Validity of Claims-Made Clauses

In a judgment rendered in March, 2007, in re: “Furtado Nestor Gabriel c/ Edesur S.A. s/ Daños y perjuicios”, Tribunal C of the National Civil Court of Appeals set out the grounds for the doctrine that recognizes the validity of a so called “claims-made” clause inserted in a civil liability insurance contract between HSBC La Buenos Aires Compañía de Seguros S.A. and Edesur S.A. (the power supplier in the Southern part of the City of Buenos Aires).

In this way, the tribunal departed from the doctrine established in re: “Barral de Keller de Sarmiento c/ Guevara Juan s/ daños y perjuicios” – commented upon in Marval News # 57 dated June 6, 2006 – where the tribunal had ruled against the validity of claims-made clauses.

Claims-made clauses provide that a policy will grant coverage only if the following conditions are met:

(i)           the events giving rise to liability on the part of the insured must occur within the policy period – or within the retroactive date;

(ii)           third parties’ claims against an insured must be made within the policy period; and

(iii)          an insured must give to the insurer notice of a claim also within the policy period or such extended reporting period as the policy may provide.

Background Facts

In re: “Furtado”, the plaintiff sued Edesur for damages as a consequence of an electric discharge suffered by a minor named Joaquín Alejandro Furtado, on June 9, 2000.

Upon being served with the complaint, Edesur moved to bring its insurer, HSBC La Buenos Aires Compañía de Seguros, into the lawsuit but the latter moved for a rejection of the impleader arguing that the insured had not given notice of the loss before the period of cover expired, on June 30, 2002.

The policy period ran from 12 a.m., March 15, 2000 through 12 a.m., June 30, 2000, and, in addition, the policy contained a clause by which claims reported to the insurer within the policy period and up to 24 months after its expiration would be covered.

The accounting expert’s report produced in the lawsuit showed that not only had Edesur failed to give to the insurer any notice of the claim, but it had also failed to bring the insurer into the mandatory mediation proceedings carried out before commencement of the lawsuit.

The Grounds of the Judgment

The tribunal held that the insurance contract entered into by the defendant (Edesur) and the insurer was governed by the freedom of contract doctrine and, hence, section 1197 of the Civil Code fully applied, according to which“agreements made in contracts constitute a rule for the parties to which they must conform as to the law itself”.

As a consequence, the claims-made clause agreed upon by the parties was perfectly valid, and bearing in mind that the first notice of the loss was given to the insurer on February 14, 2003 and that the term to report the loss under the policy expired on June 30, 2002, failure to give notice within the term agreed to in the policy must be deemed as a notice given when coverage was non-existent due to the expiration of the 24-month extended reporting period.

The tribunal distinguished the instant case – favoring the validity of claims-made clauses - from the decision rendered in re: “Barral” (where a claims-made clause was found invalid) on the basis that the insured in re: “Furtado” is a business entity, of undoubted and recognized importance and, as such, it could have established an in-house department or obtained adequate external advice before entering into an insurance contract on a claims-made basis, and thus it cannot be argued that the insured was in a weaker position, that the insurer had to provide the insured with further information on the issue, or that the insured was unaware of the type of coverage it was buying.

Conclusion

Based on the parties’ freedom of contract and in the fact that the insured could – and should – have known the terms and conditions of the coverage taken out, Tribunal C deemed that the claims-made clause was valid.

In addition to the reasons given by the tribunal, we believe that there are other grounds for concluding that claims-made clauses are perfectly valid.

The Insurance Law regulates civil liability insurance specifically in sections 109 to 120.

Section 109 provides that “the insurer is obliged to hold the insured harmless for what the latter may owe a third party by reason of the liability covered under the contract, as a consequence of an event occurring within the agreed term”.

As it transpires, section 109 regulates civil liability insurance on a “per occurrence” basis and so, coverage is provided for an event occurring within the policy period even if the claim to the insured is submitted after the expiration of the period of cover, limited only by the statute of limitations applicable to the action sought by the third party (usually, two years).

In other words, if an event occurs while the policy issued by insurer A was in effect, the latter will cover such loss even if the policy is not renewed with insurer A.

Since section 109 is not listed among those that, pursuant to section 158, cannot be amended by the parties, there is no legal obstacle to agreeing on civil liability coverage issued on a claims-made basis. And it is so not only because the law does not forbid it but also because the purpose of civil liability insurance (i.e., keeping the property of the insured unharmed) is not affected by such a clause.