In judgment SC1169-2026, dated October 19, 2026, the Civil, Agrarian and Rural Cassation Chamber of the Supreme Court of Justice (the “Supreme Court”) ruled on an extraordinary cassation appeal filed by an insurer that had issued a performance bond in favor of a state-owned financial institution to cover losses arising from a contractor’s breach of its contractual obligations.
The dispute arose from the contractor’s failure to perform several obligations assumed under a contract for the drilling of a well. As a result of such breach, the contracting entity declared the contractor in default and submitted a claim to the insurer seeking compensation for the resulting losses, which the insurer denied.
In parallel, the Office of the Comptroller General of the Republic (Contraloría General de la República) joined the contractor to a fiscal liability proceeding, and the insurer as a civilly liable third party. In that proceeding, the contractor was found liable, and the insurer paid the indemnity under the performance coverage of the performance bond, including its adjustment for inflation (loss of purchasing power). These payments almost entirely exhausted the sum insured under the performance coverage.
For its part, the contracting entity also sued the insurer to obtain payment of the indemnity under the insurance. At first instance, the judge dismissed the insurer’s defenses, which argued that its liability was limited to the sum insured, and ordered it to pay the full indemnity to the insured under the advance payment and performance coverages of the insurance. On appeal, the court of second instance modified the first-instance judgment by excluding the amounts already paid in the fiscal liability proceeding, in order to avoid double payment, and upheld the award only for the damages that had not been compensated in that proceeding. However, the second-instance court did not compare that award against the balance remaining under the performance coverage after the payment made in the fiscal liability proceeding.
The insurer filed a cassation appeal against the second-instance judgment, arguing that the court had failed to take into account the payments it had been required to make in the fiscal liability proceeding, and that, as a result, the award exceeded the sum insured under the performance bond.
The insurer filed a cassation appeal against the appellate judgment, arguing that the court failed to take into account the payments it had been required to make in connection with the fiscal liability proceedings. According to the insurer, had the court considered those payments, it would have concluded that the amount awarded exceeded the insurance limit available under the performance bond coverage.
The CSJ partially set aside the lower court’s judgment and reduced the award to the available balance of the sum insured under the performance coverage, on the basis of the following considerations:
Sum insured as the maximum limit of the indemnity
The CSJ reiterated that, in property and casualty (indemnity) insurance, the sum insured is the maximum limit of the insurer’s indemnity obligation. It added that this cap is a limit different from the damage proven by the beneficiary of the performance bond, so a greater loss does not automatically increase the sum insured:
“In indemnity insurance, the insurer does not assume the economic consequences of the loss without limit. Under Article 1079 of the Code of Commerce, it ‘shall not be obligated to respond except up to the amount of the sum insured.’ The sum insured quantitatively defines the risk assumed and sets the maximum amount of the indemnity payable, in correspondence with the agreed premium; hence its mandatory nature (Art. 1162 id.).”
(…)
“Two limits of a different nature therefore apply: (i) the proven damage, which sets the measure of the compensable loss, and (ii) the sum insured, which sets the cap on the insurer’s obligation. The former does not expand the latter: proving a loss greater than the coverage does not extend the risk assumed by the insurer, such that there may be damage whose redress exceeds what was contracted for. That excess falls outside the insurance and must be borne by the insured or by whoever is legally obligated to redress it.” (Underlining and bold added).
Reduction of the sum insured limit
Under Article 1111 of the Code of Commerce, indemnity paid under the coverage of the insurance reduces the available sum insured by the same amount, unless the parties have agreed to its reinstatement.
In this case, the insurance expressly excluded the automatic reinstatement of the insured limit. All losses arising from the same breach were allocated to the same coverage under the insurance and were subject to the same limit. Accordingly, before entering judgment against the insurer, the court should have determined the insurance’s original insured limit, deducted any prior payments made under the same coverage, and limited the award to the remaining balance:
“Therefore, absent a stipulation to the contrary – since this provision is not among those that Article 1162 removes from the parties’ autonomy – each indemnity paid is charged against the sum insured and reduces the available coverage by the same amount. Once that amount has been exhausted, the insurer’s indemnity obligation with respect to the insured risk is extinguished, even if the loss suffered or the debt owed by the insured is greater (...).” (Underlining and bold added).
Inflation adjustment paid also reduces the sum insured
The CSJ clarified that the sum insured is reduced by the full amount of the indemnity actually paid, including its adjustment for inflation. Although the inflation adjustment is not an additional item of damage, it forms part of the indemnity that discharges the obligation and exhausts the coverage to that same extent:
“Suffice it to recall that the sum insured sets the cap on the insurer’s obligation and that, absent an agreement to the contrary – which does not exist in this case, since the policy itself excluded the automatic reinstatement of the sum insured – that limit is reduced by the amount of the indemnity actually paid, and the inflation adjustment component cannot be separated from it in order to exclude it from the exhaustion of the coverage.” (Underlining and bold added).