Co-authored by Karina Recchia

The Superintendence of Private Insurance ("Susep") exercises regulatory and supervisory authority over some segments of insurance, open private pension funds and capital markets in Brazil. Susep issued Circular 541/2016, which came into force on 17 October 2016, establishing new general guidelines applicable to Directors' and Officers' ("D&O") insurance in Brazil. Circular 541/2016 was met with some criticism from the local market and Susep was asked to reconsider its terms. As a result, on 23 February 2017, its application was suspended by Susep via Circular 546/2017. In May 2017, Circular 553/2017 ("the new Circular") was issued, superseding Circulars 541/2016 and 546/2017. For the purposes of this article we consider the wording of the new Circular and its potential impact on D&O insurance in Brazil, comparing it also to Circular 541/2016.

The new Circular came into force on 24 May 2017, from which insurers have 180 days to submit new compliant policies to Susep, should they wish to continue to be licensed to sell D&O insurance. All existing registered D&O products that are not compliant with the new rule by this deadline will be automatically closed and archived. Any existing policies already issued that are due to expire before the 180-day deadline, can be renewed for one year. However, any that expire after the 180-day deadline cannot be renewed and insurers would need to instead sell one of the new policies, assuming it has been duly registered with Susep.

The new Circular (as did Circular 541/2016) establishes on a firmer footing that D&O insurance is on a claims-made basis, as any D&O policy must be issued as such - insurers are explicitly prohibited from issuing occurrence/event based D&O policies. It is worth noting here that the concept of claims-made is still relatively recent in Brazil, particularly amongst individuals whose only experience of insurance will have come from events/occurrence based policies in personal lines. Accordingly, it is still relatively common, particularly when it comes to issues such as notice and attachment, that D&Os seek to notify a claim based on the date that the alleged acts took place. It is unclear whether the new Circular will have any impact on this, as local insurers have in any event steadily become much more familiar with the claims-made basis, and the new Circular is aimed at insurers, such that insureds will not necessarily be aware of the rule. That said, if there are no more occurrence/events based D&O policies, the potential for confusion amongst policyholders and insureds might be reduced.

D&O policies are to be divided into three sections: general conditions, special conditions and additional (or particular) conditions. Many D&O policies in Brazil are already structured in this way, so the changes here will be limited. The new Circular allows D&O insurance to be contracted directly by an individual (as well as by a company), in the event the individual's company does not purchase such a policy.

Perhaps the most surprising element of Circular 541/2016 (and that which had caused much of the debate), was that it stated that D&O insurance does not cover attorney fees and defence costs incurred by an insured and that defence costs cover must be offered by insurers under the additional conditions. Understandably, much of the criticism towards this Circular was focused on this change, which appeared to miss one of the, if not the central, key reasons for D&O cover – the advancement of defence costs to individuals, who might not have the resources of a company to support such costs.

The new Circular changes this and reverts back to the previous position, where such costs can be part of the basic D&O cover.

D&O policies must provide insurers with the right to claim costs back from an insured whenever the damages are the result of wilful misconduct; or the insured acknowledges his or her liability.

Another interesting outcome is that Susep have confirmed that the new rule allows coverage of civil and administrative fines and penalties, provided they relate to non-intentional acts. This in fact does not alter the previous legal position, but does overturn recent guidelines issued by Susep suggesting that such fines should not be covered by D&O insurance (the reasoning for that previous guidance being that fines lose their deterrent effect if not borne by those being punished). This is notable as typically the most common claims to Brazilian D&O policies are those relating to regulatory investigations (partly due to the increasing number of administrative fines and penalties imposed by Brazilian Regulators, such as the Securities and Exchange Commission of Brazil (the CVM), where coverage of a fine is sought.)

In addition to matters excluded from cover by law, the new Circular, (as did Circular 541/2016) states that D&O insurance shall not cover the following liabilities: (i) general liability (e.g. any losses incurred by a third party due to an insured's act that was not committed in his/her D&O capacity); (ii) professional indemnity; and (iii) environmental risk liability. The latter has typically been included in cover in Brazil by way of extensions. Although Susep has not explained the reasoning for this, it would seem the new Circular is an attempt to cut back D&O cover to its most basic coverage, with other add-ons, such as environmental liability, restricted to policies specific to that line. However, given that there may be overlaps in such areas, and insurers may not wish to offer and insureds wish to purchase, multiple policies that might offer more coverage than required, rather than a single policy that provides the bespoke coverage sought, this aspect of the new Circular has been met with some resistance from the local market.

The new Circular also excludes from basic cover, company liability for third party losses caused by the non-intentional misconduct of D&Os. If insurers wish to sell such coverage as part of basic cover, it should be done by way of general liability policies. This would suggest that D&O cover will be limited to Side A and B. However, the new Circular does seem to allow parties to contract such coverage in a D&O policy by way of additional cover. Consequently, some believe that Side C will be permitted under D&O policies, despite neither Circular specifically referring to Side C and also stating that D&O insurance is to benefit individual insureds. It is important to note that the company cover referred to by the new Circular is broader than traditional Side C in some respects, as it is not limited to securities actions, although it must be connected to the misconduct of a D&O. It is anticipated that clarity will be obtained on these issues when insurers submit their new wordings to Susep.

Finally, the new Circular only allows reference to foreign law in D&O policies that have their geographical scope of coverage extended globally. However, the use of foreign expressions related to D&O insurance is permitted if they are commonly used by the Brazilian insurance market and provided that they are locally translated or translated in the policy.

In July 2017, a new Brazilian provisory act ("Act") came into force allowing the CVM and the Brazilian Central Bank ("BC") to apply more than one penalty to an offence, such as: fines, restriction of rights, and other penalties. The Act has also increased the CVM's fines from BRL 500,000 to BRL 500 million (approximately USD 158 million on current rates) and the BC's fines from BRL 250,000 to BRL 2 billion (approximately USD 632 million) - although it should be noted there are other measurements for the levels of fines, which are unchanged. The Act is in force, albeit on a temporary basis. To become final it requires the approval of Brazilian Congress. On 10 August 2017, the Act's effect was extended for another 60 days.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.