This article by Luis Felipe Pellon takes a detailed look at subrogation and the laws that govern them in Brazil. It then explores the differences between how international courts handle such actions.
What are the limits to subrogation in Brazil
Subrogation is a legal term in Brazil that arises when a third-party fulfills the obligation, transferring the rights, lawsuits and privileges of the original creditor to the new creditor. The debt does not cease to exist, and is still due, but the conditions and limitations of the subrogation.
The Brazilian Civil Code provides for payment with subrogation in articles 346-351. It can be conventional or legal. Conventional subrogation is based on the agreement of the parties, and it must be included in the contract. Its limits and conditions are then set, allowing the parties to limit or extend the rights that will be transferred by virtue of subrogation. Legal subrogation, on the other hand is a legal right that arises from the law and does not depend on any contract. The only requirement for its operation to be valid is the receipt from the original creditor.
In the context of insurance, the subrogation rights are governed by Articles 768 and 769 of the Civil Code. These articles limit subrogation only to the amount paid by the insured to the insurer. Moreover, this same article states that the insurer can only exercise its rights against third parties who are and not the spouse or descendant, ascendant, consanguineous, or in-law relative of the insured. All these restrictions can be lifted if one or more persons involved in the claim have contributed intentionally to its occurrence.
Whenever there is a deductible, or the value of the damages is greater than the limit for indemnity, the insured is entitled to receive the excess compensation from the party responsible, in conjunction with its insurer. In these situations it is not unusual to encounter problems, particularly when the insured pays out amounts to the third-party without protecting the rights of the insurer. The second paragraph of Article 768, which deals with this issue, states that any act by the insured that reduces or eliminates the rights and obligations of its insurer is ineffective.
The insurer can only exercise his rights against third parties that are not the spouse or descendant, ascendant, consanguineous, or in-law relative of the insured.
What happens if an insured refuses to cooperate with the process?
The insured has a fundamental obligation to work with their insurer to determine the cause of damage, the extent of damages and the agent responsible for it. Refusal to cooperate is a reason for refusing to pay compensation. There has been much discussion about how far an insured can go to protect or conceal certain information using confidentiality agreements. However, there is a general understanding that confidentiality can only cover information about industrial processes and not anything that could lead to compensable damage.
What is the subrogation rule for joint and co-insureds?
In engineering risk policies, and in policies involving great risks generally, it is common to find a large number co-insureds or co-beneficiaries. They are automatically excluded from any subrogation because they have been mentioned as such in the policy. It is important to note that the subrogation cannot be caused by them. In some cases, this can even result in the refusal to pay compensation.
What other factors can complicate subrogation?
Subrogation can be complicated by several factors arising from the original contract. Limiting clauses are common in contracts between an insured and third-party providers (such as service and goods providers) such as a limitation of value, or the exclusion of loss profits from compensation. These limitations are not valid for an insurer who may find himself receiving less subrogation for indemnification than he paid. The clauses of arbitration, applicable law, and jurisdiction can also be applied to an insurance company, even if they were concluded before the contract.
We do not believe so, as the law of arbitrage requires that the parties freely agree to the removal state jurisdiction. The constitutional guarantee that the common justice’s jurisdiction is inalienable would be affected as the insurer was not involved in the decision. The Superior Court of Justice (REsp. 1.962.113/RJ), has acknowledged that the institution of subrogation doesn’t transmit procedural questions.
Many engineering risk policies, and policies that cover great risks in general, contain many co-insureds or co-beneficiaries.
This issue is not universally accepted. This question was already addressed by the Federal Court of Justice of Germany, Bundesgerichtshof (BGHZ, 68, 356), which also held that, because the natural judge is removed, the arbitration clause cannot be enforced against non-signatories. In the United States, the courts also oppose the use of arbitration clauses to settle disputes in the absence an express will from one party. Based on the precedent established in CardioNet, Inc. v CignaHealth Corporation, the United States District Court of New Jersey decided in Association of New Jersey Chiropractors et al v AETNA, Inc. et al that the insurer had not accepted the arbitration clause.
The Supreme Court of the United Kingdom also denied the extension of the arbitral clause to the government of Pakistan as a beneficiary of a contract that was made between a real-estate company (Dallah), and a trust which had been dissolved after the change of government in Pakistan. In arbitration, the plaintiff company was able to obtain the conviction of the Pakistani government. The award could not be enforced because the Supreme Court of the United Kingdom did not find any evidence to support the claim that the government of Pakistan had been a party to the agreement.
What are the steps you take to give a general overview when you advise on a subrogation?
Before initiating a claim for subrogation, it is important to check several aspects. Verify the existence of coinsurers on behalf of the insurer. Each one is responsible for their own share, and therefore all must be represented, or they will lose the right. Be aware of the limitations periods, which can be very short in certain cases (e.g. General stores are often very short. Even if compensation hasn’t been paid yet, you can still file an interruption protest to stop the clock. 203).
Check the policy to see if there is a co-insured, co-beneficiary or if it makes it impossible to take action. Check the deductibles, other mandatory contributions of the insured and if the loss total was higher than the policy limits. This should be noted in the subrogation claim. Check for a counter-guarantee; whether it meets the legal requirements and has the necessary signatures, grants, liquidity, and enforceability to execute the guarantee and recover the indemnity from the cause of the damage.
The original contract that is the subject of the insurance, and which binds a third party to an insured, should also be examined. Check the contract for indemnification limitations, arbitration clauses and legal jurisdiction. Verify if there is a consistent evidence of liability for the third party who caused the damage, and if its financial capability (or insurance coverage is enough to support payment in the event of losing the case).
Luis Felipe Pellon Founder
Pellon & Associados Advocacia Empresarial
Rua Desembargador Viriato 16, CEP 20030-090, Altavista Building, Rio de Janeiro, Brazil
Tel: +55 21 3824-7800
Luis Felipe pellon is a 30-year veteran of the insurance and reinsurance industry, having worked in all legal and operational areas. Luis is involved in contracts, claims and lawsuits, arbitrations, product development as well as corporate, tax, and government issues. Luis is based in Rio de Janeiro, but he serves clients throughout the country, including abroad. He also works closely with trade associations, such as AIDA WORLD.
Pellon & Associados is a law firm with a special and long-standing relationship with the Brazilian insurance industry. It has over 100 lawyers in its offices located in Rio de Janeiro and Sao Paulo. The firm offers a wide range of services for insurers, re-insurers, agents and brokers, including consultations, court litigations and administrative procedures, across all jurisdictions.