When It Comes to Insurance Disputes: No ADR in PR!

Friday, June 1, marks the official commencement of the 2018 Atlantic Hurricane Season. This year, the season begins with concerns about what is yet to come – particularly in light of the passing of Subtropical Storm Alberto through the Gulf of Mexico – and the lingering impact of the last hurricane season. This is particularly true in Puerto Rico. The 2017 Atlantic Hurricane Season was unkind to “La Isla del Encanto."

In 2017, Hurricanes Irma and Maria delivered a one-two punch within a span of weeks. While the entirety of the 2017 Atlantic Hurricane Season has been dubbed the most expensive hurricane season in history with early tabulations indicating approximately $200 billion in damage, indemnity payments in Puerto Rico are still the subject of measurement and quantification challenges today. Adjustment of last year’s CAT losses in Puerto Rico exposed many problems within the area of insurance and reinsurance on the island. From widespread issues with underinsurance to the lack of qualified claims consultants equipped with the necessary tools (in some instances language being the primary barrier) to the failure to understand the functions and requirements of local insurance law and regulations, last season is turning out to be a very costly lesson in many ways.

A question often posed in the context of insurance disputes is whether there is a more efficient, cost-effective way toward resolution. For instance, instead of undergoing a lengthy claims process that may result in litigation, is arbitration or appraisal a viable option to expedite the claims process in Puerto Rico? Unfortunately, the answer is no.

Chapter 26, section 1119 of Puerto Rico’s Insurance Code, provides as follows:
(1) No policy delivered or issued for delivery in Puerto Rico and covering a subject of insurance resident, located, or to be performed in Puerto Rico, shall contain any condition, stipulation, or agreement:
(a) Depriving the insured of right of access to the courts for determination of his rights under the policy in event of dispute.
(b) Depriving the courts of Puerto Rico of jurisdiction of action against the insurer.

(c) Limiting right to institute action against the insurer to a period of less than one year from date cause of action accrues in connection with all insurances other than property and marine and transportation insurances; in property and marine and transportation policies such right shall not be limited to a period of less than one year from the date of occurrence of the event resulting in the loss.

(d) Requiring that the policy be governed by the laws of any other jurisdiction except as necessary to meet the requirements of motor vehicle financial responsibility laws or compulsory disability benefit laws of such other jurisdiction.
(2) Any condition, stipulation, or agreement in violation of this section shall be void, but such voidance shall not affect the validity of the other provisions of the policy.
See 26 LPRA §1119. 

The Code’s prohibition against contractual agreement to an extra-judicial, alternative form of dispute resolution was at the center of the decision in Agustin Berrocales Gomez v. Tribunal Superior de Puerto Rico, case number O-73-419, 102 D.P.R. 224 (1974). The facts in Berrocales involve the consumer purchase of a vehicle wherein the contract for $34,809.20 included the sale of an insurance policy issued by American Motorists Insurance Co. of Chicago for a premium of $2,054.00. Subsequent to the purchase, Berrocales sustained a loss to the insured vehicle and submitted a claim for said loss the value of which had been the subject of contention resulting in the filing of lawsuit against the carrier.

The carrier filed a motion, which was granted by the court of first instance, effectively abating the court proceeding and compelling Berrocales to participate in “forced arbitration against his wishes.” Berrocales, 102 D.P.R. at 225. The specific provision analyzed by the Supreme Tribunal of Puerto Rico in the cert petition read as follows:
If the insured and the company fail to agree as to the amount of loss, either way, within 60 days after proof of loss is filed, demand an appraisal of the loss. In such event the insured and the company shall each select a competent appraiser, and the appraisers shall select a competent and disinterested umpire. The appraisers shall state separately the actual cash value and the amount of loss and failing to agree shall submit their differences to the umpire. An award in writing of any two shall determine the amount of loss. The insured and the company shall each pay his chosen appraiser and shall bear equally the other expenses of the appraisal and umpire. The company shall not be held to have waived any of its rights by any act relating to appraisal.
Berrocales, 102 D.P.R. at 225 n. 1. You may recognize this language as standard appraisal language, which is commonly given effect in most jurisdictions. But not in Puerto Rico. The Supreme Court of Puerto Rico reasoned, through a series of syllogisms, that compulsory appraisal or arbitration was void as a matter of law. The court’s conclusion was likely the result of a careful navigation of the tension between a judicial dislike of appraisal clauses such as the one at issue in Berrocales and public policy favoring arbitration as a viable alternative dispute mechanism in commercial law, as codified in Puerto Rico’s Law of Arbitration. See 32 LPRA §§3201 et seq.

First, the court determined that the Civil Code prohibits parties from contracting in contravention of the laws of the Commonwealth. See 31 LRPA §3372. Second, the court noted that the Insurance Code was enacted on June 19, 1957, postdating the enactment of the Law of Arbitration, enacted May 8, 1951. Additionally, the court noted that the Insurance Code governed a very specific area – insurance – which was the basis for concluding that the Insurance Code controlled (even above the Law of Arbitration) in the dispute brought by Berrocales. With this rationale in place, the Supreme Court of Puerto Rico vacated the lower tribunal’s decision to compel arbitration, remanded the dispute to the lower tribunal with instructions to proceed in litigation consistent with the Supreme Court’s opinion.

Another interesting aspect of this decision lies in the dicta explaining the controlling order of each respective portion of codified law in Puerto Rico. The opinion contains a brief sentence wherein the Supreme Court of Puerto Rico explains that even a mutual agreement to arbitrate would be in violation of the law. See Berrocales, 102 D.P.R. at 227 (holding that “the parties would not have been able to agree to voluntary arbitration because it too would be in contravention of the Insurance Code.”).

Therefore, to the extent that insurers and insureds are caught in the chaos of the claims left behind by the 2017 Atlantic Hurricane season in Puerto Rico, even an agreement to arbitrate or appraise claims with the aim of a more expeditious mechanism would violate the Insurance Code and therefore offer no real closure or ability to avoid litigation. The Insurance Code in Puerto Rico has been interpreted as providing a single path to resolving contentious claims: the judicial system. So, when it comes to insurance disputes, keep in mind “No ADR in PR.”