Peru: "claims made" policies still valid

There has been a lot of talk, perhaps too much talk, following the recent non-binding opinion of the legal counsel of the local regulator SBS against the universally-accepted "claims made" system of insuring certain liability risks. The SBS opinion is unhelpful and misguided, but relatively inoffensive, and the markets can continue underwriting on this basis.

This is the conclusion we, and the rest of the market that attended a recent market-wide discussion on the topic we organised in Lima, have arrived to. Certain carriers also explained that they are taking this up jointly, under the auspices of industry association APESEG, to try and get SBS to reverse its opinion as it does no justice to market practice locally or the law in Peru.

Our partners in Peru have lodged numerous queries with SBS on a number of issues in the past. This query was no different. Several carriers and underwriters had queried whether “claims made” was accepted in Peru and therefore, unilaterally, this firm decided to ask SBS for its opinion. Our apologies for any confusion in this respect.

Although the Insurance Contract Act of 2013 is silent about “claims made” - whilst earlier drafts of the law expressly allowed it - it is a constitutional right in Peru to allow whatever is not prohibited. That, and the market reality that the SBS knows well, as there are several carriers with 'claims made' policies registered with the regulator, and reserves set up and notified accordingly, should have been the guiding principle of the response.

Instead, the SBS responded that, per Article 78 of the Act, the limitation period for the insured to request coverage under any insurance policy is 10 years, and therefore, policies should be underwritten under “occurrence” basis, and that any shortening of the limitation period would render the policy null and void. It is hoped that the SBS will reconsider, as under “claims made” the rights of the insured insofar as limitation goes are intact. It is just that the period of cover is restricted to “claims made” against the insured in the policy period, for events that took place in the past. This system provides underwriters with greater certainty, as the insured is requested to disclose any known third party claim or circumstance (defined widely) upon each renewal, therefore allowing the closure of years of account more quickly and efficiently managing reserves.

No doubt the SBS was well intended in their attempt to protect insureds - always an overriding concern of regulators - but “claims made” is legal, not against the limitation rights under local law. It is also equally as important for insureds, priced competitively thanks to the availability of several reinsurance markets that prefer it to “occurrence” as they can bracket the risk more accurately.

In the recent market event in Lima, it became apparent that local carriers and reinsurance brokers intend to continue to offer “claims made” policies. It is also clear that APESEG is taking the matter forward with the SBS, and perhaps lawmakers, in order to get the Act to expressly recognise “claims made” as in akin jurisdictions such as Mexico, Spain, or Brazil (via regulatory circular). In Colombia, whilst “claims made” is expressly allowed in the law and the insurance regulator is of the view that insureds are adequately protected under such policies, the Contraloria, the watchdog for adequate funding of public works, is fudging the issue. This will be discussed in our next article and the upcoming Latin American and Caribbean Forum (view the program here).

The SBS has no power to declare policies illegal. It is highly unlikely insureds would take this matter to court, as asking the courts to declare policies null and void, if by chance granted, would have unintended consequences, as there would be no cover at all, with premium being returned to the insured in exchange for resolving the contract.

Unfortunately, there is no “large risk” provision in the Insurance Contract Act making it clear that the contract has been entered into by grown-ups, making the intervention of regulators or courts unnecessary in their quest to protect the rights of the insured, who is usually (but often mistakenly) seen as the weaker party in need of tutelage by the authorities. As ever, clear language evidencing that the policy was entered into consciously, and that the insured understands and agrees its terms and conditions, including “claims made”, would be welcome. A signature by the insured would also help.