Introduction
Turkey's new Commercial Code ("the TCC") entered into force in 30 June 20121. The insurance section of the TCC is much wider in scope and attempts to provide clarity in terms of both law and terminology controversial under the old Code of 1956 which was highly insufficient to meet the dynamic needs of today's insurance industry. For the first time in Turkish insurance law, a specific section on third party liability insurances has been introduced by a Code.
The German Versicherungsvertragsgesetz2 of 30 May 1908 as amended and German and English insurance general conditions were taken as primary and secondary sources of reference in the drafting. Developments in the insurance laws of Germany, France, England, and Switzerland were also considered.
This Article provides an overview of some of the major new provisions related to property and third party liability insurances.
Insurable Interest
The TCC provides clarity that the lack of insurable interest, not only at the time of the loss but at any stage, will result in invalidity of contract. Provisions to the contrary will render the contract invalid.
The TCC with respect to property insurances also provides that, unless otherwise agreed, the contract shall terminate where the holder of the insured interest changes.
As in the old Code, overinsurance is prohibited and the excessive part shall be invalid. A new rule in that regard is with respect to overinsurance which renders the entire contract invalid if the policyholder concluded it in bad faith to obtain any financial benefit.
Extent of Insurer's Liability
The TCC provides that insurance contracts shall in principle be considered as "named perils" and not "all risks" clarifying controversy in that regard.
The TCC as in the old system prohibits cover for losses arising from risks occurred as a result of willful acts of the insured, the policyholder or third parties for whose acts they bear legal liability. In the later case clarity has been provided that the relevant third parties must have acted with an intention to trigger policy indemnification as a further condition to willful causation of the loss.
Unless otherwise agreed, employees, representatives, auditors and directors shall automatically be considered as additional insureds, where insurance is obtained for liability related to the business enterprise of the insurance holder.
The TCC clearly provides that a liability policy shall be considered "occurrence based" unless otherwise indicated in the policy. Provided the loss triggering event occurred within the policy period, a claim can be filed within the ultimate insurance time limitation period of ten years, unless otherwise provided by contract.
A new provision of the TCC requires the insurer to pay reasonable expenses made by the insured or the policyholder for the purpose of determination of the extent of the risk or the insurance indemnity, even if these expenses have not proven useful.
The TCC also imposes on the insured in addition to the duty of mitigation measures upon occurrence of the risk, a duty of prevention and mitigation measures in case of high likelihood of occurrence and thereby extends liability of the insurer to pay for reasonable costs in that regard in addition to insurance indemnity. The TCC with respect to third party liability policies however requires a specific policy condition for payment of reasonable expenses with respect to third party claims exceeding the insurance limit.
The TCC also explicitly provides for the duty of protection of the insurer's right of subrogation to third parties and the insurers right to continue any legal procedures against third parties liable for loss.
Duties of Disclosure and Notification
Detailed and mostly new rules with respect to many unsettled issues in that regard have been introduced by the TCC, in particular with respect to sanctions for non – compliance e.g. requirements for a link between non – compliance and the occurrence of the risk and its effect on insurance indemnity; effect of the degree of fault on the application of sanctions. The TCC also introduces new periods for the use of respective rights in that regard. A clear distinction between the rights of the insurer in case of discovery of the failure to notify before and after the occurrence of the risk has also been brought which was not properly provided in the old Code.
Before Policy Inception, the duty of disclosure is in principle confined to the questions by the insurer as in the old system. The TCC also provides for consequences where although not directly asked, material facts were concealed in bad faith, putting an end to controversy in that regard.
Alternative rights of termination (with retrospective effect) or collection of premium difference is given to the insurer in case of discovery before the occurrence of the risk, irrespective of the degree of fault in the non - disclosure. Where the non – disclosure was in bad faith, the insurer is entitled to premium for the period in which the risk was carried.
The TCC foresees a reduction in the indemnity according to the degree of negligence in the failure to disclose, provided the negligence has the potential to affect the occurrence of the risk or the amount of the indemnity. In case of willful failure, the insurer's liability is lifted provided that there is connection between the non – disclosure and the occurrence of the risk. In case of lack of such connection, the proportion of the paid premium to the premium which should have been paid shall be taken into consideration.
During the term of the Contract, the policyholder is under the duty to immediately notify increases in the risk (irrespective of whether the increase was caused by the policyholder) and where the increase has occurred without his knowledge within ten days of learning at the latest. The insurer has the right to terminate the policy or request premium difference within one month of becoming aware of the increase. The right to terminate shall be ineffective if the status ante quo is re-established. Where the non – disclosure was willful, the insurer will keep the premium for the period he carried the risk. Where the increase has been learned after the occurrence of the risk, the same sanctions and conditions are applicable as in the case of failure in the duty of disclosure before the inception of the policy.
Upon Occurrence of the Risk, the TCC introduces a duty for immediate notification upon learning in liability insurances and without delay in property insurances. The TCC with respect to third party liability policies introduces a new duty on the insured to also notify events which may give rise to his liability within ten days of learning. Lack of notification or late notification shall lead to a reduction on the indemnity according to the gravity of negligence in the failure to disclose, provided that the failure led to an increase in the insurance indemnity.
The TCC recognizes claims control and imposes a duty on the liability insurer to inform the insured within five days of notification whether it will assume control over legal proceedings against the third party. Where the insurer has not chosen to do so, the insurer must pay any indemnity determined by finalized judicial decision. In any case settlement agreements cannot be made without the consent of the insurer unless otherwise agreed.
Where the policyholder and the insured are different persons, the TCC explicitly provides that where the TCC attaches any legal consequence to the policyholder's behavior or knowledge, the same consequence shall attach also to the behavior of the representative or of the insured provided the insured was aware of the insurance contract.
Non – Compliance with Conditions & Warranties
Sanctions attached to certain warranties or conditions precedent to cover (as usually transferred from English policy wordings) do not necessarily give the terms the intended effect and may be caught by semi – mandatory or mandatory provisions of the TCC. The TCC introduces a new and specific provision in that regard and provides that where the insurance contract provides for partial or entire avoidance of the contract by the insurer for non – compliance with the duties by the insured (where the sanction of non – compliance with such duty has not already been specifically provided for in the TCC), avoidance shall not take effect unless the non – compliance is based on fault. Where non – compliance is based on fault; the right to avoid the policy will drop where it has not been used within one month of learning of the circumstances. Also the insurer will have no right to avoid the policy unless the non – compliance had any effect on the occurrence of the risk and the extent of the obligations of the insurer.
Rights of the Holder of Restrictive Rights on Insured Property
Lack of provisions have been completed by the TCC with respect to indemnity payment for insured property subject to "limited rights in rem" (including pledges) for the benefit of a third party. Where the insurer is notified of the relevant right on the property, or the right has been subject to a registration, the insurer can in principle not be released of liability by payment to the insured, unless consent is given by the holder of the relevant right. The holder of such restriction has been given the option to continue the insurance contract in case of default of payment by the policy holder or the termination of the contract by either of the contract parties.
Creditors of the owner of an insured property who have applied a seizure on the relevant property for securing their credits are also protected by way of a provision obligating the execution office to inform the insurer of such seizure and the insurer to pay the insurance indemnity to the execution office until further notice.
The explicit Recognition of Third Party Right for Direct Claim against Liability Insurers already recognized in practice and the obligation of the insurer for direct payment to the third party is an important provision introduced by the TCC. The insurer has been prohibited from setting off its receivables arising from the contract against its liability to the third party.
Right of the insurer to obtain information from the suffering third party for the purpose of identification of the loss triggering event and the amount of the loss has been explicitly recognized. Where the third party does not make available required information, liability of the insurer shall be limited to the amount that it would have to pay had the information been made available, provided that the third party has been warned in writing.
Maturity of and Time Limitation for Insurance Indemnity Claims
The TCC in addition to the existing two years time limitation period starting from maturity introduces an ultimate time limitation of six years in property insurances and ten years in liability insurances from the occurrence of the insured event.
Numbers of problems with maturity dates have been removed by the TCC. Insurance indemnity shall in principle become payable upon finalization of the insurer's investigation following the occurrence of the risk and the receipt of relevant risk related documents and in any case within 45 days upon notification of the occurrence of the risk. If the investigation was delayed due to a fault not attributable to the insurer, this period shall not begin to run. If the investigation was not finalized within three months upon notification, the insurer shall pay at least fifty percent of the loss as mutually agreed by the parties or, in the absence of such agreement, as determined promptly by a preliminary court expert examination. Any provision in the contract relieving the insurer from payment of default interest shall be invalid.
Footnote
1 Under Articles 39 and 40 of the Code on Implementation of the Turkish Commercial Code (dated 14.01.2011 and numbered 6103) it is provided that the insurance contracts issued and became effective at the time when the old TCC was in force will continue to be subject to the provisions of the old TCC for a period of one (1) year starting from the effective date of the TCC; except for the provisions of the TCC (excluding article 1517) protecting the policyholder, insured and the beneficiary. In the event of renewal or extension of the insurance contracts which expired within the referred one year period, the provisions of the TCC are applied. It is further provided that the insurance contracts concluded while the old TCC was in force and which are contrary to the semi-mandatory and mandatory provisions of the TCC as well as article 1488 regarding tontine are subject to the provisions of the TCC.
2 German Insurance Contracts Act
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
