Mexican Social Inflation

By Aldo Ocampo, Ocampo 1890

  I recently had a meeting with one of my clients and they told me that they were interested in this topic. My best response was that I didn’t understand the Anglo-Saxon term, but that if they explained the context to me, I might be able to give them an answer, and to my surprise, it is something that I have been closely linked to for a long time in my daily practice. I just needed to give a name to the phenomenon that is happening in Mexico.

First, it is prudent to give a source to the Anglo-Saxon term, in order to then go into an analysis of how this is impacting Mexico. Well, the term was coined by Warren Buffet in 1977 “ to describe how society was expanding its vision of what insurance covers. When Buffet coined the term, he was referring to the asbestos litigation that was making headlines and changing society at the time ,” according to Google.

For its part, the digital publication Risk & Insurance points out that “ Four decades later, the sector continues to feel the effects of rising social inflation. This expansion of what is considered insurable, coupled with increasingly high jury verdicts across the country, has created a unique challenge for the sector. US consumers pay an annual tax on rising litigation costs in their state, and insurers face rising claims adjustment expenses and defense costs.”

In Mexico, the phenomenon of Social Inflation (as defined by Warren Buffet) has come about as a result of certain specific moments in our country, such as the constitutional reform of June 2011, in which, among other things, the integration of Human Rights provided for in the Constitution itself and in other international treaties to which Mexico is a party was elevated to constitutional status. Notable among these are the Universal Declaration of Human Rights and the Inter-American Convention on Human Rights, among others.

The above has brought a revolution to our jurisdictional forum, highlighting the issues of Civil Liability (CL), since for the purposes of compensation for victims, the guiding principles of Human Rights have been used, which are based on the fact that every person must be provided with a dignified life and, in the event of suffering damage, have full reparation for the damage.

El efecto en México ha sido que nuestros tribunales, han estado explorando las maneras de indemnizar a las víctimas de manera integral, analizando de manera exhaustiva la conducta del responsable del daño de cara a las víctimas, favoreciendo de una manera importante a dichas víctimas en los procesos judiciales, ya sea revirtiendo la carga de la prueba al responsable del daño; o bien, la intervención del órgano jurisdiccional en suplencia de la queja de la víctima cuando existen personas que pertenecen a grupos vulnerables.

In this sense, the amounts with which those responsible are being sentenced are considerably high, if we compare them with those that existed before the Constitution was reformed; moreover, within the amounts that are being considered for the purposes of full compensation (regardless of whether they are part of it or not) punitive damages were created, thereby creating a “social reproach” against the responsible party, with the deterrent effect of not repeating the harmful conduct.

The above is also supported by the fact that our legal system has evolved to be hybrid, in the sense that written law is ultimately what governs legal relations, but judicial precedents emanating from the Federal Judicial Branch create application parameters.

Retomando el tema de la Social Inflation, el día de hoy las reclamaciones por RC en contra de las aseguradoras es una tendencia a la alza que se ve beneficiada por factores del entorno jurídico creado. Veamos algunos ejemplos.

In principle, one of the first important resolutions on the matter was the declaration of unconstitutionality of the limit on compensation for moral damages established by the Civil Aviation Law, an issue that can be extrapolated to the rest of the limits provided for in all existing laws in Mexico. That is to say, if there is a limit, it should be considered unconstitutional in the event of litigation; and this is so, because as considered by our highest court, the pain suffered by a person cannot have a limit expressed in money and based on the principle of fair compensation or full reparation for damages, it is against Human Rights to consider that it has limits.

Subsequently, the fair compensation was developed by considering the present and future situation of the victim. That is, how the victim was at the time of the damaging event and how he or she would be if it had not occurred. With this, the courts have come to analyze concepts such as compensation to the victim for the stress, anguish and anxiety caused by the damaging event; but also for the life project that was interfered with by the event. Given these circumstances, the possibility has been opened for indirect victims (economic dependents, for example) to also claim the impact on their life project altered by the damaging event.

Punitive damages have been created by our highest court as a division of moral damages, where their determination depends completely and absolutely on the criteria of a judge, which can be modified by an appeals court, a criterion that can be upheld, revoked or modified by a constitutional court of amparo. In other words, the criteria for determining the amount of punitive damages is totally ethereal and subjective. In this regard, it is worth mentioning that the case in which this figure was created in Mexico attributed punitive damages of 30 million pesos to the victims, without making a specific reasoning about the assets of the responsible party or the victim, so that the calculation mechanism could be understood.

Finalmente, dentro de los criterios relevantes que se han creado para la protección de las víctimas, es el de la prescripción de la acción, en donde ha sido extendida en materia de daño moral hasta 10 años; y con respecto al contrato de seguro, prevalece la de dos años, contados a partir de que la víctima tiene conocimiento del derecho constituido a su favor (conocimiento de la póliza de seguro del responsable del daño), con lo cual la acción puede perdurar por muchos años después del accidente.

All of the above has created the “Mexican Social Inflation”, because naturally there has been a direct impact on the insurance sector, which has received multi-million dollar claims, in which, due to the lack of objective scales or references for compensation, the amounts claimed are simply irrationally huge.

The quantification of direct damages remains the same because it is objective. That is, the damaged physical assets are susceptible to valuation and therefore can be compensated. But the moral assets are the subject for which litigation is increasingly costly and arduous; in the knowledge that the pro-victim tendency of the courts is a pernicious factor that will definitely alter the insurance and reinsurance sector. Not necessarily because they have to pay hefty sentences, but because liability insurance will become increasingly expensive and inaccessible.

Now, as far as coverage is concerned, the courts have also ruled on the unconstitutionality of excluding moral damages, which meant that the insurer should also have covered that item (in that particular case). Thus, it is clear that the Judiciary is seeing the insurance sector as the means by which victims can obtain compensation, independently of the insurance contract they initially wanted to enter into. This last point (the will of the parties in the insurance contract) merits a complete and independent analysis that I will not develop so as not to lose focus of what I am stating in this article.

It should be noted that in general, in Mexico, the courts are not ready to receive this type of cases and, in addition, we have an anachronistic judicial system that does not allow the efficient presentation of evidence. The expert evidence, which in these cases is essential, is influenced by the existence of a third expert in dispute whose credentials are usually not the best to be able to issue an objective opinion of the specific case. Confessional evidence continues to be an inefficient evidentiary mechanism for these purposes and if the declaration of the parties is not allowed as a means of evidence, I estimate that there will not be an appropriate mechanism for the development of these procedures.

The phenomenon of “Mexican Social Inflation” is beginning. The sentences that are being seen in courts tend to be irrational in terms of measuring moral damage. Let me explain. Judges and magistrates start from life situations that are exposed by the party that is suing and, based on them, they analyze some evidence. They assume the existence of moral damage when there has been physical damage or considerable losses and, based on that, they sentence an amount usually expressed in millions of pesos.

With the above, citizens’ taxes (as Buffet said) also go to the analysis of this type of cases, at local and federal level.

The RC is therefore responsible for the phenomenon described above and today we lawyers are working to understand the best way to litigate this type of case.