Sources of Insurance and Bonding Law in Mexico

The main sources in Mexico are legislation and judicial criteria. Insurance law legislation includes:

• the Law of Insurance and Bonding Institutions;
• the Sole Insurance and Bonding Circular;
• the Insurance Contract Law;
• the general insurance provisions issued by the National Commission for the Protection and Defense of Users of Financial Services;
• the Code of Commerce; and
• the Federal Civil Code.

International legislation is used when there is an international contract (reinsurance or insurance), where, depending on the type of insurance, the provisions that will apply may be Mexican or international laws.

In 1996, Mexico ratified the Inter-American Convention on the Law Applicable to International Contracts, which establishes a framework to determine the law applicable to international contracts, such as reinsurance or insurance contracts. For the regulation of international insurance or reinsurance, international conventions or treaties are considered depending on the type of insurance and the insured objects; for example, in air transport insurance, international treaties specialised in aeronautical law are used so that the insurance complies with all the requirements in international matters.

Additionally, there is the jurisprudence and judicial criteria issued by the Supreme Court of Justice and the highest courts in the country. This source of law is very important in the Mexican legal system, since it sets precedents for the resolution of judicial disputes in insurance matters, and is also a guideline for insurers as to the conduct they must adopt in their operations.

Regulation of Insurance and Surety Bonds

The National Insurance and Bonding Commission is the governing body that regulates insurance and bonding companies, from their incorporation to their operation, and at all times ensures that they comply with their obligations under the relevant regulatory framework, including the correct constitution of their corporate governance, solvency capital, the contracts they issue, and the constitution of their technical reserves, among others.

On the other hand, the National Commission for the Protection and Defense of Users of Financial Services is the governing body that oversees that insurance and surety companies provide adequate service to consumers of their products. Likewise, such authority may sanction them where they fail to comply with any administrative provision related to consumers. Among other provisions, it is in charge of ensuring compliance with the Law for the Protection and Defense of Users of Financial Services.

Corporate Insurance and Reinsurance

The authorisation to subscribe insurance and reinsurance for (small- or medium-sized) companies corresponds to those companies that have the respective authorisation from the National Insurance and Bonding Commission to operate as an insurer and that also have permission to distribute the product required by the company, ie, in the life, accident and sickness or damage line of business. There are no specific or differentiated requirements for insurers to operate consumer insurance or business insurance.

In the case of business insurance, adhesion contracts are also used; however, this is not an obstacle for them to be negotiated by the contracting company, in terms of its specific needs. For an insurer to issue an insurance policy to a company, it must verify, at the time of subscription, what is contained in its policies and subscription manuals. Other issues that are contemplated include:

• the objects to be insured;
• risk profile;
• seniority in the market in question; and
• sector of economic activity.

The restriction for insurers at the time of taking out insurance is that they do not exceed the capacity for which they can assume risks; for this purpose, Articles 256 and 257 of the Law of Insurance and Bonding Institutions provide that they must diversify and disperse the risks through coinsurance or reinsurance with foreign companies, specifying that there is no different or specific regulation when it comes to business or consumer insurance.

Details of all the requirements that insurers must comply with to operate consumer and business insurance can be found in the Sole Insurance and Bonding Circular.

The Premium Regime

Under Mexican law, the nature of the premium regime is taxable, since if the contracting party or insured party does not pay the premium within the term established for such purpose, the insurance ceases to be effective. The general rule is that the premium is due in advance; that is, at the beginning of each period of the term of the insurance contract. In some cases, depending on the type of insurance, the premium may be divided and paid in specific periods, but it must be paid in periods of equal duration.

Operation of Foreign Insurance or Reinsurance Companies

The operation of insurance in Mexico is authorised for institutions incorporated under Mexican law. If a foreign company wants to operate in Mexico, it must incorporate an affiliate entity in Mexico to provide insurance services in Mexico.

Regarding the operation of reinsurance, in order to provide this service from Mexico and to hold itself out as a Mexican reinsurer, it is necessary for the company to open an affiliate entity in the country and obtain authorisation from the National Insurance and Bonding Commission. However, if the insurance was granted by a Mexican insurer, the insurer, in order to diversify and disperse the risks and responsibilities it assumed when carrying out this operation, is allowed to contract reinsurance or coinsurance with a foreign company. For an insurer to enter into reinsurance with a foreign company, the latter must be registered in the General Registry of Foreign Reinsurers, which is obtained through the authorisation of the National Insurance and Bonding Commission, which, prior to granting the registration, will review, among other aspects, the solvency and stability requirements to carry out reinsurance operations.

In Mexican legislation, there is no express provision allowing fronting and, in some cases, there are restrictions in that insurance cannot be contracted with foreign companies when the persons or companies to be insured reside in Mexican territory or when the object to be insured is located in Mexican territory or is the property of a person domiciled in Mexico and, in general, in cases where the risks may occur in Mexican territory.

However, as stated in 3.1 Overseas-Based Insurers or Reinsurers, Mexican insurance companies may diversify their risks through reinsurance or coinsurance with foreign companies, and it is in these operations that fronting occurs, since through these operations the insurers that assume the risk transfer it to other insurers or reinsurers.

In this respect, there is no percentage limit for reinsurance or coinsurance, nor is there a minimum retention requirement for the transferor company. On the contrary, Mexican law establishes that an insurer cannot retain all the risk if it exceeds its capacity to mitigate the risk, and what it provides is that the surplus must be diversified in reinsurance. In practice, it is common for the entire risk to be reinsured, so that sometimes it is actually the reinsurer who assumes the entire risk; however, it is not the reinsurer but the transferor insurer who will be liable to the insured.

Mergers and acquisitions (M&A) of insurance companies are very common in Mexico, especially when international insurers absorb local insurers, since the absorption facilitates the insurers that arrive, as they already have the authorisation of the Mexican regulatory authority and the permits to operate products. In recent years, M&A have been recurring in Mexico, which is accepted, as there is regulation on M&A in the Law of Insurance and Bonding Institutions and in the Sole Insurance and Bonding Circular.

The absorbing insurer takes over the portfolio of the absorbed insurance institution and assumes all the risks it had insured, for which it must have a contingency plan in place for all the risk it assumes.

The distribution of insurance and reinsurance products is regulated by the Law of Insurance and Bonding Institutions and by the Sole Insurance and Bonding Circular, and is carried out as follows:

• Direct sales – these sales are made by insurance companies.
• Sales through insurance agents – insurance agents offer the general public a wide range of insurance with various institutions and products. In order to be able to sell insurance, the individual or legal entity must be authorised by the National Insurance and Bonding Commission and comply with various requirements set forth in the Insurance and Bonding Agents Regulations, including having completed high school or equivalent, having the technical capacity to perform brokerage activities, not being a public servant, not having been convicted of a property crime, and not having been declared bankrupt. Likewise, it is important to point out that agents are also required to contract and maintain civil liability insurance for errors and omissions.
• Sales through digital media – the sale of insurance and reinsurance products through digital media is also regulated by the Sole Insurance and Bonding Circular, particularly with regard to the terms and conditions under which electronic insurance contracts must be made, since Mexican legislation is very specific in that insurers must provide all the information and documentation clearly to the contracting parties or insured parties.
• Bancasurrance – in Mexico, there is the distribution of products through financial institutions, but this model is known as contracting through a legal entity. In order to start with the distribution of insurance, financial institutions must sign a contract with the insurers which must be authorised and registered before the National Insurance and Bonding Commission. Also, in some cases, before the financial institutions or legal entities distribute the insurance products, they should receive training from the insurance company, or obtain evaluation or certification by the National Insurance and Bonding Commission.

Disclosure of Information about the Risk

In Mexico, as in most jurisdictions, insurance contracts are documents previously drafted by the insurers and in which there is no margin for negotiation by the insured, being classified for such reason as "adhesion contracts". This type of contract has a distinctive characteristic in that the parties do not agree on equal terms nor do they have the possibility of compromising or negotiating between equals. Thus, the distinguishing feature of the adhesion contract lies in the fact that the clauses are not drafted by both parties, but are predisposed (and sometimes imposed) by one of them to the other, who can only accept or reject them.

Having established the above, it is the insured who is obliged to declare in writing to the insurer, according to the corresponding questionnaire, all the facts important for the appreciation of the risk that may influence the agreed conditions, as they know or should know them at the time of the execution of the contract. There is no obligation on the part of the insurer to actively investigate the important facts on the part of the insured and which may influence the agreed conditions.

The frequent and growing use of insurance contracts has generated the need to regulate their execution; legislation which, in view of the advantageous position of insurance companies, has been directed towards the development of consumer protection and transparency rules, obliging insurance contracts to comply with certain standards.

Consequence of Failure to Provide Information in the Subscription of an Insurance Contract

As stated in 6.1 Obligations of the Insured and Insurer, most insurance contracts are non-negotiated contracts or adhesion contracts. The omission or misstatement of any material fact by the insured party that could influence the terms and conditions of the insurance entitles the insurer to consider the insurance contract legally terminated.

Insurance companies act through agents who may be individuals or legal entities that intervene in the contracting of insurance through the exchange of proposals and acceptance of said insurance, through marketing and through the provision of advice to enter into such contracts, and whose activity is subject to the legal framework of the Insurance Contract Law, the Law of Insurance Institutions and Mutual Insurance Companies and the Insurance and Bonding Agents Regulations.

Even though the insurance agent is usually considered an intermediary, the truth is that in Mexican law they are considered an agent of the company, when they act according to its instructions and direction, and represents it, since their activity binds the insurer in the contracting of the insurance; however, they have the obligation to provide advice to the insured in relation to the contracting of the insurance.

In terms of applicable legislation, in order to be valid, the insurance contract (as well as its additions and amendments) must be in writing, and it is perfected from the moment in which the insurer is aware of the acceptance of the offer by the insurance-contracting party.

The insurer is obliged to deliver to the contracting party a policy stating the rights and obligations of the parties, which must contain at least the following:

• the names and addresses of the contracting parties and the signature of the insurance company;
• the designation of the insured thing or person;
• the nature of the risks guaranteed;
• the time from which the risk is guaranteed and the duration of this guarantee;
• the amount of the guarantee; and
• the insurance fee or premium.

Beneficiaries of an Insurance Contract

According to Mexican law, it is possible to take out insurance on one's own behalf or on behalf of another person, even without the designation of the person of the insured third party.

An example of this is D&O liability insurance in which only those persons (without identifying them) who fall within the general conditions of the insurance to be considered as directors and/or officers of a company are established as beneficiaries of the insurance.

The position is no different with regard to consumer contracts or reinsurance.

Alternative risk transfer in insurance refers to non-traditional solutions for transferring risks. In Mexico, this figure has been incorporated in products such as financial guarantee insurance and parametric insurance.

Financial guarantee insurance is regulated in the Law of Financial Institutions and in the Sole Insurance and Bonding Circular, and specific rules for their operation have also been published.

Additionally, parametric insurance is beginning to make inroads into the Mexican market, both by private companies and by the government. In June 2022, the granting of parametric insurance for social protection to small corn farmers in some states such as Oaxaca and Tabasco was announced; this is a pilot programme led by the government and some Mexican insurance companies.

The Law of Insurance and Bonding Institutions does not specify provisions for ART transactions in other jurisdictions with implications in Mexico. However, there are no explicit bans in this matter.

Whether other jurisdictions celebrate ART transactions that may be validated in Mexico will depend on the specific acts celebrated in the foreign jurisdiction with regard to Mexican insurers.

Where ART transactions signed in other jurisdictions are part of a reinsurance or co-insurance contract with a Mexican insurer, this operation will be considered as a reinsurance or co-insurance contract; this applies only where those acts are part of the contract and comply with the requirements of Mexican law for recognition as a reinsurance contract.

Insurance contracts are regulated by the Insurance Contract Law and in a supplementary manner by the rules of construction of contracts contained in the Code of Commerce and the Federal Civil Code.

The Insurance Contract Law provides that the policy conditions, scope, terms, exclusions, limitations, deductibles, and any other modality established in the coverage or plans offered by the insurance company, as well as the rights and obligations of the contracting parties, insured or beneficiaries must be drafted in terms that leave no room for doubt as to the risks covered and those that are excepted, restricted or conditioned in any way.

Regarding the latter, the law is clear in stating that the insurance company must respond to all events that present the nature of risk that has been insured, unless a certain risk or event is expressly excluded, limited, or subordinated in a precise manner.

Consequently, if a risk is not expressly excluded, circumscribed, or reserved from the coverage established in the policy in a clear and precise manner, the insurance company shall have the obligation to respond to it upon the occurrence of the incident, under the terms agreed in the contract.

As stated in previous answers, insurance contracts are classified as “adhesion contracts”, which are those whose clauses are drafted by only one of the parties, while the other party is limited to accepting or rejecting them, without being able to modify them. It is for this reason that there are special rules different from those applicable to the construction of freely negotiated contracts, so that any doubt is constructed against the stipulating party – ie, the insurer.

Therefore, the obscurity of the clauses in such (adhesion) contracts must be constructed in favour of the insured (consumers), who are not responsible for the drafting of the contract.

As stated in 8.1 Interpretation of Insurance Contracts and use of Extraneous Evidence, the Insurance Contract Law provides that the policy conditions, scope, terms, exclusions, limitations, deductibles and any other modality established in the coverage or plans offered by the insurance company, as well as the rights and obligations of the contracting parties, insured or beneficiaries must be drafted in terms that leave no room for doubt as to the risks covered and those that are excepted, restricted or conditioned in any way.

Under Mexican law, there is no particular form of words necessary to constitute a warranty, and, in fact, they are generally treated as a condition precedent and are not treated differently to other contractual terms.

As stated 8.2 Warranties, the Insurance Contract Law provides that the policy conditions, scope, terms, exclusions, limitations, deductibles and any other modality established in the coverage or plans offered by the insurance company, as well as the rights and obligations of the contracting parties, insured or beneficiaries must be drafted in terms that leave no room for doubt as to the risks covered and those that are excepted, restricted or conditioned in any way.

The breach of a condition precedent (if material to the loss that arises) will discharge the insurer from liability under the policy as long as it is clear from the content of the policy that such breach constitutes a discharge of liability.

In Mexico, there are two procedures to claim insurance coverage: (i) a conciliatory or mediation procedure before the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) and (ii) through the competent courts by filing an Ordinary Commercial Trial or Oral Commercial Trial, depending on whether liquid or illiquid benefits are claimed. The filing of the former is not a procedural requirement for the latter.

A claim for the performance of service or consumer contracts can be filed through a conciliatory proceeding before the Federal Consumer Attorney's Office (PROFECO) or through an Ordinary Commercial Trial or an Oral Commercial Trial.

The term to file a lawsuit to claim the compliance of an insurance contract is two years, as a general rule, and five years in the case of life insurance, which is interrupted in the case of filing a claim before CONDUSEF, and restarts as of the day after the conciliation hearing in which the rights of the parties are safeguarded for not having reached an agreement or where they have agreed to submit to arbitration.

There are several cases in which an unidentified beneficiary or other third party may claim an insurance payment. An example of this would be in the case of liability insurance where the victim can sue the insurer directly. Another example would be in the case of legal expenses insurance where lawyers could sue the insurer directly for payment of their fees.

For hearing any controversy related to insurance contracts entered into in Mexico by insurance companies authorised as such by the Mexican regulatory authorities, the competent courts shall be those of Mexico.

Since insurance contracts are “adhesion contracts”, and in the event that the lawsuit is filed by the insured, the competent courts will be those chosen by the insured, even if the contract has indicated a different court.

Suing for the payment of an insurance indemnity must be done by means of an Oral Commercial Trial, which has the particularity that ordinary appeals (ie, appeals and/or revocations) are not admitted, and consists of the following stages.

• The filing of the lawsuit together with the offer of evidence takes place.
• The summons occurs.
• An answer to the claim and an offer of evidence is given, for which purpose the insurer shall have a period of nine business days;
• Once the claim has been answered, the judge will notify the plaintiff with such answer within three business days.
• Once the notification with the answer to the lawsuit has been served, the judge will set a date for the preliminary hearing, which must be held within the following ten business days.
• At the preliminary hearing, the following occurs:
1. the parties will be urged to reach an agreement;
2. the undisputed facts will be determined;
3. the fixing of evidentiary issues will take place;
4. qualification on the admissibility of evidence will take place;
5. summons for the trial hearing within the following 40 days will take place.
• At the trial hearing, the presentation of evidence, pleadings and issue of judgment will take place.

A foreign judgment may be validly enforced in Mexico, provided that this is not contrary to Mexican public policy.

The requirements for enforcing a judgment issued abroad in Mexico are as follows:

• that the requirements set forth in the Federal Code of Civil Procedures regarding letters rogatory are complied with;
• that it is not a real action;
• that the judge has had jurisdiction to hear and judge the matter;
• that the defendant has been notified or summoned in person;
• that it has the character of res judicata; and
• that the action that gave rise to it is not the subject matter of a lawsuit that is pending between the same parties before a Mexican court and which a Mexican court has previously heard.

As a general rule, in any commercial contract containing an arbitration clause, such a clause is valid and enforceable.

Although it is true that the will of the parties is the supreme law of contracts in commercial matters, including insurance contracts, it is also true that this generic rule in commercial matters is not applicable to the submission agreement when the insured is submitted to the jurisdiction of an arbitration court.

This is because in insurance contracts the aim is to safeguard the rights of the user, and to ensure equity, certainty, and legal security in the relationship between the insurer and the insured. Based on the these premises, the arbitration clause agreed in an insurance contract is not valid in the event of a dispute if it is agreed that it be settled through arbitration, and even more so if the place where the arbitration is to be carried out is different from the place where the insured has his usual place of residence.

Being an adhesion contract, its terms are not negotiable, and although the insured may choose not to enter into it if they do not want to be bound by the terms stipulated therein, this would imply that they could not enjoy the insurance they wish to contract for, which shows that if the consumer wants to enjoy the referred insurance, they are forced to subscribe to the adhesion contract on the terms in which it is drafted and with the conditions imposed by the insurer.

This shows that the insured cannot oppose what was previously stipulated in the referred contract and that therefore there is no evidence that the insured has expressed their will to submit to an arbitration clause.

According to Mexican law, arbitration awards may be validly enforced in Mexico and for such purpose the intervention of the Mexican courts in commercial matters, whether of local, state, or federal jurisdiction, will be required.

Although Mexico is a party to the New York Convention for the enforcement of arbitration awards rendered abroad, its application is not usually very effective, and even the enforcement of an arbitration award in Mexico is usually at least as time-consuming as the arbitration proceeding itself.

The authority in charge and empowered to carry out a conciliatory procedure between the insured and the insurer is CONDUSEF, and it is also empowered to act as arbitrator.

Although currently in Mexico there are alternative justice centres in the states that depend on the Superior Courts of Justice of each of the jurisdictions, alternative dispute resolution is still little known and little used, especially in insurance-related matters, where users generally go to CONDUSEF and/or the courts to enforce their rights.

In terms of Mexican law, in the event that the insurers do not comply with the obligations assumed in the insurance contract within the terms established for such a purpose, they must pay the creditor an indemnity for late payment.

The insurer paying the indemnity shall be subrogated, up to the amount paid, in all rights and actions against third parties corresponding to the insured due to the damage suffered.

The insurer may be released in whole or in part from its obligations if the subrogation is prevented by acts or omissions originating from the insured.

The right to subrogation shall not be applicable where the insured has a marital relationship, kinship by consanguinity or affinity up to the second degree, or civil relationship with the person who has caused the damage.

In the insurance sector, the use of technological means has increased every day, both for the distribution, marketing, and operation of insurance, which has been reflected in the modification of the insurance legal framework. Although not to the expected extent, there has also been legislation in various aspects, such as operative areas.

In this regard, in 2018 the “New Model” was implemented, which consists of a model that uses technological tools or means for the rendering of insurance services with modalities different from those existing in the market at the time of granting the authorisation to operate, where such authorisation will be temporary. This model is regulated by the Law to Regulate Financial Technology Institutions and Chapter 41.3 of the Sole Insurance and Bonding Circular.

Through this, a company can be incorporated for a term, to operate insurance through technological means. Among the requirements that are requested for authorisation are the following:

• that the service must be rendered by a controlled means, which represents a benefit to the client;
• that the project must be in a stage of beginning operations and that the project can be started up immediately; and
• that the company must have sufficient means, insurance, guarantees or other mechanisms to compensate the client for any damages caused during the term of the temporary authorisation.

Through this option, a pilot programme operates, which may not be valid for more than one year with a single extension of one more year.

Likewise, insurtech activities have increased in Mexico, including the creation of Asociacion Insurtech Mexico, which estimated that by 2021 there were at least 43 startups engaged in insurtech activity.

In 2018, the Law to Regulate Financial Technology Institutions was issued, through which the services provided by financial institutions through technological means began to be regulated. For insurance matters, such law is also applicable in conjunction with the provisions of the Sole Insurance and Bonding Circular.

As stated in 10.1 Insurtech Developments, through these provisions insurtech has begun to be regulated, so it is clear that in Mexico there is a concern and interest to venture into the issues of technological development associated with insurance.

While it is true that there is still a long way to go in terms of insurtech, there is concern both from legislators and from the regulatory entity, the National Insurance and Bonding Commission, to continue developing policies and provisions to achieve progress in insurtech issues.

In the current scenario, the main emerging risks in Mexico are pandemic diseases, infectious diseases, cybersecurity, social and political movements, and catastrophic risks.

On the one hand, public health continues to be an important risk to be addressed, since, as a result of the COVID-19 pandemic, secondary health effects are just beginning to become known and continue to cause health consequences for the insured population as a whole. Likewise, outbreaks of other diseases have begun to appear in the population, such as simian smallpox and infantile hepatitis.

On the other hand, in view of recent events in the social and political context where there have been several incidents involving hacks, it has also become important to pay attention to cybersecurity issues and also to contingencies due to political matters, such as social movements or even measures adopted by the government that may affect companies.

Finally, catastrophic risks in Mexico are still present, since due to its geographical location, Mexico is constantly exposed to earthquakes and hurricanes.

For COVID-19 pandemic issues, health insurance policies contemplated an exclusion of coverage for pandemics or epidemics, which, in most cases, was not applied by the insurers and they covered the claims, registering such modifications to their contracts with the National Insurance and Bonding Commission. In addition, this regulatory authority granted regulatory facilities to insurance institutions so that they could incorporate risks derived from COVID-19 in their products.

Mexican insurance companies have also increased the number of products that include political risks.

Likewise, in recent years, parametric insurance (also known as index insurance) has been evolving and used increasingly, and in Mexico this type of insurance is commonly required for earthquakes and hurricanes, and more recently for pandemics.

Post-Pandemic Regulatory Changes

As noted in 11.2 New Products or Alternative Solutions, many insurance policies have included changes to the clauses of medical expense insurance policies, in some cases incorporating COVID-19 into their coverage, or limiting the coverage they provide. In this regard, it should be noted that it was the Mexican insurance companies themselves who incorporated coverage for this disease and, in response to this reaction, the regulatory body, ie, the National Insurance and Bonding Commission, supported the decision and granted facilities so that it would not only remain a matter of practice but would be duly incorporated into regulation.

The COVID-19 claims have not been closed, since the insurance companies are still dealing with judicial disputes of multiple claims resulting from COVID-19 diseases and illnesses, as far as medical expenses and life insurance are concerned.

In view of this panorama, it is very likely that there will be changes in the insurance legal framework, especially with regard to judicial criteria, since the judicial disputes are still ongoing and many of them have yet to be resolved, which will undoubtedly set a paradigm depending on the enforceable obligations and the compliance of the insurers.

Throughout 2022, there have been significant developments in judicial criteria. Relevant regulatory developments include the following:

• in medical expense insurance, prescriptions do not prove the illness claim in trial;
• the obligation of insurers to protect the rights of consumers providing their clients with complete information in a reliable manner; and
• the liability insurance of a car must cover moral damage.