Fiscal liability - Update on Colombian Law-Decree 403 and case law in Spain

In our third and last update on this topic so far, issued in November 2019, we discussed a case handled by Kennedys in which the office of the Comptroller General (CGR) revoked a decision that disregarded how claims made policies work. The CGR recognised claims made policies and ordered a full return of the payments done by the insurers.

In two previous articles, we wrote about how fiscal liability proceedings work in Colombia and mentioned that, on 11 September 2019, a Constitutional Amendment had been approved, on 11 September 2019, to allow Congress to enact legislation to further regulate on the subject. That happened on 16 March 2020, when Law-Decree 403 was issued.

In this article, we outline relevant provisions of Law Decree 403 and some additional developments that have taken place since, with regard to case law in Spain.

Law-Decree 403

Law-Decree 403 introduced what has been called the “superpowers” of the CGR. After its enactment, the CGR can supervise and control the administration of public funds of all administrative levels, and in accordance with the Constitutional Amendment the CGR can exercise its control preventatively, and simultaneous to other administrations.  Judicial police powers, among others, are now enjoyed by the CGR.

The remit of what the CGR can investigate has also been widened. By way of LD 403, all activities, actions, omissions, operations, proceedings, accounts, contracts, agreements, projects, acts or facts, as well as all other business that are included or that affect directly, or indirectly public funds management or that involve public property, funds, or monies, are subject to the CGR’s vigilance and control. With such augmentation of the CGR’s jurisdiction, many academic and practical discussions have been brought to an end, including whether fiscal liability can be incurred by omission.

However new issues arise, for instance whether the CGR exercising preventative control should be a cause for insureds giving precautionary notice under the policy.

The limitation period or “caducidad” to start fiscal liability proceedings is now 10 years (double than the previous five) from the moment in which the damage occurred followed by yet another five years (as before) from the moment in which, in the Opening Writ, it is determined whether fiscal liability attaches. The changes to the limitation period are essential for insurers since timings in fiscal liability proceedings will affect, and apply, to insurance contracts.

Refreshingly, pursuant to article 144 is possible for the alleged liable parties and third civil liable parties (insurers) linked to the proceedings to petition the termination thereof when prejudice is considered negligible, and the costs of the proceedings and subsequent enforcement would become uneconomical. If agreeable, the CGR will report the matter in their “lessons learned” Improvement Plan, which sounds edifying.

To speed things up once the administrative resolutions are (invariable) appealed, the contentious-administrative courts hearing the appeal are ordered, by way of Article 152, to give such appeals preferential treatment but only somewhat—much as when we used to travel, seven other type of causes of action also qualify for preferential treatment. Perhaps too optimistic is the law’s mandate that the judicial review, which consists of two instances, cannot take longer than a year. It remains to be seen whether there will be enough judges to make this a reality.

ILC CASE

We have probably beaten to death the IDU case in previous updates, and there is another important precedent regarding the interrelationship of claims-made clauses with fiscal liability proceedings. Industria Licorera de Caldas is a state-owned enterprise located in the region of Caldas, that produces and markets brandy, rum and other spirits such as the Cheers beverage. However the CGR investigation that commenced on 26 March 2015 was not that cheerful, as it related to payment of penalties and interest for the irregularities in the company’s 2002 sale tax declaration. The CGR sought to collect COP 1,543,105,619 (c. USD 397,051).

On 27 December 2018, the CGR issued the accusation writ (indictment) against two ILC officers and of their 2001-2003 D&O insurers. On 29 August 2019, the CGR issued the first instance decision against the ILC officers and insurers, ordering the joint and several payment to the State of such funds. On 31 January 2020, the Director of Fiscal Trials of the CGR issued the second instance administrative decision confirming liability.

In this case, the CGR again disregarded the application of claims made clauses. However, on 17 July 2020 the CGR Conciliation Committee, considering the action filed by ILC’s D&O insurer before the Administrative Courts, decided to revoke its decision against insurers, on grounds carriers were no longer considered a liable third party within the fiscal liability proceedings since the policy was claims made, and the Opening Writ was issued outside the policy period.

CGR’s Circular 5 dated 16 March 2020 issued by the CGR

It is no coincidence that the CGR´s chief issued Circular 5 on the same date LD 403 was issued, as the market has been quite vocal with the need to remove uncertainties as to the impact of fiscal proceedings on insurers, and the Circular, addressed to all Contralorías and investigators within them, attempts to do just that. The Circular states:

  • Insurance companies are not fiscal managers; therefore, their liability is limited to the risks determined in the policy.
  • Insurer’s obligations have limits—these are established in the insurance contract; among others: sum insured, limits of liability, deductibles, periods of insurance, and certain conditions and exclusions that determine what is a covered loss. Investigators are implicitly invited to familiarise themselves with these concepts.
  • Under article 44 of Law 610 of 2000, for insurers to be linked to fiscal liability proceedings the policy must cover the alleged liable party, the property, or the contract subject to the investigation, that must be clearly ascertained. Particular care, it is said, should be taken to avoid piling up the wrong policies.
  • Emphasis is made on investigators performing what is, in effect, a proper coverage review: they are directed to obtain all policy terms and endorsements making up the entire policy, not just cover notes, and to pay particular attention to the basis on which the policy is predicated—occurrence, claims made, etc. and there is a well-intended attempt in the Circular to give specific guidance as to how these work.
  • It is considered of utmost importance that “in the future”—admitting this did not necessarily happened in the past—an early, timely and comprehensive study is made of all insurance policies that could potentially respond in the proceedings, to comply with the provisions of Law 389 of 1997, the Commercial Code and the contractual terms of the respective insurance contracts, in harmony with the particular rules that regulate the fiscal liability proceeding.

Regarding claims made policies it is specifically stated that the policy period to be triggered is the one that was in effect at the moment in which the Opening Writ was issued. Unfortunately, this guideline ignores the possibility of the insured to give notice of circumstances, or when the claim is other than the Opening Writ.

In short, Circular 5 is a herculean attempt to summarise in three short pages the workings of the type of insurance that would respond to fiscal proceedings. For that, it must be commended, and although it has imperfections, time will tell how it is actually implemented.  

Ministry of Finance Decree project draft regarding claims made policies.

On 18 September 2020, the Ministry of Finance published the draft of the Decree that aims to regulate claims made policies. The Decree draft in principle applies to all claims made policies, but it refers to D&O policies. The Decree incorporates some definitions such as what should be considered as a claim, aggregation, retroactive date, notice of circumstances, exclusion of previous claims or circumstances.

Whilst overall a noble initiative, there are some issues in the definitions as drafted, and there can be several problems when the policy defines such concepts in different terms.

Regarding the terms of the Decree some general comments can be made:

  • The definition of a claim under D&O policies is different depending on whether it is a fiscal liability proceeding or not. For proceedings different from fiscal liability proceedings, the definition determines 45 cases in which there is a claim. By listing those cases, the meaning can leave aside other possible scenarios different from formal claims or investigations. For fiscal liability proceedings claim defined as the notification of the Opening Writ or Preliminary Investigation, leaving aside the possibility of arguing in these type of proceedings that the claim is another investigation, requirement or notification.
  • The definition of policy term leaves aside the possibility to make any claim in the extended period if it has been granted in the policy. Now the second paragraph of said definition, which refers to the premium calculation does not relate to the meaning of the term.
  • The definition of notice of circumstance refers to facts that the Insured have known during the policy period of which it is reasonable to expect could give rise to a claim and which are informed to the insurer during the policy period or the extended notification period, if applicable. This definition leaves aside other policy requirements that can be established within the policy terms and conditions such as the reasons why it is anticipated that the fact or circumstance may give rise to a claim with full particulars of the reasons for foreseeing that the claim will be brought, the dates, acts or circumstances and persons involved.
  • The drafting of the exclusion of claims or facts known before the inception of the policy period, and the definition of a claim for fiscal liability proceedings, is such that it would be challenging to argue that this exclusion is applicable.
  • The draft was opened to comments, and different market operators provided remarks. Kennedys presented some observations, and all of them were accepted.
  • We will update the market on further developments on the draft Decree.

 

Fiscal liability in Spain

Fiscal liability in the traditional meaning, and in particular its insurability has always been controversial, as well as insurability of tax fines. The Spanish Supreme Court has recently admitted a tendency in favour of the insurability of fiscal liability. For instance, the Spanish Supreme Court decision of 29 January 2019 has ruled that the fiscal liability of directors and officers was insured under the D&O policy in spite of the exclusion for taxes in the policy. The Court considered that the invoked exclusion for taxes is a limitation of the insured rights beyond what the insured may expect from a standard D&O cover cover and that limitative clauses have to be expressly accepted by the insured (article 3 of the Spanish Insurance Contract Act).

Arguments against insurability of tax fines are: (i) fines imposed for wilful misconduct (own conduct or by way of vicarious liability) are not insurable under article 76bis of the Spanish Insurance Contract Act; (ii) the insurability of fines is contrary to public order (articles 1255 and 1275 of the Spanish Civil Code); (iii) if fines are insurable, their deterring and punitive purpose falls away as well as the inherent personal character of a fine and, finally (iv) it may not be possible to consider the risk as fortuitous, it being a basic requirement for the validity of an insurance contract.

It will be interesting to see how Spanish case law develops this question which will be of paramount importance for the insurance market in Spain.