In the following guest post, Javier Ybarra, Oswald Carvalho, and Sofia Garcia-Ollauri, all of Marsh Spain, consider a special feature of D&O insurance in Spain. Spain’s legal system allows civil damage claims to be pursued within criminal proceedings, which can lead courts to require directors and officers to post civil or bail bonds (“fianzas”) before liability is finally determined. As the authors discuss below, D&O insurers in Spain may be expected to provide or support these bonds, and companies with Spanish operations should ensure their D&O policies explicitly address bond coverage, reimbursement obligations, and related collateral requirements. Our thanks to the authors for allowing us to publish their article as a guest post on this site. Here is the authors’ article.

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A bondsman is one who acts as a surety to pay a defendant’s bail assuming the responsibility of a bond. In the insurance world this would not expected to be a D&O insurance carrier but rather a Surety bond one. In Spain, when a civil liability case is handled by a criminal court in criminal proceedings this may not be the case and you will find in the below article the reasons behind the peculiarity of such coverage and its relevance for Directors and Officers in Spain.

Spanish Criminal Proceedings and “Fianzas” (Bonds) Impact on D&O Policies in Spain

Claiming for damages in civil and criminal proceedings

In case of tort, breach of contract, etc., prejudiced parties may bring civil proceedings to claim for damages.

If the act or omission concerned amounts to a criminal offence, the prejudiced party is entitled to bring criminal proceedings. In addition, the plaintiff (i.e. the prejudiced party) is entitled to claim for damages within the criminal proceedings (unless the prejudiced party waives its right or expressly reserves it for a subsequent civil proceeding). That is because, under Spanish law, a civil action can be brought together with the criminal action and both actions shall be heard by the criminal court. In summary, one of the particular characteristics of the Spanish legal system is the fact that the civil action to claim for the damages caused by a criminal offence can be brought at the same time as the criminal proceedings.

In this respect, it should be noted that only if, following the trial, the court finds that a criminal offence was committed, damages can be awarded by the criminal court to the plaintiff (i.e., the criminal court is not allowed to order the payment of damages if it finds that no criminal offence was committed). At the same time, if the defendant is acquitted in the criminal proceedings, the claimant will still be entitled to bring a separate civil proceeding to claim for damages.

In view of the above, where a criminal offence has been committed by a Director or an Officer of company, any prejudiced party is entitled to bring criminal -and also civil- proceedings against them.

Types of bonds (“fianzas”)

In civil proceedings, there are no bonds or deposits imposed by the Courts. Having said that, under certain circumstances, the plaintiff is entitled, when the suit is filed, to apply for the seizure/lien of the assets of the defendant (“embargo preventivo”). If the application is successful, the court will issue the appropriate order, but the defendant may, if he/she wishes to, offer a bond in replacement of the seizure/lien order.

In criminal proceedings, a Judge may impose two different kinds of bonds:

• Bail bond (“fianza carcelaria”): a surety required by a Judge or Court to ensure compliance with certain obligations on the part of the defendant. The purpose of the bail bond is to guarantee the presence of the defendant at the trial while the Court is investigating the circumstances surrounding the alleged commission of a crime. A bail bond is only imposed under certain circumstances, and if the accused person attends the trial, then the bond shall be returned. If the defendant however fails to appear in front of the Court on the date of the trial, the bond will be enforced by the Court immediately if such bond was deposited by the defendant. If the bond was deposited by a third party, a Bank or an Insurance Company, such third party or company will have 10 days to get hold of the defendant and place him before the Court. Once this period has elapsed, the third party will have to pay the full value of the bond to the Court and would only be able to attempt recovery from the missing individual. The amount of the bail bond depends upon factors such as the wealth of the accused director and tend to remain at relatively manageable levels when compared to a Civil bond.

• Civil bond (“fianza civil”): It is another type of bond or surety which a Judge may demand in the course of the investigative phase (when the Judge considers that there are sufficient “rational indications of criminality” -in practice, it is usually requested at the end of the investigation stage and with the order of the Judge for the commencement of an oral trial). The purpose of the civil bond is to secure the payment of damages or guarantee any eventual civil liability which may arise from the commission of the crime, in case that the accused persons are found guilty following the trial.

The bonds, which can be deposited either by the defendant or by a third party, are furnished into the Court in one of the following ways:

  • In cash to be deposited in Courts bank account.
  • By means of a real guarantee, i.e. a charge, mortgage or pledge over the assets of the defendant or a third party.
  • A Bank Guarantee.
  • An Insurer Guarantee (i.e. a letter signed by a representative of the insurance company securing the payment of the relevant amount, similar to a bank guarantee)

D&O Insurance Cover

Taking into account the above (particular features of Spanish Law), insurance policies in the Spanish marketplace usually provide cover for bonds in one of the following manners:

1. The Insurer itself will provide the bond. If the insurer provides cover for the provision or constitution/collateral of the bond itself, the Court may accept as a valid bond the insurance policy together with a letter signed by a legal representative of the insurer (“insurer guarantee”). In this case, no cost will be incurred initially by the Insurer. If the “insurer guarantee” is not accepted by the Court, then it will be for the insurer to obtain a bank guarantee to be filed with the Court or deposit the relevant amount in cash at the Court’ bank account. In the case of a Civil Bond, Cover for the provision or collateral of the bond by the Insurer is the standard market practice in most of the policies currently in force. As a condition to grant cover for the collateral, some insurers will require that the request to the insurer is jointly made by the insured and the policyholder (in particular for Bail Bonds) and that a guarantee will be provided (by the Policyholder) to the Insurers in order to secure recovery in the event that the bond is executed by the courts. Or:

2. The Insurer will only assume the cost or premium, but not the collateral of the bond itself. This, in practice, will mean that once the bond is imposed by the Court, the defendant directors will have to attempt to obtain from a bank a surety which will then be deposited at the Court. The cost of keeping this surety over the time of duration of the proceedings will be borne by the Insurer. This is standard market practice for a Bail Bond, although some insurers will provide full collateral cover as mentioned above.

In this regard, below there is an example of cover of a D&O policy:

“The Insurer shall pay to or on behalf of the Insured all Spanish “Bonds” arising from a Claim first made against an Insured during the Policy Period, consisting on:

  • the constitution of civil bonds which have been imposed on insured persons by a court decision to guarantee potential civil liabilities covered by this policy; or the costs incurred by an insured person in connection with the constitution and maintenance of bail bonds imposed in criminal proceedings by a court decision to secure its provisional freedom;
  • the constitution of the surety that an insured person provides, in substitution of the precautionary measures ordered by a judge in accordance with the provisions of Articles 746 and 747 of the Law 1/2000, of 7th January, of Civil Procedure, to guarantee possible civil liabilities covered by this policy as a consequence of a claim first made against the insured person during the policy period.

In case of enforcement of the bond or of the instrument by virtue of which the bonds or guarantees referred to in this Extension and in case that a liability arising from fraudulent, criminal or deliberately unlawful conduct is established by an authority, judge or court, the insured person and the policyholder undertake jointly and severally to reimburse the insurer, on first demand, the amount of the bond executed, or the costs paid by the insurer”.

In this regard, please note that insofar D&O policies exclude fraudulent, criminal or deliberately unlawful conducts (when such conducts are admitted by the insured or finally established by a judge or court) and Section 19 of the Spanish Insurance Contracts Act provides that the insurer shall be obliged to pay the indemnity, except when the loss has been caused in bad faith by the insured, in case of enforcement of the bond and in case the liability arises from a fraudulent, deliberate or dishonest act of the insured, the insurance company is entitled to recover from the insured and/or the policyholder. Further to the policyholder´s obligation, it is common practice that Spanish insurance companies request the corresponding policyholder (before providing the bond at the court) to provide a counter guarantee in order to guarantee such repayment obligation.

Further, it is worth noting that the Spanish Criminal Procedures Act provides that the civil bond may be imposed on the accused persons (i.e. on the person who allegedly committed the criminal offence) but also provides that any “liable person” (i.e. any person or entity which could be liable for the damage allegedly caused by the accused person) may, if requested by the plaintiff, be ordered to post the civil bond. Liability insurers fall within the concept of “liable persons”. In consequence, for the mere fact of having issued a liability policy, insurers may be ordered by the courts to secure the payment of the alleged damages (i.e. to post a civil bond) where criminal proceedings are brought against its insured. It should be noted that insurers may be ordered to post the civil bond whether or not the policy provides cover for the provision of bonds, for the costs of maintaining a bank guarantee or even if any kind of cover is provided in respect of bonds (including the case of foreign policies which may be silent on this matter), since in such case, the bond is imposed on the insurer directly.

Conclusions and recommendations

In summary, it might be advisable and prudent to: Apart from the coverage aspects, it is important to note that Spain does not permit non-admitted insurance, therefore any insurance policies procured outside of the European Union, where the EU Freedom of Services rule applies, would not be considered valid.

Taking into account the above considerations, foreign policyholders should be aware of this particular exposure of the Directors and Officers of their Spanish subsidiaries, regardless of whether the D&O´s are Spanish or not, or whether they are executive or independent directors, and review their D&O policies so coverage for bonds is properly reflected in their Master policies (whether via Difference in Conditions clauses) and/or local policies taken out in Spain.

In this regard, a final remark to consider is that if the governing law of the Master policy would not be Spanish Law, but a foreign Law, and such Law would have to be proved within the corresponding criminal proceedings with the pertinent complexity-.

In summary, it might be advisable and prudent to:

  • Verify the policy coverage in respect of such bonds and the ability of the insurance company to grant such coverage in Spain
  • Review policy language regarding the reimbursement of any civil bonds that may be seized by the court, in the event of a judgement against the insured persons
  • Review in advance any collateral / guarantee letters from the insurance company to be prepared for any eventual claim as the courts may require bonds to be deposited in a very short period of time.
  • Review Indemnification provisions for the advancement of defence costs, including possible bonds.
  • Review any mechanism in place to offer the D&Os any alternative source of financing such bonds.

We recommend clarifying the scope of your policy and addressing any concerns with your insurance advisor.

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Javier Ybarra, Managing Director, Head of FINPRO. Marsh Spain

Oswald Carvalho, Director, Executive Risk Practice Leader. FINPRO. Marsh Spain

Sofia Garcia-Ollauri, Director, Coverage Counsel & Product Specialist Leader, FINPRO, Marsh Spain