As part of The D&O Diary’s ongoing efforts to keep abreast of important D&O insurance developments around the world, I am pleased to present the following guest post regarding D&O issues in Spain. In his guest post, Jorge Angell, the senior partner at the Madrid law firm of LC Rodrigo Abogados, takes a look at certain features of the criminal liability system in Spain and reviews the implications for D&O insurance. I would like to thank Jorge for his willingness to publish his article as a guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit an article. Here is Jorge’s guest post.
One of the peculiarities of the Spanish criminal law is that a criminal offence may be a source of civil liability should damages arise from the criminal action. Subject to evidence, the criminal court may award damages unless the victim or injured party opts for claiming damages in the civil court.
If the injured party chooses to claim damages in the civil court and the defendant is found guilty eventually, the factual findings of the criminal case will bind the civil court. Hence, the claimant in the civil case will only be required to prove the heads of damage. However, should the defendant in the criminal case be acquitted or the file be closed definitively by the criminal court at an early stage of the investigation due to lack of merits, the claimant in the civil court will have to prove both the facts and the heads of damage.
The criminal court has discretion to estimate the civil liability (damages) arising out of the criminal offence and to require the defendant to post security (bond) in order to ensure payment of the damages that may be awarded by the court eventually. The law provides for different types of security. These can be a personal undertaking, a mortgage, a pledge, a cash deposit, a bank joint and several guarantee and any others which in the court’s judgment guarantee the immediate availability of the amount in question.
Further, property and casualty insurers may be found to be directly liable from a civil standpoint for losses derived from risks covered by them and triggered by a fact envisaged in the Criminal Code up to the limit of indemnity set out in the law (if any), or in the insurance contract. The insurer may be joined to the proceedings on the motion of the injured party (and claimant), or the public prosecutor.
A directors’ and officers’ liability insurer could thus be joined and made liable eventually for the civil damages arising out of the criminal offence. The defences he could raise against the claimant are extremely limited, and these will not even include the insureds’ wilful misconduct exclusion. The insurer may, however, recover from the convicted insureds subject to certain conditions and even from the policyholder if so agreed in the policy.
In Spain, it is common that D&O policies require the insurer to provide security, within the indemnity limit agreed, in order to guarantee the civil liability of the directors and officers. The policyholder must reimburse the amount should the security be enforced and it is later established that the claim was not covered (i.e., in the case the court finds that the director or officer acted maliciously).
Likewise, it is customary that D&O policies provide for the advance of defence costs whenever the parties have agreed that the insured will conduct his own defence. Defence costs are usually included in the limit of liability and therefore erode the limit of the policy. The actual amount is normally subject to the insurer’s prior written approval. Should the insured admit liability or be convicted, defence costs must be returned to the insurer. This can pose practical problems to recover in the event the insured is insolvent.
A typical D&O policy issued in Spain includes a definition of defence costs or expenses. These are normally defined as fees, costs, charges and reasonable and necessary expenses (with the exception of certain remunerations) incurred with the prior written consent of the insurer, which shall not be unreasonably withheld or delayed, for the investigation, defence, adjustment, liquidation or challenge to any claim made, or filed, against any insured.
In the general scenario described above there is one recent criminal case involving a D&O policy, which can provide some practical lessons. In this case, the insurer was not joined to the criminal proceedings.
Primary policies, excess layers
This case involves the fraudulent uplift of public construction contracts prices resulting apparently in the embezzlement of public funds. This case is still under investigation, and could have an important impact on D&O insurance.
In this case, the D&O coverage of the officers of one of the companies prosecuted is structured in several layers which follow the terms and conditions of the “primary policy”. Accordingly, once the limit of the primary policy has been exhausted, the rest of insurers in the tower will be liable successively up to their respective limits once the previous layer has been exhausted.
The prosecutor estimated the possible damages in a certain amount, and suggested that the court request a joint and several bond for the total amount from all the persons prosecuted which the court did.
The primary insurer of the company concerned provided the security under the terms and conditions of its D&O policy, which required the insurer to provide the security within the indemnity limit agreed. The security posted by the primary insurer exhausted the limits of the policy. Then, the insureds claimed the advance of defence costs to the first layer excess insurer.
In this scenario, certain problems could arise. Firstly, it could well happen that the amount of the security posted by the primary insurer pursuant to the estimation of the court is higher than the damages actually awarded by the criminal court. This would be the case, for example, if the defendants stand acquitted eventually on the criminal charges pressed against them, or, if the court, based on the evidence examined, sets a lower amount of damages than the security. In this event, the court shall be bound to return to the primary insurer the amount of the security exceeding the amount effectively awarded. This outcome would mean that the primary insurer did not actually exhaust the limits of his policy, so in theory it would not have been necessary for the first layer excess insurer to advance defence costs. The fact is he did advance defence costs, so the point is how and on what basis the first layer excess insurer could recover from the primary insurer.
Since the primary policy and the first layer excess policy do not provide for a solution to this problem, the carriers agreed the following:
- Firstly, the primary insurer agreed to reimburse, up to its indemnity limit, to the first layer excess insurer, the amount of the defence costs advanced by the first layer excess insurer; and
- Secondly, the primary insurer accepted the assessment made by the first layer excess insurer when advancing the defence costs; thus, the primary insurer waive its right to oppose the heads of damage, their reasonability and the amount of the advanced defence costs.
In our opinion, the proposed agreement is a reasonable solution for both the primary and the first layer excess carrier. Perhaps carriers should think of including such a solution in a multi-layer policy structure.
Madrid, 10 May 2017.
L.C. RODRIGO ABOGADOS