Third party liability requirement for subrogated recovery actions under Spanish law

Recovery actions are available for insurers, under Spanish law, after payment of indemnity arising from a covered loss. Subrogated recovery actions are frequently before the Spanish courts. This is because the scope of liability between a contractor and subcontractor is not always easy to identify, especially in construction projects where different companies work together. An example of this is the case decided by the Barcelona Court of Appeal dated 19 February 2021.

Contractor and sub-contractor liability regimes: decision of the Barcelona Court of Appeal

Here, a recovery action brought by an insurer against a third party (a subcontractor of an insured), for not fulfilling liability requirements was dismissed by the Court of Appeal of Barcelona.

The insurer had indemnified the loss to the insured contractor under the terms of the CAR policy in place, when performing construction works in Barcelona. The insurer issued proceedings against the subcontractor for defectively performing the subcontracted works.

In reaching its decision, the court considered the scope of both the contractor and sub-contractor’s liability. In doing so, the court took into account the terms of the contracts in place, and witness and expert evidence on the performance of the works.

The court determined that when companies are linked by contractual relationships, the subcontractor has its own separate scope of liability. This is unless the contractor retains a duty for intervening in the works by directing or supervising the sub-contracted works. In this case, both contractor and subcontractor had a shared liability for the works achieved by the sub-contractor.

Therefore, the key issue in this case was to clarify if the subcontractor had acted under direction and supervision of the main contractor, or whether he had a real autonomous regime for performing the subcontracted works. This was assessed by the court on a contractual and factual basis.

The court concluded that, on the evidence provided, and by analysing the contractual terms, the insured contractor was supervising, controlling and directing the work of its subcontractor, who had received instructions on how the works should be performed. Consequently, although the subcontractor had carried out the works, both were held jointly liable for the defective performance of works.

Following these considerations, the court held that the insurer was not entitled to bring the subrogated recovery action because the allegedly liable subcontractor had acted under the scope of the insureds liability. On this basis, the recovery claim was dismissed.

The Spanish Insurance Contract Act provisions (ICA, Section 43) states that the insurer, having confirmed coverage of damage, is entitled to a subrogated recovery action against the party that is considered liable for the loss. However, in light of the decision of the Court of Appeal of Barcelona, the insurer does not have the right to subrogate against any party whose liability also entails the insureds liability. This is because, indirectly, the insurer would be claiming against its own insured. This provision applies to a wide range of property and construction policies including all risks, contractors’ all risks, erection all risks, machinery breakdown, business interruption, and others.

In general terms, losses arising from fire, explosion, flood, theft, or other related coverages, may provide the insurer with the said recovery action mechanism under Spanish law. According to the Spanish Supreme Court, the aim of this mechanism is to allow the insurer to re-establish the economic balance of the loss by way of recovering the indemnity paid. The mechanism also prevents the liable third party from being released from its obligation to compensate the loss. It further benefits the insured who suffered the loss, by avoiding future and severe premium increases.

Requirements for recovery

A recent Supreme Court Decision (16 March 2021) has confirmed the formal requirements that are to be fulfilled to allow the insured to bring an action against a third party, who is potentially liable for the loss.

These are:

  • Insurance coverage: the insurer must have paid the indemnity of a covered loss to the insured.
  • Liability: the insured should benefit from a compensation duty from the third party causing the damage; which means that the third party should be found liable (on contractual or non-contractual basis) of the loss.
  • Claim: the insurer has to expressly claim against the third party, as this mechanism is optional and does not operate automatically.

For recovery claims filed at Spanish courts, the insurer as claimant, has the burden of proving (subject to severe CPR provisions on evidence) that all these requirements are strictly met to have access to the recovery mechanism. If these requirements are not strictly met, it may cause the full dismissal of the claim.

Problems may arise from ex-gratia payments (without access to the recovery claim), or on limitation periods issues, but the main challenge for being successful for recovery actions is the third party liability requirement.

To be liable on a non-contractual basis, evidence of negligence, a guilty action or omission by the third party should be provided. This must be directly linked to the damage on a strict causal basis. Without a causal link, there is no liability.

On a contractual basis, evidence is to be provided in the event of non-compliance of the third party being the direct cause of loss. Clarification of the contractual terms is essential for this, in order to fix limits and scopes of liability, and clauses are to be analysed very carefully. Also, waivers of liability or clauses limiting or excluding liability may apply, and the validity of the general terms and conditions may be questioned.

Recovery actions on a contractual basis may be subject to court proceedings or arbitration (usually subject to ICC rules), when jurisdiction and applicable law are defined by contractual clauses. For cross-border disputes, regulations such as Rome I on the applicable law to contractual obligations, may apply.

Comment

These and other recent Court decisions have clarified some aspects of the recovery actions mechanisms in Spain. These are available for insurers, allowing them to obtain compensation for losses regarding a wide range of property and construction policies, arising from fire, explosion, flood, theft, or other related coverages.

The Spanish Supreme Court has recently confirmed the strict formal requirements for entitlement to recovery actions, and the Barcelona Court of Appeal has recently specified the obstacles for recovery that arise when a defendant’s liability entails the insured’s liability.

For optimising the chances of recovery of losses in Spain, it is highly recommended to prepare for the recovery action from the outset when handling the loss, and to ensure you have all documentary evidence on the formal requirements for recovery, before payment of compensation.

Read other items in Construction and Engineering Brief - October 2021