Legal Framework for Guarantees: surety guarantee agreement now to be directly enforceable

On October 31, 2023, Law No. 14,711 came into force, which established the Legal Framework for Guarantees, providing for the improvement of regulation regarding guarantees, and aiming to facilitate the enforcement of debts in the event of default.

Besides other provisions described in our specific Client Alert covering this new rule (available here), the Law amended the Code of Civil Procedure, in its article 784, in order to include, as an extrajudicial debt instrument, the surety guarantee agreement with the policyholder (in Portuguese, “Contrato de Contragarantia”) or any other instrument that embodies the insurer’s right to reimbursement against surety bondholders and their guarantors.

The surety guarantee agreement is an instrument regulating the right of recovery that the insurer has against the bondholder in case of an indemnifiable loss and subsequent indemnification to the insured or even the collection of unpaid insurance premiums.

Prior to the new provision, liquidation of surety guarantee agreements was not always certain: it depended upon declaratory lawsuits to first recognize the enforceability of such instrument and only then secure the recovery of amounts paid by the insurer as indemnification under surety bond policies. This litigation was costly and time consuming.

Now, having been elevated to the status of extrajudicial debt instrument, the surety guarantee agreements will have an expedited liquidation procedure, with the subsequent encouragement of insurers and reinsurers to take on larger and more complex risks, benefiting the entire economic chain involved in large-scale projects.

The change also imposes on insurers, the insured and brokers greater caution regarding the terms and conditions of the surety guarantee agreements, as any court dispute regarding their wording will now be more restrictive in enforcement procedures.

Demarest’s Insurance, Reinsurance, Private Pensions and Supplementary Health team is available to provide legal assistance and any clarifications on the subject.