Mr Lucas Fajardo Gutiérrez
Partner

Lucas Fajardo is a Partner at the Insurance and Reinsurance Team with extensive experience advising national and international insurance companies on corporate, contractual, regulatory, and claims handling matters. He has supported major insurance and reinsurance groups before the Financial Superintendence, assisting with the incorporation of companies, brokers, approval of business lines, and more. He has also guided industrial and commercial companies in securing insurance programs to cover their risks.

Lucas served as president of INSURALEX, the largest global network of insurance and reinsurance law firms and is a member of the Colombian Association of Insurance Law – ACOLDESE.

He holds a Law degree from Universidad de los Andes, two graduate degrees, one in Insurance Law from Pontificia Universidad Javeriana and the other in Transport Law from Universidad Externado, and a Master of Comparative and European Law from Maastricht University in the Netherlands.

In January 2025, he was awarded “Insurance Lawyer of the Year” by Legal 500.

Mr Juan David Marín Montes
Associate

Juan Marín is a Senior Associate in the Insurance and Reinsurance Team. He has a strong background in insurance and reinsurance regulation, having worked for the Colombian Financial Regulator, the Financial Superintendence, and as Deputy Director of Financing and Financial Inclusion at the Secretary of Economic Development of Bogotá.

Juan specializes in providing regulatory, contractual, claims, and insurance commercialization advice to national and international companies in the insurance sector. His work includes representing insurers and reinsurers before the Financial Superintendence to obtain authorization for the incorporation and launch of operations of local insurance carriers.

Juan holds a Law degree and a graduate degree in Financial Law from Universidad de los Andes. Also, Juan Holds a master’s degree in Regulation from the London School of Economics and Political Science.

He previously worked at Brigard Urrutia from 2012 to 2015 and returned in 2024.

Legal principles of reinsurance contracts as defined by the Supreme Court of Justice

Reinsurance plays an important role in ensuring the stability and growth of the insurance market.

It is essential for industry professionals and for anyone seeking a deeper comprehension of risk management mechanisms to understand the fundamental legal principles that govern reinsurance operations in Colombia. These principles allow a better understanding of how reinsurance works and how it can accommodate complex transactions.

In this article, we will explore the key elements that characterize reinsurance operations in Colombia, shedding light on how they shape the market dynamics and contribute to the management of risks, by following a recent ruling issued by the Supreme Court of Justice¹.

1. Context of Reinsurance Contracts in Colombia

The general norms that regulate insurance contracts contain the foundational principles of reinsurance contracts. In this sense, as defined in Article 1037 of the Commercial Code, both an insurance and a reinsurance contract are agreements where one party transfers risks that could affect their assets or physical integrity to another party, a carrier, authorized to undertake such risks.

Article 1134 of the Commercial Code defines reinsurance as an indemnity contract between two insurers. One, known as the ceding insurer, transfers risks to the other, the reinsurer, who assumes responsibility for covering them. Essentially, reinsurance serves as a second layer of coverage, ensuring that the ceding insurer can protect their assets and reduce their exposure to catastrophic events.

The reinsurance contract benefits the ceding insurer, not the original insured, as it is designed to safeguard the insurer’s financial position rather than provide a direct benefit to the original policyholder or original insured.

The limited regulation of reinsurance in Colombia is due to the balanced relationship between the parties involved (both are professional entities with the necessary technical, economic, and legal knowledge to manage risk effectively).

The professionalism and expertise of both parties reduce the need for extensive regulatory intervention. Consequently, the parties’ self-sufficiency in negotiating their terms becomes a fundamental aspect of reinsurance agreements. Mandatory legal principles, however, constrain this autonomy by ensuring that reinsurance practices align with broader ethical and legal standards.

2. Principles Governing Reinsurance Contracts

Key principles ground the regulatory framework of reinsurance in Colombia, guiding the relationship between the ceding insurer and the reinsurer. These principles, as outlined in the Colombian Commercial Code, not only ensure the fair execution of reinsurance contracts but also contribute to the stability of the insurance market. The primary principles that govern reinsurance contracts in Colombia are those of following the fortunes and good faith.

According to Article 1134 of the Commercial Code, these principles represent the minimum standards that should guide the reinsurance activity. They must be considered throughout the life of the contract, from its inception to its termination. Another principle discussed in this article, as developed in the ruling of the Supreme Court of Justice, is the right of subrogation.

2.1. Follow the fortunes

Reinsurance contracts are founded on the principle of “follow the fortune”. It refers to the shared participation of both the ceding insurer and the reinsurer in the results of the underlying insurance contract, whether they are favourable or adverse. This principle ensures that the reinsurer is directly impacted by the economic, technical, and legal outcomes of the original insurance contract.

In practical terms, this means that the consequences of the primary insurance contract—whether it involves a claim or a financial loss—also affect the reinsurer. The connection between the risks covered by both the original insurance and the reinsurance contracts is not merely theoretical; it is causal. When an insured event occurs under the primary contract, the same event triggers the corresponding obligation of the reinsurer.

This principle ensures that the reinsurance contract is not an isolated agreement but is intrinsically linked to the performance and outcomes of the primary insurance contract. Both the ceding insurer and the reinsurer share responsibility for the risks, making it a mutual and interdependent relationship.

2.2. Good Faith

The principle of good faith is another fundamental tenet governing reinsurance contracts. As with insurance contracts, the parties involved in reinsurance are expected to act with honesty, transparency, and fairness throughout the duration of the agreement. Good faith is particularly important during the negotiation, execution, and fulfilment of the reinsurance contract, as both the ceding insurer and the reinsurer must rely on the accurate and timely exchange of information.

In the context of reinsurance, good faith is reflected in the mutual obligation of both parties to disclose all material facts that may influence the terms and conditions of the reinsurance agreement. This includes the accurate reporting of risks, claims, and the financial standing of both parties. Any failure to act in good faith, such as withholding critical information or misrepresenting facts, can undermine the integrity of the reinsurance contract and potentially lead to its invalidation.

The principle of good faith serves three functions in the reinsurance contract: (i) it integrates additional obligations into the reinsurance contract; (ii) it serves to construe the contract; and (iii) it maintains the economic equilibrium or balance between the parties.

The integration function allows good faith to incorporate all secondary or additional obligations not foreseen by the parties when entering into and executing the reinsurance contract. In terms of the interpretation of reinsurance contracts, good faith serves to clarify ambiguous, imprecise, or unclear clauses. Also, it establishes a hermeneutic standard, which consists of always preferring the interpretation that best satisfies the interests of the parties involved, within a framework of honesty, loyalty, and integrity. Finally, good faith serves to preserve and restore the contractual equilibrium between the contracting parties.

In conclusion, it is important to highlight, under the principle of utmost good faith, that reinsurance contracts oblige the reinsured party to act with integrity and professional diligence and to communicate transparently and promptly all facts relevant to the assessment of risk, payment, recovery, and other matters related to the agreed-upon subject.

2.3. Subrogation

The right of subrogation is a key principle that governs the relationship between insurers and insureds in the context of insurance contracts. This principle allows the party that has paid a claim to step in for the insured and recover the amount paid from the third party responsible.

According to Article 1096 of the Commercial Code, when an insurance company pays a claim to the insured person or beneficiary, it can “subrogate”. This means that the insurer has the right to seek recovery from the third party who caused the loss, up to the amount paid in the insurance claim.

In the context of reinsurance, this principle is complex. The issue is that Article 1096 of the Commercial Code does not give reinsurers the right to take legal action, even if they have paid for some or all the loss covered by an insurance policy.

In reinsurance, this right comes from the principle of fairness and the duty to act honestly in head of the insured. The party that originally insured the loss must repay the reinsurer for the amount it paid out from the money received from the party responsible.

In conclusion, in the reinsurance contracts, subrogation means that the insurer must carefully and responsibly use their right to pursue claims, so they protect their own interests as well as those of the reinsurer.

3. Notes regarding the ruling from the Supreme Court of Justice

As noted above, the purpose of this article is to reflect on key principles governing reinsurance contracts and to illustrate their practical application in our jurisdiction through a recent ruling by the Supreme Court of Justice. This chapter presents the dispute between an insurer and a reinsurer and analyses how the Supreme Court applied these principles to resolve the case.

The controversy arose when the insurer settled a compensation claim for a loss suffered by the original insured due to the default of a third party. Upon indemnification, the insurer exercised its subrogation right, replacing the original insured in its claims against the responsible party. In turn, the reinsurer compensated the insurer for 75% of the indemnity and, lacking direct action against the responsible party, relied on the insurer’s recovery efforts to follow the fortunes of the insurance company.

In this case, the Supreme Court of Justice found that the insurer breached its obligations under the reinsurance contract and failed to duly perform according to the principles of subrogation and “follow the fortune”. Instead of diligently pursuing the recovery of the indemnified amount, the insurer unilaterally assigned the subrogated credit to a third party for less than half of its actual value, without notifying the reinsurer. This action deprived the reinsurer of its rightful share of the recovered funds.

The Court reaffirmed that under Article 1134 of the Commercial Code, the reinsurer and the insurer share the economic outcomes of the insurance contract. The insurer, having been indemnified by the reinsurer, had a duty to recover the loss in proportion to the contributions made by each party. By ceding the credit without preserving the reinsurer’s interest, the insurer violated this principle.

The Court emphasized that good faith is an essential part of reinsurance contracts, requiring insurers to act transparently and in the best interest of all parties involved. The insurer’s unilateral decision to transfer the credit without consulting the reinsurer and at a significantly reduced price, constituted an act of bad faith, as it resulted in an unjustified loss for the reinsurer and an enrichment for the assignee.

3.1. Case summary

3.1.1. Reinsurance Agreement

• The reinsurer and the insurer concluded a proportional reinsurance treaty.
• The coverage limit was set at COP 5,000,000,000, with a claim’s distribution of 75% for the reinsurer and 25% for the insurer.
• The policy covered non-compliance of contracts.

3.1.2. Occurrence of the Loss and Compensation

• One of the insured debtors failed to meet its contractual obligations.
• The insured filed a claim and an indemnity request amounting to COP 4,144,000,000.
• The claim was paid by the insurer and reinsurer as per their share on the reinsurance treaty.
• The insurer then subrogated the rights of the beneficiary.
• The subrogation granted the insurer with a privileged credit against the third party responsible of the loss.

3.1.3. Credit Assignment to a Third Party

• The insurer, without informing the reinsurer, assigned the subrogated credit to a third party.
• The transaction price (paid by the third party) was significantly lower than the value acknowledged by the third party responsible of the loss, impacting the reinsurer’s recovery rights.
• This assignment hindered the reinsurer from reclaiming 75% of the paid indemnity.

3.1.4. Legal proceeding

• The first instance Judge ruled in favour of the reinsurer, acknowledging the breach by the insurer.
• The second instance Judge reversed the ruling, finding no proof of bad faith by the insurer when assigning the credit. The court found justification in the assignment based on economic and practical considerations.
• The Supreme Court of Justice reversed the second instance ruling and found that the insurer breached the principles of the reinsurance contract as described in this document.

4. Conclusion

Reinsurance plays a critical role in the stability of the insurance industry, particularly in Colombia, where the regulatory framework allows insurers and reinsurers to negotiate terms based on mutual expertise and professionalism.

Understanding the legal principles that govern reinsurance contracts is essential for those involved in risk management and insurance operations. The principles of “follow the fortunes,” “good faith” and “subrogation” ensure that reinsurance contracts are executed fairly and transparently, fostering trust between parties and contributing to the overall stability of the market.

Recent case law, such as the ruling by the Supreme Court of Justice, underscores the importance of these principles in practice. The Court’s decision highlights the duty of insurers and reinsurers to act in good faith, particularly when it comes to managing recoveries and ensuring that all parties receive their fair share of any compensation. By upholding these principles, the Colombian legal system helps maintain the integrity of reinsurance agreements and reinforces the professionalism and trust that underpin the insurance industry.