Spanish penal code leaves risk managers bare

According to experts, the new rules create challenges for risk managers because the insurance market is not yet able to offer the tools required to transfer the new risks. The implications of Spain's new penal code, which started to bite in December, were explained by legal and insurance experts gathered by Iniciativa Gerentes de Riesgo Españoles Asociados (IGREA), the risk management association, in a special session in the offices of broker Aon in Madrid. It is uncertain how the insurance market will react to the law. One key reason is that a new insurance contract law is being drafted by legislators, which will also affect the way companies can transfer the risk of a criminal sentence. hide"The penal code has introduced for the first time in Spain the criminal liability of companies for a number of offences committed by their representatives or employees,” said Joaquin Ruiz Echauri, a partner and insurance law expert at Hogan Lovells, the law firm, in Madrid. “Fines are established as the ordinary forfeit. The question here is, can the said fines be covered by insurance? And the answer today is no.” An article that prohibits the payment of compensation for crimes imposed by the courts in administrative and criminal cases has been included in the forthcoming contract insurance law. The new law has not yet been approved. But Spain's insurance regulator, Dirección General de Seguros y Planes de Pensiones, has already ruled that insurers cannot cover financial punishments imposed on criminal cases, even when intention has not been proved. Spanish insurers and lawyers have tried to change this article. “Our view is that there should be a distinction between criminal acts that were intended to defraud and those that were negligent,” Mr Ruiz said. The list of possible crimes by which companies can be imputed in Spain with the new penal code is long, he noted, with some odd exceptions. For example, in the case of work-related accidents, firms cannot be criminally condemned, only individual executives. Companies will have to adapt their internal controls and risk management practices to comply with the new penal code, the experts said. Crime prevention plans will have to be drafted and properly documented, according to Marta Grande, compliance director at AON Global Risk Consulting in Madrid. This is because they could prove to be important defence elements when a company is taken to the courts, she explained. “The plan must begin from an ethical framework that incorporates all criminal risks,” Ms Grande said. “Then these risks must be identified in a risk-mapping exercise. The next step is to develop policies to prevent employees from committing those crimes, and everything must be subsequently audited to check that controls are effective,” she added. “Risk managers will be called upon to play a very important role in the development of compliance manuals, which will aim to prevent the company being accused of a crime,” Mr Ruiz said. “The existence or not of such manuals will be taken into account by insurance companies when it comes to pricing civil responsibility and other coverages,” he added. Insurers will also have to adapt to meet the new needs created by the penal code because risk managers will look for solutions in the insurance market that are not available at the moment. “Current D&O coverages will have to be revised, as possible conflicting positions between firms and their executives will become more evident,” Mr Ruiz stressed. According to Ms Grande, some insurance companies have already considered creating specific coverages for the liability of legal persons. She noted that, in some cases, D&O policies that were imported from other markets, particularly the United Kingdom and the United States, contained clauses that related to legal persons who were excluded because they could not be taken to the courts for criminal reasons in Spain. Insurers will also have to decide whether their D&O policies will cover legal expenses incurred by companies. This is because D&O coverages only allow such claims when executives are taken to the courts. The matter becomes more complicated when the company and one of its executives find themselves on opposite sides of the same trial. “Both the company and its executives can be criminally imputed now, and the first reaction of companies is often to blame their workers for illegal acts, especially if they have crime prevention plans in place,” Ms Grande said. Other issues that still need to be resolved include whether policies will cover the loss of revenues in cases where a company is considered guilty of criminal acts, and intention is proved. The option of compensation for reputational losses in such cases is also under discussion in the market. “It is still not clear what the insurance market can offer, and as a result it is in a standstill at the moment,” she concluded.

Spanish penal code leaves risk managers bare

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