Amendments to the Chilean Commerce Code Insurance Contract London 11 September 2013

2. Amendments to the Chilean Commerce CodeInsurance Contract London11 September 2013

3. Introduction • As per what is set forth by Law 20.667, from 1 December 2013 next – and for the first time since 1865 – will be amended the regulations regarding insurance agreements in the Commerce Code. • Title VII of Book II of said Code is replaced in whole. • Said amendments have as purpose incorporating commercial practices not recognised legally, modernising mechanisms for commercialising mass insurances, better protecting the rights of the insured in personal insurance.

4. Introduction • Also, amendments in most relevant matters are made. These, in the opinion of the undersigned, did not require legal innovations for until now have been dealt properly by way of contracts and their application had not caused conflicts or inequities in contractual relations between insurers and insured requiring legal regulation in the terms to be analysed. • The purpose of this presentation is to analyse some of the most important legal amendments. They have caused controversy and are especially relevant from the viewpoint of the contractual regulation of the coverage of Large Risk insurance. This type of risks are generally assigned to foreign reinsurers trough facultative reinsurance contracts; and especially to members of Lloyd’s of London.

5. 1. Execution of the Insurance Agreement (Art. 515) • Currently, the insurance contract is a solemn one. This means it is formalised and proven by the insurance policy, which may only be amended by an endorsement signed by all parties. • As per the amendments being analysed, the execution now is consensual, and its existence and regulations may be proven by all legal means of proof. To the extent there is an evidence principle in writing arising from any document evidenced by a telex, fax, e-mail and, in general, any system for digital or electronic (written or oral) transmission and recording.

6. 2. Legal Regulations are Mandatory (Art. 542) • It is established that the regulations governing the insurance agreement are mandatory, unless they state otherwise. • In any case, all contractual regulations benefiting the insured or the beneficiary, will be valid. • An exception to it is Large Risk insurance. This is a case of damage insurance in which both the insured and the beneficiary are legal entities and the annual premium exceeds CLF 200 (US$10.000). • The exceptions include also hull insurances and sea and air carriage insurances.

7. 2. Legal Regulations are Mandatory (Art. 542) • The above exceptions are a recognition of the contractual freedom of the parties contracting the insurance. It is presumed they are informed and have contractual negotiation ability. • The History of the Law states that the contracting of Large Risk insurance is an exception to the mandatory nature of the law, taking precedence contractual liberty. • In this area, a matter of great relevance to the future will be the determination of the scope of this contractual freedom, as to its exercise and its extension regarding which specific regulations it may be exercised without affecting elements essential to the insurance contract. • All the above becomes especially relevant from the viewpoint of the assignment of the risks by virtue of the reinsurance contracts agreed.

8. 2. Legal Regulations are Mandatory (Art. 542) • The question to be made then is whether the consensual character of the insurance is or is not an essential element to it. This is most relevant from the viewpoint of the reinsurance “as original” of the risk assigned. • There is a new regulation establishing the essential requirements of the insurance agreement. They are: (i) the risk insured; (ii) the agreement of the premium; and, (iii) the conditional obligation of the insurer to indemnify. The consensual character is not mentioned. • Then, it would be possible interpreting that the character of consensual of the insurance is not an element of its essence, and the parties can, in all Large Risk insurance, agree that it will only be governed and proven by the policy and its amendments. This is, the parties may agree “making solemn” the insurance agreement being executed.

9. 2. Legal Regulations are Mandatory (Art. 542) • On other part, exercise of the contractual freedom established by the Commerce Code – within the scope in may be exercised by the parties – will mean for the insurers the need to regulate specifically those matters in which they wish to agree terms and conditions different to those set forth by the Commerce Code, or clarifying or regulating some of the general conditions of exercise of the obligations of the insured, so to guarantee they are exercised as they should. • Said differently, although contractual freedom may be exercised, in matters of the nature of the contract (matters that the parties can freely agree) that are not agreed contractually and explicitly, legal regulations will apply suplementally.

10. 3. Declarations on the Risk to be Insured(art 525) • The obligation of the insure to declare and inform truthfully of the facts and circumstances it knows and that are useful for indentifying the object insured and the existence of the risk, is now limited solely to what is required by the insurer. • Being agreed the insurance agreement without the insurer requesting the above declaration, it may not claim subsequently the errors, reticence or inaccuracies of the insured. Neither may do so as to those fact or circumstances of which no information was required from the insured at the time of executing the insurance agreement.

11. 3. Declarations on the Risk to be Insured(art 525) • Currently, it is entirely an insured obligation to provide all relevant information for the assessment of the risks and their extension. • False or misleading declarations or reticence on the part of the insured, which had been known by the insurer would have retracted the latter from granting coverage or would have done it differently, may cause the nullity of the insurance agreement. • In this matter we are in the presence of an essential amendment of the regulations on reticence by the insured, which will force insurers and reinsurers to amend substantially their policies and procedures for the underwriting of risks.

12. 3. Declarations on the Risk to be Insured(art 525) • In case the insured incurred inexcusably in errors, reticence or inaccuracies that are “determining” solely as to the information explicitly required by the insurer and the loss has not yet occurred, the insurer may rescind the insurance agreement. If they are not “determining” the insurer may propose an amendment to the terms of the insurance agreement, so to adequate the premium or coverage conditions to the circumstances not informed. In the latter case, if the insured rejects it or does not respond within 10 days, insurer may rescind the insurance agreement. • If the loss has occurred, the insurer is released from its obligations to pay indemnity if it is the case of the materialisation of one of the risks object of the reticence. It that is not the case, it may reduce the indemnity pro rata to the difference between the premium agreed and that it would have been agreed should the real status of the risk had been know.

13. 4. Aggravation of Risks (Art. 526) • It is established the legal obligation of the insured or of the contracting party to inform the insurer of the facts or circumstances aggravating substantially the risk declared and supervening after the execution of the insurance agreement. • Said information is to be provided within 5 days after is known, to the extent that due to its nature it was not previously known otherwise by the insurer. • It is presumed that the insured knows of the risk aggravations arising from facts occurred with its direct participation.

14. 4. Aggravation of Risks (Art. 526) • For this purpose, in the insurance contract the parties shall agree as clearly and objectively possible as to each specific case and risk what is a “substantial aggravation of the risk insured”. Without this specification, this obligation for the insured will become a source of endless conflicts during the existence of the insurance agreement. • The consequences of the non-fulfilment of this legal obligation are the same analysed for the case of reticence.

15. 5. Plurality of Causes in an Incident (Art. 533) • It is established that if a loss is the consequence of many causes, the insurer must indemnify in whole the loss if any of the concurring causes is a risk covered by the insurance policy. • In facultative reinsurance contracts, is to be considered especially this new legal regulation to prevent contractual gaps between the insurance policy assigned and the reinsurance contract.

16. 6. Definition of Coinsurance Agreement (Art. 557) • For years now has been a commercial practice in Chile the execution of Coinsurances between insurance companies. This with the purpose of providing coverage to large risks, as industrial, mining, energy or investment projects. In these projects there are most relevant placements of facultative reinsurances. • However, the inexistence of a legal framework regulating this contract has meant quite some operational and patrimonial difficulties for insurers granting coverage under this modality.

17. 6. Definition of Coinsurance Agreement (Art. 557) • In the amendment to the Commerce Code is legally established the existence of coinsurance, where with the consent of the insured two or more insurers agree to ensuring jointly a certain risk. • Each insurer is obligated to the payment of the indemnification pro rata of its participation quota. • If a single insurance policy is issued it is presumed that the issuer is a representative of all the coinsurers for all purposes of the agreement.

18. 6. Definition of Coinsurance Agreement (Art. 557) • The existence of a legal definition of Coinsurance and the definition that the insurer issuing the policy is the representative of all other insurers is a basic legal framework on which the insurers are to propose moving forward in structuring a contractual framework. • Said contractual framework is to establish the rules and procedures allowing the existence, management and performance of these contracts. Thus establishing the procedures allowing the leader issuer of the policy the due exercise of its mandate within a limited and precise framework of its faculties. And for the other coinsurers, exercising their rights and requesting the proper rendering of accounts for the actions of the representative, as well as the mechanism for taking agreements in relation to the management of the policy and the payment of incidents.

19. 6. Definition of Coinsurance Agreement (Art. 557) • This contractual framework becomes more important in those cases – every time more usual – in which each coinsurer has placed its facultative reinsurance with different reinsurers and through the intermediation of various reinsurance brokers. • In these situations, the terms and conditions of the facultative placements may vary substantially, especially in relation to the adjustment and payment of losses. This translates into the coexistence of “cooperation clauses” and “control clauses” regarding one and a same loss, situations requiring rules and procedures for the due management and compliance on the part of the assignors.

20. 7. Reinsurance Agreement and Fronting Transactions(Art. 584-587) • The reinsurance agreement is legally defined – what does not happen now. And is established that by virtue of said contract the reinsurer undertakes indemnifying the reinsured within the limits and modalities set forth in the agreement, for the liabilities affecting its patrimony as a consequence of the obligations it has undertaken in one or more insurance or reinsurance contracts. • In these contracts, which are governed by the Chilean law, for construing the will of the parties will be applicable international uses and customs on reinsurance.

21. 7. Reinsurance Agreement and Fronting Transactions(Art. 584-587) • It is established, also, that the reinsurance agreement does not alter in any manner whatsoever the insurance agreement and that the insurer may not defer paying the indemnification of an incident by reason of the reinsurance. • The reinsurance does not give the insured a direct action against the reinsurer, save the reinsurance agreement establishes that the payments due to the insurer for incidents are made directly to the insured; or that in case the incident has produced, the direct insurer assigns to the insured the rights arising from the reinsurance agreement to collect from the reinsurer.

22. 7. Reinsurance Agreement and Fronting Transactions(Art. 584-587) • As per explicit legal regulation, all legal regulations on reinsurance are mandatory and as a consequence, any agreement to the contrary by the parties will be null and of no value. • This mandatory character, which is a substantial alteration of the current situation, in which these regulations were construed as being able to be waivered by the parties in the case of Large Insurances, will prevent from 1 December next that the parties – in fronting transactions- may agree clauses conditioning the payment of the indemnities until payment is made to the assignors of the indemnities corresponding to the reinsurance agreements affected by the incident.

23. 8. Fraudulent Collection of an Insurance (Art. 470 Criminal Code) • Is defined as a form of fraud those that maliciously obtained for themselves, or for a third party, the undue payment, in full or in part, of an insurance. Be it by simulating the existence of an incident, intentionally causing it, presenting it to the insurer as having been caused by or in circumstances other than the true ones, hiding the insured thing or fraudulently increasing the actual losses suffered. • If the undue payment is not made by causes independent to its will, is also consider the existence of fraud, as an unsuccessful crime.

24. 8. Fraudulent Collection of an Insurance (Art. 470 Criminal Code) • Undoubtedly, the configuration of a fraud crime for these kind of conducts affecting the insurance industry was a long time desire and is a clear advance in protecting the good faith and preventing malicious conducts currently affecting the legitimate interests of the insurers. • However, this legal amendment will only have a true effect to the extent the insured, insurers, the criminal system, the public authority, courts of law and society in general assume these situations and qualify them effectively of criminal conducts unacceptable and intolerable in a modern and developed society.