The good faith principle in insurance contracts
In accordance with the Mexican law, an insurance contract has a specific condition to become effective: the good faith of the parties. This is confirmed by article 8 of the Mexican Insurance Contract Act (“ICA”) that sets forth the insured party’s obligation to disclose in writing all the important facts for the insurance company to conduct a risk assessment process that may influence the conditions of the insurance coverage.
If the contract is executed by the named insured’s agent or representative, he shall disclose to the insurer all the important facts that are known or should be known by the representative and his principal (article 9 of the ICA).
When a third party offers to execute an insurance contract on behalf of the named insured, the offeror shall disclose all the important facts that are known or should be known by himself or the insured party (article 10 of the ICA).
The failure to reveal or disclose information by the named insured or his agent or representative will entitle the insurer to cancel the insurance contract without liability, even if such non-disclosed information does not relate to the occurrence of the loss or accident (article 47 of the ICA).
The good faith principle inherent to insurance contracts has been confirmed by the First Chamber of the Mexican Supreme Court (the “Court”) by discussing the direct constitutional trial in review (amparo directo en revision) 5256/2015.
The subject matter of the Court’s decision was to determine the constitutionality of article 70 of the ICA, and more particularly to confirm whether such an article breaches (i) the constitutional principle of certainty in the rule of law, (ii) the principle of equality, and (iii) the freedom to contract on consumer relations.
An English translation of article 70 of the ICA is as follows:
“The obligations of the insurer will be extinguished if it proves that the insured party, the loss payee or their representatives conceal or misrepresent the facts that would exclude or might limit such obligations, with the purpose of misleading the insurance company. The same principle shall apply in the case that, with the same purpose, the insurance company is not provided on a timely basis with the documents referred to in the previous article.”
Article 69 of the ICA provides that the insurance company shall be entitled to request from the insured party or loss payee all types of information on the facts relating to the loss or accident and by which the circumstances for its occurrence and the consequences of the same may be determined.
Facts of the matter
An insured entity brought an action before a court of law to enforce a car insurance contract, given the car was stolen. The trial court and the appealing court decided the case in favor of the plaintiff.
The defendant (the insurer) filed a constitutional trial (amparo action) and the court granted constitutional protection to the insurance company for the lower court to regard as admissible the exception established in article 70 of the ICA. That is, the insurer was released from its obligations because of the insured party’s concealment and misrepresentation on the facts of the car theft.
Afterwards, the plaintiff filed a motion claiming the unconstitutionality of article 70. The motion was denied on a constitutional appeal.
The Court did not find any unconstitutionality in the article 70 of the ICA, and confirmed the constitutional protection granted to the insurance company.
Court rationale
The Court decided the case in favor of the insurance company on the following grounds:
a) Article 70 of the ICA does not infringe the principle of certainty in the rule of law, given that it clearly states the behavior leading to the extinction of the insurance company’s obligations. It is not necessary that such article provides a list of cases that might constitute concealments or misrepresentations leading to the release of the insurance company’s obligations.
Such cases will depend on the terms and conditions of each insurance contract and are behaviors determined by an ex post investigation of the loss by the insurer.
b) Article 70 of the ICA does not infringe the principle of equality, and the freedom to contract on consumer relations, because the insurance company, when performing an investigation that follows a loss notice, must conduct it professionally and in good faith.
In addition, the insurer shall secure the insured party his right of information on a clearly and accurate manner, by formulating questionnaires pertaining to the important facts of an event. This will lead the insurer to know the circumstances and consequences of the loss.
Final remarks
The Court decision will very likely apply by extension to other types of insurance contracts where the insured party, loss payee or their representatives conceal information or make misrepresentations aiming at misleading the insurance company.
The principle of good faith in contract law becomes even more important in insurance agreements. Insurers should know all relevant information and important facts revealed by the insured entity to conduct their risk assessment, or, an ex post event investigation.
If insured parties, loss payees, or their representatives, hide information, make misrepresentations or dishonest statements; and the insurance companies prove so, they will be released from all their obligations assumed in the insurance contracts.
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