This article considers the issues for (re)insurers to bear in mind when dealing with claims arising out of the recent Latin American earthquakes.

Exposures to two major earthquakes, in Chile and, more recently, Mexico, will be prominent for London Market and international insurers and reinsurers.

Initial reports suggest losses for the Mexico quake will be lower than the devastating Chilean quake, owing to more stringent building codes in Mexico and California. So far, the focus, as regards the Chilean quake, is rightly on adjusting properly the underlying losses. There are, however, a number of insurance and reinsurance issues that need to be kept in mind.

Adjusting the Claims

Understanding the underlying Chilean legal regime and adjustment process will be a new challenge. Recently, the Chilean insurance superintendent implemented a special loss adjusting procedure ("Oficio" 591 of 30 March 2010) to handle property claims more effectively.

The new procedure applies to all property claims arising from the 27 February quake and applies as follows:

  • once the claim has been notified, the insurance company will opt to either handle the loss in-house or appoint an adjustor;
  • the adjustor will visit the property, assess the loss and advise on the appropriate indemnity;
  • the adjustor will be able immediately to make his settlement recommendation which can be accepted there and then;
  • should the proposal not be accepted, the claim will be handled in accordance with the normal procedures.

Aggregation

It is early days and, so far, aggregation has not been a priority issue. It is emerging that initial theories of the Chilean quake and aftershock falling as one event are being questioned. Press reports indicate that aftershock damage is still occurring to this day. For the losses to be aggregated as one "event", there needs to be commonality of location, time, cause and intention of any human agents.

These questions will be asked as the risk rises further up the risk chain as the loss passes to excess layers and retrocessionaires. No clear answer can be given now, but insurers and reinsurers may wish to ensure their positions are protected and reserved as new facts come to light.

Ex-Gratia Settlements

Catastrophes such as this require urgent and prompt responses. There is increasing political pressure on insurers being seen to pay claims, as well as reputational pressure. But any reinsurance is put in peril if claims are paid on an ex-gratia basis. Insurers and reinsurers need to look carefully at their wordings. Is there a follow settlements clause that allows ex gratia settlements? If so, under English law the insurers need not show an actual underlying liability to the assured, but instead need to prove they acted in an honest and businesslike manner. If there is no such clause, insurers will need to show they were legally liable to pay the claim.

Notification and Claims Control?

Insurers and reinsurers also need to review their notification and claims control provisions. What needs to be reported to reinsurers? What level of involvement can reinsurers expect to have? Do the claims control provisions require reinsurers to consent to any settlements?

The claims are still developing and are in their infancy. It will be essential for insurers to maintain an ongoing dialogue with their reinsurers, particularly to comply with the tight local timeframes for adjusting claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.