SUSEP promotes amendments in the rules for the trading of Surety Bond Insurance

The Superintendence of Private Insurance (“SUSEP”) published SUSEP Circular nº 662/2022, which provides for the rules that apply to the sale of Surety Bond Insurance, repealing SUSEP Circulars 477/2013 and 577/2018. 

 After submitting the topic to two Public Consultations in 2021 (Public Notices No. 24/2021 and 40/2021), SUSEP consolidated a new resolution seeking to simplify the entity’s regulation in the scope of Surety Bond Insurance, in addition to putting forward a new set of clauses and greater contractual freedom between the parties, given that it excluded the imposition of standardized contractual conditions in the set of clauses to be commercialized. 

The new Circular introduced the following amendments on the matter: 

  • PARTIAL GUARANTEE OF THE OBLIGATIONS OF THE CONTRACT’S MAIN PURPOSE

Possibility of limiting the guarantee to certain obligations of the main contract, with exclusion of the obligation of full guarantee, so that the parties will have greater autonomy to agree on the obligations that will be guaranteed, which must be highlighted and described clearly and objectively in the set of clauses. 

  • SURETY BOND INSURANCE TERM

Inclusion of the possibility for the policy to have a validity period different from the term of the guaranteed obligation should the contract or specific legislation so determine.  

In the event that the insurance proposal is sent after the guaranteed obligation is in force, the policy term will be subject to the general insurance rules. 

If the term of the policy is shorter than the term of the guaranteed obligation, the Insurer must ensure that the coverage is maintained for as long as there is risk to be covered, and it is mandatory to specify the criteria for maintaining coverage throughout the risk period and ensure the procedures for renewing the policy. The Insurer must ensure that the maintenance of coverage and the renewal of the policy occur prior to the expiration of the policy, notifying the Insured and the policyholder at least 90 days prior to the expiration of the policy. 

The Insured has the right to oppose the maintenance of the coverage, by express declaration, while the Policyholder can only do so if it replaces the policy with another guarantee accepted by the Insured.   

  • AMENDMENTS TO THE POLICY CLAUSES

If the main contract is amended, the policy will be obliged to follow according to the amendments made if (i) they have been previously stipulated in the contract, in its specific legislation, or in the document that served as a basis for the acceptance of risk by the Insurer, or (ii) if the Insurer accepts them. 

The procedures to be adopted by the Insured in case of amendments made to the main purpose must be objectively established in the contractual conditions of the insurance. 

If the express requirement to communicate amendments to the main purpose to the Insurer does not occur, occurs late, or is not in compliance with the conditions of the set of clauses, the Insured will only lose the right to the guarantee if such non-compliance aggravates the risk and, concomitantly, (i) the amendment is related to the loss; or (ii) it is proven by the Insurer that the Insured failed to communicate such amendments in bad faith. 

  • DEDUCTIBLES AND GRACE PERIOD

Exclusion of the prohibition then contained in SUSEP Circular 477/2013, so that the establishment of deductibles, mandatory participation in the risk by the Insured and/or grace period is now authorized, upon express consent of the Insured. 

  • BENEFICIARIES OF THE SURETY BONDINSURANCE

Possibility of third parties being included in the policy as beneficiaries, in accordance with the terms of the contract’s main purpose and/or its specific legislation, in the event that default by the policyholder causes them losses. 

  • EXPECTATION AND COMMUNICATION OF LOSS

Determination that, if the expectation of a loss is foreseen, the contractual conditions of the insurance must clearly describe the act or fact that defines the loss, as well as whether or not there is a requirement for its communication to the Insurer and the criteria for its formalization.  

Provision that the procedures and criteria for proving default by the policyholder, which characterizes the loss, are the responsibility of the Insured, and that the Insurer does not interfere in this process, except as otherwise provided for in the contract’s main purpose or in its specific legislation.  

A provision was also inserted that differentiates the constitution of the loss (default by the policyholder) from the loss adjustment process, making it clear that the proof of default is not to be confused with the adjustment of the loss. 

  • INDEMNITY

The definition of the form of indemnification by the Insurer (payment in cash or performance of the obligation) shall be in accordance with the terms of the contract’s main purpose, or, in the case of absence of provision, by agreement between the Insurer and the Insured.  

In the case of execution of the obligation by the Insurer, the choice of an individual or legal entity to continue and complete the guaranteed obligation occurs by agreement between the Insurer and the Insured, and thus there is no provision for an obligatory step-in by the Insurer. 

  • SET OF CLAUSES

In each modality of Surety Bond Insurance, the policies must have specific clauses and definitions of the insurance purpose, the guaranteed obligations, the policy term, the description of the guaranteed values, the expectation and characterization of a claim, and the objective criteria and methods for calculating indemnification.  

  • UNDERWRITING AND RISK MITIGATION POLICY

Inclusion of the possibility for the Insurance Company to (i) follow up and/or monitor the main purpose; (ii) act as mediator in the event of default or of any conflict between the Insured and the policyholder; and (iii) provide assistance to the policyholder. 

  • CONFLICT OF INTERESTS

If the policyholder maintains any relationship with the Insurer, the policy must expressly mention the existing relationship. 

  • CNSP RESOLUTION 407/2021 – LARGE RISKS

For the coverage of large risks, defined in CNSP Resolution 407/2021, the Insurer may adopt the provisions of this Resolution, except in what concerns the insurance purpose and definitions established by the new Circular. 

The new Circular will enter into force on May 2, 2022. Accordingly, as of January 01, 2023, Insurance Companies may no longer sell Surety Bond Insurance that are not in compliance with the present provisions, such that: 

  1. Surety Bond Insurance plans registered at SUSEP before this Circular became effective must be replaced and adapted by January 01, 2023;  
  1. After January 01, 2023, all Surety Bond Insurance processes dated prior to May 02, 2022, will be automatically cancelled;  

iii. The Surety Bond Insurance contracts in force and not in compliance with the provisions of the new Circular, and which have their expiration date (i) before January 01, 2023, may be renewed only once for, at most, the same originally agreed term; or (ii) after January 01, 2023, may be in force only until the end of their validity period. 

Demarest’s Insurance and Reinsurance team is available to provide more information on this and other related topics.