The principle of full compensation for damages in the light of the most recent jurisprudence of the Supreme Court.

One of the most common issues that arise in the context of Tort Law is the scope of the right of the injured party to be compensated for all damages suffered as a result of an accident.

In Spain, the general principle that governs the full compensation for damage (“restitutio in integrum”) is set out in Art. 1,106 of the Civil Code in the following terms:

 “Compensation for damages includes, not only the value of the loss they have suffered, but also that of the gain that the creditor has ceased to obtain, except for the provisions contained in the following articles”

It is clear that this theoretical principle raises many problems when it comes to its practical application, especially in the context of claims for personal injuries (eg: “pretium doloris”, the quantification of moral damages, etc.). However, claims for property damage also present a series of specific problems, such as the replacement value or the scope of the damage mitigation costs, which arise systematically once the loss has occurred.

These issues are analyzed on a continued basis by our Supreme Court in greater or lesser depth. The last time that the Supreme Court ruled in this regard, was in their Judgment 420/2020 of July 14, 2020, in which a claim for damages to a car involved in a road traffic accident was resolved. This ruling, although asserting nothing radically new with respect to the positions that many Appeal Courts and the Supreme Court had been following up until now, in truth represents an effort to try to clarify and unify the conceptual framework for the full compensation for damage principle.

In Judgment 420/2020, the Supreme Court analyzes a specific case in which the Plaintiff claimed the repair of the damaged vehicle despite the fact that the economic cost of said repair was well in excess of the value of the vehicle itself. Thus, for the Supreme Court, the starting point, as it cannot be otherwise, is the principle of the “Restitutio in integrum” as set out in the Civil Code and recognizes the following points:

  • That, the injured party generally has the right to proceed with the repair of the vehicle and to pass on the cost of the repair to the person causing the damage.
  • In addition, with respect to the already traditional problem of the replacement value, the Judgment indicates that “it is true that the repair may imply a certain advantage for the owner of the damaged vehicle, arising from the replacement of old parts damaged by use by new ones in optimal conditions, but neither is compensation for the injured party capable of being carried out mathematically, so these benefits are tolerable and equitable“.

However, having acknowledged these points, the Supreme Court also clarifies that these rights are not unconditional and the injured party cannot demand “an excessive sacrifice or an unreasonable effort” from the party that has caused the damage. Therefore, the Judgment concludes that “when we are faced with a situation of this kind, which occurs in cases where the amount of the repair is much higher than the value of a vehicle with similar characteristics, it is not contrary to the law that the compensation be carried out by setting compensation equivalent to the price of the damaged vehicle, plus a percentage amount, which has been called a surcharge, a supplement for risk or trust, and that, in our judicial practice, has been generalized with the expression of attachment price or value, that will include the amount of the administrative expenses, difficulties to find a similar vehicle in the market, uncertainty about its operation… ”.

Finally, the Supreme Court confirms that the costs of mitigating the damage by the injured party are also subject to the principle of proportionality. Thus, in the specific case analyzed, the Supreme Court understood that the rental of a replacement vehicle for about a year, far exceeding the cost of repairing the damaged vehicle, was a disproportionate expense that could not be fully recovered from the party that caused the damage.

By way of conclusion, it is important to note that the arguments developed in a very clear and simple way by the Supreme Court in Judgment 420/2020, can be applied to other types of more complex claims in the context of industrial risks (machinery breakdowns, etc.).

Author: David Diez Ramos (Partner)

Email: ddr@rogersco.es 

© ROGERS ABOGADOS SLP – December 2020

The obligation of the reassured to mitigate damages under reinsurance contract

There is no doubt that the contract of reinsurance, in its various forms, is a crucial contract allowing insurers to share the risk and without which the insurance industry simply could not operate. However, and despite this clear significance of the contract of reinsurance, there are very few Spanish judgments that analyse and/or assess the scope of the obligations assumed by the parties under this type of contract.

But this absence of jurisprudence is not accidental. Disputes between insurers and reinsurers are normally resolved through commercial channels, or by specialized arbitrations or are referred to other foreign jurisdictions with a long and tested history resolving insurance disputes and so in practice, very few disputes end up in the Spanish courts.

Furthermore, in Spain the reality is that there is very little legislative regulation of contracts of reinsurance – only 3 articles in the Law of Insurance Contracts 50/1980 refer specifically to the contract of reinsurance, which means that it is important for the gaps to be filed by caselaw as and where possible.

This is precisely the contextual background to the Judgment of the Appeal Court of Madrid of 3rd November 2017 – and even though this is a judgement of 3 years ago, it was recently ruled final and unappealable by the Supreme Court on the 28th October 2020 – when the highest court in Spain firmly rejected the appellants attempt to overturn said judgment.

By way of introduction, the case involved the sinking of a Galician fishing vessel back in 2004 off the coast of Galicia and resulted in the tragic death of the owner/skipper and entire crew. Said fishing vessel was insured for civil liability (including employer’s liability) with a Spanish insurer which in turn, had fully reinsured the risk in the Dutch market.

As a result of this casualty, and though the insurer attempted to settle the claims amicably, the relatives of the deceased fishermen issued court proceedings against the owner in the Labour Courts of Vigo, and in July 2006 the estate of the owner was ordered by that court to pay a total of approx. € 416,000 damages to the families of the deceased crew. Following an Appeal, this judgment was then upheld in its entirety by the Superior Court of Justice of Galicia in June 2010 – and the estate of the owner was ordered to pay a further approx. € 600,000 for the accrued interest and costs.

After paying the judgement, the estate of the owner looked to their insurer to reimburse them the compensation they were ordered to pay to the families, but the insurer refused and the estate of the owner commenced proceedings against their insurer before the Commercial Courts of Pontevedra. In June 2012, the Spanish insurer was ordered to reimburse the estate of the owner in full plus an award of penalty interest pursuant to the Law of Insurance Contracts 50/1980 article 20 accruing at a rate of 20% p.a. since 2006 and costs.

This award of penalty interest increased the sum to be paid by the Spanish insurer by a further approx. € 260,000. So, the Spanish insurer finally indemnified their assured 8 years after the sinking, in the sum of approx. € 860,000.

Having exhausted the court procedures against the assured, the Spanish insurer then looked to recover their full outlay to the assured from the Dutch reinsurers – by commencing litigation in June 2013 in the Court of 1st Instance of Madrid, also claiming all their own legal costs and expenses incurred along the way in the dispute with the assured – which resulted in a total reimbursement claim of approx. € 914,000 being pursued by the Spanish insurer against the Dutch reinsurer. So what had started as a claim for € 416,000 against the assured in 2006 had turned into a claim against the reinsurer for € 914,000 in 2013. In September 2015 the Court of 1st Instance of Madrid published their judgment. In this judgment, the Dutch reinsurer was only ordered to reimburse the Spanish insurer the sum of approx. € 416,000 corresponding to the judgment award of the Labour Court of Vigo published back in 2006.

The 1st Instance Court of Madrid understood that the Spanish insurer could not “purport to pass on to the reinsurer its own negligence in the handling of the claim, since from the beginning it has argued that the injured parties were justified in all their claims, and this is explained vehemently in its claim and therefore we understand that the claim now in dispute could only be accepted in part, since the award against the estate of the owner was known to the Spanish insurer given by a judicial ruling of the Labour Court of Vigo, and knowing the right of repetition that the heirs would have against the insurer they should have handled the claim without further delay, and as such owe the amounts we understand were granted there”.

The judgment was appealed by both the Spanish insurer and the Dutch reinsurer and said appeal was resolved by the Appeal Court of Madrid by judgment (No. 462/2017) dated 3rd November 2017 and which, other than a slight adjusted increase in accrued interests, totally upheld the reasoning of the Court of 1st Instance of Madrid.

Thus, the Madrid Appeal Court commented that “considering that the resulting amount is the one that the appellant should have paid immediately, avoiding the expenses of the other two subsequent judicial actions (of the appeal before the Superior Court of Justice of Galicia and the procedure before the Commercial Court number 1 of Pontevedra)”.

This judgment was then appealed by the Spanish insurer before the Supreme Court, which, by Order of October 28, 2020, rejected any right to appeal and thereby endorsing the Judgment of the Appeal Court of Madrid of 3rd November 2017 and awarding costs against the Spanish insurer.

Regardless of the complicated and long journey through the different courts, the 1st Instance and Appeal Court of Madrid, as endorsed by the Supreme Court all confirm a fundamental principle that applies equally to the contract of reinsurance, namely, the obligation of the reinsured to act as a prudent non-reinsured and to mitigate the loss.

This case is strange on its facts, given that the Spanish insurer forced the estate of the owner to litigate and yet, in their own litigation against the reinsurer, the Spanish insurer was happy to admit that the assured had a totally legitimate claim. Presumably the Spanish insurer believed that they were entitled to exercise the right to defend the claim regardless of the merits of that defense – and on the basis, also presumably,that they could simply pass the entire financial burden to the reinsurer.

But what is remarkable about this case is that for whatever reason, the Spanish insurer assumed that there would be no accountability to the reinsurer regarding how they managed the assured’s claim – basically a belief that the contract of reinsurance was devoid of any obligation to act as a reasonable uninsured – ie the obligation to mitigate. At no time did the Spanish insurer try to explain why they believed the contract of reinsurance to be an exception to the general rule on damages.

What the judgment does make clear is that the Spanish court will not criticize an insurer for exercising their legitimate right to defend a claim brought by their assured, but that right of the insurer to control the relationship with the insured comes with the burden of accountability of the insurer to the reinsurer by way of the obligation to mitigate.

Moving forward, we may find that the circumstances of this case are exceptional in the insurance / reinsurance market, but the Judgment of the 3rd November 2017 is nonetheless welcome for showing that the right of the insurer and the protection of the reinsurer can be effectively balanced through the obligation on the insurer to act as a reasonable un-reinsured and mitigate.

Author: David Diez Ramos (Partner)

Email: ddr@rogersco.es