Proposed Spanish law may restrict D&O coverages

Alarms were raised earlier this month, when Ricardo Lozano, the head of Spain’s insurance regulator, said that the Justice Ministry has requested the prohibition be included as a clause in the new act.

The measure had been discussed before and has been opposed by the insurance industry. Negotiations to limit its reach are under way, but Mr Lozano’s warning reinforced fears that the new act could contain a tough version of the clause.

According to newspaper Cinco Días, the supervisor mentioned specifically the restriction would apply to D&O policies. But experts warn that the prohibition could have negative effects.

For instance it would make it more difficult for companies to buy coverage for their managers who run the risk of breaching, even inadvertently, Spain’s tough laws on digital privacy.

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Unespa, Spain’s insurance association has pressed for the prohibition to be less restrictive. The case for insurance policies that cover fines that originate from criminal cases is more difficult to make. But the insurance industry would like to remain able to provide coverage when administrative sanctions are in play.

More worryingly perhaps in the short term, if the Justice Ministry’s plans go ahead, the new act could make clauses of current liability policies void. In their own commentaries on the insurance act project, insurers have urged that clauses should only be annulled if acts were committed willingly and in bad faith, rather than when even sheer negligence or incompetence is the case.

According to Luis Alfonso Fernandez Manzano, a counsel at Hogan Lovell’s law firm in Madrid, the matter was first dealt with a couple of years ago by Dirección General de Seguros y Fondos de Pensiones, DGSFP, the insurance regulator, in response to a query from one of the insurers.

The reply, which opposes the inclusion of such coverages in liability policies, was subsequently integrated into article 5.2 of the latest draft of the project of the forthcoming Insurance Contract Act. “It says that contractual clauses which aim the coverage of administrative or criminal fines will be null and void,” Mr Fernández said.

“If approved, it would affect D&O policies, but its effects could go well beyond them. For instance, here in Spain, the data protection law is very strict and many insurance policies cover the risks of companies being sanctioned by the data protection agency. If the project is approved in its current form, it would create a big problem for liability insurance companies,” Mr Fernández pointed out.

Spanish firms also fear that large corporate clients could simply opt to transfer their liability risks abroad and buy insurance in markets with less stringent legislation. “It is not easy to do it,” Mr Fernández says. “You can purchase insurance abroad on the freedom of services basis. But, in general terms, policies that cover risks located in Spain must comply with the Spanish Insurance Contract Act. But there is one important exception, which are large risks. In those cases, the parties of the insurance contract can agree to apply the insurance law where the policy is purchased,” he concluded.