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Spanish ruling to resolve 'gray' areas over claims payments


[MADRID, Spain]—A Spanish ruling that clarifies the way in which delayed claims are to be settled should not lead to an increase in the number of disputes and delays, experts say.

A ruling by the Tribunal Supremo, Spain's highest court, established that insurers should apply lower interest rates to compensation for delayed payments of claims.

The decision is not yet binding, but insurers expect the ruling to determine the outcome of similar actions in the future.

Experts say, however, that policyholders should not fear a rise in the level of claims delays and disputes as a result of the changes.

"[Insurance] companies may show themselves less inclined to reach out-of-court agreements to pay indemnities. At the end of the proceedings, they would have to pay lower interest than before," explained Luis Alfonso Fernández Manzano, insurance and reinsurance expert at the Madrid branch of Lovells, the London-based law firm.

Status quo

"But the lower rate applies only in the first two years, so for big companies it won't make much difference. It is an important decision for the Spanish insurance industry, but they are not going to change their relationship with customers because of it," he continued.

David De La Cueva, the head of legal department at Madrid-based Marsh España S.A.-a unit of New York-based Marsh Inc.—agreed.

"The new jurisprudence does not necessarily give an incentive for insurance companies to delay payments," he said.

Experts agree that it provides useful clarification of the Spanish Insurance Contract Act (Ley 50, de Contrato de Seguro—that was specifically designed to prevent insurance companies from dragging their feet with claims.

The law states that companies have three months to pay a claim.

If this deadline is not met, legal interest plus 50% must be applied over the amount due during the first two years after the date of the loss.

If the claim drags on past two years, the rate rises to a minimum of 20% a year.

The way in which the 1980 law was written, however, allowed two different interpretations which have been adopted inconsistently by the courts.

Some argue that the interest rate of 20% should only be levied on compensation payments that are due from the start of the third year after the original loss.

But other magistrates have decided that, if the due compensation is not paid in the first two years, the punitive interest rate must be applied retroactively, significantly raising the costs to insurers.

The insurance industry has pushed for a clarification of the matter for years.

In February the Tribunal Supremo, adopted the first interpretation while deciding a dispute about a personal accident insurance claim.

"The new interpretation is clearly favorable to insurance companies," said Javier Rivera Román, legal advisor at FECOR, the Spanish federation of insurance brokers.

"It took 27 years, but the Supreme Court has managed to unify the thinking about this matter," he added.

One of the reasons that the government agreed to the change in the rules over disputes is that it was written at a time of rampant inflation and high interest rates in Spain.


Lawyers argued that the rates charged became anachronistic as the economy cooled down, particularly after Spain adopted the euro and the effectively delegated monetary policy of the European Central Bank.

"The reading of the law in the February ruling is more in line with the real aims of the legislator," Mr. De La Cueva said.

"The uncertainty was a worry, as companies didn't know which interest rate they would have to pay. It would vary according to the provincial high court where the case was taken," said Mr. Fernández.

"Most of the courts tend to rule that the 20% interest rates are to be applied retroactively. But now there is a clear sign from the Supreme Court that the right interpretation of the law is the other one," he continued.

Interest rates during the first two years are unlikely to be higher than 9% or 10% a year if Spain does not suffer an inflationary surge, experts believe.

According to Mr. Fernández, a second similar decision from the High Court is necessary for the interpretation to become binding.