Update: Fiscal liability proceedings in Colombia

In our previous article, Fiscal liability proceedings in Colombia, we discussed how the recent decisions of the office of the Comptroller General or Contraloría (CGR), the autonomous governmental agency in charge of monitoring public fund use, have caused great concern among (re)insurers globally due to their departure of long established market principles.

The CGR investigates and issues administrative decisions on publicly-sponsored projects that have gone wrong, and they also hear the first appeal before the matter goes to judicial courts. In this article, we discuss a recent CGR decision which has renewed controversy and concern among (re)insurers.

The CGR investigation commenced on 15 September 2014 and was related to the third extension of the urban public transportation system of Bogotá, known as Transmilenio. The Institute for Urban Development (IDU) was charged with double paying preliminary studies and design models for the work.

The CGR also concluded that several IDU officers got ahead of themselves by approving work to commence before the design had been finalised, and then incurring unnecessary expense in getting the detailed design done, which modified the initial design parameters.

The CGR sought to collect COP 5,567,141,588 (approximately US$ 1,622,69306). On 8 April 2019, the CGR issued the accusation writ (indictment) against three IDU officers and of their D&O (directors and office liability) insurers. On 12 June 2019, the CGR issued the first instance decision against the IDU officers and insurers, ordering the joint and several payments to the State as compensation for the damage caused, i.e. the unnecessary fees paid in consulting and design fees. On 15 August 2019, the Head of the CGR issued the second instance decision confirming liability.

The reasons why this decision has caused so much controversy within the (re)insurance market include those that were advanced in our previous article, but also confuses the application of deductibles. In summary:

• The CGR disregarded the application of claims made clauses because, they say, claims made clauses are not applicable within fiscal liability proceedings since the civil and commercial rules to trigger the policies differ from the ones applicable to fiscal liability proceedings and the “occurrence” underwriting model should apply.
• The CGR asserts that multiple and subsequent acts and omissions caused the damage. The CGR does not aggregate the loss as such but considers this is a continuous event, even though all of those acts or omissions are related. Therefore, the loss is not allocated in accordance with the rule of Article 1073 of the Commercial Code - that says that if a loss starts during the policy term and continues after its expiration, the policy in force at the outset responds - but rather concluded that all the policies in effect during the years that the loss ensued, from 2004 to 2011, should contribute to the indemnity to be received by the CGR.
• The CGR expressly states that Title V of the Colombian Commercial Code, which regulates the insurance contract, is not applicable within fiscal liability proceedings. The CGR read the Constitution and Law 610 of 2000, which regulates fiscal proceedings, as somehow precluding the application of insurance principles. In a dangerous move, the CGR considers that procedural aspects of how a fiscal investigation should be progressed prevail over substantive regulation of the insurance contract.
• The CGR ignores the applicable deductibles: the CGR states that within the fiscal liability proceeding, insurers would be held liable up to the net value of the damage caused in each particular case. Once again, perhaps unconsciously, the CGR applies the “procedure comes first” approach to state that any petition regarding the application of deductibles shall be raised during enforcement proceedings.

Insurers agreed with us that addressing these excesses required a new approach. Having exhausted the available administrative remedies, Kennedys on behalf of one of the insurers filed a pioneering request for direct revocation of the GCR's decision before the CGR, allowing the CGR to overturn the decision before starting an administrative Court Proceeding.

We argued that the CGR decision is against the public and social interest of the country and that, if it becomes final, unjustified detriment will be caused to the insurer. Within the request there is a detailed explanation about claims made clauses, what should be considered as a claim, their history, how Public Officers D&O policies are usually drafted, why insurance is a business concerned with the public interest and the possible consequences that decisions like this one would have for the country as (re)insurance capacity may disappear. Furthermore, as the biggest concern of the CGR was that according to the defence arguments no policy would ever respond, we decided to present a different approach than the traditional litigation position, which was to run a coverage analysis of the case in terms of policy period.

Regarding the possible consequence that the CGR decisions might have for the country, it is also of importance to highlight the award dated 27 August 2019 of the International Centre for Settlement of Investments Disputes (ICSID) in the arbitration proceeding between Glencore International A.G. and C.I. Prodeco S.A. v the Republic of Colombia. The arbitration Tribunal ordered the Republic of Colombia to refund to C.I. Prodeco S.A. the amount awarded during fiscal liability proceedings, with interest. The Arbitration Tribunal argued that the determination of the existence and quantum of damages made by the CGR was biased, contrary to basic principles of legal reasoning and financial logic, and incompatible with the standard of conduct that Colombia undertook to provide to protect Swiss investors under the 17 May 2006 Agreement - for the Promotion and Reciprocal Protection of Investment.

The CGR decision is awaited. If the revocation is accepted, it will become precedent for similar proceedings affecting the market.

Finally, the Constitutional Amendment mentioned in our previous article was approved on 11 September 2019. Congress shall enact the laws to implement the preventive controls, to regulate the ex-post judicial controls regarding fiscal liability administrative acts, the General Comptroller’s Office prevalent jurisdiction, the General Comptroller’s judicial policing powers and the regional control exerted by the CGR.

Dialogue between (re)insurers and several government agencies continues.

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