Insurance law and regulation in Chile

1. Introduction

Insurance companies in Chile must be incorporated as public corporations or be authorized as Agencies of a foreign insurance company, both regulated by Statutory Decree (Decreto con Fuerza de Ley) No. 251 of 1931 and its amendments, and supervised and controlled by the Superintendency of Securities and Insurance (Superintendencia de Valores y Seguros, or “SVS”). Insurance contracts are regulated by articles 512 to 601 and 1157 to 1201 of the Commercial Code, and the general terms and conditions of the policies must be those registered by the insurance companies in the SVS; however in the case of “large insurance”, where the insured is a legal entity and the annual premium is not less than 200 U.F. (Unidad de Fomento, a unit of account used in Chile), (approx. USD 8,000), the terms and conditions can be freely agreed by the parties.

Foreign insurance companies cannot offer coverage in Chile, with the exception of insurance related to international maritime, commercial aviation, goods in transit, and satellite and its load insurance. Chilean residents can freely contract insurance coverage with foreign insurance companies, paying the corresponding taxes on the premiums (22%).

The insurance companies are legally classified between those providing general insurances, and those providing life and health insurance.

The loss adjustment process is regulated by law, and the loss adjusters are independent of the insurance companies, and perform their function under the supervision of the SVS.

All disputes related to insurance contracts, with the exception of minor coverage, are subject to arbitration in Chile, and the applicable law is Chilean law.

Insurance contracts are consensual, and can be proved by any kind of written document.

2. Effects of Misrepresentation and/or non-disclosure

The general rule is that the insured, under the requirement of the insurance company, must provide all the information within its knowledge related to the risk to be covered, which will allow the insurance company to make a correct assessment of the risk, its characteristics and extension.

Failure to fulfil this obligation by the insured will allow the insurance company to withdraw from the insurance contract or to reduce or modify the extension of the coverage and request an increase in the premium. The relevant information is that related to relevant circumstances that will make it advisable for the insurer to enter into the insurance contract at all or under the agreed terms.

3. Effect of breach of warranty and condition precedent

Warranties are legally defined in Chile as the conditions agreed by the parties to restrict, specify or reduce the risks to be covered in an insurance contract, and that must be fulfilled by the insured to obtain the payment of an indemnification in the case of a loss.

When these types of warranties or conditions precedent are incorporated into the terms and conditions of the insurance contract for the cover of a loss, they are fully applicable in the case of a dispute between the insurance company and the insured.

In the case of large insurance, the parties quite often agree to introduce these warranties and conditions precedent, which have been previously agreed by the insurers with the reinsurers in the reinsurance contract which supports the primary coverage of the insurance contract.

4. Effect of late notification

The general rule in this market is that the insured must promptly notify the occurrence of an insured event, as a way to avoid fraud and to support the determination of the loss or the rights of the insurance company to recover against third parties.

That said, the actual effect of a reasonable late notification will be measured in relation to the material adverse effects of it, and how it actually affects the insurance company’s contractual right, not only in relation to compliance with a formal obligation of the insured.

Calculations of Premiums

There is a fully free market, and the premiums are determined by insurance companies, depending on the risk to be covered, the administrative cost of the insurer and the cost of reinsurance protections, etc.

Premiums must be invested in the Technical Reserves established by law and supervised by the SVS.

In the event of early termination of the policies, the insured will be entitled to a reimbursement of the unused part of the premium.

5. Entitlement to bring a claim against an insurer

The insured is contractually entitled to initiate an action against the insurance company under the insurance contract. It will also entitle any person who after the occurrence of the loss, acquired those rights from the insured, or any person who in the case of large insurance is contractually designated for that purpose.

In the case of life insurance, the general rule is that beneficiaries designated in the policy, or the successors if there is not a beneficiary, will be entitled to file a claim or collect the payment of contractually agreed indemnities.

6. Entitlement to damages from an insurer for late payment of a claim

This is a matter that will be resolved during the arbitration process, and will depend on whether or not the insurance company denying the coverage is acting in accordance with the recommendation given in the loss adjustment report. If the insurance company is acting with the support of the loss adjustment report, it will probably not be ordered to pay damages, but only the contractual indemnity plus interest, assuming that the insurance company has a legitimate reason to dispute the payment; on the other hand, if the insurer denied the coverage against the recommendation of the loss adjustment report, it will likely be ordered to pay damages.

Insurable Interest

The insured must have an economically valuable interest in the conservation of the thing, right or property, object of the insurance contract or coverage. Without insurable interest the insurance contract is null and void.

In life insurance the insurable interest is not applied, and the insured can freely select the beneficiaries.

7. General rules concerning the limitation period of claim

In accordance with the Commerce Code, the statute of limitations is four years, calculated from the date of the final loss adjustment report.

8. Policy trigger with respect to third-party liability insurance

The general rule in massive insurance, which includes terms and conditions that are duly registered in the SVS, is “claim occurrence”; The insurance policy will cover the civil liability of the insured that originates in an event during the term of the insurance contracts.

In the case of large insurance, with terms and conditions that are freely agreed between the parties, it is quite common in certain types of coverage, such as medical liabilities, to use “claim made” triggers, where the coverage will be given by the existing policy on the date of the claim. The type of trigger will normally depend on the terms and conditions of the reinsurance contract that protects the primary coverage.

9. Recovery of defence costs

It will depend on the arbitration award and on the basis of the existence of legitimate cause to litigate. Normally, it is not considered in the coverage of the policy, with the exception of D&O policies that cover, in certain conditions, the defence costs incurred by the insured in defending against the civil liability claim.

10. Insurability of Penalties and Fines

The general rule is that penalties and fines are not covered by insurance companies in Chile; wilful misconduct or gross negligence and its effects will never be covered by an insurance policy. In large insurance, some administrative fines have been exceptionally covered.

Year in view

Law No. 21,210 of 24 February 2020 established that remote remunerated services provided by non-residents not domiciled in Chile, must pay value added tax (VAT) from 1 July 2020. This tax obligation is only for foreign taxpayers without domicile or residence in Chile who that provide remote services to be used in Chile's national territory by natural or legal persons who are not VAT taxpayers.
As regards its impact on insurance contracts agreed outside Chile, the general position can be summarised as follows:

  1. Premiums paid for insurance contracts agreed outside Chile are subject to a 22 per cent withholding tax and exempted from VAT. However, under the new regulations, VAT would apply provided that the premium (1) is related to services rendered or used in Chile and (2) is exempted from the 22 per cent withholding tax because of the application of laws or treaties to avoid double taxation.
  2. The cases expressly exempted from the 22 per cent withholding tax remain the same, namely those related to premiums paid in connection with (1) hull and machinery (H&M) insurance, protection and indemnity insurance (P&I), freight and other insurance related to the maritime industry; (2) aircraft, freight, P&I and other insurance related to the air navigation industry; (3) insurance and reinsurance related to export credits; and (4) insurance and reinsurance related to guarantee payments of obligations towards third parties arising from the financing of concessionaires of public ports.
  3. Reinsurance remains subject to a 2 per cent withholding tax.30
  4. In addition to those at point (a) above, the cases expressly exempted from VAT remain the same, namely those related to premiums paid in connection with (1) import or export cargo insurance, H&M and risks for assets located abroad; (2) earthquake risks; (3) air navigations risks within Chile; (4) reinsurance; and (5) adjustable life insurance.

Given that the VAT changes are relatively recent and as yet there are no guidelines available, this summary proceeds from a conservative standpoint. In this respect, the IRS may in future issue resolutions or guidelines that help to clarify how these changes actually impact the insurance industry.

Outlook and conclusions

Owing to the October 2019 civil unrest in Chile, policies providing or excluding related risks, such as civil disturbance, civil commotion, looting or terrorism, among others, are being tested by local adjusters and courts. This also includes the testing of aggravation clauses, limits and sub-limits wording and deductibles. In addition, it remains to be seen how local policies will deal with the effects of the covid-19 pandemic, particularly in relation to business interruption.