Preliminary and jurisdictional considerations in insurance litigation

Fora

In what fora are insurance disputes litigated?

In the Turkish judicial system, insurance disputes are resolved by the commercial courts, irrespective of the amount or value of the dispute. On the other hand, insurance disputes arising out of maritime law are heard by a specialised commercial court. If a province has no specialised court or any other regular commercial court, disputes are heard by the general competent court, namely a civil court of first instance.

The Code of Civil Procedure provides the claimant with a number of alternative courts with jurisdiction for insurance disputes, including the commercial courts at the domicile of the defendant, and the place of immovable property or risk that is claimed to have triggered the insurance coverage. The Turkish Code of International Private Law No. 5718 has designated specific jurisdictions for the cases arising from insurance contract disputes including foreign elements, and clearly states that they cannot be contracted otherwise by the parties. Article 46 of the The Turkish Code of International Private Law No. 5718 provides that the relevant jurisdictional rules shall prevail:

‘The court where the insurer’s headquarters, or its branch office or the agent who concluded the contract are located in Turkey, has jurisdiction in the disputes arising from insurance contacts. In the cases to be filed against the insured or the beneficiary, the court of the Turkish domicile of these persons has the jurisdiction.’

As an alternative, the Insurance Arbitration Commission, which is incorporated under the Insurance Union of Turkey, is a feasible dispute-solving mechanism alternative to court proceedings. Only the insured or policyholder is entitled to apply to the Commission to avoid prolonging litigation procedures and obtain a viable solution. No arbitration clause is needed to apply to the tribunal, provided that the insurer is a member of the Commission. Regarding disputes arising out of mandatory insurances, the insured, beneficiary and policyholder are entitled to apply to the arbitral tribunal even if the insurer is not a member of the Commission. The total number of disputes settled by the Insurance Arbitration Commission reached 293,698 as of 30 September 2019. The scholars describe the proceedings conducted before the Insurance Arbitration Commission as an alternative and unique mechanism of dispute resolution, rather than the regular arbitration procedure, since it lacks some of the essential aspects of arbitration, as no arbitration agreement is concluded between the parties and the arbitrators are appointed by the Commission, instead of the parties, from the arbitrators registered in the Commission's list.

It is also possible to initiate international or domestic arbitration proceedings pertaining to the insurance disputes.

Causes of action

When do insurance-related causes of action accrue?

As per the general insurance rules stipulated in the Turkish Commercial Code (TCC) No. 6102 and dated 14 February 2011, the insured’s cause of action against the insurer accrues when the insurer’s obligation to indemnify the insured commences; in any event, this is within 45 days of the date of notification of the policyholder (in life insurance, this period is 15 days) provided that the insurer’s right to examine the risk in question is not prejudiced by the insured or any external hindrance. After this 45-day period (15 days in life insurance), the insurer falls into default without further notice and is also responsible for the interest arising from the delay.

There is a prescription period that should always be kept in mind. As per the general insurance rules under the TCC, all claims arising from insurance contracts shall be prescribed after a period of two years as of the date when payment falls due. In any event, all claims relating to an insurance indemnity or insurance sum shall be prescribed after a period of six years from the date of materialisation of the risk. In liability insurance, indemnity shall be prescribed within 10 years of the event constituting the subject of the insurance: for example, negligence of the insured.

Preliminary considerations

What preliminary procedural and strategic considerations should be evaluated in insurance litigation?

Mediation has become a mandatory course to be exhausted before filing a lawsuit on commercial disputes, as per the Law on Starting Legal Proceedings for Monetary Receivables Arising from Subscription Agreements No. 7155, published in the Official Gazette No. 30630, dated 19 December 2018. However, the culture of settlement or mediation is not yet firmly established in practice in Turkey.

In general, the following must be taken into account before initiating insurance litigation:

  • the scope of the law governing the insurance contract and duties imposed on the insured or policyholder imposed by the governing law and policy conditions;
  • the competency of the courts or arbitral tribunal;
  • costs that will arise from litigation (in the Turkish litigation system, although the costs are not sky-high, the claimant should bear the costs during the litigation and the losing party should bear the costs after the litigation period is completed, together with the claimant’s attorney fee up to the amount prescribed by the tariff of the Turkish Bar Association); and
  • the prescription period of the claim.

The parties should also keep in mind that insurance contracts must be concluded in Turkish and must not contain words in foreign languages, pursuant to the Insurance Act. Similarly, all private law contracts must be concluded in Turkish as per Law No. 805 on Compulsory Use of Turkish Language among Commercial Entities. This is an outdated law falling short of satisfying the commercial needs of today. Scholars suggest that the applicable law on the form of insurance policies is either lex causae or locus regit actum (ie, the law of the place where the contract is executed) and consider that the provision in the Insurance Act stipulating the form of the policies should not apply to policies concluded abroad. However, scholars are concerned that Law No. 805 is a piece of mandatory Turkish law that, by reason of its particular purpose, is applicable regardless of the designated law. In line with this, the Supreme Court still takes into account whether the parties complied with the requirements of Law No. 805.

The consequence of the breach of the formalistic requirements laid down by Law No. 805 has not been determined. Based on court practice, however, the use of foreign languages may cause, depending on the circumstances, the exclusions in the contract and insurance policy to be deemed invalid or the contract to be interpreted to the insurer's detriment.

Regarding insurance disputes, identifying the damage, determination of the material facts in relation to loss and whether the insured has increased the risk of occurrence is particularly important. Similarly, these also have an immense effect on the recourse action between jointly liable parties.

To identify and determine the damage or loss accrued and the material facts as of the date of the loss, it is advisable to take immediate action to record the evidence. In practice, this action is preferably taken right after the occurrence of the risk. Obtaining an adjuster’s report or filing a determination action before the court is also advisable to secure required evidence and fulfil the burden of proof. It is also important for the insurer to detect whether there is another insurance covering the risk.

Last but not least, the conditions to initiate a recourse action must be considered carefully. The following should be noted: (i) to be entitled to the right of subrogation, first the insurer must pay the indemnity to its insured or, depending on the circumstances, the beneficiary; (ii) the right of subrogation only covers the amount that is paid by the insurer and the insured or beneficiary remains the rightful owner of the amount that is not covered by the insurer; (iii) the interest applied to this amount starts from when the payment was made; (iv) principally, the prescription period set forth for the successor is the same as that stipulated for the original insured; and (v) during and before the recourse action, the insured is obliged to take the necessary precautions to protect the insurer’s rights of recourse and to collaborate.

Damages

What remedies or damages may apply?

Monetary damages are claimed in a typical litigation case.

Monetary damages in insurance disputes would cover the indemnity foreseen under the policy and the default interest, provided that the claim for the interest is stated within the initial claim. The commercial interest rate to be accrued is set every year; in 2019 it was 19.5 per cent per year. With respect to foreign currency, the commercial interest rate will be the highest interest rate applied to deposit accounts with a one-year maturity, unless a higher rate is stipulated in the contract.

Regarding non-life insurance, the main principle is the prohibition of enrichment. Therefore, in non-life insurance such as property and liability insurance, it is not possible to claim for a higher amount than the incurred damages. The ultimate purpose of the damages to be awarded by the court would be to reinstate the insured or policyholder to the position it would have been in had the risk covered under the policy not occurred.

If the policy stipulates a fixed sum for all damages, it may not be possible for the insured to be in the position it would have been in before it suffered damage. However, if the policy covers the total property valued under the contract, provided that all duties of the insured are satisfied, it may be possible for the insured to claim and obtain the sum of all its damages.

It is also possible to include a revaluation clause in the insurance contract and pay the current value of the property. This is usually preferred in motor vehicle insurance, where the value of the motor vehicle is revalued at the time of the occurrence.

Last but not least, the TCC establishes that no insurance can be made covering a loss that may arise from acts of the insured or the policyholder that violate the mandatory provisions of the law, morality, public order and personal rights.

Under what circumstances can extracontractual or punitive damages be awarded?

Under Turkish law, it is not possible to award punitive damages because of the principle of prohibition of enrichment. It is, however, possible to insert penalty clauses in agreements where one or more of the parties agree to pay a certain sum of money or perform an action if they fail to fulfil their obligations under a contract. Under penalty clauses, loss does not need to be proved. However, it is not common to insert penalty provisions in insurance policies in Turkey.

In reinsurance, extracontractual obligations refer to damages awarded by a court against an insurer that are outside the provisions of the insurance policy, owing to fraud, bad faith or negligence of the insurer in handling a claim. Turkish law precedents and practice are scarce in this respect; however, courts are inclined to deal with this issue from the point of the insurer’s burdens of proving the scope of the insurance coverage and enlightening the insurer regarding fundamental aspects of the policy. If the insurer fails to fulfil these burdens, the court may either conclude that the disputed matter is within the scope of the insurance policy regardless of the written agreement or may order the insurer to compensate the insured for any loss caused as a result of the insurer’s failure. The reinsurer, on the other hand, would be responsible only to the extent of the reinsurance agreement with the insurer and may avoid any compensation for these court judgments unless a particular clause, such as Follow the Fortunes, holds the reinsurer responsible.

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21 January 2020