Brazil’s legal system is based on civil law. Therefore, its legal framework consists of various codes and laws. The Brazilian insurance market is mainly regulated by the following legal documents:

• the Civil Code (enacted by Law 10,406 of 2001), which dedicates an entire chapter to insurance contracts and the principles that rule the relationship between the insured and the insurer;
• Decree-Law 73 of 1966, which enables insurance market regulation via rules enacted by the National Council of Private Insurance and the Brazilian Private Insurance Authority (SUSEP); and
• Supplementary Law 126 of 2007, which sets out the main rules for reinsurance and retrocession transactions in Brazil after dismantling the Reinsurance Institute of Brazil’s monopoly of this area.

In addition, the interpretation of insurance policies may also be subject to the very protective Consumer Protection Code, enacted by Law 8,078 of 1990, should a consumer be the insured or beneficiary of the coverage.

As for the procedural regime, insurance disputes are generally subject to the judicial courts, where the New Civil Procedure Code rules will apply (enacted by Law 13,105 of 2015). An arbitration procedure is also possible for the resolution of insurance matters, provided that the arbitration procedure is expressly agreed upon by the parties of the relevant insurance contract.

The Brazilian litigation system has three instances:

• a first instance, which is composed of state and federal lower courts and characterised by the development of the phase of cognition (including the evidentiary phase) and by acts of collection of credits;
• a second instance, which is composed of regional federal courts or state high courts and is related to appeals filed against decisions in the first instance; and
• a third, Superior Court instance, which is composed of the Superior Court of Justice (SCJ, with jurisdiction for non-constitutional matters) and the Supreme Federal Court (SFC, with jurisdiction for constitutional matters) and is designed to decide appeals based on federal law violations or constitutional law violations.

While the first instance has the evidentiary stage and different manifestations of the parties in order to convince the judge, the other instances are not designed for the production of evidence, but for the re-examination of the main arguments of the case.

Insurance disputes may be time consuming if the parties refuse to accept the first-instance judgment. The New Civil Procedure Code attempts to make litigation less time consuming by developing and enhancing the rules concerning alternative dispute resolution mechanisms (especially arbitration and mediation), and rendering certain decisions by the superior courts binding and making a decision in a single case the model for court decisions in cases that are similar (similar to precedents in the United States).

A one-year statute of limitation applies for most insurance-related matters, and a three-year term will apply for some limited situations. The triggering of those terms is one of the main issues disputed in court, varying on a case-by-case basis for several matters.

Arbitration is the most popular ADR method for relevant amount matters, subject to prior express acceptance in insurance-related matters.

Consensual extrajudicial mediation may also be agreed upon by the parties, and specific legislation has been enacted on the subject but it has not yet gained as much momentum as that seen with regard to arbitration (Law 13,140 of 2015).

The New Civil Procedure Code and the judiciary (National Council of Justice Resolution 125 of 2010) have made relevant developments in the use of ADR methods, such as mediation and conciliation. According to the New Civil Procedure Code, a mandatory conciliation/mediation hearing shall be scheduled prior to the presentation of the defendant’s answer. Judges are encouraged to try to make the parties reach an agreement, and additional mediation/conciliation hearings may be held during the proceedings, including on appeal.

The Law of Introduction to the Rules of Brazilian Law (Law 13.655/2018, based on Decree-Law No 4,657/1942, as amended, or LIRBL) brought into the Brazilian legal system the basic principles of private international law. The Law provides guidance on the effectiveness, applicability and interpretation of Brazilian law and sets out conflict of laws rules.

Regarding governing law, the LIRBL provides that the law of the country where agreements are executed or the proponent’s residing country should govern such agreements. However, this legal provision does not exclude the contractual freedom of the parties to elect the law that will govern their rights and obligations under international agreements. This contractual freedom would be more limited if the dispute is subject to Brazilian courts; the local court will assess whether there is a link between the chosen governing law and the underlying transaction. It is broader if the dispute is subject to arbitration, because arbitration law expressly allows parties to choose the governing law and rules.

Regarding jurisdiction, as a general rule, Brazilian jurisdiction is determined by the respondent domicile and whether the obligation has to be fulfilled in the country. Such jurisdiction rule is also subject to the parties’ agreement as provided in the relevant contract, and may vary on a case-by-case basis; they can negotiate an exclusive forum clause.

For the consumer-insurance relationship, the jurisdiction is mandatorily the place of residence of the consumer (Consumer Protection Code, Law No 8,078, Article 101.I).

Finally, with respect to reinsurance contracts, Resolution CNSP 168/2007 establishes that a reinsurance contract will set forth Brazilian governing law and jurisdiction for contracts involving local risks; an exception is made for contracts providing for an arbitration procedure, although such provision in a regulatory rule is highly debated. Such limitation of rights posed by a mere resolution may be disputed; such type of regulation should not limit the material rights of the parties.

Foreign judgments can be enforced by or against insurers in Brazil, upon being recognised by means of a homologation procedure.

Whether it is a judicial or arbitral foreign judgement, the motion requesting the homologation of the foreign decision and its enforcement must be filed before the SCJ, which will analyse whether the decision:

• has been rendered by the authority with jurisdiction;
• has been preceded by suitable service of process, even whether there is default;
• is effective in the country of origin;
• violates Brazilian res judicata;
• is accompanied by an official translation, when necessary; and
• contains an express violation of public policy.

Besides that proceeding, a letter of request (rogatory letter) determining an order to be enforced in Brazil must also pass through the SCJ for exequatur. Both proceedings are regulated by the New Civil Procedure Code (ratification of the foreign decision – Articles 960 to 965), the SCJ’s internal regulation (Articles 216-A to 216-N) and the Law of Introduction to the Rules of Brazilian Law (Article 15).

After those proceedings, the decision is enforceable in Brazil.

As mentioned in 1.2 Litigation Process and Rules on Limitation and 6.1 Right of Action to Recover Sums from Third Parties, insurers must be aware of the statute of limitation period applied to their right of being reimbursed by the one who caused the insured risk.

Insurers have a legal right of subrogation following the payment of a claim in most cases and have to file a suit before the liable third party within the applicable limitation period. If the insurer fails to file a suit before the limitation period elapses, the claim becomes time-barred.

Under the Brazilian Arbitral Law (BAL), enacted by Law 9,307 of 1996, the matters that are generally arbitrable refer to freely disposable property rights, which include insurance and reinsurance contracts. Also, as the Law incorporated the competence-competence principle, arbitrators should issue a decision regarding their own jurisdiction before the courts.

However, parties should pay attention to certain particularities of the arbitration clause, since insurance and reinsurance contracts are qualified in some cases as adhesion contracts and are regulated by SUSEP provisions.

In view of all the above, the arbitration clause should mention that:

• the insured party has freely adhered to said clause;
• by doing so, the party is waiving its right to litigate its case before the courts, and is choosing to resolve its dispute by arbitration, which shall lead to an award with the same binding legal effects of a judicial decision; and
• the arbitration clause is governed by the BAL.

If those requirements are not met, a court may declare an arbitration clause null prima facie.

Brazil has ratified the New York Convention (Decree 4,311 of 2002) and the grounds set out in Article V to deny recognition are mirrored in Articles 38 and 39 of the BAL. Following the recognition of the award by the SCJ, as described in 2.2 Enforcement of Foreign Judgments, enforcement proceedings may be initiated before lower federal courts.

In Brazil, arbitration is generally more attractive in certain cases rather than ordinary court procedures, especially when the matter in dispute is marked by its complexity and specificity, because of some particular characteristics:

• it is usually faster than procedures in Brazilian courts;
• parties have the freedom to choose arbitrators, who may have more knowledge on specific and technical questions (as is the case regarding insurance and reinsurance matters);
• parties are free to select the applicable law;
• parties can determine that the existence of the procedure and the final decision will be confidential;
• more flexibility is conferred to the procedure; and
• decisions in arbitration can be enforced by courts.

In fact, SUSEP has encouraged insurance policies involving big risk portfolios to add arbitration clauses in their contracts.

As for the lines of business within insurance arbitration, disputes about coverage and the relationship between the insurers and reinsurers generally attract more attention to establish an arbitration clause in the contracts.

The choice of law needs to be respected, but national arbitrations usually use Brazilian insurance law, described in 1.1 Statutory and Procedural Regime, to govern the arbitration proceeding.

In matters of insurance dispute, arbitration is private and, under the BAR, the award given in an arbitration proceeding cannot be appealed before an arbitration tribunal. The defeated party can only request the annulment of the arbitration award before a judicial court under specific and restricted circumstances, provided in Article 32 of the BAL.

Although there are no implied terms in a contract of insurance, which has its rules defined in the terms and conditions of the insurance policy, adhesion contracts (common on insurance policies) tend to have an interpretation that is more pro-insured, especially if the insured is considered a consumer (under the Consumer Protection Code).

Insureds must comply with the duty of utmost good faith, disclosing all material facts and acting honestly towards the insurance companies, in such a way that the insurance company has sufficient information about the circumstances involving the acceptance of the risk.

As provided by the Civil Code, insureds must disclose all the relevant information upon contracting the policy and notify the insurer if the risk is aggravated. Nonetheless, courts generally impose on insurers the obligation to ask for all relevant information from insureds, mostly because insureds may not have the specialised knowledge of what would aggravate their risks – such assumption would be relativised under complex risks insurance.

Should the insured party fail to provide the requested information (or omit relevant data), the insurance company may (i) increase the premium or terminate the policy, if the omission was not in bad faith; or (ii) refuse to cover any claims that would otherwise be covered under the terms and conditions of the policy issued to the insured party, which may result in the partial or total refusal of the coverage, if the omission was in bad faith.

In most cases, Brazilian courts require evidence that the insured has engaged in intentional wrongdoing. Brazilian courts also generally require a direct connection between the cause of the loss and the missing information relevant to the insurer, although such causal relation is not expressly provided for in Brazilian law.

As mentioned in 7.1 Type and Amount of Litigation, in the past 12 months there have been significant trends in disputes involving directors' and officers' (D&O), rental and credit insurances, as well as business interruption due to the increase of such policies during the COVID-19 pandemic.

Insurance coverage disputes are usually resolved (i) on internal administrative negotiations between the insurer and the insured, and (ii) on judicial procedures as an ordinary lawsuit. Insurance coverage disputes may also be submitted to arbitration, although arbitration is a less common type of resolution of an insurance dispute when compared to judicial litigation, since it usually involves more complex situations and demands more resources from the parties.

With regard to reinsurance contracts, arbitration procedures are more frequently chosen by the contracting parties due to the amounts and complexity in the disputes, even though there is no specific rule providing for the submission of reinsurance disputes to arbitration.

When the insured party is considered a consumer, some particularities must be noted. The consumer has a special protection provided by the Consumer Protection Code. Therefore, contracts that involve a consumer and an insurer have a different interpretation. On those types of contracts, there is an obligation for the insurer to provide all the information in a clear and adequate way, informing the insured of all their rights and risks, and answering all the possible questions regarding the insurance contract. In addition, the interpretation of insurance contracts when the requirements of a consumer relationship are met, in the event that any provisions are ambiguous or contradictory, is in favour of the party who adhered to such contract.

For consumer contracts, the jurisdiction is mandatorily the place of residence of the consumer, according to the Consumer Protection Code.

As a general rule, a third party is not able to enforce an insurance contract or to sue an insurer in connection with an insurance contract. In civil liability cases, the third party will present a lawsuit against the person/company who caused the casualty. Should such liable person/entity have insurance cover, they/it will have the right to trigger the insurance policy.

An exception is made in insurance policies contracted in benefit of third parties for complying with a legal or contractual obligation (ie, mandatory insurance), whether such party is a nominated beneficiary formally indicated in the insurance policy or not.

The Brazilian legal system mentions the effect of bad faith, but does not have a particular provision defining it.

According to Article 422 of the Brazilian Civil Code, the parties are obliged to act in good faith in the execution and performance of contracts. Therefore, parties must collaborate and may not act in order to create an unjustified benefit or perform any other kind of bad faith action, such as:

• the leading of a party to a mistaken conclusion;
• lying about facts of the negotiations;
• misinforming the counterparty; and
• other unethical behaviours.

In Brazil, the regulations set forth that a solution for a claim must finish within a 30-day deadline, counted after the delivery of the necessary documents by the insured to the insurer to properly assess the insured's claim. On the elapse of such 30-day term, insurance indemnification will be accrued by the inflation rate and default interest. However, there is no legislation providing for the payment of fines or punitive damages as a result of failing to meet the aforementioned deadline.

The question of whether an insured is bound by representations made by its broker may vary on a case-by-case basis, but in most cases, the insured is not bound by the broker’s representations, considering that Brazilian law does not provide that brokers act as representatives of either the insurer or the insured, and as long as there is no evidence that the broker has acted under the insured’s instructions on how and what to inform. The broker is an intermediary between the insurer and the insured who, according to SUSEP, acts by approximating the interest of the parties, handling communication and documentation exchanged between the insurer and the insured.

The Brazilian legal system allows delegated underwriting or claims handling authority arrangements.

In Brazil, defence costs are commonly covered by insurance products. The main cases in the corporate area are (i) construction, (ii) D&O, (iii) errors and omissions (E&O) and (iv) car insurance.

There are no relevant changes expected for litigation, although several changes are being implemented and are expected for products, corporate and surveillance matters.

There have been no noteworthy trends in terms of the cost or complexity of litigation in the past few years.

There is no legal prohibition on buying protection against costs risks in connection with claims.

Usually, those protections are already included in the insurance products, and clauses may be negotiated for coverage extension or limitation in that regard.

Defence costs are generally covered under liability insurances, provided that the main issue claimed is also subject to coverage.

Costs with posting bonds as a guarantee are, in some cases, also covered.

Insurers in Brazil have, in most cases, a legal right of subrogation following the payment of a claim and up to the amount of the indemnification paid by the insurers to the insured/beneficiary, as established in the Civil Code.

The right of subrogation is not applicable to life insurance. Furthermore, a number of legal scholars understand that rights of a strictly personal nature, such as that to a moral damages plea, cannot be transferred from the insured to the insurer, but this matter is disputable as there is no specific provision in law for that.

Insurers have the right to pursue third parties in the case of subrogation and, in some very limited cases, to protect the imminent subrogation right.

The right of subrogation arises pursuant to the Brazilian Civil Code (Article 786) and is reassured by guiding precedent 188 of the SFC.

If subrogation occurs while there is a dispute between an insured and a third party, the claim insured tends to remain in the case and the insurer may join litigation.

If subrogation occurs before litigation is started against the third party, the insurer will be entitled to file the suit in its own name.

The COVID-19 pandemic has not affected the type or amount of insurance-related litigation.

And no legislative changes to insurance rules have been made due to the COVID-19 pandemic. It is worth mentioning that there is a bill of law under discussion in the Brazilian Congress for mandatory coverage under health and life insurances for COVID-19-related risks. Nonetheless, for commercial reasons, insurers volunteered to cover insureds' deaths due to COVID-19, mitigating the potential litigation risk derived therefrom.

Also, demand for certain types of policies – such as D&O, rental and credit insurance – has increased due to the COVID-19 pandemic and companies have been facing higher premiums and restricting the room for coverage negotiation due to hard market conditions. Therefore, an increase in potential litigation involving these policies is expected.

Due to the economic perspective for the next 12 months, considering the impact of the pandemic, no significant change in the demand for certain policies and their pricing is expected in the short run.

For business interruption coverage, considering that Brazilian damages insurance policies are designed to cover business interruption events as a consequence of material/physical damages to insured proprieties/sites, the COVID-19 pandemic has not given rise to coverage issues.

As for life insurance in Brazil, most policies consider pandemics an excluded risk. However, many insurance companies proactively announced assuring coverage for COVID-19 deaths and are experiencing a hard hit in their financials.

For car insurance, on the other hand, the lack of mobility made claims figures plunge, granting insurers a relevant margin for the time being.

At the time of writing, there is a legislative bill under discussion that intends to oblige insurers to cover all life, health and invalidity losses incurred due to the COVID-19 pandemic. So far, no law or regulation has obliged any insurer to cover deaths due to COVID-19.

Concerning appetites for risk, companies are interested in broader business interruption coverage and the authors have noticed a harder market for risks such as D&O insurances, due to economic events.

Climate change is affecting business and practices all around the world. In Brazil, the agriculture sector is suffering different types of losses derived from climate change. In response to those losses, parametric insurances are being developed. This kind of insurance links the coverage of the insurance with the parameters of an occurrence of natural events. Therefore, depending on the stipulated parameter (eg, an excessive amount, or absence, of rain), the insurance would cover the damages or pay an amount as an indemnification, in some cases with a very simplified loss adjustment procedure.

In the past year, there have been regulatory developments in relation to deregulating insurance products and other initiatives on the agenda of SUSEP; for instance, opening new agendas for sandbox regulations for insurtechs, providing more freedom to parties to agree on contractual terms of complex risk insurances and others, but not regarding, or directly impacting, coverage, litigation or claims.