In a recent ruling, the Colombian Constitutional Court (the “Court”) outlined significant guidelines concerning the repercussions of misrepresentations made by policyholders at the inception of an insurance policy. In an inter-partes proceeding for the protection of fundamental rights (“acción de tutela”), the Court ruled in favor of the claimants against an insurance company. The latter alleged misrepresentations or undisclosed pre-existences on behalf of the insured at the inception of the credit life insurance policies.
1. Background: Code of Commerce Article 1058
According to Colombian insurance law, policyholders are obligated to disclose all pertinent information at the outset of the insurance policy to determine the risk status accurately. This encompasses divulging any facts or circumstances that, if known to the insurer, would have influenced their decision to enter the contract or would have led to more burdensome conditions in terms of premium vale. Failure to disclose such information can render the insurance policy null. Article 1058 underscores that insurance contracts operate under the principle of utmost good faith. As per this principle, insurers are not compelled to scrutinize all risks and typically rely on the representations made by the policyholder.
2. Effects of Misrepresentation
Traditionally, insurance policies issued based on misrepresentations by the policyholder used to be nullified, regardless of whether there was a causal link between the misrepresented facts or circumstances and the loss incurred. In essence, the traditional understanding deemed it immaterial whether the misrepresented facts or circumstances directly contributed to the loss. The principle of utmost good faith dictates that the insurance policy may be nullified from its inception without necessitating proof of a direct causal relationship between the misrepresentation and the accident.
Notwithstanding the foregoing, in the recent ruling, the Court stated that not all misrepresentations automatically invalidate an insurance contract. To nullify an insurance policy, a judge must ascertain (i) the policyholder’s bad faith, (ii) the significance of the misrepresented fact, and (iii) the connection between the misrepresented fact and the loss.
In this regard, the Court stated:
“The policyholder incurs in misrepresentations when he inaccurately declares the circumstances that determine the risk status, that is, when the policyholder fails to comply with the obligation set forth in article 1058 (…). “However, not all misrepresentations or inaccuracies in relation to pre-existing conditions derive in the contract being null. In accordance with paragraph 1 of article 1058 (…), as well as constitutional and ordinary jurisprudence, misrepresentations only derive in the nullity of the insurance contract if three essential elements or requirements are proven: (i) the subjective element -bad faith-; (ii) the relevance of the pre-existence and (iii) the causal link between the pre-existence and the accident.”
The Court confirmed that the previous understanding has been consistent since 2017:
“(…) article 1058 of the Commercial Code does not require demonstrating a causal link between pre-existence and the incident. Furthermore, in ruling C-232 of 1997, the Constitutional Court declared the enforceability of this norm and stated that nullity occurs “due to the sole occurrence of inaccuracy or reluctance.” (…) However, since 2017 the Constitutional Court and the Supreme Court of Justice have consistently considered that “when asserting misrepresentations of the insured derived from an alleged pre-existence, the burden of proof falls on the insurer, that must clearly and precisely prove a causal link between the alleged pre-existence and the medical condition that generated the accident””.
3. Bad faith and burden of proof
Traditional understanding of article 1058 held that insurers did not have to demonstrate the bad faith of the policyholder in its statement of the risk status. Nonetheless, in the recent ruling the Court ruled that risk status statements are presumed to be true. Furthermore, the Court stated that the party alleging the nullity of the insurance is the one with the burden of demonstrating the reasons for his allegation:
“As per the principle of good faith, it is presumed that the risk status statement is truthful and not debased. Likewise, Article 167 of the General Procedural Code provides that “it is incumbent upon the parties to prove the factual assumption of the rules that enshrine the legal effect that they pursue”, so that the nullity must be proven by the one who alleges it. In this sense, the burden of proof to prove the elements of misrepresentations is on the insurer”.
In addition, the Court held that it was the insurer’s duty to clearly exclude pre-existing conditions in the policy. Otherwise, it will be understood that such events have been carried:
“In this sense, the insurer has the duty to “stipulate in the text of the policy, clearly and expressly, the exclusions or pre-existences that result from the information provided by the policyholder and from its investigation.” If the insurer does not clearly exclude the pre-existing conditions that were reported, it is understood that the carrier was aware of them and decided to cover them. In this respect, the Constitutional Court has emphasized that the facts detected by the insurer at the time prior to the inception of the contract (and to which the insurer did not said anything), “shall be considered as irrelevant for the insurance company and therefore shall be considered as covered risks””.
4. Medical examinations.
Finally, traditionally, the Court’s jurisprudence and the Supreme Court’s jurisprudence was at conflict regarding the duty to undertake medical examinations. There used to be three different understandings: (i) under no circumstances insurers ought to conduct medical examinations, (ii) the obligation to conduct examinations arises only when it is reasonable to assume that there is a difference between the representation and the real risk status, and (iii) medical examinations should always be conducted. Customarily, the preferred understanding was the first one, because insurers were not compelled to scrutinize all risks.
In an attempt to harmonize its own jurisprudence and that of the Supreme Court of Justice, in the specific case, the Court adopted the second position because it (i) encompasses with the obligations of the parties to the insurance contract in the pre-contractual stage and does not impose disproportionate burdens on either of them, and (ii) reflects the current jurisprudence of the Supreme Court of Justice, the ordinary expected judge of disputes arising from the insurance contract.
By: Lucas Fajardo and Juan David Marín
Brigard Urrutia, Insuralex exclusive member in Colombia
For comprehensive information regarding the ruling, please feel free to contact Lucas Fajardo (lfajardo@bu.com.co) or Juan David Marín (jmarin@bu.com.co).
