SUSEP issue new Rules for D&O and Engineering Insurance
The Brazilian Private Insurance Agency (SUSEP) issued, on 17 October 2016, new rules applicable to D&O and Engineering insurance. Both rules practically reproduce the texts of the respective Minutes which were submitted to public consultation in 2013 and 2015. We outline below the main points of the rules issued by SUSEP:
The Circular nº 541/2016 establishes an extensive list of definitions, most of which is already provided in other rules issued by the regulatory body, such as "occurrence basis insurance policy" and "claims-made insurance policy". Moreover, some concepts are not clear, such as "gross negligence"; others are unnecessary, once they have no practical application on D&O, for example "injury to person"; and others, seem to conflict amongst themselves, as the definitions of "bodily damage" and "injury to person", as well as "damage to property", "damage to patrimony" and "damage/prejudice".
The Rule also limits the insurance issuance to legal entities (borrower of services), in benefit of the directors and officers. In spite of being the usual market practice, prior to the said Rule it was possible, at least theoretically, to issue the insurance directly to the individual, should the company not wish to contract D&O for its officers and directors.
Also, the policies must be issued as claims-made basis, being the insurance companies prevented from issuing occurrence basis policies. In addition, the Rule clarifies that the D&O shall not cover damages related to General Liability, Professional Liability or Environmental Liability Insurances.
In consonance with SUSEP Rule N. 437/2012, the new rule offers Insurers the option to pay compensation directly to third-parties, as well as maintain the possibility of reimbursing the insured or the borrower, should the latter have advanced payment on behalf of the insured.
However, the most relevant alteration refers to the coverage for defence costs and fines and penalties.
The costs of defence and attorney's fees, which are the main guarantee under the D&O Insurance and previously assured by the basic coverage, will now be covered upon additional coverage, which must be offered by insurers.
On the other hand, the fines and penalties coverage has always been subject of discussion, given that, prior to the issuance of this Rule, SUSEP prevented coverage for fines and penalties based on a legal opinion related to pension funds issued by the Federal Prosecutor's Office in 2006. The market, on its turn, understood that the prohibition would only fit in the hypothesis of fines regarding malicious acts and that there would be no impediments to indemnify fines for negligent acts. By the new Rule, SUSEP clarified this controversy by authorising coverage for fines and contractual and administrative penalties imposed to the insured, without mentioning if this should be done by means of a basic or an additional coverage.
Another point worth mentioning is the mandatory offer of the arbitration clause by the insurance companies. While this disposition was unnecessary, once the resolution of conflicts by arbitration is already guaranteed by the Brazilian Law N. 9.307/96, the Rule reinforces this possibility, as long as the legal requirements to formalise its acceptance are observed, especially those related to Adhesion Contracts.
Finally, it is prohibited to refer to any foreign legislation, allowing only those habitually used in the Brazilian Insurance Market, provided they are locally translated or which translation appears on the general glossary of the insurance policy.
Onwards the issuing of the Rule, new insurance plans submitted to SUSEP must be adapted to its new rules.
The Insurers that already operate with the D&O shall submit to SUSEP its insurance plans adapted to the new rules until 28 February 2017, so there is no interruption in the commercialisation. The plans in force on the date the Rule was published will be terminated on 01 June 2017.
Regarding the renewal of the policies in force on the date the Rule was published, those with period of validity until 31 May 2017, might be renewed once, for one year, and the others following the said period (31 May 2017) cannot be renewed.
The Rule N. 540/2016, regarding Engineering Risks Insurance, revoked the Rule N. 419/2011. The main differences between these regulations are exposed below:
In summary, the new Rule excluded the basic coverages for Construction Works (Obras Civis em Construção - OCC) and Installation and Assembly of Equipments (Instalação e Montagem - IM), maintaining only the possibility of issuing the unified coverage of Construction Works/Installation and Assembly (OCC/IM). In view of this, there is no limit provision (previously stated as 25% of the Limit of the Insured Amount) for the equipment to be assembled and installed at the construction site and to the necessary construction work to the installation and assembly of the equipment.
Insurers remain able to structure their insurance plans with additional coverage distinct from those contemplated on Rule N. 540/2016, provided that the covered risks are directly related to the Engineering Risks field and are not typical of other insurance segments. In this regard, the revoked rule did not allow the provision of coverage related to Life, Health, Disability or Civil Liability Insurance, which were distinct from those proposed in its Annex. The new rule, however, expressly prohibits Civil Liability coverage, not mentioning any disposition regarding Life, Health or Disability insurance coverage.
Furthermore, there is no longer the requirement that the additional coverage may only be inserted in the insurance plan in cases where the respective risk is clearly excluded from the basic coverage.
Another innovation of the Rule refers to the debris expenses (including loading, transportation and unloading in appropriate site), which shall be encompassed by the Limit of the Insured Amount of the basic coverage, up to the percentage to be established in the insurance policy, with the minimum of 5%. Moreover, there is still the possibility of issuing additional coverage for debris with a specific insured amount.
The Rule also provides for additional coverage for Moral Damages and Financial Losses, Loss of Profits and Other Emerging Expenses, as a result of events guaranteed by the coverages for General Civil Liability or Cross-Civil Liability. Moreover, the insurers may offer additional coverage to ensure the transportation of materials to be incorporated to the construction work (as long as it is done by land transportation) and Fire after the Conclusion of Construction (limited to the term of 90 days after the conclusion of the construction). The Fire after the Conclusion of Construction coverage has similar treatment as the Maintenance coverage, which already existed.
Finally, it maintains the prohibition of renewing the insurance, only allowing the extension of the effectiveness term by endorsement. The exception, provided by the new Rule, refers to open policies which provide construction works belonging to the same Insured.
Upon the issuance of the Rule, new plans shall be adapted to the new provisions and submitted to SUSEP's approval. The term for the adaptation or substitution of the existing plans is 15 April 2017. The contracts in force which period of validity expires from 15 April 2017 will be valid for all the effectiveness period of the insurance policy or the extension endorsements.
Demarest offers a specialised team on development and adaptation of policies wordings, remaining at your disposal for any further clarification.