The Brazilian real has devalued by more than 30% against the US dollar in 2020, making now an attractive time for Brazilian cedants supported by international reinsurers operating in US dollars to settle their claims.
Accrual of interest and monetary correction
One of the salient features of Brazilian insurance claims is the accrual of significant levels of interest and monetary correction (ie, inflation-linked interest), which has the capacity to increase quantum at an alarming rate. As regards interest, some courts apply the Brazilian Central Bank's official interest rate (2% per year, as of 5 August 2020), while other courts apply a non-variable rate of 1% per month. Neither of these rules should prevail over any express contractual agreement regarding interest. Interest usually applies from the date of service of the lawsuit or when the claim is denied.
As a general rule, monetary correction starts to run under the local policy from the date of damage (ie, the date of loss), although some courts apply it from the date of the inception of the policy. The applicable rate for monetary correction can vary from state to state, and the prevailing rate in a given state is usually set out in tables issued by the state courts and corresponds with the prevailing federal rate of inflation. At the time of writing, the official rate of inflation in Brazil for the past 12 months is approximately 2.3%.
Therefore, the combined rate of interest and monetary correction can exceed 14% per year. The quantum situation is made worse by the long period between filing a claim and obtaining judgment, during which time the monetary correction and inflation indices continue to accrue. Most courts are overstretched and complex cases are often defined by interim applications, sometimes on relatively straightforward procedural issues. The procedural landscape is such that complex cases are almost always best settled between the parties or in arbitration. Parties should include arbitration clauses with mediation escalation provisions.
In facultative programmes, when cedant insurers seek to pass the costs of interest and monetary correction onto reinsurers, reinsurers are often taken by surprise, insisting that they have not been kept apprised of material developments regarding the underlying claim. The best way to avoid this is for cedant insurers to carry their reinsurers with them throughout the adjustment process, treating them as partners. The broker is essential to this process. Careful regard should be given to the claims control or cooperation language and all material documents and information should be passed up the reinsurance chain.
Claims experts must be on top of their claims from the outset, especially given the payment timeframe of 30 days from proof of loss. In order to reduce the accrual of interest and monetary correction, the best policy for insurers and reinsurers is to pay any undisputed amounts as quickly as possible.
An important element of the quantum analysis is the application of deductibles. In most jurisdictions, deductibles or excesses are to be paid by the assured from the ground up. Usually, the policy limit will be eroded by the deductible, which is retained by the assured for its own account. Alternatively, the uneroded policy limit will sit on top of an excess. In both scenarios (ie, deductible or excess), the underwriter will derive comfort knowing that the assured has its own financial motivation to look after its property or avoid exposing itself to liability to third parties.
One 'jabuticaba'(1) in the Brazilian claims landscape is the unusual habit among local adjusters of applying the deductible from the top down, to the total adjusted loss, irrespective of policy limits. It follows that if the adjusted loss is significantly higher than the policy limits, no deductible will apply. To avoid disputes, parties should include unambiguous language in the policy wording setting out how the deductible is intended to apply (ie, from the ground up or on some other basis).
Endnotes
(1) The jabuticaba is a fruit which is unique to Brazil and, as such, it lends its name to anything that is unique to the country.
An earlier version of this article was first published in Insurance Day on 9 July 2020.
