Regulation, rates and dies a quo of the Spanish penalty interests.
Spanish penalty interests are regulated at article 20 of the Insurance Contract Law 20/1980 which imposes an extreme speed and diligence on the insurer in carrying out the necessary investigations and examinations to establish the amount of the damages resulting from the accident, as well as in the fulfilment of its obligation.
They are likely to be applied each time a loss covered by a policy occurs, and compensation for late payment shall be imposed ex officio by the court and shall consist of the payment of an annual interest equal to the legal interest rate plus 50%. However, from the second year after the accident, this annual interest will rise to 20%.
The jurisprudence has well established the rigorous application of this rule, providing a punitive meaning to the default interest which goal is to promote a swift and prompt fulfilment of the payment obligation by the insurance companies.
It will be understood that the insurer is in default when he has not offered the victim a minimum amount within 40 days of being notified of the claim, which is the dies a quo of that strict obligation.
Reasons for exemption from payment of penalty interests established by the Spanish Supreme Court
Few exemptions from payment can be alleged by the insurance companies, based on justified causes that have been outlined by the Spanish Supreme Court through its reiterated jurisprudence.
For instance, the existence of legal proceedings is not a justifiable reason for not paying compensation, unless the need to resolve a rational doubt about the obligation itself to compensate. This has been reiterated by the Supreme Court for years (Judgements of 5 February and 17 May 2019 among others). However, the existence of a criminal proceeding to elucidate the circumstances of the claim may be a justified cause, that would disappears if the criminal proceedings end in a judgement of acquittal or dismissal (Supreme Court ruling of 28 March 2019, quoting the resolution of 26 May 2011).
The doubts as to how the accident arose persisting over time (Judgements of 17 January 2019) or the existence of contradictory case law on the application of a rule that gives rise to compensation (rulings of 17 and 18 January 2018 and 17 January 2019) can be considered a justified cause, as well as the absence of knowledge of the claim until the date of notification, as the Supreme Court decision of 6 February 2018 reminds us.
In the same way, the notorious disproportion between what was requested by the claimant and what was granted in the judgement is a justified cause for not paying since amounts claimed would not correspond, according to the Supreme Court sentence of 25 January 2019. However, it would not be a justified cause if the judgement awards until 30% less than what was requested in the claim, according to the Supreme Court decision of 30 May 2018.
However, non-payment based on the interpretation of a limiting rights clause is not a justified cause, unless such a clause limiting rights was included in the policy, clearly and precisely worded, specially highlighted and specifically accepted in writing by the policyholder, as the judgement of 10 April 2018 explains.
As we have seen, the cases are varied, but what can be inferred is that the Supreme Court wants to restrict as far as possible the application of article 20.8 of the Spanish Insurance Contract Law 20/1980 to cases in which there are serious and well-founded doubts about the occurrence of the claim or its coverage.
As a curiosity, in cases where the insurance consortium has to pay compensation, because for instance the insurance of the vehicle causing a road accident is unknown, it is also obliged to pay default interest in accordance with the provisions of article 20 of the Insurance Contract Law.
Spanish penalty interests, are they a a procedural or a substantive rule?
In relation to the question of whether these interests constitute a procedural or a substantive rule, it must be said that article 20 of the Law 50/1980 Insurance Contract Act is not part of the Spanish Civil Procedure Rules contained in Law 1/2000 of the 7th January.
Such default interest is therefore substantive law within the Scope of Art 15.a) of Rome II and has, as stated by the Supreme Court decisions mentioned above, the purpose of imposing sanctions to insurance companies with the aim of obtaining swift and efficient reparation of the harm covered by the police, considering that the insurance companies have the special duty of diligence in the payment of compensation.
The application of Spanish penalty interest by the British courts
It is from that point of view noteworthy the internal judicial debate that is taking place in the United Kingdom in recent years on this issue, from the Maher vs Groupama 2009judgment which determined the substantive nature of this interest but opened the door to a free application based on the principle of discretion of the British judge, to the Hide vs Sara Assicurazioni SpA 2014 which attributed to the English court the discretion to award interest or not according to its own principles as a procedural or substantive matter, or the Wall vs Mutuelle de Poitiers Assurances 2014 which determined that interest was procedural in nature and should be imposed according to the law of the forum, mining English law for proceedings in England.
However, in 2020, two relevant and contradictory judgments were published. On the one hand, the Scales v MIB judgment, which considers that the existence of a right to claim interest as an element of damages is a substantive question to be determined in accordance with foreign law or lex causae. And on the other hand, the judgment of Troke Anor vs Amgen Seguros Generales Compañía de Seguros y Reaseguros SAU, which stipulates that the award of interest is a procedural question in accordance with the law of England and Wales as lex fori, which empowers the judge to award interest at English rather than Spanish rates.
Finally, in October 2022, two prominent judgments were published, Woodward v Mapfre España Compañía de Seguros y Reaseguros issued by the County Court of Norwick, and Sedgwick v Mapfre España Compañía de Seguros y Reaseguros issued by the High Court of Justice, King’s Bench Division, which establishes that the right to claim interest on damages clearly falls within Article 15 of Rome II and is to be governed by the law applicable to the non-contractual obligation; however they also state that the provisions on interest for late payment are procedural in nature, discretionary and can be excluded if there is a good reason to do so, but finally both, in application of the Spanish law on insurance contracts, impose the punitive interest of Article 20.
It will be of great interest to closely follow the evolution of English jurisprudence on this subject.
In any case, it is essential to be aware of the importance of these interests and their impact on the final amount of a lawsuit, since a victim or beneficiary may see their compensation doubled if seven years elapse from the event covered by a policy until its effective payment.
On the other hand, this risk should be correctly sized by the insurers, and taken into account when compensating, both in the context of a negotiation and a legal proceeding. It should be remembered that Spanish Punitive Interests are compatible both with the payment of the corresponding procedural interest and with an order to pay legal costs, which can further aggravate the consequences of a long-term payment.