Banking Board of Ecuador

RESOLUTION No. JB-2015-3498

THE BANKING BOARD

CONSIDERING:

THAT the second paragraph of the Third Transitional Provision of the Organic Code of Monetary and Financial Law determines that the Banking Board will continue to act until it resolves all claims, appeals, and other administrative procedures that it was hearing on the date of entry into force of this Code, within a period of one hundred and eighty days, extendable at the discretion of the Monetary and Financial Policy and Regulation Board;

THAT on January 6, 2011, Alianza Compañía de Seguros y Reaseguros S.A. and the Generation, Distribution and Commercialization Unit of Electrical Energy of Guayaquil - Eléctrica de Guayaquil signed Machinery Breakdown Policy No. 20D-0003212, valid from December 31, 2010, to December 31, 2011. In said private insurance contract, it was established that the insured assets would be the machinery and equipment described in the fire insurance. Likewise, the insured sum was set at 20,000,000.00;

THAT on January 6, 2011, Fire and Business Interruption Policy No. 03D-0017731 was issued, whose validity period comprised from December 31, 2010, to December 31, 2011. From said policy, it is observed that the coverage consists of "gross earnings, excluding extra expenses incurred in the generation, transmission, purchase, replacement, trade, or distribution of electrical energy, fines, and contingent business interruption, in addition, it will indemnify the economic losses that the company may suffer as a consequence of the decrease in income due to the occurrence of an event covered by the Fire and/or Machinery Breakdown policies, in relation to fixed costs and expenses, including but not limited to salaries, wages, and daily wages. Increases in ICO operational costs are also included";

THAT through Executive Decree No. 887, published in the Official Register No. 548 of October 4, 2011, Empresa Eléctrica Pública de Guayaquil EP was created, which subrogated in the rights and obligations of the Generation, Distribution and Commercialization Unit of Electrical Energy of Guayaquil;

THAT through Memorandum No. SEG-01-0006, dated September 30, 2011, the technologist Patricio Castillo, Head of Insurance of Empresa Eléctrica Pública de Guayaquil EP, notified Alianza Compañía de Seguros y Reaseguros S.A. of a claim consisting of the breakage of the base of a check valve of Unit TG3 N/S 685097 of the Aníbal Santos Central, which occurred on September 29, 2011;

THAT through Letter No. G-530-864/2011 dated December 2, 2011, signed by the General Manager of Alianza Compañía de Seguros y Reaseguros S.A., it is indicated to Empresa Eléctrica Pública de Guayaquil EP that the insurance payment is objected to based on the following argument: "(...) the loss does not exceed the minimum deductible provided for in the policy";

THAT through communication entered in this control body on September 17, 2013, the architect Francisco José Estarellas Solís, General Manager and Legal Representative of Empresa Eléctrica Pública de Guayaquil EP,

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EP, based on Article 42 of the General Insurance Law, filed an administrative claim in which he requests that the control body order the insurer to pay USD $186,028.72, in the following terms: "...the insurer has not satisfied to date the real values for Business Interruption that we are entitled to receive and which amount to US$ 110,674.73, without adding interest, plus the Expenses previously detailed in which my represented party incurred, which in total amount to US$ 186,028.72...";

THAT through Resolution No. SBS-DNAE-2014-604, dated July 11, 2014, the engineer Carolina Pesántez Benítez, National Director of User Attention and Education, resolved the administrative claim in question in the following terms:

"ARTICLE 1.- REJECT the claim presented by the architect Francisco José Estarellas Solís in his capacity as General Manager of Empresa Eléctrica Pública de Guayaquil, EP., derived from Policies Nos. 20D - 0003212, of All Risk Machinery Breakdown and No. 03D – 0017731 of Business Interruption of Fire and/or Machinery Breakdown. According to the fifth paragraph of Article 42 of the General Insurance Law, the claimant's right to resort to summary verbal trial before competent judges or to submit to commercial arbitration or mediation, as the case may be, is reserved."

THAT through communication entered in the Superintendence of Banks on August 6, 2014, the architect Francisco José Estarellas Solís, General Manager and Legal Representative of Empresa Eléctrica Pública de Guayaquil EP, under the protection of Article 70 of the General Insurance Law, filed an appeal against Resolution No. SBS-DNAE-2014-604, dated July 11, 2014, before the Banking Board;

THAT in accordance with what is provided in Article 22 of Supreme Decree No. 1147, during the processing of an insurance claim, the insured who has the interest in obtaining the agreed indemnification must prove to the insurer the existence of the claim and its amount. On the other hand, it corresponds to the insurer to justify the causes that exempt them from responsibility in the payment mentioned, in accordance with contractual stipulations. In this case, with regard to the technical criterion of the National Directorate of User Attention and Education, it is noted that in the case of Machinery Breakdown Policy No. 20D-003212, the Head of Insurance of Empresa Eléctrica Pública de Guayaquil EP, with memorandum SEG-01-0006, informed the insurer about the occurrence of the claim but did not quantify the indemnification for it;

THAT on November 1, 2011, Empresa Eléctrica Pública de Guayaquil EP, through Letter No. GGS-01-0034, states "...Due to the mutual need we have to know as soon as possible, the definitive extent of the damages presented by Gas Generator No. 685097, the determination of the root cause of its current affectation, and the definitive repair budget, this Entity has decided to transfer at our cost, and immediately, the mentioned equipment to the workshops of Turbo Services, in Margaret, Florida, due to the guarantee of the repair previously carried out...";

THAT with regard to the file formed around this appeal, a communication dated January 10, 2012, signed by engineer Nelson Granda, on behalf of Wood Group Pratt & Whitney

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Industrial Turbine Services LLC, addressed to the INSURED, in which it states: "...The present has the objective of reiterating our Offer No. 11G142NG dated December 21, 2011, for the repair of the Pratt & Whitney model GG4A-11 gas generator, currently in the Turbo Services workshops for the amount of $747,691.73 US...";

THAT it is thus that upon the technical inspection carried out, it was determined that the damages amounted to USD $747,691.73, therefore, it does not exceed the deductible according to what is stipulated in the particular conditions of the policy, duly signed, which in its pertinent part says: "Deductibles: Turbines, Boilers, and Generator Groups: 10% of the value of the claim, minimum $750,000.00...";

THAT concomitant with the above, the insurer has exposed to the Superintendence of Banks the content of the referenced contractual clause, therefore, its objection, in this sense, has foundation and obeys what is provided in Articles 42 of the General Insurance Law and 22 of Supreme Decree No. 1147. It is also important to highlight that Article 10 of the aforementioned determines that the insurer may assume all or some of the risks to which the insured thing or the patrimony or the person of the insured is exposed, but they must be specified in such a way that there is no doubt regarding the covered and excluded risks. In this case, there is coverage from a certain deductible.

THAT the deductible is defined as follows: "Amount or percentage established in a policy whose amount must be exceeded for a claim to be paid. It is also a synonym for franchise."

THAT the insurer also questions the unilateral designation of the claims adjuster (UNILATINA S.L.A. Cía. Ltda.) by the insurer, which, in its opinion, would violate a special condition contained in the policy;

THAT numeral 23 of the text of Special Clauses of Policy 20D-0003212 of All Risk of Machinery Breakdown contemplates: "...It is clarified and agreed for any case of claim, in which the Company wishes to appoint an adjuster, liquidator, or independent expert, except in the case of arbitration, the Insurer undertakes to propose a slate to the Insured(s), who will determine among them the accepted adjuster...";

THAT on its part and in relation to the special conditions of a policy, numeral 4.2., of Article 4, of Chapter IV, of Title VI, of Book II of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board, contemplates:

"4.2. SPECIAL CONDITIONS.- They are:

4.2.1. Those that expand, condition, delimit, modify, or suppress risks, extend or restrict the coverages provided for in the general conditions of the policies, or institute new protection conditions, without containing provisions expressly prohibited by the General Insurance Law and its general regulation, the Legislation on the Insurance Contract, and the principles of insurance technique; and,

4.2.2. Approved previously by the Superintendence of Banks and Insurance, before putting them into effect. They will prevail over the

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general conditions. They must be drafted in annexes, clauses, among others, to be incorporated into the corresponding policies.

The annexes containing the special conditions, in accordance with what is provided in the last paragraph of Article 7 of the Legislation on the Insurance Contract, must indicate the number of the policy to which they adhere; the name of the policyholder and/or insured(s); the validity period; the record of payment of the additional premium when applicable; the date of issuance and the signature of the contracting parties, unless they are cited in the particular conditions of the policies, with the character of mandatory for the parties, or correspond to standard policies, provided they comply with what is stated in numerals 2.2.1 and 2.2.2 of this article.". (Emphasis added);

THAT in the case at hand, it is contemplated that in the special conditions cited by the insured, the resolution of the Superintendence of Banks with which it was approved is not mentioned; nor is the validity period recorded, therefore, these conditions are not applicable;

THAT from the claim presented by Empresa Eléctrica Pública de Guayaquil EP, it is derived that "...the insurer has not satisfied to date the real values for Business Interruption that we are entitled to receive and which amount to US$ 110,674.73, without adding interest, plus the Expenses previously detailed in which my represented party incurred, which in total amount to US$ 186,028.72, which the insurer is also obligated to pay and has refused to do so...". However, it is evident in the file that the insurer accepts its responsibility in the item of business interruption for the value of US$ 41,974.89;

THAT in that line, it must be highlighted that numeral 16.2 of Article 16 of Resolution No. JB-2013-2489, dated May 28, 2013, which contains the "Manual of Procedures for the processing of Administrative Claims Formulated under the protection of Article 42 of the General Insurance Law", provides that the administrative claim in the matter of private insurance will be rejected, leaving the right of the claimants to resort to ordinary justice or to commercial arbitration, when the insurance company has fulfilled the payment of the indemnification, without distinguishing whether the insured agrees or not with said settlement;

THAT in the specific case, the insurer recognizes its responsibility in the business interruption risk, based on its own arguments, which clash with those expressed by the insured and that, in both cases, have an eminently technical character, as can be appreciated in the appeal, which in its pertinent part says: "...in this way, the relationship between the Approved Fixed Costs and the Real Incomes received by our generator can be evidenced, which are proportional to the Availability of the machines, which means that for the case of a scenario of ideal conditions (all Generation Units Available), we would have Approved Costs = Real Incomes...";

THAT this determination of business interruption, in all respects, requires the intervention of specialized and impartial technicians who verify the assertions of the parties even through an on-site, accounting, and financial examination in the context of a judicial process or when the parties resort to an alternative conflict resolution mechanism. The Superintendence of Banks nor the Banking

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Board have sufficient evidence nor the power granted by the Law to resolve this tension. Likewise, numeral 16.2 of Article 16 of Resolution No. JB-2013-2489, dated May 28, 2013, prevents the control body from pronouncing itself on this matter;

THAT through the report contained in Memorandum INJ-DNJ-SAL-2015-0460 of June 15, 2015, the National Legal Superintendent and the National Superintendent of the Private Insurance System ratify the antecedents, legal analysis, conclusion, and recommendation contained in Memorandum No. INJ-DNJ-SAL-2015-0235 of March 18, 2015;

THAT the National Legal Intendancy, through Memorandum INJ-DNJ-SAL-2015-0235 of March 18, 2015, recommended to the Banking Board to reject the claim contained in the appeal filed;

AND IN exercise of its legal attributes,

RESOLVES:

SINGLE ARTICLE.- REJECT the appeal filed by the architect Francisco José Estarellas Solís against Resolution No. SBS-DNAE-2014-604, dated July 11, 2014; and, in virtue thereof, RATIFY Resolution No. SBS-DNAE-2014-604, dated July 11, 2014, with which it was ordered "...REJECT the claim presented by the architect Francisco José Estarellas Solís in his capacity as General Manager of Empresa Eléctrica Pública de Guayaquil, EP., derived from Policies Nos. 20D - 0003212, of All Risk Machinery Breakdown and No. 03D – 0017731 of Business Interruption of Fire and/or Machinery Breakdown. According to the fifth paragraph of Article 42 of the General Insurance Law, the claimant's right to resort to summary verbal trial before competent judges or to submit to commercial arbitration or mediation, as the case may be, is reserved."

NOTIFY.- Given at the Superintendence of Banks, in Quito, Metropolitan District, on June twenty-four, two thousand fifteen.

Econ. Rodrigo Eandeta Parra GENERAL SUPERINTENDENT, S PRESIDENT OF THE BANKING BOARD, E

I CERTIFY.- Quito, Metropolitan District, on June twenty-four, two thousand fifteen.

Lcdo. Pablo Cobo Luna SECRETARY OF THE BANKING BOARD

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Banking Board of Ecuador