Insurance Flash: Spanish Update

Update on Spanish Courts Criteria about punitive interests imposed on insurers when compensating claims.

The Spanish Insurance Contract Act ("SICA") establishes in its section 20 punitive interests for delay in payment under an insurance contract. The interest rates are: (i) for the first two years after the loss, the legal interest rate enhanced by 50% (4.875% in 2023), (ii) after the second year, a flat rate of 20%.

The recent Appeal judgement of the English High Court of Justice of 4th May 2023 (Nicholls v. Mapfre and Woodward v. Mapfre) has exported this concern about punitive interests to other countries, by setting a precedent of applying the Spanish punitive interest in English proceedings.  In the case at hand, the British citizens Jane Nicholls and Sonia Woodward brought each a claim against the Spanish insurer MAPFRE for different accidents (both occurred in Spain) that caused them personal injuries. To both claims, Spanish law was applicable (in application of Rome II, pre-Brexit), although the English Courts had jurisdiction to resolve the conflict. The High Court of Justice has ruled that the imposition of interests is a question of substantial law (subject to Spanish law), and not a question of procedural law (subject to English law), with the subsequent application of interests under the Spanish Insurance Act in English proceedings.

In view of this judgement, it is worthwhile to give an overview on how exactly the punitive interests regime works in Spain.  

I. Punitive Interests under Spanish law

First of all, the Spanish Insurance Contract Act is only mandatory for insurance that is not considered as a large risk. However, the reality is that judges tend to apply section 20 of the SICA also to large risks.

Some considerations regarding the imposition of interests are the following:

• These punitive interests may be claimed by policyholders, insureds, but also by third parties (liability insurances) and beneficiaries, who have a direct action against the insurers.
• It is understood that there is an unjustified delay in payment if after three months after the date of loss, the insurer has not paid yet -at least- the minimum amount that is due.
• The law says that these interests should be imposed from the date of the loss.
  In case of personal injuries, the interests only start running once the personal injuries have become stable (i.e. there is no improvement possible).
• The insurer may avoid the payment of these interests only in very specific cases when there is a justified cause not attributable to insurers, like lack of notification of the loss, of the claim (in liability insurance), or similar cases.
• These interests are imposed by law. Therefore, they may be imposed by the judge, even if the claimant has not expressly requested to impose these punitive interests, unless we are dealing with a large risk.
  They are generally only imposed if the insurer is sued in Court proceedings. If only the insured (allegedly liable) is sued by a harmed third party, the action would be for breach of contract or in tort, but not based on the SICA.
• The interests go on top of the insurance limit.

It should be noted that, in practice, avoiding the payment of these severe interests rates becomes a difficult task, because there is a presumption that the delay in payment by the insurer is not justified.

The application of these provisions on interests is quite controversial, especially when delays are caused by circumstances beyond the control of the insurers. Long Court proceedings for example may increase significantly the amount at stake due to these severe interests that are running while the litigation is ongoing.

II. Spanish case law on justified reasons for insurers to avoid payment of punitive interests

As an insurer it is not easy to avoid punitive interests and any delay should be justified. Whether the delay is justified or not should be assessed on case by case basis.

The Spanish Supreme Court Decision n. 836/2022 of 28th November 2022 says that there is a justified cause if a Court decision was necessary to rule on the existence of the loss, or on coverage. Although this sheds some light about what reasons may be considered as sufficient to justify a delay, these criteria remain still quite uncertain. And we cannot forget that any grounds that the insurer invokes will be interpreted restrictively by virtue of the “pro insured’s” principle.

Here are some examples of situations the Spanish Courts have ruled that there were valid grounds to delay payment and have rejected the imposition of punitive interests on the insurer:

• Late notification of the claim attributable to the insured.
• Clear obstructionist behaviour from the insured or third party, that prevents the insurer from assessing the quantum of the loss.
• Where the harmed third party first sues the insured and afterwards the insurer with the sole purpose of claiming punitive interests (typically in medmal cases).
• Uncertainty about the applicability of an exclusion, where a Court decision is needed to decide on coverage.
• Uncertainty about the insured’s liability towards the harmed third party, because there exists a report of Labour Inspection concluding that the insured is not liable.
• Prevalence of lower interests rates included in the initial lawsuit.

In summary, if there are valid or reasonable grounds to refuse or withhold payment, there are possibilities to escape from the punitive interests. But the burden of proof about the validity or reasonability of these grounds lies with the insurer.

III. How to avoid interests under SICA?

Although the judgements Nicholls v. Mapfre and Woodward v. Mapfre might have caused concerns , there are ways to avoid these punitive interests.

The best option would be to try to settle the dispute out of Court. It is very unusual in Spain to include the claim for interests in settlement discussions. It is normally the amount of the principal claim that is being negotiated about, with each party bearing its own costs and without including interests. However, in most of the cases, settlement negotiations only take place once Court proceedings have begun.

And it is not always possible to reach a settlement agreement. Therefore, our recommendations would be:

• In case of liability insurance, try to avoid that the insurers are sued under direct action. It is preferrable that the insurers maintain low profile during the claims handling, if possible.
• Show a proactive attitude during the claims handling process. It is important that insurers are able to show that the claim has been taken care of, but that there was a valid ground to withhold payment. With the most recent Supreme Court judgements, discussions on the existence of the loss or even issues on coverage can be considered as valid grounds. If the insurer is asking for information on a regular basis, and leaving written record of this proactive attitude, insurers may revert the presumption on the lack of justification of the delay.
• A payment on account would reduce the amount to which the interests would be applied. But, it is very important to take into account that anything done on a “without prejudice” basis is not always safe. In Spain, the Estoppel doctrine applies (preventing a party from acting inconsistently towards its own previous acts), so any payment could be construed as a recognition that this amount was due (tacit recognition of coverage or liability).

In any case, the risk of punitive interests should be considered on a claim by claim basis, in function of the particular circumstances of the loss.