Insurance law and regulation in Spain

Insurance and insurance distribution activities in Spain are regulated, among others, under the Act 20/2015, of 14 July on the organisation, supervision and solvency of insurance and reinsurance companies, the Royal Decree 1060/2015, of 20 November, which approves the regulation on organisation, supervision and solvency of insurance and reinsurance companies and Royal Decree-Law 3/2020, of 4 February, on urgent measures to transpose into Spanish law several European Union directives in the areas of public procurement in certain industries, private insurance, pension plans and funds, taxation and tax litigation. Additionally, the Act 50/1980, of 8 October on insurance contract, governs the content of insurance agreements, rights and obligations of the parties and related issues.

 There are various alternatives available for carrying out insurance activity in Spain. This depends on the origin of the company undertaking the business.

To carry out insurance or insurance distributions activities in Spain, Spanish companies must obtain a licence granted by the Ministry of Economic Affairs and Digital Transformation (i.e. Ministerio de Asuntos Económicos y Transformación Digital). For this purpose, the General Directorate of Insurance and Pension Funds (“DGSFP”) is responsible for compiling and analysing the relevant information provided for prospective insurance companies or insurance distributors. Such activities will be limited to the classes of insurance that are expressly authorised by the licence. Likewise, it is necessary to bear in mind that Spanish legislation requires insurers to supervise their employees in order to comply with the requirements established to be able to distribute insurance (e.g. they meet the requirement of commercial and professional honourability; they possess appropriate knowledge and skills, etc.).

On their incorporation, Spanish insurance companies have to fulfil a series of requirements, among which the following should be highlighted: (i) legal form provided by law; (ii) limitation of the corporate purpose to insurance and reinsurance activity; (iii) presentation of a programme of activities; (iv) having the minimum share capital or mutual fund; (v) maintaining minimum funds to protect the minimum capital; (vi) having an effective system of governance, among others.

Insurance companies and insurance distributors based within the EEA already authorised by their home country regulators will be entitled to carry out insurance activity in Spain through the incorporation of a branch in Spain (on a right-of-establishment basis) or directly from their home country (on a freedom-of-services basis). In these cases, EEA insurance companies and distributors will be allowed to conduct insurance activities in Spain in accordance with the licence granted by their home country regulator, upon notification has been made by this regulator to the DGSFP communicating their intention to conduct insurance or insurance distribution activities in Spain.

For an EEA insurer, it is more time-consuming to incorporate and obtain a licence from the Spanish Ministry of Economic Affairs and Digital Transformation than to proceed on a right-of-establishment or freedom-of-services basis, where the home country regulator notifies the Spanish Ministry of Economic Affairs and Digital Transformation of: (i) the intention of the company to conduct insurance or insurance distribution activities; (ii) the submission in Spanish of the documentation and information required by the DGSFP; and (iii) to have the obligation to register in the correspondent Administrative Register, but for merely informative purposes.

Companies based outside the EEA are required to establish a branch and obtain a licence from the Ministry of Economic Affairs and Digital Transformation in order to carry out insurance activities. Once the authorization has been granted, the branch, its general representative and the managers will be registered in the administrative registry.

Prior to the execution of the insurance contract, the insured must disclose all circumstances known by him that are material to the risk to be covered by the insurer. This information is commonly gathered by insurers in the form of a risk questionnaire to be completed by the policyholder. If any information is not requested by the insurer or is not raised in the questionnaire, the policyholder is not obliged to disclose it. Notwithstanding it, the insurer will have the right to propose a partial amendment of the insurance contract to the policyholder to reflect any new circumstances of the risk arising from the information thus disclosed. This proposal must be made by the insurers within the two-month period following the disclosure of the information. After receiving the proposal, the policyholder will be entitled to accept or reject it within the following 15 days. In case of refusal or absence of response from the policyholder, the insurer may terminate the agreement after an additional 15 days' notice to the policyholder, after which, within the following 8 days, the insurer shall notify the policyholder of the definitive termination.

If an insured event occurs and the policyholder has not disclosed all the above information, the insurer has the right to adjust the claimed payment in proportion to the difference between the premium paid and the premium that the insured would have had to pay if the proper information had been disclosed. During the policy period, the policyholder must disclose all new circumstances that increase the risk that would have affected the insurer’s decision to underwrite the risk if the insurer had been aware of it during the placement of the risk. Likewise, the policyholder is also entitled to disclose circumstances that lower the risk that would have resulted in more beneficial terms and conditions for the insured if the insurers had been aware of the circumstance during assessment of the risk.

The legal effectiveness of the insurance agreement may depend on certain warranties or conditions precedent. Please note that Spanish insurance regulations do not provide for explicit provisions about the enforcement of warranties and conditions precedent and, therefore, general civil law principles set out in the Spanish Civil Code shall apply.

In case any warranty has been included in the contract shall be construed as an explicit contractual agreement, without the insurer being discharged from liability in case of breach. However, when a specific precedent condition has been explicitly agreed by the parties, the effectiveness of the insurance contract may depend on the fulfilment of said condition.

The Policyholder is obliged to notify the insurer of the occurrence of an insured event within a maximum of 7 days, unless the parties agree an extended term in the insurance contract. In the event of breach, the insurer may claim the damages arising from late notification, though this effect will not be produced if it is proven that the insurer had knowledge of the loss by other means.

In this regard, the policyholder must also provide the insurer with all kind of information on the circumstances and consequences arising from the insured event. In case of violation of this duty, the right of indemnity shall only be forfeited in the event of wilful misconduct or gross negligence of the insurer. 

The beneficiary appointed in the insurance contract may claim compensation for loss arising from the insured event.

However, for third-party liability policies, the third party has the right to directly claim against the insurer where said third party has suffered a loss resulting from acts and/or omissions of the insured which are covered by the policy. The insurer may subsequently claim against the insured if the damages were caused by wishful misconduct of the insured.

An insurer may not oppose to the damaged third party those exceptions that it holds vis-à-vis the policyholder or the insured. However, insurers may challenge the claim on the grounds that the third party was solely responsible for the event and also oppose any other exceptions that the insurers may hold vis-à-vis the claimant.

For the purposes of the exercise of the direct action, the insured must notify the third party or its heirs of the existence of the insurance contract and its content.

In accordance with Article 20 of Spanish law on insurance contract, the insurer is obliged to pay the compensation to the beneficiary within 3 months from the occurrence and, in any case, the minimum compensation accepted by the insurer must be paid within 40 days as from the notification of the occurrence. In those events, the insured shall be entitled to damages.

It should also be noted that the date of the occurrence will mark the beginning of the calculation of the interests, unless the policyholder, the insured or the beneficiary do not notify the loss within the established term in the policy or within 7 days of knowledge thereof, the computation will begin on the day of notification.

Said damages are calculated as the annual legal interest rate increased by 50%. Furthermore, after 2 years from the occurrence, the applicable annual interest rate shall not be less than 20%.

The interests are accrued on a daily basis from the date of the occurrence, unless the policyholder, the insured or the beneficiary does not communicate it on time to the insurer.

If the insurer pays the minimum compensation due within the 40 days following the notification of the occurrence, interest shall not accrue any more at the time of payment. If the insurer does not pay at this time, the interests shall accrue until the company pays all the compensation. However, the insurer shall not be obliged to pay this default compensation if the delay arises by due cause or it is not attributable to the insurer.

Claims resulting from an insurance contract covering loss or damage must be made by the insured within two years of the date the insured is able to notify the occurrence of the event to the insurer. For life and personal insurance, claims must be made within five years.

The same limitation periods apply for claims made by the insurer against the insured.

For third-party liability contracts, coverage is triggered either (i) by the occurrence of an insured event, or (ii) by a third party notifying the insured of their intention to make a claim for reimbursement of damages.

Spanish law allows claims-made policies if they meet certain requirements relating to the limitation periods for covering the damages: (i) if the claims-made clause establishes that the insurance contract shall cover the events that occurred following the expiration of the insurance policy, the additional coverage period shall be not less than one year from the expiration of the contract; (ii) similarly, if the claims-made clause establishes that the insurance contract will cover any events occurring prior to the enforceability of the policy, the policy must cover any insurance event which occurred within, at least, the one-year period before the enforceability of the policy.

On the other hand, ‘losses-occurring’ policies should also be considered. These policies require the third party to provide evidence that the damage was suffered during the enforceability period of the policy and any damages arising out of this period are rejected.

In order for the insured to recover the cost of judicial or extrajudicial proceedings, it is necessary that the policy provides for defence cost cover. Moreover, the insurer could settle different constraints for this coverage, for example, the insured can recover only a limited portion of the fees.

This type of cover usually imposes that the insured’s choice of legal advisor be authorised, or, at least, communicated to the insurer, prior to the beginning of legal proceedings.

Spanish insurance regulations do not set out any explicit rule in this regard. Therefore, the general provisions of the Spanish Civil Code regarding the autonomy of the parties shall apply. Said principle shall be, in any case limited, by any agreement contradicting law, morality or public policy.

On a non-binding consultation, the Spanish General Directorate of Insurance and Pension Funds declared in 2008 that the coverage of fines and penalties for criminal and administrative liability would be forbidden, since it would contradict public policy. Said argument was based on the potential reduction of the punitive effect of fines and penalties in case their effects are insured and, therefore, assumed by a third party.

Notwithstanding the above, since said criteria is not binding and no explicit prohibition is currently in place, penalties and fines cover is usually offered in the Spanish contract. (e.g. data protection, driving, etc.), being applicable the limits of wilful misconduct or gross negligence.