Insurance law and regulation in Colombia

1. Introduction

Under Colombian law, the insurance contract is a commercial contract regulated in Title V of Book IV of the Commercial Code and it is described as a bilateral, consensual, and aleatory contract, for consideration and of continual performance.

The Commercial Code regulates the general principles common to land insurance, damage insurance, and personal insurance. Suggest: The law deals with the contractual parties, the essential parts of the contract, the policy documents, its requirements and annexes, risk status disclaimers, definition and effects of warranties, the obligations of the insured event at the occurrence of the event, a statute of limitations, payment of the policy, and non-insurable acts, among others.

We proceed to answer the following questions which involve essential knowledge required for anyone interested in acquiring an insurance policy issued under Colombian law, taking into consideration:

  • that the parties to the contract are the insurer; a corporation legally authorized to assume the risk and supervised by the financial regulator; and the policy holder, the party that on behalf of itself or others, allocates the risk 1 Colombian Commercial Code, Article 1036
  • that the contract has four essential elements: a), an insurable interest b) an insurable risk c) a premium paid by the policy holder in exchange for the transfer of risk and d) an agreement on the part of the insurer to pay an indemnity,  2 Colombian Commercial Code. Article 1045
  • the general principles and regulation of the contract’s common elements.

2. Effects of misrepresentation and/or non-disclosure

The policy holder is under an obligation to truthfully disclose all material facts. If a form is used to asses risk, any misrepresentations or non-disclosure of material facts on the part of the policy holder will invalidate the contract and it will be voidable at the insurer’s discretion. If no form is used, the contract will be voidable in the case of fraudulent or negligent misrepresentation or non-disclosure. Innocent misrepresentation or non-disclosure will not void the contract, but a proportional remedy applies; the insurer is only required to pay the claims in proportion to the actual level of risk covered by the premium under truthful circumstances. The insurer’s remedies will not apply if, before the formation of the contract, the insurer knew or ought to have known the actual facts and circumstances in question, or if, once known, the insurer tacitly or expressly accepts the terms, or allows an opportunity to cure. 3 Colombian Commercial Code. Article 1058

The policy holder has an obligation to notify the insurer in writing of any facts or circumstances which materially alter the risk contemplated in the agreement. The insurer has the option to cancel the policy or adjust the terms of the premium. Non-disclosure of any such fact or circumstance will cause the termination of the contract. 4 Colombian Commercial Code. Article 1060

3. Effect of breach of warranty and condition precedent

The concept of warranty was created to provide more safety for the purposes of insurance, therefore the insured should be diligent and their actions should be aimed at avoiding the occurrence of the claim. Article 1061 of the Colombian Commercial Code establishes that the warranty is a “promise under which the insured is obligated to do something specific, or meet certain requirements, or by which affirms or denies the existence of a particular factual situation …”

As a “promise,” the effect that the law contemplates for a breach of warranty is the voidance of the contract, unless the exception of article 1062 applies: “Non-compliance with the warranty will be excused when, by virtue of changed circumstances, it is no longer applicable to the contract or its implementation has come to mean a violation of law after the conclusion of the contract”.

When the warranty refers to an event subsequent to the contract’s celebration, the insurer may terminate the contract at the moment of breach.

The Colombian Commercial Code does not consider the warranty as a condition precedent, as Common Law does, where the consequences of a breach will be different.

4. Consequences of late notification

The insured or beneficiary is required to notify the insurer of the occurrence of an insured event within three days following the day on which the insured or beneficiary became aware or should have became aware of the occurrence of the event. This term may be extended, but not reduced, by the parties.

If the insurer performs salvage operations or confirms the occurrence of the insured event within the established notification term, the delay or omission of notice may not be used as an excuse to contest or deny payment. However, as a delay or omission of notice constitutes a breach by the insured, the insurer may deduct from the payment of the claim the amount of damages generated by the breach.

5. Entitlement to bring a claim against an insurer

The insured is the person entitled to bring a claim against the insurer. The insured must prove the occurrence of the harm and the amount of damages. Once proven, the insurer’s obligation to pay the amount of the claim is triggered.

In order to contest a claim, the insurer is required to show the facts and circumstances which relieve its liability.

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

The insurer is under obligation to make payment by the end of the month following the date on which the insured or the beneficiary proved its loss (or within 60 days for policies with a sum in excess of USD 3.5m at the current exchange rate) 5 Organic Statute of the Financial System. Article 185 . In case of late payment, the insured or beneficiary is entitled to either: (1) interest at a punitive moratorium rate, equal to 1.5 times the commercial lending rate, or (2) recover damages which may include reliance (actual loss, damnum emergens) and expectation damages (loss of profit, lucrum cessans). 6 Colombian Commercial Code. Article 1080

7. General rules concerning the limitation period for claims

In Colombia, insurance claims have (1) a general limitation period of two years from the date on which the interested individual knew or ought to have known the facts giving rise to the claim, and (2) a special limitation period of five years from the date on which the right arises, applicable to all persons regardless of their knowledge of the facts. 7 Colombian Commercial Code. Article 1081

The Supreme Court has defined the difference between the two periods as both objective and subjective. The general limitation period has a subjective element, as it applies only if there is actual or presumed knowledge of the facts, whereas the special limitation period is objective, as it applies to everyone, regardless of the knowledge they have of their rights, and of their legal capacity. 8 Colombian Supreme Court. Justice Fernando Giraldo Gutierrez, Case 00457-01. April 4, 2013

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

Monetary damages arising out of third-party contractual or tort claims over which the insured is liable are policy triggers with respect to third-party liability insurance. 9 Colombian Commercial Code. Article 1127   While the insured or beneficiary’s gross negligence is insurable, wilful intent, or voluntary acts are not.  10 Colombian Commercial Code. Article 1055 11 Colombian Supreme Court. Justice Fernando Giraldo Gutierrez, Case 2005-00425. July 5, 2012

9. Recoverability of defense costs

According to article 1128 of the Colombian Commercial Code, when dealing with liability insurance, the insurer must assume the defense costs of any legal process that third parties initiate against the insured or the insurer, even if it exceeds the insured amount.

However, the insurer is not obliged to cover such costs when: (i) the liability is caused with intent; (ii) the liability is expressively excluded from the insurance contract; (iii) if the insurer initiates the process against the express order of the insurer; or (iv) if the penalty for the damages caused to the third party exceeds the insurer’s responsibility; in such a case it will only take on defense costs in proportion to its compensation share.

In that sense, in the event in which it is found that the insured acted with intent or fraud, the insurer is entitled to recover defense costs from the insured.

10. Insurability of penalties and fines

Any insurance contract pursuing the protection of the insured against penalties and fines for felonies or misdemeanors is invalid under Colombian law. However, fines and penalties of a different nature are considered insurable.