that the party can specifically identify.[9]
Presentation of evidence at the trial is also different between common law and civil law jurisdictions. In complex coverage cases, expert witnesses often play a fundamental role in ascertaining the cause and origin of the loss, which in turn may determine whether there is coverage under the contract. Expert witnesses are also typically relied on to calculate any business interruption losses sustained by the insured.
In common law countries, expert witnesses are generally instructed by the parties and have frequent contact with the insurers and their attorneys throughout the course of their work. This is particularly true in the U.S. Even though the English procedural rules expressly provide that experts owe an overriding duty to the court,[10] the use of experts is similar to the U.S.
By contrast, in civil law jurisdictions the court will generally appoint experts to assist it with technical matters.[11] Although the parties can also retain their own experts, the court often gives more value to the opinion of the independent experts it appoints. Insurers and reinsurers in these jurisdictions may be well-served to instruct an independent expert to assist the court-appointed expert.
Another consideration impacting preparation and strategy for trial is that, in the U.S., parties have the right to trial by jury in civil matters, including insurance and reinsurance cases, although in declaratory judgment actions relating to coverage the right to a jury trial will depend on the nature of the action.[12] In England and Wales, and in civil law jurisdictions, civil trials are held in front of a judge. Some civil law jurisdictions, like Mexico, conduct litigation without oral hearings and rely exclusively on written submissions.
Lastly, there are differences among legal systems with respect to the recovery of legal costs after the conclusion of litigation. In the U.S., as a general rule, each party bears its own attorneys' fees and litigation costs. Some states do allow recovery of fees and costs against insurance companies under certain circumstances, such as bad faith.[13] Rarely can insurers or reinsurers recover attorneys' fees in the U.S. In English litigation, and in civil law countries, there are no bad faith damages, but courts in those jurisdictions apply some version of the loser pays principle, requiring the losing party to pay some or all of the successful party’s costs, including attorneys' fees.[14]
Conclusion
When handling claims in foreign jurisdictions, international insurers and reinsurers need to understand the significant differences that exist between common law and civil law systems. These differences can impact every phase of a complex insurance claim, from adjustment through the retention of experts and a final resolution, and may significantly impact the ultimate outcome of a coverage dispute.
Awareness of these differences and obtaining appropriate guidance can assist insurers and reinsurers in making sound claims-handling and strategic decisions. Providing a common law analytical framework to address complex problems not addressed in local civil law codes is often an effective strategy in bridging any gaps in the code.
—By José M. Umbert and Jason Reeves, Zelle Hofmann Voelbel & Mason LLP
José Umbert is a partner and Jason Reeves is counsel in Zelle Hofmann Voelbel & Mason's London office.
The opinions expressed are those of the authors and do not necessarily reflect the views of their firms, their clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See Chilean Civil Code, Art. 1560; Colombian Civil Code, Art. 1618.
[2] See Peruvian Insurance Contract Act, Title I, Art. IV, para. 11.
[3] See Argentine Insurance Act, Art. 36.
[4] See Colombian Commercial Code, Art. 1061.
[5] For example, under Louisiana and Washington law, mandatory arbitration clauses in insurance contracts are unenforceable. See La. Rev. Stat. Ann. § 22:868; Wash. Rev. Code Ann. § 48.18.200.
[6] For reinsurance contracts, see, e.g., Brazilian CNSP Resolution 168, Art. 38 (except for arbitration); Argentine SSN Resolution 35.615/2011, Art. 15.
[7] See Argentine Insurance Act, Art. 57.
[8] See Federal Rules of Civil Procedure, Rule 26 et seq.; English Civil Procedure Rules, Part 31.
[9] See, e.g., Spanish Civil Procedure Act, Art. 328.
[10] See English Civil Procedure Rules, Part 35.3.
[11] See, e.g., Chilean Civil Procedure Code, Art. 414.
[12] See, e.g., In re Environmental Ins. Declaratory Judgment Actions, 693 A.2d 844, 850-851 (N.J. 1997).
[13] See, e.g., Brandt v. Superior Court, 693 P.2d 796, 798 (Cal. 1985).
[14] See, e.g., Spanish Civil Procedure Act, Art. 394.
