In this article, Luis Felipe Pellon provides an in-depth look at subrogation actions and the legislation that governs them in Brazil, going on to explore the differences in how such actions are handled by international courts.
What are the limits of subrogation in Brazil?
According to Brazilian law, subrogation arises from the fulfilment of the obligation by a third party, with the consequent transfer to the new creditor of the rights, lawsuits, privileges and guarantees of the original creditor. Although there is a substitution of persons, the debt is not extinguished and becomes due to this third party, but only on the terms and limits in which the subrogation will occur.
Payment with subrogation is provided for in Articles 346 to 351 of the Brazilian Civil Code and may be legal or conventional. Conventional subrogation arises from the will of the parties and must be expressed in a contract, setting its limits and conditions, so that it is possible for the parties to restrict or extend the rights to be assigned by virtue of the subrogation. On the other hand, legal subrogation arises exclusively from law, from which its operation is independent of any contract or term, with the only necessary prerequisite being the presentation of the receipt of the discharge given by the original creditor.
With regard to insurance, subrogation is governed by Article 768 of the Civil Code, which, by express provision, restricts subrogation to the amount actually paid by the insurer to its insured. In addition, according to that same article, the insurer may exercise its rights only against third parties who are not the spouse, descendants, ascendants, consanguineous or in-law relatives of the insured. However, all these restrictions may be removed in the event that one or more of these persons have intentionally contributed to the occurrence of the indemnified claim.
In this way, whenever there is a deductible or when the value of the damage is higher than the indemnity limit, the insured will be entitled to have against the party responsible for the damage the corresponding excess compensation, simultaneously with its insurer. It is not uncommon to have problems in these situations, especially when the insured receives amounts and gives discharge to the third party without properly safeguarding the rights of its insurer. For this reason, the second paragraph of Article 768 provides that any act of the insured that diminishes or extinguishes the rights of the insurer shall be ineffective.
The insurer may exercise its rights only against third parties who are not the spouse, descendants, ascendants, consanguineous or in-law relatives of the insured.
How is the process affected if the insured party refuses to cooperate?
It is an essential obligation of the insured to collaborate with its insurer for the analysis of the cause and to the extent of the damages, as well as for the identification of its cause and its causative agent. The refusal to cooperate in this regard is grounds for refusal to pay compensation. Much has been discussed about the extent to which the insured can protect or hide certain information by claiming confidentiality agreements. There is, however, an understanding that confidentiality cannot go beyond information about certain industrial processes, never extending to something that gives rise to compensable damages.
How does subrogation apply to joint and co-insureds?
It is very common for engineering risk policies and great risks policies in general to contain a large number of co-insureds and even co-beneficiaries. The fact that they are mentioned in this condition in the policy automatically excludes them from the effects of any subrogation. However, it is worth noting here that they cannot intentionally cause a claim. In certain cases, the penalty for this could even mean refusing to pay compensation.
What other factors may complicate a subrogation?
There are several factors stemming from the original contracts taken to insurance which can complicate subrogation. In fact, limiting clauses in the contracts previously concluded between the insured and third parties (service and goods providers), such as limitation of value or exclusion of lost profits from eventual compensation, are quite common. These limits are not valid for the insurer, who finds himself in the contingency of receiving less in subrogation than he paid for the indemnification of the claim. There is also the election of applicable law and jurisdiction and arbitration clauses, whose question is: would it be possible to apply them to an insurer, having been concluded prior to the insurance contract, without the consent of the insurer?
We believe not, because the law of arbitration requires the free will of the parties to agree to the removal of the state jurisdiction. As the insurer did not participate in this decision, the constitutional guarantee of the inalienability of the jurisdiction of the common justice would be hit. The Superior Court of Justice has recognised (REsp 1.962.113/RJ) that the institute of subrogation does not transmit procedural issues.
It is very common for engineering risk policies and great risks policies in general to contain a large number of co-insureds and even co-beneficiaries.
This issue is not unanimous abroad. The Federal Court of Justice of Germany (Bundesgerichtshof) has already faced this question (BGHZ 68, 356) and has also ruled to the effect that the arbitration clause, by removing the natural judge, is not enforceable against those who are not its signatory. The courts of the United States also have a position contrary to the application of the arbitration clause to resolve a dispute in the absence of an expression of will by one of the parties. The United States District Court of New Jersey, in Association of New Jersey Chiropractors et al v AETNA, Inc. et al, based on the precedent set in CardioNet, Inc. v CignaHealth Corp, thus decided on the understanding that there was no express manifestation of the insurer, accepting the arbitration clause.
The Supreme Court of the United Kingdom has also denied the extension of the arbitration clause to a non-signatory, the government of Pakistan, a beneficiary in a contract between a real estate company (Dallah) and a trust, which was extinct after the change of the Pakistani government. The plaintiff company obtained the conviction of the government of Pakistan in arbitration. This, in turn, prevented the enforcement of the award because in the view of the Supreme Court of the United Kingdom, there was no material evidence that the government of Pakistan was a legitimate party to the arbitration agreement.
To give a broad overview, what steps do you take when advising on a subrogation action?
Several aspects should be checked before initiating a subrogation action. First, on the side of the insurer, verify the existence of co-insurers, since each one responds independently for its share and, therefore, all have to be represented in the action, under penalty of losing the right. Observe the time bar limitation periods which, in some cases (e.g. general stores) are very short. If necessary, file an interruptive protest of the time bar even if the compensation has not yet been paid, which the law provides to the interested party (CC, art. 203).
Also check in the policy if the causative agent is not listed as co-insured or co-beneficiary, and if this makes the action unfeasible. Check the deductibles and other mandatory participations of the insured, as well as if the total loss was greater than the limits of the policy, which should be duly noted in the subrogation action. Check if there is a counter-guarantee agreement; if it complies with the legal requirements, the signatures, grants and the liquidity and enforceability necessary for the execution of the guarantee and recovery of the indemnity against the causative of the damage.
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Next, the original contract, which is the object of the insurance and which binds the third party to the insured, must also be carefully examined. Check if there are indemnification limits imposed by the contract and if there is an arbitration clause and/or legal jurisdiction and venue. Also verify if the evidence characterising the liability of the third party causing the damage is consistent, as well as whether its financial capacity (or insurance coverage) is sufficient to support the payment in case of losing the action.
Luis Felipe Pellon, Founder
Pellon & Associados Advocacia Empresarial
Rua Desembargador Viriato 16, CEP 20030-090, Altavista Building, Rio de Janeiro, Brazil
Tel: +55 21 3824-7800
Luis Felipe Pellon has worked on insurance and reinsurance matters for 30 years, covering all its legal and operational aspects. Luis deals with contracts, claims, lawsuits, arbitration, product development, corporate, tax and governmental issues. Based in Rio de Janeiro and serving clients all over the country and abroad, Luis frequently works with industry associations, especially AIDA WORLD, of which he is a member of the Presidential Council.
Pellon & Associados has a long and special relationship with the insurance market, as a leading law office in the Brazilian insurance market with over 100 lawyers distributed among its offices in Rio de Janeiro, São Paulo and Vitoria. The firm renders a full range of services to insurers, reinsurers, brokers and agents, from consultation to court litigations and administrative proceedings, in all jurisdictions.
