Credit insurance. Insurer’s duty to notify its decision to repudiate a loss

In the case of “Fax S.A. c/ Alba Compañía Argentina de Seguros S.A.” the claimant had taken out a credit insurance policy with the defendant to cover the final losses that it couldsuffer as a consequence of the insolvency of one of its clients, C.B. S.A.

Some checks drawn by C.B. were not paid. Fax demanded their immediate payment and threatened to file a bankruptcy petition against C.B.

C.B. remained silent and therefore Fax reported C.B.’s breach of its payment obligation to Fax’s insurer. Fax indicated the insurer that it would file a bankruptcy petition against C.B. the following week. A few days later the insurer requested Fax further information and documents regarding its claim. Such further information (except a copy of Fax’s petition of C.B.’s bankruptcy) was provided by Fax some months later.

More than 30 days had passed from the date Fax provided the information and documents when the insurer denied liability for the claim. The insurer alleged that the loss had not occurred and that the insured had not complied with some obligations under the policy.

At first instance the judge found against the insurer because it had communicated its denial of liability beyond the 30-day term imposed by article 56 of the Insurance Law. This article establishes that the insurer must take a decision as to the right of the insured to be indemnified within 30 days of the insurer’s receiving notice of the loss or the complementary information that it may have requested. If the insurer does not formally reject the claim within such period, the law will consider that the loss has been accepted.

The Court of Appeal repealed the first instance decision. The Court of Appeal held that credit insurance provides cover against a total or partial “final loss” of the credit as a consequence of the debtor’s insolvency. Whether a debtor is insolvent must be decided pursuant to the strict wording of the policy.

According to the policy the insured had to report potential losses to the insurer within three days from the day when the debt was not paid on the due date.

Additionally, the policy provided a definition of insolvency that required a judicial declaration of bankruptcy of the debtor or evidence that further proceedings to collect the unpaid credit would yield no result.

According to the Court of Appeal, the claimant had reported to its insurer a potential but not an actual loss. That was because under the policy a loss occurred with the insolvency of the debtor and not by the fact that the debtor had not paid some checks.

The Court of Appeal held further that although the insurer had asked Fax for information and documents regarding its claim this did not turn a potential loss into an actual loss if at the time Fax first reported its claim to the insurer the debtor was not insolvent.

The insurer’s obligation established by article 56 of the Insurance Law to communicate to the insured its decision on whether a loss is covered within 30 days is based on the assumption that a loss has actually occurred while the policy is in force. In the case decided by the Court of Appeal the debtor’s insolvency occurred after the policy had expired.

Since the loss had not occurred the insurer had no obligation to communicate its decision regarding whether the loss was covered. It was therefore irrelevant that the insurer had repudiated liability for the loss after the 30-day term of article 56 of the Insurance Law had expired.

Finally the Court of Appeal held that a different construction of the Insurance Law would be unfair because it would mean that an insurer would be liable for a non-existent loss.

Conclusion

This decision is not the only that considers that, when a loss has not actually occurred, an insurer is not liable even if it does not communicate to the insured its decision regarding liability for the loss within 30 days from the date the loss is reported to the insurer, or from the date when the insured provides the complementary information and documents requested by the insurer to investigate the loss.

Nevertheless, to avoid conflicts such as those decided in the present case and given that there are conflicting court precedents, insurers are advised to communicate to the insured its decision regarding liability for the loss within the 30-day term.