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COVID-19 | Temporary and exceptional regime applicable to insurance contracts
Last May 12, the official publication of the Portuguese Republic published the Decree-Law no. 20-F/2020. This is a law that approved an exceptional and temporary regime, framed in the current context of the coronavirus pandemic aimed at restoring the economic balance of the insurance contract.
In this sense, individuals and companies now have a number of prerogatives linked to the reduction of insured risk resulting from the reduction or suspension of activity, as well as the associated impact on the value of the insurance premium. These measures were proposed by the Insurance and Pension Funds Authority (ASF) to the Ministry of Finance through the presentation of a draft decree, due to their prudential tasks of economic and social stabilization of the insurance market.
In short, this decree introduces three fundamental changes, which are set out below:
In accordance with article 59 of the legal regime for insurance contracts (DL 72/2008 and henceforth LCS), coverage of risks depends on payment of the corresponding premium.
Non-payment of premiums on due dates, under Article 61 of the LCS, has several effects such as automatic withdrawal from the date on which the contract was concluded (in the case of an initial premium) or on the due date for the premium (for premium instalments payable in the course of the annual contract).
Therefore, academic doctrine mentions that the scheme for premium payment is subject to a principle of absolute imperativity in so far as risk´s coverage must be preceded by payment of the associated premium. However, according to the current exceptional rules, a regime of relative imperativity has entered into force.
This means that the insurer and the policyholder can agree to defer the payment of the premium to a date later than the commencement of the risk coverage. In the event of this deferment, the insurer may not terminate or oppose the extension of the contract on the pretext that the premium has not been paid. Relative imperativity means that parties may amend these standards only by others which are more favorable to the policyholder.
Finally, as there is no rule without exception, it should be noted that not all insurance is subject to the mandatory and absolute premium payment regime as described. For example, life insurance and large-risk insurance grant more autonomy to the parties to set different contractual standards than the general regime.
By agreement between the Parties, the legislator suggests a set of contractual amendments aimed at rebalancing the contract economically. In particular, it may be agreed: the premium fraction, contract extension, temporary suspension of the Parties’ payment or temporary reduction of the premium payment.
In accordance with Article 2(3) of the exceptional regime in force and in the absence of agreement, compulsory insurance cover shall be maintained without restriction for a period of 60 days from the date on which the premium or fraction due is payable. This extension shall be reflected in the corresponding insurance certificate when it is required.
However, it is important to note that termination of the contract due to non-payment of the premium, or a fraction, until the end of the 60-day period does not relieve the policyholder from the obligation to pay a corresponding payment connected with the period when the contract was still in force.
Facing this scenario, in the absence of agreement between the parties, the policyholder may not want to keep his coverage for another 60 days. In this case, the insurer must inform the policyholder at least 10 working days before the premium due date, so that the policyholder can decide on the maintenance of the coverage.
Finally, concerning the insurance premium that may be in default, the legislator provides that these amounts may be deducted from any payment, to be paid by the insurer, in which the borrower is its creditor, particularly in the event of an accident during the period that this contract has been in force.
Policyholders who carry out activities that are suspended or whose premises are closed as a result of exceptional measures, as well as all those who perform activities in which the risks covered have decreased drastically, may request that these circumstances be reflected in the insurance premium. Strictly speaking, this is not an amendment, since this prerogative was already enshrined in Article 92 of the LCS, to which the legislator points.
Alternatively, policyholders may apply for a fractionated premium instalment scheme for the current annuity without additional costs.
Still with regard to these renegotiations, a substantial reduction in activity is considered to exist when the policyholder is in a situation of business crisis, serving as an indication of an abrupt and sharp drop of no less than 40% in invoicing.
Naturally, with reference to the insurance that can be renegotiated, there must be a correlative link between the activity developed and the insurance purchased. In this sense, renegotiations regarding liability insurance, accidents at work, etc. are perfectly acceptable.
Finally, with reference to Article 3(3) of the exceptional regime in force, these considerations do not apply to large risk insurance.
All the above changes to the contract shall be reduced to a written amendment in additional minutes, or on a particular condition, to be sent by the insurer to the policyholder within 10 working days of the date of the agreement or the date on which the policyholder exercises his right.
This law entered into force on May 12 and will expire on September 30, 2020.
ASF is responsible for supervising and monitoring the implementation of this exceptional regime. It will also have to develop some of the legal provisions through a regulatory rule.