Insurer exonerated due to insured’s breach of duty to provide information
Supreme Court judgment 20 April 2016
The insured, a public hospital in Valencia, was held liable for several medical faults and ordered to pay compensation of €369,671.96 plus interest to the victims as well as legal costs.
The insured had insurance to cover its liability but the insurer rejected these claims on the grounds of not having received sufficient information from the insured to analyse the claims.
Subsequently, the insured sued the insurer to recover the indemnities, arguing a deliberate breach of the insurance contract. In this specific case, the insurer had not drafted the policy clauses, which corresponded to the technical specifications and clauses of the public hospital included in the tender process for the awarding of the contract.
The lawsuit was rejected by the first instance and second instance courts. In this article we will analyse the judgment issued by the Supreme Court, which confirmed the rejection of coverage and the exoneration of the insurer.
The judgment analyses the obligation of the insured to provide information to the insurer about the circumstances and consequences of an insured event in accordance with section 16.3 of the Spanish Insurance Contract Act, and establishes a clear and important distinction with section 16.1 of the Act, which concerns the obligation to communicate the occurrence of an insured event.
Section 16. 1
The policyholder or the insured or beneficiary shall notify the insurer of the occurrence of a loss within a maximum of seven days from knowledge thereof, unless a longer period has been set in the policy. Insurers may claim damages and losses caused by the lack of notification.
The policyholder or the insured shall furthermore give the insurer full disclosure of the circumstances and consequences of the loss. In the event of infringement of this duty, the loss of the right to indemnity shall only occur in the event that there has been fraud or serious fault by the insured or policyholder.
The Supreme Court understood that this lawsuit involved a relevant legal issue related to the information that must be provided to the insurer and proceeded to resolve the appeal of the insured.
Legal reasoning of the Supreme Court
The insured centred their appeal to the Supreme Court on only one of the claims included in the original lawsuit, which amounted to €50,000. The insured had notified the initial claim of the third party in June 2008 but did not provide further information to the insurer until July 2010 when a court judgment was issued that found the insured liable to pay an indemnity to the third party.
The insurer rejected the claim as it had not been discussed in any claims committee, the issuing of legal proceedings by the third party had not been notified and the insurer had not been called into the proceedings to defend its position.
The Supreme Court analysed the obligation of the insured contained in section 16.3 of the Insurance Contract Act, the breach of which has the consequence of the loss of the indemnity if there is fraud or serious fault. A clear differentiation is made with the obligation to notify an insured event as per section 16.1 of the Act, the breach of which only permits the insurer to claim for losses and damages.
In this specific case, the insured notified the initial claim of the third party but no further notification was made that subsequent legal proceedings had been issued until the first instance court had issued its judgment. According to the Supreme Court, in application of section 16.3, the insured breached their obligations, which prejudiced the position of the insurer, which was deprived of the opportunity to defend its position.
The court highlighted that such effective breach of the duty to provide information is especially serious for civil liability policies due to their specific characteristics to permit evaluation of the circumstances by the insurer in order to manage claims and proceed to settlement.
The Supreme Court rejected the insured’s appeal, confirming the exoneration of the insurer from paying due to the serious breach of the duty to provide information by the insured, and also for failing to follow the contractual steps related to management of claims. The judgment also included a costs order against the insured in the same manner as the first and second instance judgments.
The Supreme Court highlights that the insured must facilitate the possibility that the insurer is called as a party in the judicial proceedings, which can lead to an increased cost of the claim and also interest implications in accordance with section 20 of the Spanish Insurance Contract Act. In practice, claims for professional indemnity are usually directed against the professional but less frequently against the insurer, which reduces the economic exposure to the interest that can be applied under section 20 of the Act.