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Reinsurance and loss adjustment procedures in Brazil

In common law countries, it is generally recognized that reinsurers shall be granted the right to participate, to some extent, in claim adjustment proceedings, which may bring them financial consequences. In these countries, the reinsurance market has developed ways to protect reinsurers' interests, such as claims cooperation clauses and claims control clauses.

In the first case, reinsurers shall have the right to cooperate and participate actively in the loss adjustment. Reinsurers may be granted, for instance, full access to any data, ledger and records of the original insured which the reinsured (insurer) has been given access to in order to obtain information related to the loss adjustment. Likewise, the cedent may undertake to keep reinsurers duly informed of all relevant incidents likely to affect the reinsurance treaty.

Claims control clauses are even stricter, entitling reinsurers with the exclusive power to conduct and control the loss adjustment.

However, under the Brazilian Law this dynamic can be affected considering it is common sense that contracts are binding exclusively between the parties who have entered into them, neither benefiting nor harming third parties. According to the Brazilian Superior Court of Justice:

"The principle of the relativity of contracts means that the transaction is binding only to the contracting parties (res inter alios acta). Only the contracting parties chose to bind themselves. The contract is a law between the parties, but only between the parties. The rights and obligations arising from a contract do not have legal effects before third parties, who did not take part in the transaction. On the other hand, no third parties are allowed to intervene in the contract."1

In spite of this, the res inter alios acta rule does not always apply to insurance contracts, especially due to its social and economic relevance.

According to the Brazilian Superior Court of Justice, the legal relationships arising from insurance contracts are not limited exclusively to their parties, since third parties may be affected, such as beneficiaries.2

Likewise, reinsurance also tends to mitigate, to a certain extent, the application of the res inter alios acta rule to insurance contracts, as explained by the doctrine:

"(…) the difficulty in perceiving the shortcomings of bilateral contracts, where only the insured and the insurer are perceived, is a major one. Third parties, such as reinsurers and retro-reinsurers, are fundamentally responsible for determining the text of contracts of insurance, intervening as a kind of 'regulating agents' of the content of such contracts, particularly in the case of large risk insurance, where the parties' freedom of disposition is further constrained, since the content complies with pre-requisites posed by reinsurance technicians (…), alas, by those third parties that contract only with the insurers, in a relationship that is, in summary, an 'inter alia relationship'."3

In Brazil, reinsurance has been regarded as a peculiar kind of insurance contract, as the reinsurer undertakes, upon the payment of a premium, to protect the insurance company's equity, in case of liability before the original insured party. This idea has already been endorsed by the Brazilian Superior Court of Justice.4

This discussion, however, is still far from ending. In 2007, the National Council of Private Insurance issued a rule (Resolution no. 168), stating that claims cooperation clauses and claims control clauses should be considered valid under the Brazilian Law in some circumstances (according to its article 39).

Still, it has been discussed the extent to which reinsurance contracts can entitle reinsurers to intervene in claim adjustment proceedings. Some experts have questioned the effects of claims cooperation clauses and claims control clauses before the original insured.

After all, the original insured and the reinsurer are not parties to the same agreement, so that, from the original insured's perspective, the party responsible for conducting the loss adjustment should be the insurer, not the reinsurer.

Thus, it has been argued that claims control clauses should not exempt insurers from their prerogative to take part in the loss adjustment procedure. It has also been stated that claims control clauses should not be enforceable against the original policy holder, due to the res inter alios acta rule.

Moreover, de lege ferenda, it is also necessary to emphasize that Bill no. 29/2017 (from the Brazilian Chamber of Deputies) contains relevant provisions related to reinsurance. According to article 65 of the bill, unless otherwise provided (v.g., in the case of a cut-through clause has been accepted by the original insured), the reinsurer shall not be directly liable before the policy holder.

Article 78 of the bill also sets forth that the insurer is the only responsible for conducting the loss adjustment and settlement of claims. If the bill passes, this legal provision may be interpreted so as to impede reinsurers from taking part in loss adjustment.

As we can see, the traditional civil law principles, such as the res inter alios acta, are widely adopted in the Brazilian legal practices. Due to this, it may be quite challenging for reinsurers to intervene unrestrictedly in loss adjustment procedures in Brazil, no matter how widespread such practice may be in the reinsurance market in other countries.

  1. Appeal called Recurso Especial no. 1,158,815/RJ, Rapporteur Judge PAULO DE TARSO SANSEVERINO, 3rd Chamber, judged on 02.07.12 – free translation.
  2. Appeal called Recurso Especial no. 401,718/PR, Rapporteur Justice SÁLVIO DE FIGUEIREDO TEIXEIRA, 4th Chamber, judged on 09.03.02.
  3. TZIRULNIK, Ernesto. Construction risks insurance: instrument for development. São Paulo: Roncarati, 2017, pages 70-71.
  4. Appeal called Recurso Especial no. 1,170,057/MG, Rapporteur Judge RICARDO VILLAS BÔAS CUEVA, 3rd Chamber, judged on 12.17.13.