At the end of last year Russian insurance law celebrated its 20th birthday. The Law on the Organisation of the Insurance Industry (the “Law on Insurance”) was adopted in November 1992, and has since been subject to numerous amendments and modifications. Some of them caused dramatic changes in the market place, such as the November 1999 amendments that allowed foreign investment from EU countries into Russian insurance companies, or the November 2007 amendments that introduced the split between life and non-life companies. Certainly, the April 2010 amendments, which quadrupled the statutory minimum capital requirements and led to market consolidation, are worth mentioning too. More recently, over the past ten to twelve months, this evolutionary process has peaked. In full accordance with the theory of evolution, this should enrich the Russian insurance market with new qualities. Moreover, in a few years, the events of the first six months of 2013 may well be regarded as a revolution in the Russian insurance market, or at least a turning point and very important milestone. In this Alert we revisit the latest developments, focusing primarily on court practice. We also briefly address legislative aspects, although these will be covered more thoroughly together with regulatory ones in the subsequent part of this Alert to be released at a future date.
- Court practice on consumer protection
Chronologically speaking, one would probably need to first mention Supreme Court Resolution No. 17 of 28 June 2012 which expanded consumer protection to the insurance sector. This Resolution reversed the previous position of the judiciary regarding the application of various consumer protection mechanisms to insurance products. Since 28 June 2012 all personal lines of insurance (life and non-life) are subject to the general rules of the Consumer Protection Law. For example, insurance companies are now obliged to provide consumers with full information about their products and bear liability for failure to do so. Failing to pay the indemnity within the time frame provided by the policy and/or the law is regarded as a violation of consumer rights. Insurers are now obliged to compensate not only for actual damage, but also moral damage when they violate the rights of consumers.
Undoubtedly, one of Resolution No. 17’s most adverse consequences for insurers is the threat of having to pay a penalty of 50% of the amount awarded against the insurer on top of the insurance indemnity and any other damages (including default interest and moral damages) that the consumer may now recover for breach of consumer rights. If the court finds in favour of the consumer, this penalty applies automatically on any amount it awards and may, perhaps, be regarded as the Russian equivalent of punitive damages.
Jurisdiction and insurance fraud
Another example where the extension of consumer protection law to the insurance sector may well change the face of the insurance market is the right of the consumer to file a claim against the insurer with the court of the place of the insured’s residence free of court fees. Until recently, personal insurance policies usually provided that any disputes had to be resolved in the court where the insurer has its place of business and claims under personal lines of insurance were subject to court fees. As the largest country in the world, Russia spreads over a huge territory. Many insurance companies operate throughout the country from the Baltic Sea to the Bering Sea. Also, more and more insurance policies are being sold over the Internet or through bank branches and other distribution channels. Insurers have already seen a significant increase in claims coming from various parts of Russia, and not all of these claims are bona fide. Insurance fraud is flourishing, but it would be unfair to say that the Government is not taking steps to try and balance the interests of the parties concerned. In November 2012 the Russian Criminal Code was amended to include insurance fraud as a new specific crime. The punishment for fraudulent misrepresentation as to the occurrence of an insurable event and the amount of loss is now subject to various penalties, forced labour and up to four years’ imprisonment.
- Court practice on personal property insurance
As if the Supreme Court wanted to keep the momentum, it handed down another Resolution on 27 June 2013, this time entirely dedicated to personal property insurance. This Resolution confirmed the current position of the Supreme Court on the applicability of consumer protection requirements to personal property insurance. It also provided compulsory guidelines to the lower courts in relation to civil law issues arising in that field. Many of these guidelines simply reiterate the provisions of the Russian Civil Code on insurance contracts. However, the Supreme Court clarified a number of key issues as outlined below. Particularly significant and long-awaited developments relate to the concepts of insurable interest, insurable event, insurance value and deductible.
Statute of limitations
The Supreme Court put an end (at least in relation to property insurance) to the protracted discussion about the inception date of the statute of limitation under insurance contracts. One group of commentators and some courts held that it was the date of loss under the policy. Others, mainly consumer rights activists as well as some courts, were of the opinion that it was the date when the insurer refuses to pay the indemnity to the insured. The Supreme Court ruled that the two-year limitation period under a property insurance contract starts running from the date when the insured became or should have become aware of the insurer’s refusal to pay the indemnity in full or in part. If the policy provides for a time frame for payment of the indemnity (which has been the case in practice and became compulsory as a result of the latest amendments to the Law on Insurance (see the continuation part of this Alert)), the two-year limitation must be computed from the expiry date of such period. Subrogation claims are subject to the general rules on the statute of limitations and can be filed within three years of the date of loss.
The Supreme Court established a rebuttable presumption that an insurable interest is deemed to exist. Thus, if the insurer wants to repudiate the personal property insurance policy for lack of insurable interest, it must demonstrate that the insured or the beneficiary has no such interest. Neither the insured nor the beneficiary has to prove that he/she has an insurable interest in the property.
Equally significant is the Supreme Court’s endorsement of the legal doctrine on insurable event, under which the insurable event consists of the insured peril, the loss and the causal link between the peril and the loss. An insurable event is deemed to have occurred if, during the policy period, the insured peril started causing or caused the loss (which may be discovered after the policy period ended). Therefore, an insured peril that manifested itself during the policy period, but started causing the loss outside such period, is not regarded as an insurable event. If it is not possible to determine when the loss occurred, it is deemed to have occurred when it was discovered. The Supreme Court also clarified what is meant by “fortuity of the insurable event”. An event is fortuitous if, at the inception of the policy, neither participant in the insurance contract knew or should have known that it had already occurred or could not have occurred at all. Notably, the Supreme Court does not refer to the insurer and the insured, but to the participants in the contract. This suggests that the Court may have intended to include the beneficiary in that concept. Although the beneficiary is not a party to the insurance contract, he/she is viewed by some commentators as a participant in such contract who has certain rights and may have certain obligations. Therefore, there is a possibility that, even if the insured and the insurer were ignorant as to the insurable event having occurred or being probable, but the beneficiary was aware of the same, the insurance policy may still be found void.
The Supreme Court further notably confirmed that the insurance value of the property is the market value of such property at the inception date of the policy and at the place where the property is located. The market value of the property is defined by reference to the Law on Valuation Activities and can be established by an independent appraiser.
The concept of deductible has at long last been introduced in Russian law. That said a health warning must be issued: the Russian concept of deductible does not fully correspond to the meaning normally attributed to it, such as on the UK insurance market. Until now in Russia there was no clear legal definition of this key insurance concept. The Supreme Court explained that if the policy provides for the deductible the loss is not paid if its amount is below the deductible which can be set as a percentage of the sum insured or as a fixed amount. It is not clear from the Resolution what happens if the loss exceeds the amount of the deductible: should the insurer pay the loss in full or only the part of the loss that exceeds the deductible? It should be noted that the most recent amendments to the Law on Insurance (explained in more detail in the continuation part of this Alert) also provide for a definition of the deductible which broadens the strict meaning of this term proposed by the Supreme Court. According to these amendments, a deductible is either conditional or unconditional. Where the policy provides for a conditional deductible, the insurer is not liable for any loss below or equal to the amount of the deductible. If the loss exceeds the deductible, the insurer pays the loss in full, without any deduction. In case of an unconditional deductible, the insurer is only liable for the loss to the extent it exceeds the amount of the deductible. Under the amendments to the Insurance Law, the parties to the insurance policy are free to agree on other types of deductible.
It is too early to say how these varying definitions of the deductible will interact. The Supreme Court seems to suggest, though, that in relation to personal property insurance deductibles may only be unconditional. On the other hand, unconditional deductibles are less favourable to consumers than conditional ones. Therefore, one cannot exclude that court practice will take the view that the general provisions of the Law on Insurance should be extended to deductibles under personal property insurance.
Consent to terms and policy triggers
The Supreme Court expanded the existing obligation of the insurer under the Consumer Protection Law to notify the consumer of the terms and conditions of insurance by adding a requirement to obtain the consumer’s direct, clear and unequivocal consent to these terms. No guidance is given as to how this may be achieved. In case of a dispute, the courts will take into account the particular circumstances of the case.
Paragraph 23 of the Resolution allows the parties to refer to actions of the insured that cause the policy to become effective. The most common action that has always been provided for by the Civil Code is the payment of the premium by the insured. Under the Civil Code, it is also possible to introduce other triggering actions on the part of the insured. However, there has been no unified court practice in this regard. It remains to be seen whether this provision of the Resolution will be interpreted as considering actions of the insured as conditions precedent to coverage rather than conditions for the policy entering into effect.
Insurers’ late notification defence has never been popular with the Russian courts. Contrary to the Civil Code’s provisions on the onus of proof in case of late notification, the courts have consistently held that the insurer must prove that its ability to pay the indemnity was adversely affected as a result of the insured’s late notification and cannot avoid liability simply because the insured was late in notifying the loss. The Resolution puts the court practice (at least in relation to personal property insurance) in line with the Civil Code provisions. The Supreme Court confirmed that, in case of late notification, the burden of proof of prior knowledge and, most importantly, of the lack of adverse effect of the late notification on the insurer’s ability to pay the indemnity lies with the insured rather than with the insurer. However, the Supreme Court went further and specified that the notification obligation of the insured is deemed to have been fulfilled if the insured notified the insurer within the time frame and by the means specified in the policy. Any provision of the insurance policy that requires the insured to provide certain documents to support his/her notification is unlawful, according to the Supreme Court.
It is worth mentioning that the latest amendments to the Law on Insurance provide that the general terms and conditions of insurance (also known as the rules of insurance) must set out an exhaustive list of documents that the insured has to submit to the insurer for the purposes of evaluating the risk and the amount of the loss. The Law on Insurance is silent as to whether the insurer can request additional documents in relation to the occurrence of the loss. That said it is reasonable to assume that the courts and the regulator will continue to be of the view that such documents must also be limited to those listed in the policy. From the insured’s perspective though, paragraph 35 of the Resolution allows him/her to submit other documents to support his/her claim both on coverage and quantum even if they are not listed in the policy.
Release from liability and refusing coverage
The grounds for release of liability and refusing coverage were also considered by the Supreme Court. In this regard reference should again be made to the latest amendments to the Law on Insurance on exclusions. The amended Law on Insurance requires the rules of insurance to set out an exhaustive list of grounds for the refusal of coverage. Court practice so far has tended towards the idea that the list of grounds for refusal provided by the Civil Code is exhaustive and it is not possible to provide additional grounds for refusal in the policy. It remains to be seen how the new provision of the Law on Insurance will be interpreted in light of this approach, as the rules of insurance usually form a part of the policy. Hopefully, court practice will evolve to allow the parties to agree on other grounds for refusing the coverage based on another provision of the amended Law on Insurance that prohibits refusing the coverage on grounds other than those listed in the law or in the policy. In other words, the Law on Insurance now allows the parties to provide for additional contractual grounds for refusal and the courts are expected to start enforcing this rule.
The Supreme Court clarified that the insurer is released from an obligation to pay the loss if it proves that the beneficiary’s intent was aimed at causing loss of, damage to or shortage of the insured property and that the beneficiary wanted these negative consequences to occur. On the face of it, this provision does not make much sense since, if the beneficiary intends to cause damage, he/she also wants the damage to occur. These concepts seem to be the same. It is conceivable, though, that the Supreme Court wanted to distinguish between the beneficiary (i) actively causing damage to the property by his/her own actions and (ii) willingly allowing such damage to occur.
Importantly, the Supreme Court confirmed that, unless otherwise provided by law, gross negligence of the insured or the beneficiary does not release the insurer from liability and explained that gross negligence for these purposes also includes negligence, thoughtlessness and similar kinds of behaviour.
Calculation of indemnity: loss of market value
The Supreme Court put an end to the discussion about indemnification for the loss of market value under personal property insurance policies (mainly, motor). It provided a definition of the loss of market value and considered it to be a part of the property damage indemnifiable under the property insurance policy.
As mentioned above, along with more general principles of insurance, the Supreme Court dealt with rather narrow issues related to particular kinds of insurance or particular insurance products. This Alert does not attempt to embrace all issues considered by the Supreme Court, but motor insurance is worth special mention. The Supreme Court ruled that if the insurer sends the damaged car to be repaired, the insurer remains liable for the quality of the repair as if the insurer had performed the repair works itself. One wonders whether the insured will also have a right to file consumer protection claims against the insurer for poor quality car repairs…
One final point to note in relation to the Resolution relates to the interpretation by the Supreme Court of the provisions of the Law on Insurance dealing with total loss. Paragraph 5 of Article 10 of the Law on Insurance provides that, in case of loss of the insured property, the insured may abandon such property in favour of the insurer in order to receive the full sum insured. The Supreme Court confirmed that the parties cannot contract out of this provision and explained that it covers both physical total loss and constructive total loss (damage beyond repair). In addition, the Supreme Court introduced a special case of partial constructive loss of immovable property. If the insured immovable property still exists but is so severely damaged that it is unfit for subsequent use in accordance with its original purpose, the insured should sell the debris and the insurer will have to compensate the insured for the difference between the proceeds from the sale of the debris and the sum insured. In this case, the insured may abandon the debris and claim the sum insured in full as provided by the policy.
(to be continued)