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)