The Insurance and Reinsurance Law Review: Spain

Introduction

In the past, the Spanish insurance and reinsurance industry was very fragmented and weak and did not have the financial capacity to cover the risks of the market. Consequently, the risks were largely ceded abroad and local insurers fronted for foreign carriers. This changed slowly following an extensive restructuring and consolidation in the 1980s and there are now Spanish participants competing in the international market.

This financial weakness led to the creation of the Insurance Compensation Consortium, a wholly state-owned entity whose main task is to cover what are known as extraordinary risks.

The legal system endeavours to protect consumers while participants on equal negotiating terms are not subject to the otherwise mandatory insurance provisions concerning those risks classified as large risks.

Generally speaking, the insurance industry is heavily regulated and supervised.

Regulation

i The insurance regulator

Law 20/2015 of 14 July, on regulation, supervision and solvency of insurance and reinsurance entities (Law 20/2015) entered into force on 1 January 2016. At the same time, the Regulation and Supervision of Private Insurance Act 2004, was abrogated, except for a few provisions that are still in force.

Responsibility for the day-to-day regulation of insurance and reinsurance business conducted in Spain is delegated to the Directorate-General for Insurance and Pension Funds (DGIPF), which is a division of the Ministry of Economic Affairs and Digital Transformation.

The main focus of the DGIPF is control of insurance activities, solvency, the competence and suitability of the directors and certain other senior managers, the appropriateness and robustness of the systems and controls that the insurer has in place for the conduct of its business, the administrative protection of the insured, beneficiaries, injured third parties and participants in pension plans through the attention and resolution of complaints, and the inspection and sanction of certain infractions.

Other areas such as policy terms and wordings, technical issues and the rate of premiums and commissions are more lightly regulated and are not subject to authorisation or filing, although the DGIPF may require insurers to submit this information at any time.

European Economic Area (EEA) insurers operating in Spain either by way of establishment or providing services are subject to the disciplinary power of the DGIPF in coordination with the relevant EEA supervisory authority.

ii Position of non-admitted insurers

Policies issued by non-authorised insurers are null and void by law. However, the effects can differ from the general civil rules on nullity of contracts: if no loss has occurred, the insured is not required to pay the agreed premium or has the right to recover any premium paid. However, if a loss that would otherwise have been covered had the policy been valid occurs before the premium is returned, the non-authorised insurer may keep the premium, but would be required to pay an indemnity, the quantum of which would be determined in accordance with the void policy terms. The insured may also claim any other relevant damages sustained by reason of the void policy. Both the company and the directors or officers that permitted the policy to be issued shall be jointly and severally liable for those obligations.

iii Position of brokers

Insurance and reinsurance brokers are wholly independent intermediaries between purchasers of insurance and reinsurance on the one hand and insurers and reinsurers on the other.

Insurance and reinsurance brokers are required to be registered in the administrative register that covers insurance, reinsurance and ancillary insurance intermediaries, which is handled by the DGIPF. It is not an authorisation proper, but a formal requirement to be able to carry out their activity. See Section III.v.

iv Requirements for authorisation

Insurers or reinsurers based in the EEA who are duly authorised to write business in their countries will be entitled to carry out business in Spain under either the freedom of establishment regime (as a branch) or the freedom to provide services regime (FOS) subject to complying with the EU notification procedure. In both cases, they must abide by the regulations dictated by Spain, as the host Member State, for reasons of the general good, as well as the applicable regulatory rules. To set up an insurance branch, it is necessary that the DGIPF, after the EU appropriate notification procedure has been completed and all other applicable requirements have been met, enters the branch office on the Administrative Register of Insurance Entities. Further, the branch office must be recorded with the Companies Register.

However, EEA reinsurers willing to write business in Spain may do so both by setting up a branch in Spain or under the FOS regime without being required to obtain any prior administrative authorisation or give any prior notification to the DGIPF.

Insurers and reinsurers from non-EEA countries are required to obtain an authorisation from the Ministry of Economic Affairs and Digital Transformation if they wish to set up a branch in Spain. However, reinsurers may carry out business in Spain from the country in which their head office is located.

v Regulation of individuals employed by insurers

Law 20/2015 establishes that those who are in charge of the effective management of insurance and reinsurance companies must be commercially and professionally trustworthy and have the appropriate professional qualifications, knowledge and experience to ensure sound and prudent management.

Generally, individuals employed by insurers are subject to the same rules as any other employee, namely the Workers’ Statute 2015 and the relevant collective bargaining agreement, if any. There is a specific collective agreement for insurance and reinsurance companies. The system is highly protective of employees although the rules have been somewhat relaxed by the current government.

vi The distribution of products

Insurance and reinsurance distribution activities are subject to Royal Decree-Law 3/2020 of 4 February (RDL 3/2020), which transposes into Spanish law the EU Insurance Distribution Directive (IDD).² RDL 3/2020 entered into force on 6 February 2020. It repealed the Private Insurance and Reinsurance Mediation Act 2006.

RDL 3/2020 extends the scope of application to all distributors of insurance and reinsurance products: insurance and reinsurance companies, insurance and reinsurance intermediaries (which includes agents and brokers) and ancillary insurance intermediaries to the extent that they do not fall within the exclusions provided for in the law (e.g., travel or car rental companies). Likewise, distribution of insurance products through insurance comparison websites is subject to the insurance distribution regime.

Notwithstanding the foregoing, in accordance with the provisions of the Spanish Constitution, decree-laws enacted by the government on an urgent basis (as was the case following the delay in transposing the IDD) are provisional and must be validated by Parliament, which may process such decree-laws as draft bills. In this context, on 20 February 2020, Parliament approved the validation of RDL 3/2020 and its processing as a draft bill (the provisions of which are identical to those of RDL 3/20200). In May 2020, parliamentary groups submitted amendments to the draft bill, which is now pending approval by Parliament. The new law will replace RDL 3/2020 (which will therefore be in force only until repealed by the new law).

vii Compulsory insurance

There are a number of forms of compulsory insurance, including third-party motor insurance, air navigation, 10-year building cover, travel insurance and professional liability (for auditors, lawyers, engineers, architects, etc., if they practise in professional firms). Civil liability insurance is required to own or use certain properties (e.g., recreational and sports boats and personal watercraft); to keep potentially dangerous animals (e.g., dogs); to obtain authorisation for certain business activities (e.g., sea transportation, travel agencies, public shows and leisure activities, exploration, prospecting and exploitation of hydrocarbons, installation or maintenance services of telecommunications equipment or systems); and for many other activities.

viii Compensation

The Insurance Compensation Consortium (ICC) is in charge of the winding up of insurance companies with the ICC undertaking the role of liquidator, in the cases set out by Law 20/2015 and by the ICC Statute approved by Royal Legislative Decree 7/2004 of 29 October, as amended.

The main goal of the winding-up proceedings as handled by the ICC is the timely payments of the creditors’ rights under the relevant insurance policies (the insured, beneficiaries and injured third parties). The ICC purchases the creditors’ rights in accordance with the foreseeable net liquidation balance without having to wait for the winding-up procedure to be completed. Payments are made with the ICC’s resources and then the ICC is subrogated to the creditors’ rights. Any recoveries will belong to the ICC. This is a significant improvement on ordinary insolvency proceedings.

ix Dispute resolution regimes

Section 97 of Law 20/2015 provides for dispute resolution mechanisms in insurance matters. These are litigation, arbitration (subject to certain limitations in the case of consumers) and mediation. See Section IV.

In addition, pursuant to Section 97, insurers are required to receive and resolve any claims and complaints of the insured. Insurers operating under the FOS regime are not required to set up a customer service department in Spain; it would be sufficient to provide to the insured full details of the insurance broker or the underwriting agency (i.e., the place where such complaints can be sent).

The insurer may appoint a customer ombudsman – either an entity or recognised independent expert – who shall handle and resolve the claims and complaints submitted to it. If this is the case, the policy must provide the address and the email of the customer ombudsman. The DGIPF should be informed of this appointment.

The insurer or the customer ombudsman must respond to a complaint within two months of the date it is filed. After this period has elapsed, if the insured’s claim or complaint is not answered or is dismissed, the claimant can submit a complaint to the complaints service of the DGIPF. The policy must indicate the insured’s right to proceed in this way.

x Taxation of premiums

In Spain, there is an insurance premium tax (IPT), which until the end of 31 December 2020 amounted to 6 per cent of all premiums collected in Spain in non-exempt lines. The General Budget Law for 2021 has increased the IPT to 8 per cent with effect from 1 January 2021. The IPT is ultimately paid by the insured, but the insurer is required to collect and deliver the tax to the Treasury. For this purpose, the insurer must file returns on a periodic basis (monthly plus one annual summary).

The following transactions are exempt from the IPT:

those related to the compulsory social security insurance and collective insurances for alternative systems to pension plans and pension funds;
life insurance;
capitalisation operations based on actuarial techniques;
reinsurance operations;
surety;
export credit insurance;
insurance operations related to international transport of goods or passengers;
insurance operations related to international shipping or air travel, with the exception of private navigation or aviation for leisure purposes;
insurance operations of medical care assistance and disease; and
operations related to insured prevision plans.

Insurers are also required to pay to the ICC a levy or surcharge of 0.15 per cent on all premiums for the insurance of risks located in Spain other than premiums for life and export credit insurance, which is intended for the financing of the winding up of insurance companies.

Finally, insurers are required to collect from the insured and turn over to the ICC a tariff (in fact a premium) for the coverage of extraordinary risks. This tariff is paid on certain lines only.

The levies and tariffs payable to the ICC are ultimately paid by the insured, but the insurer is directly liable to the ICC for these.

Insurance and reinsurance law

i Sources of law

Pursuant to the provisions of Section 1 of the Civil Code, the sources are the law, custom and the general principles of jurisprudence, in that order, with certain peculiarities.

The criteria repeatedly laid down by the Supreme Court when interpreting and applying the law, custom and the general principles of jurisprudence will complement the legal order. Only that judicial trend constituting solid doctrine may be regarded as a precedent. Courts cannot depart from their previous decisions without sound reason.

The main substantive insurance and reinsurance rules are contained in the Insurance Contract Act 1980 (ICA). Reinsurance is regulated as a type of casualty insurance and is not subject to the otherwise mandatory provisions of the ICA. Spanish case law on reinsurance is scarce and the existing case law focuses mainly on the legal autonomy between the underlying insurance contract and the reinsurance contract from the perspective of the insured, who has no right of action or claim against the reinsurer.

The inherent complexity of the matter is enhanced by the relative inexperience of courts in reinsurance matters.

Marine insurance is regulated by the Maritime Navigation Act 2014, which abrogated the former rules contained in the Commercial Code.

ii Making the contract

Essential ingredients of an insurance contract

The basic principle of Spanish contract law is party autonomy, hence the parties are free to establish the conditions they may deem convenient provided these do not infringe upon the law, public morals and public policy.³ There are areas in which party autonomy is severely restricted, namely with regard to consumers.

The contract exists from the moment one or several persons undertake to give something or render some service to another or others.⁴ Contracts are concluded merely by consent⁵ and consent is expressed by the convergence between the offer and the acceptance about the thing and the consideration that are to constitute the contract.⁶

Where contracts between distant persons are concerned, there is consent when the offerer learns about the acceptance or, in the event of the acceptance having been sent by the accepter, the offerer could not ignore it in good faith. In connection with agreements entered into by automatic devices, there is consent from the moment the acceptance is manifested.⁷

Utmost good faith, disclosure and representations

The general principle for the interpretation of insurance contracts, as with any other contract, is good faith. The principle of utmost good faith means to behave loyally and truthfully towards the other party and it is particularly relevant where insurance contracts are concerned, as case law has consistently proclaimed. Reinsurance contracts are also based on this principle. The duty of utmost good faith is a continuing one.

Prior to the conclusion of the contract, the policyholder is subject to the duty to disclose to the insurer, pursuant to the questionnaire submitted by the insurer, all the circumstances known by the policyholder that may be relevant for the evaluation of the risk. The policyholder will be relieved from said duty if the insurer does not submit a questionnaire or, submitting it, there are circumstances that may be relevant for the evaluation of the risk but are not covered in the questionnaire.

It follows that the policyholder is not under the proactive duty to disclose all material facts that may have a bearing on the evaluation of the risk, but only those the policyholder is asked about by the insurer.

In the event of ‘inaccuracies’ (misrepresentations) or ‘reservations’ (concealment or non-disclosure) in the information provided when completing the questionnaire or proposal form, the remedies available will depend on when the insurer becomes aware of the inaccuracies or reservations.

If the insurer becomes aware of the inaccuracies or reservations before the loss takes place, it will be entitled to rescind the contract within one month of learning about the misrepresentation or reservation. In this event, the insurer may keep the premium for the period in course, save that it acted in bad faith or with gross negligence (an event that is difficult to imagine). If the loss occurs before the rescission is notified or if the misrepresentation or non-disclosure is discovered after the loss takes place, the insurer will no longer be entitled to rescind the contract but solely to reduce the indemnity in the same proportion to that existing between the premium actually collected and the premium that would have been collected had the real risk been disclosed to it. However, if the policyholder acted in bad faith or with gross negligence (to be proved by the insurer), the insurer will be released from its obligation to indemnify.

iii Recording the contract

The insurance contract and any amendments or supplements must be formalised in writing, whether on paper or by another durable medium that enables it to be stored, easily retrieved and reproduced without changing the contract or the relevant information.

Further, the insurer has the duty to hand out the insurance policy or at least a provisional document attesting coverage to the policyholder. This is for purposes of proof only. It is standard practice to write down insurance contracts.

The reinsurance contract need not be executed in policy form or generally in writing to be valid. In practice, however, written form is customary in the market.

iv Interpreting the contract

General rules of interpretation

Along with utmost good faith, which is the general principle for the interpretation of insurance contracts, a foundational concept of Spanish contract interpretation law is that the contract should be construed upon its own terms (i.e., literally, provided the terms reflect the common intent of the parties). If the terms appear to contradict the evident intent of the parties, the common intent will prevail and should be looked for. When looking for the intent, actions before, during and after the contract was concluded may be taken into consideration. In other words, if the intent of the parties flows clearly from the terms of the contract then those terms will be applied and no interpretation will be required.⁸ In addition, there are a number of subsidiary rules of construction.

Ambiguous clauses may not be construed in favour of the drafter of the contract. In the case of contracts with consumers, which are characterised as ‘adhesion’ contracts by case law, courts apply the contra proferentem rule and normally will find in favour of the insured.

The Law on Standard Contract Terms applies to both consumers and non-consumers.

Incorporation of terms

Terms implied by statute are fairly common under Spanish civil law. Notably, this is the case of contracts for sale. There are some limited cases in insurance law (data protection rules, protection for extraordinary risks in connection with certain lines) and virtually none with regard to reinsurance contracts.

The courts could imply and incorporate terms when interpreting, construing or integrating the contract, but this is rare. Incorporation by usage (of principles such as ‘follow the fortunes’ or ‘follow the settlements’) would be feasible in principle under Section 1258 of the Civil Code, subject to evidence and consistent observance in the relevant market.

Types of terms in insurance contracts

A fundamental distinction is whether the insurance contract involves a large risk (as defined in the Solvency II Directive and Law 20/2015) or a mass or consumer risk.

Generally, all the provisions of the ICA are mandatory, unless the law itself provides otherwise. However, clauses that benefit the insured shall be permissible and valid. The fundamental effect of an insurance contract involving a large risk is that the parties are free to agree as they wish, subject always to the general limits to party autonomy and the basic principles of insurance law; hence, they are not subject to the otherwise mandatory provisions of the ICA.

Aside from contracts involving large risks, the conditions of the insurance contract must be written in a clear and precise way and signed by the insured (there are special rules for electronic contracts). Further, clauses that limit or restrict the rights of the insured must be highlighted and written in bold letters and explicitly accepted by the policyholder or insured.⁹ Otherwise, it will be understood that the clause has not been included in the contract and the insured will not be bound by it. It is a requirement to include a statement that the policyholder or insured has read the limitative clauses, if any, and agrees to them. In addition, Section 8 of the ICA, as amended by Law 20/2015, provides that the policy must describe, in a clear and comprehensible manner, the guarantees and covers and the applicable exclusions and limitations, which must be highlighted.

On the other hand, contractual clauses limiting or restricting the insured’s rights, or exclusions contained in the policy that by nature do not delimit and specify the coverage afforded by the insurer, cannot necessarily be raised against the third party who has the right to claim directly from the insurer (in the context of civil liability policies). Clauses specifying the risk are those relating to the subject matter or object of the insurance, the sum insured, the period of insurance and the geographic scope, etc. The rest may be limitative clauses or exclusions. In these cases the insurer may recover from the insured but cannot oppose the third party’s claim on the basis of such clauses. Case law (e.g., the decision of the Supreme Court of 30 November 2011, RJ\2012\3519) has drawn a subtle (and not always clear) distinction between clauses delimiting cover and clauses delimiting the rights of the insured or providing for exclusions. Occasionally, these exclusions have been described as delimiting cover objectively and therefore, theoretically, they could be raised against the third party. A key exercise is therefore to examine each contract on a case-by-case basis. This is particularly true in the case of motor insurance, for example.

Extreme care should be taken when incorporating legal concepts and principles from other jurisdictions into Spanish policies. These principles may mean little or nothing in Spain and, even worse, they can lead to misinterpretations.

Parties to a reinsurance contract are not subject to the otherwise mandatory provisions of the ICA. Therefore, party autonomy fully operates subject to the general limits to party autonomy (the law, public morality and public policy).

Warranties, conditions precedent and conditions

Warranties and conditions precedent do not have the same meaning and effect in Spain as those envisaged in English law.

Under Spanish law, a condition precedent (e.g., ‘it is a condition precedent to liability under this policy that the insured notifies the insurer’) is not a condition proper although there are similarities. Technically, there will be a condition proper (suspensive) if the effects of the contract depend on a future and uncertain event or on an event that has actually taken place without it yet being known to the parties. In the first case the contract cannot go into operation until after the event; in the second case, the obligation is effective from the day on which it was undertaken, but it cannot be enforced until the event is known. In any case, the occurrence of the event must not be subject to the will of any of the parties. In this sense, a condition will be void if the occurrence of an event depends on the exclusive will of the other party.¹⁰

A court could also find the condition precedent to be limitative in nature (of the rights of the insured) if it has not been adequately singled out in the contract and accepted specifically in writing by the policyholder, and thus could set it aside. Alternatively, it could take the view that the clause is detrimental to the insured and, for this reason, null and void. The Law on Standard Contract Terms could also be applicable to the extent the terms of the contract are imposed by one contracting party to the other. Under this Law, for these clauses to be valid, the party that adheres to the agreement must accept them explicitly. Otherwise the contract may be deemed null and void.

However, there is no reason why a well-drafted clause providing for these conditions should not be valid and enforceable if incorporated into an insurance contract involving a large risk where the parties are not bound by the otherwise mandatory provisions of the ICA.

v Intermediaries and the role of the broker

Conduct rules

As mentioned in Section II.vi, insurance and reinsurance distribution activities are subject to RDL 3/2020, which transposes the IDD in Spain. RDL 3/2020 entered into force on 6 February 2020. On 20 February 2020, Parliament approved the validation of RDL 3/2020 and its processing as a draft bill. (See Section II.vi for further information on the draft bill legislative process.)

RDL 3/2020 establishes new rules of conduct and information requirements for insurance distributors (see Section II.vi).

As a general principle, RDL 3/2020 requires insurance distributors to act honestly, fairly and professionally in accordance with the best interests of their customers. In addition, it sets out that all information provided to customers or potential customers must be fair, clear and not misleading and the marketing communications shall always be clearly identifiable as such. Moreover, in line with the IDD, RDL 3/2020 establishes that insurance distributors cannot be remunerated in a way that conflicts with their duty to comply with customers’ best interests.

RDL 3/2020 regulates the information that must be provided to customers prior to the conclusion of the insurance contract. Moreover, the insurance distributor is required to provide the customer with relevant information about the insurance product in a comprehensible form to allow the customer to make an informed decision. In addition, prior to the sale of an insurance product, the insurance distributor must provide the customer with a personalised recommendation explaining why a particular product would best meet the customer’s demands and needs. The distribution of insurance-based investments products is subject to additional requirements.

RDL 3/2020 classifies insurance and reinsurance intermediaries into three categories: insurance agents, insurance brokers and reinsurance brokers.

Insurance brokers must provide independent and objective advice to whomever demands insurance. They are independent actors.

Commission

An insurance agent acts on behalf of the insurer (one or several insurers), promoting and concluding insurance contracts in exchange for a remuneration characteristically on a continuing and stable basis. The commission is the usual remuneration of the agent. The commission is set at a percentage of the premium, which varies depending on the line of business and type of the insurance.

The broker’s remuneration may be paid by both the client and the insurance company.

RDL 3/2020 allows remuneration agreements on a freedom of contract basis between insurers and insurance brokers, in the form of a commercial commission for their mediation services.

The broker can enter into a written commission contract with the client in relation to a particular insurance operation and issue a professional fee invoice to the client for the services rendered.

RDL 3/2020 contemplates the case where an insurance intermediary informs the client that an objective and tailor-made advice on insurance-based investment products in which the client bears the investment risk is given independently. In this case, intermediaries will not accept or retain any fees, commissions or any other monetary or non-monetary benefit paid or provided by a third party or by the person that acts on behalf of the third party in connection with the distribution of the products. Excluded from this prohibition are the minor non-monetary benefits, provided they do not impair the quality of the service to the client and are of a level and nature such that they do not affect the duty of the broker to act with honesty, impartiality, professionalism and in the best interest of the broker’s clients.

Reinsurance brokers are remunerated by reinsurers on a freedom-of-contract basis between the broker and the reinsurer in the form of commissions on premiums or other forms of remuneration.

Agencies and contracting

Insurance agents can be bound by an agency contract with one or several insurance companies and act under their direction and supervision. Insurance agents are classified as exclusive insurance agents and tied insurance agents.

An exclusive insurance agent is considered to be an extension of the insurance company, which is administratively liable for the agent’s actions that infringe upon the legislation on insurance intermediaries. This should be understood notwithstanding the agent’s civil and criminal liability for his or her own actions. Insurance companies have to register the agents in their own agent registry. This registry is controlled by the DGIPF. Exclusive agents must also have the required knowledge and ability.

The tied insurance agent may be linked to several insurance companies, in which case, the express consent of the first insurance company with which he or she concluded the first agency agreement is required. Tied insurance agents must pass training courses as set out by the DGIPF relating to financial matters and private insurance and must have sufficient financial capacity to respond to their customers’ claims in the event of professional negligence (there are exceptions to this requirement).

How brokers operate in practice

In practice, brokers operate in much the same way as in the United Kingdom and other jurisdictions, particularly where international brokers are involved. Generally speaking, they are the dealmakers and coordinate the parties involved (the insured, underwriter, reinsurer, etc.). Spanish brokers authorised to operate in Spain may also conduct business in other EEA Member States by means of the EU single passport provided that they have disclosed to the DGIPF their intention to do so.

Insurance brokers act for the insured and must provide objective advice according to the criteria laid down by RDL 3/2020. Reinsurance brokers normally act for the cedent although their commission is paid by the reinsurer.

vi Claims

Notification

As a general rule, insurance claims must be reported within seven days of the moment the insured knew about the loss.¹¹ A longer term can be agreed for the benefit of the insured. Shorter terms could be agreed in the case of a large risk. In practice, however, many policies insert imprecise wording of the type ‘as soon as possible or practicable’ or similar, which could conceivably be longer than the statutory seven days.

The late notification of the loss would not per se entitle the insurer to rescind the contract, but only to claim damages, if any.¹² As an exception to the general rule, the prompt notification of the loss can be made a condition precedent to liability of the insurer if the risk in question concerns a large risk.

The law does not provide for the case of reinsurance. It will depend on the agreement of the parties.

Good faith and claims

The policyholder or the insured have the duty to provide all information available on the circumstances and consequences of the loss. The breach of this duty with gross negligence or bad faith on the part of the insured would release the insurer from its obligation to indemnify.¹³

The foregoing provision is connected with the general duty of salvage in casualty and property insurance, which is to be understood as the duty to diminish or minimise the loss.¹⁴ If the insured breaches that duty, the insurer will be entitled to reduce the indemnity in the relevant proportion taking into account the significance of the damages derived from the breach and the degree of fault of the insured. If the insured had the intent to prejudice the insurer, the latter will be released from its obligation to indemnify.

Once the loss has occurred, and within five days of the notification of the loss, the insured or the policyholder is required to send a list of the existing objects at the time of the loss and of the objects saved, and an estimate of loss, to the insurer. The insured is required to prove the pre-existence of the objects. However, the policy itself will constitute a presumption in favour of the insured where no further evidence could reasonably be provided. The insured must also provide all relevant information on the circumstances of the loss at the request of the insurer. The insurer is bound to pay the indemnity at the end of the investigations and adjustments necessary to establish the existence of the loss and the quantum thereof, if any. If the parties disagree on the quantum, expert adjusters designated by the parties will sort out the issue.

The law provides nothing about the reporting of facts and circumstances that could eventually give rise to a claim. Policies usually require the reporting of facts and circumstances and attach certain legal consequences to such reporting.

As a general rule, Section 19 of the ICA excludes from cover losses caused by the insured acting in bad faith. This is also the first standard exclusion in all insurance policies.

Case law has ruled that the fraudulent or bad faith exclusion in an insurance policy cannot be raised against an injured third party, in which case the insurance company would be left to recover the losses from the insured.

As regards reinsurance claims, fundamental principles of the reinsurance contract, particularly in the case of treaty reinsurance, have traditionally been the community of risk created by the contract and the follow the fortunes principle in the frame of the utmost good faith, which also compels the reinsured to protect the interests of the reinsurer.

The ICA does not make any reference to follow the fortunes or follow the settlements principles, nor does there appear to be any case law offering guidance in this regard. The former Section 400 of the Commercial Code, which dealt with fire insurance and was abrogated by the ICA, did provide that the reinsurer was to follow the settlements of the insurer but did not specify either the requirements or the consequences thereof.

The effects of a follow the settlements clause are, therefore, uncertain. It is commonly held in Spain that this clause would compel the reinsurer to accept and be bound by the settlements reached by the insurer provided the insurer is, in effect, liable under the direct policy and the risk is covered by the reinsurance contract. It would also be possible to contend that the reinsurer is not bound if the settlement is not concluded in a businesslike manner (namely in the event of ex gratia payments), but there are no authorities confirming this.

Dispute resolution

i Jurisdiction, choice of law and arbitration clauses

Jurisdiction

Insurance disputes related to consumers (mass claims) are normally resolved by litigation in court. Within the Spanish territory, any disputes arising out of the contract between the insurer and the insured must be referred to the courts for the domicile of the insured.¹⁵ Any agreement to the contrary shall be deemed null and void.

Also of relevance are the special jurisdictional rules set out in Council Regulation (EU) No. 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I Regulation recast).

With regard to insurance contracts involving a large risk, the parties are free to refer the dispute to the courts of their choice.

Choice of law

The parties to an insurance contract involving a large risk may freely choose the governing law and are not subject to the otherwise mandatory provisions of the ICA.

In the event of conflicts of laws, Regulation (EC) No. 593/2008 of the European Parliament and the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) applies to insurance contracts concluded as from 17 December 2009. The Rome Convention 1980 applies to insurance contracts concluded before that date and to those countries that opted out of the Regulation (Denmark), but its rules do not apply to insurance contracts covering risks located in the territories of the Member States of the European Union.

Arbitration clauses

The Arbitration Act (AA) approved by Law 60/2003 of 23 December, as amended, recognises the freedom of parties to submit to arbitration any disputes related to matters that they can freely dispose of in accordance with the law.

For insurance, this general principle was confirmed by Section 97.4 of Law 20/2015, with regard to both large and mass (consumer) risks, although the latter with qualifications. In the event of mass risks (consumers), any disputes between insurers and consumers may be referred to the Consumers Arbitration System as set out in the consolidated text of the Law on the Protection of Consumers and Users. Insurance disputes concerning large risks tend to be (but are not always) resolved by arbitration. The parties to a contract involving a large risk are free to submit their disputes to arbitration having regard to the general rules set out in the AA.

The parties to a reinsurance contract are free to refer the dispute to the courts of their choice or to arbitration or any other alternative dispute resolution method.

ii Litigation

Litigation stages

Generally, the Spanish civil litigation system is more adversarial than inquisitive. The civil first instance courts are the competent courts to hear insurance disputes.

A civil proceeding starts with the filing of the statement of claim with the Register of the Court. The claimant should attach to the statement of claim all documents on which the claimant bases his or her claim, or designate the private or public records where this documentary evidence may be found. The defendant has the same burden regarding the documents related to his or her defence. Therefore, the parties should disclose all the evidence they have at the beginning of the process to avoid procedural ‘ambushes’.

The main steps of the proceedings include pleadings (claim, defence and, eventually, counterclaim and response to the counterclaim), the case management conference and the trial.

In the ordinary procedure for claims exceeding €6,000, which is the main declaratory procedure, once the defendant has been served with the claim, the defendant has 20 working days to file his or her defence and a counterclaim, if any. In the latter case, the claimant will then have 20 working days to respond to the counterclaim.

The defendant is required to set out his or her defence arguments following the order of the claim (accepting or rebutting the corresponding arguments) and to file all the documents in his or her possession supporting his or her defence (this rule also applies to the counterclaim and the answer to the counterclaim).

The parties must disclose to their opponents in the pleadings phase those documents they rely on.

After the allegations (pleadings) phase has been completed, the court will call the parties to a case management conference (CMC), which should take place within 20 days. This term is rarely, if ever, observed in practice. The purposes of the CMC are reaching a settlement if possible, sorting out any procedural technicalities and submitting the evidence the parties intend to avail themselves of (namely the documents filed with the pleadings, witnesses and expert witnesses). If the court deems that the dispute relates solely to points of law or the parties only produce documentary evidence with their respective allegations, the lawsuit could be called to an end and judgment passed on the issue. If not, the court will fix a date for the trial where all evidence submitted and admitted is to be taken (testimonies, interrogatories, etc.) and then the parties’ attorneys will orally summarise their conclusions. The time frame to trial is variable, from three to 10 months, depending on the nature and complexity of the case. Judgments should be handed down within 20 days of the trial. This term is almost never observed in practice.

Parties are entitled to appeal against any adverse court decision. An appeal can be lodged on questions of fact or of law.

In some limited cases (where, for instance, the amount involved exceeds €600,000 or the matter involves a special legal interest) there is a further and final appeal to the Supreme Court. There is also a special appeal to the Constitutional Court in the event that constitutional rights are violated by the courts.

Evidence

Each party bears the burden of proving those facts supporting the position that they are defending in the proceedings.

The courts have wide discretion when assessing evidence, subject to reasoning founded on the applicable law and the relevant facts.

Evidentiary means are interrogation of the parties, public documents, private documents, experts’ reports, judicial examination and witnesses. Further, any means for reproducing words, images and sounds, as well as instruments for the storage and retrieval of data, words, figures and mathematical operations carried out for accounting purposes or others relevant for the proceedings, can be presented as evidence.

Costs

The general rule is that the losing party pays the costs of the other party, unless the court appreciates that the case presented serious factual or legal doubts.

If the claim is admitted in part, each party pays its own costs and half of the common costs, if any (e.g., experts designated by the court), unless there is merit to impose these on the party that in the court’s view litigated recklessly.

Costs are capped in that they cannot exceed one-third of the total quantum of the claim. If the nature of the claim does not permit it to be quantified, then the claim for these sole purposes will be valued at €18,000, unless the court decides otherwise in light of the complexity of the case.

iii Arbitration

Format of insurance arbitrations

The AA lays down rules for arbitrations, both domestic and international. The AA is strongly influenced by the UNCITRAL Model Law of 1985, as amended.

Procedure and evidence

The main principles of an arbitration procedure are the following:

The essential principles of the procedure are the right of the parties to be heard, the right of the parties to contradict each other and equal standing. The parties can agree to have the dispute resolved under legal principles or based on equity (fairness and justice). They may set out the procedural rules (ad hoc arbitrations). Parties may entrust the administration of the arbitration to an institution, in which case its rules will apply.
The taking of evidence upon motion of the parties or the arbitrators. The arbitrators may reject evidence that is irrelevant or not admissible under the law. Witnesses, experts and third parties participating in the proceedings will be able to use their own language in both oral and written evidence (in which case interpreters will be provided).
The arbitrators may order interim or provisional measures (injunctions).
The procedure may involve jurisdictional cooperation; the intervention of the courts is limited to certain support and control functions (inter alia, appointment of arbitrators, taking of evidence, interim measures notwithstanding the power of arbitrators to grant them, recognition and enforcement and annulment of awards).
The award must be issued within six months of the statement of defence, unless the parties agree to extend the term. The late issuance of the award does not constitute per se a ground for annulment, without prejudice to the arbitrators’ liability.
The award must be in written form and must always be reasoned, even if it is solely based on fairness and equity, unless the parties reach a settlement and agree that it be reflected in the form of an award.
With regard to the annulment of an award, the grounds on which an award can be challenged in court with the intent to vacate it in full or in part are rather limited.¹⁶

Costs

The general rule is that subject to the agreement of the parties, the arbitrators shall decide in the award on the allocation of costs.¹⁷ In the case of institutional arbitrations, the arbitrators will follow the institution’s rules on costs.

iv Mediation

The role of the courts

Although mediation as a form of resolving civil and commercial disputes has a long history, in its current form, method and approach, it is fairly new in Spain. The Mediation in Civil and Commercial Matters Act was approved by Law 5/2012 of 6 July. Section 97.3 of Law 20/2015 recognises the freedom of parties to submit their disputes to a mediator in the terms provided by Law 5/2012.

Mediation can either result from the agreement of the parties or be suggested by the court hearing the dispute. Mediation is free and voluntary and nobody may be compelled to continue in the mediation procedure and conclude an agreement. The mediator must be impartial and independent.

The parties will have to notarise the agreement reached if they need to enforce it in court. The Spanish notary public will previously have to verify the fulfilment of the requirements under the Mediation Act and that its content is not contrary to the law. This will add some red tape to the procedure.

The court’s intervention is limited to the enforcement of the mediation agreement, or to homologation (endorsement) of the agreement when it has been reached in the course of litigation.

Year in review

The covid-19 pandemic has caused and continues to cause a high toll of deaths and infections every day and has triggered the most important global health, economic and social crisis in more than a century.

The macroeconomic projections for the period 2020–2023 published by the Bank of Spain on 11 December 2020 forecast that in a moderate scenario of the spread of the pandemic, Spanish gross domestic product (GDP) would fall by 10.7 per cent in 2020 and would rebound by 8.6 per cent in 2021, while in a baseline scenario GDP would fall by 11.1 per cent in 2020 and would grow by 6.8 per cent in 2021. The Bank of Spain has also contemplated a severe scenario in which GDP would fall by 11.6 per cent in 2020 and would rebound by 4.2 per cent in 2021.

As regards the insurance industry, it is clear that the coronavirus has triggered and will continue to trigger a variety of claims related to the pandemic and the potential coverage under life and non-life insurance policies.

Apart from the general impact of the covid-19 pandemic, the following regulatory changes may be considered significant for the insurance industry during 2020:

Law 7/2020 for the digital transformation of the financial system entered into force on 14 November 2020. This law establishes and regulates the controlled testing environment (regulatory sandbox) that will allow testing of innovatory technology-based financial projects (new business models, applications, procedures or products with an impact on financial markets, the provision of all kinds of financial and complementary services or the performance of public functions in the financial field). Furthermore, the law reinforces the instruments necessary to guarantee financial policy objectives in the context of digital transformation. To this end, the law provides the competent authorities and promoters of technology-based innovations applicable in the financial system, as well as users of financial services, with instruments that help them better understand the implications of digital transformation, with a view to increasing efficiency, the quality of services and, particularly, security and protection against new financial technological risks.

In the Resolution of 15 September 2020, as supervisory authority of the Spanish insurance sector, the DGIPF formally adopted the EIOPA ‘Guidelines under the Insurance Distribution Directive on insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risk involved’ as indicated in Article 30(3)(a)(i) and (ii) of the IDD.

Outlook and conclusions

The European Union-United Kingdom Trade and Cooperation Agreement (the Agreement) concluded on 24 December 2020 and provisionally applicable as from 1 January 2021 regulates the new relationship between the EU and the United Kingdom after Brexit. At the time of writing, the Agreement is pending approval by the European Parliament.

The Agreement sets out preferential arrangements in areas such as trade in goods and services, digital trade, intellectual property, public procurement, aviation and road transport, energy, fisheries, social security coordination, law enforcement and judicial cooperation in criminal matters, cooperation on health security, cooperation on cyber issues and participation in Union programmes.

In the framework of the communications from the European Commission on the preparations for the end of the transition period on 31 December 2020, the Spanish government has approved through Royal Decree-Law 38/2020 of December 29 (RDL 38/2020) a set of measures to minimise, on a temporary basis and in certain areas, some of the negative effects produced by the withdrawal of the United Kingdom from the European Union.

First, as regards insurance contracts, those contracts concluded by UK insurance companies before 1 January 2021 will remain in force after this date.

Second, from 1 January 2021, UK insurance companies will be subject to the Spanish insurance regulations applicable for third-country entities, and a new authorisation must be obtained in the following cases:

for the renewal of contracts signed before 1 January 2021;
for the introduction of amendments to contracts signed before 1 January 2021 that involve the provision of new services in Spain or that affect the essential obligations of the parties;
where activities linked to the management of the contracts require authorisation; and
to enter into new contracts.

Activities arising from the management of contracts concluded before 1 January 2021 and not included in the cases indicated in letters (a) to (c) will not require a new authorisation.

Third, authorisations or registrations initially granted by the UK competent authority to UK entities will remain provisionally in force until 30 June 2021 to carry out the activities for an orderly termination or assignment of the contracts concluded before 1 January 2021 to entities duly authorised to provide financial services in Spain. This temporary authorisation could be extended until 31 December 2022 subject to certain conditions.

RDL 38/2020 entered into force on 1 January 2021 and Parliament approved its validation on 28 January 2021.

Footnotes

¹ Jorge Angell is the senior partner at LC Rodrigo Abogados.

² Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast).

³ Section 1255, Civil Code.

⁴ Section 1254, Civil Code.

⁵ Section 1258, Civil Code.

⁶ Section 1262, Civil Code.

⁷ Section 54, Commercial Code and Section 1262, Civil Code.

⁸ Section 1281, Civil Code and Section 57, Commercial Code, and related case law.

⁹ Section 3, ICA.

¹⁰ Section 1115, Civil Code.

¹¹ Section 16, ICA.

¹² Section 16, ICA.

¹³ Section 16, ICA.

¹⁴ Section 17, ICA.

¹⁵ Section 24, ICA.

¹⁶ Section 41, AA.

¹⁷ Section 37.6, AA.