Insurability of fines and penalties in Spain

Published 13 March 2020

The debate about whether the Spanish legal system permits insurance cover for fines and penalties has been ongoing for some time now. Although there is no specific rule regulating the insurability of fines and penalties -at least, within civil liability insurance- the insurance market has been experiencing high demand for this type of cover in recent years.

Most typical liability insurance policies would cover insureds, such as directors and officers, for any economic loss suffered as a result of an administrative fine or penalty (excluding criminal fines or penalties) imposed on them relating to their management and supervision in the course of their business activities. As a consequence, the insured under a civil liability policy who is fined when exercising its duties should, in principle, be indemnified for the amount of the fine imposed (subject to the specific limits and exclusions in the relevant policy).

The debate over the insurability of fines and penalties arises from the punitive nature of penalties and whether it is contrary to public policy to insure fines which are imposed by regulators and law enforcers to deter wrongdoing. Both concepts have been interpreted in different ways by the Spanish legal doctrine. Some consider that offering cover for fines and penalties is contrary to law. On this topic, the criterion of the Spanish Regulator (General Directorate for Insurance and Pension Funds), explained in Consultation 5/2008 of 31 March 2008 the "possibility of granting insurance coverage for criminal penalties, administrative fines and coercive fines when imposed by administrative bodies, courts and tribunals in Spain or third countries" was that "cover for administrative fines and penalties is not admissible because it could be contrary to public order and because it does not fall within the civil liability insurance object which only aims at compensating the economic damage suffered by the insured as a result of the claim for damages and, indirectly, to ensure that the third party damaged receives compensation. From this perspective, offering cover for the punitive consequences derived from criminal or administrative offences would not be possible" (translation made from the original consultation).

The Spanish Insurance Contracts Act ("SICA") remains silent on the insurability of fines and penalties regarding civil liability insurance. Subsequent draft proposals to amend the law on this issue (for example Article 5.2 of the 2011 Draft Law on Insurance Contract) expressly sought to prohibit the insurance of fines and penalties, both criminal and administrative, on grounds that cover is considered contrary to public order (however, this regulation was never approved). Likewise, the current legislative changes that could have an impact on this area (e.g. the Preliminary Draft of the Spanish Commercial Code, dated 26 October 2016) does not provide an answer to this question.

Thus, the sole legal provisions applicable to this matter are Article 19 SICA, which states that "The insurer shall be obliged to pay indemnity, except when the loss is caused in bad faith by the insured."; and -although exclusively applicable to legal expenses insurance- Article 76 b) of SICA, which excludes from cover for this specific type of insurance "the payment of fines and the cost arising from penalties imposed on the insured by the administrative or judicial authorities".

Apart from legal expenses insurance, civil liability insurance policies usually contain an express exclusion for criminal fines and penalties. As a consequence, cover is available for administrative fines and penalties if the following requirements are met: (i) the fine/penalty is legally insurable (ii) the fine/penalty derives from a negligent act/conduct of the insured (as opposed to a willful or deliberate act or crime) and (iii) there is no other exclusion in the policy which applies.

Since discussions over the insurability of fines and penalties started, a number of issues have driven the legal debate. As an example, within employer liability insurance, companies have shown a growing interest in insuring social security surcharges derived from accidents at work or occupational diseases despite the prohibition provided by Article 164 of the General Social Security Act. Likewise, there have been debates in connection with motor insurance about whether an insured should be indemnified in cases where his/her driving licence has been withdrawn (which is permitted under certain circumstances) and the insured incurs costs as a consequence such as alternative transportation, attending a driving licence course (which is required in Spain in order to recover the driving licence) or due to the inability to carry out his/her work.

In a business world which is increasingly sophisticated and digitized, companies, their directors and third parties dealing with them need certainty regarding the scope of insurance protection. It is important that companies know whether regulatory fines relating to cyberattacks, data thefts or regulatory non-compliance would be covered by their insurance so that they can manage these risks appropriately. Our legal system should, as far as possible, not be ambiguous or uncertain, yet when it comes to the insurability of fines and penalties, the position in Spain (and in many EU countries) is far from clear. This ambiguity needs to be addressed at the earliest opportunity to enhance economic growth and stability.