Earthquakes & Hurricanes in Mexico (Any End in Sight?): Tips for International Insurers

A powerful 8.1 magnitude earthquake struck southern Mexico late Thursday, September 7, 2017. According to the U.S. Geological Survey, the epicenter of the earthquake was in the Pacific Ocean off the coast of the state of Chiapas – the southernmost state in Mexico. Because of the magnitude of the quake, its effects were felt throughout Mexico and as far north as Mexico City – 600 miles from its epicenter. Approximately 50 million people across Mexico felt the tremors from the quake. The earthquake, one of the most powerful ever recorded in Mexico, toppled hundreds of buildings, and killed at least 61 people.

The effects of the earthquake were also felt in Guatemala, which borders Chiapas, and in the neighboring state of Oaxaca. Oaxaca was the most severely impacted region in Mexico reporting multiple deaths and substantial structural damage, including the collapse of the city hall in Juchitan, Anel Hotel and a hospital. 

Although Mexico City escaped major damage, it was reported that part of a bridge on a highway to the site of Mexico City’s planned new international airport collapsed. The extent of damage is still being determined nationwide, but reports indicate that hundreds of buildings collapsed or were damaged, and nearly 2 million people lost power. Schools were closed on Friday, September 8th, to allow for the inspection of the country’s infrastructure.

Thankfully, because of its location, the earthquake did not cause nearly as much damage as it could have if its epicenter had been located elsewhere in Mexico. (In 1985, a magnitude 8.1 earthquake hit Mexico City killing more than 10,000 people and causing massive property damage.)

To make matters worse, as this blog is being penned, another large earthquake struck Mexico on September 19, 2017, which is the anniversary of the devastating 1985 quake. This most recent quake, magnitude 7.1, jolted central Mexico causing buildings to sway in Mexico City. At this time, there is limited information on any damage.

In addition to the recent earthquake, Mexico, like other areas in North America, Caribbean and eastern Pacific, has been subjected to its share of hurricanes and other named storms. The original predictions by Mexican weather forecasters called for 27 hurricanes in and around Mexico in 2017 – 16 in the Pacific and 11 in the Atlantic. For once, these predictions appear eerily accurate.

In June, Dora became the first Pacific hurricane of 2017. Dora appeared along the southwest coast of Mexico causing life threatening surf and rip currents. Although there were numerous large hurricanes and tropic storms that followed Dora, the next storm to make landfall in Mexico was Tropical Storm Lidia. Lidia hit Los Cabos on September 2nd, with strong winds and substantial amount of rain. On September 14th, Hurricane Max, a Category 1 storm, hit the Pacific coast of Mexico in the state of Guerrero, bringing tropic force winds to Acapulco, which caused minor structural damage. Max was quickly followed by Tropical Depression Norma, which pounded Mexico’s Pacific coast of Baja.

In August, Franklin became the first Atlantic hurricane to make landfall in Mexico. Franklin hit the Mexican state of Veracruz as a Category 1 hurricane with maximum winds of 85 mph. Certain areas in Veracruz experienced in excess of 10 inches of rain, which brought flash flooding and landslides. On August 23rd, Harvey made landfall in the Yucatan as a tropical depression before accelerating to the Category 4 hurricane that devastated the Texas coast. On September 8th, Hurricane Katia made landfall in eastern Mexico, north of Tecolutla, between Tampico and Veracruz, as a Category 1 storm. Katia brought between 10-15 inches of rain, which resulted in flash flooding and mudslides. Heavy damage was reported from the storm, as many coastal structures could not withstand the severe weather. 

This recent slew of natural disasters in and around Mexico provides us with the opportunity to remind the international (re)insurance market of some of the difficulties in dealing with natural catastrophes in Mexico.

Know Your Jurisdiction. In Mexico, as in many other Latin American jurisdictions, there are strict requirements for claims handling, which could pose significant challenges to insurers when dealing with large scale natural catastrophes. Most of these requirements are contained in Mexico’s 1935 Insurance Statute, the Commercial Code and in the 2013 Law of Insurance and Bonding Institutions (“LIBI”). It should also be understood that generally foreign choice of law and jurisdiction is not upheld in Mexico.

Preplanning is the Key. Preplanning is the key for any insurer to attempt to successfully navigate the hurdles created by a large-scale disaster in Mexico. Following a major disaster, insurers are often faced with a lack of experienced adjusters and experts, and as such, should maintain a network of local adjusters and experts that can readily be retained in such instances. Additionally, insurers should consider establishing claims protocols in advance with their insureds to ease potential difficulties with insureds not knowing how to proceed in terms of loss notification, mitigation, securing evidence, not disposing of repaired parts, what documents need to be submitted with the initial loss notification, etc. In addition, insurers are required in Mexico to establish manuals containing adjustment procedures for adjusters to follow, which must be posted on their company webpages. In this regard, insurers should continually update these manuals specifically for natural disasters to alleviate any potential delays that could run afoul of strict deadlines for determining whether to accept or deny coverage.

Understanding the Role of the Adjuster. According to article 109 of the LIBI, the adjuster is an individual who is designated by the insurer to perform an evaluation relating to the causes of a loss and all other circumstances which may influence the determination of any indemnity derived from an insurance contract, with the purpose of facilitating the necessary information so that the insurer can determine if a claim is payable. Insurers must also be mindful in Mexico that they are deemed equally liable for the designated adjusters’ action within the scope of their adjustment duties.

Documenting Claim. In Mexico, under Article 69 of the Insurance Statute, an insurer can require that the insured supply any information related to the claim which may assist in determining the circumstances under which it occurred and its consequences. However, the availability of documentation following a natural disaster would be limited for both the carrier and the insured. With respect to insurers, we recommend that they keep all policy documentation, including translated policies, readily accessible. Although claims protocols can assist an insured in preparing for a large loss, often the information needed by insurers has been damaged or destroyed by the event. In these instances, insurers should be prepared to secure information needed to made a coverage determination for alternative means, including expert evidence. In many cases, this will be necessary in any attempt to rebut the presumption of coverage. 

Deadlines. While acknowledging the claims handling difficulties following a large scale natural catastrophe, insurers must always be mindful of various deadlines which must be complied with.
Insured’s Notice Requirements. The insured has 5 days to inform its insurer of the occurrence of the event giving rise to the claim from the date the insured became aware of the loss. This must be in writing unless the policy provides otherwise. A longer period can be agreed in the policy. However, an insurer is not entitled to repudiate liability for loss because of late notice.
30 Day Rule. According to Article 71 of the Insurance Statute, insurance proceeds are due after 30 days as of when insurers are in possession of documents and information that allow for “establishing the basis of the claim”. It should be noted that in 2010 the Mexican Supreme Court upheld the establishment under Mexican law of a presumption of coverage in benefit of insureds. Thus, insurers are required to communicate any position or circumstances that might challenge this presumption within the 30-day period established in Article 71. Consequently, the adjuster’s role in requesting and collecting relevant information in a timely fashion is crucial to the establishment of any possible defense by an insurer. Therefore, the sooner an adjuster is involved, the better chance a carrier has of not running afoul of this rule. 
Other deadlines. Insurers must also be aware of other potentially applicable deadlines, including the right to cancel a policy in case of risk aggravation, changes in the circumstances, misrepresentation or nondisclosure. In Mexico, there is a legal presumption of good faith. The insured is bound to disclose every material circumstance that could affect proper assessment of risk. Non-disclosure or material misrepresentation will entitle insurers to avoid the contract, even if material facts did not have an influence in relation to the occurrence giving rise to the claim.
In summary, while the massive 8.1 magnitude earthquake in Mexico earlier this month does not appear to present significant exposure to the international insurance market, and the scale of damage from the most recent earthquake is currently unknown, events such as these nonetheless provide a reminder to carriers that knowledge of the jurisdiction and preplanning can potentially mitigate difficulties in dealing with natural catastrophes in Mexico.