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Partner, ADER HABER
Senior Associate, ADER HABER
Trends and Unsolved Challenges of Motor Third Party Liability Insurance
The insurance of civil liability of the owners of motor vehicles in Ukraine (Motor third party liability insurance), as well as in many other countries, is obligatory. The ban on operating a vehicle without respective insurance policy makes Motor third party liability insurance one of the most popular and widespread types of insurance. Considering the number of consumers of this type of insurance, adequate and appropriate regulation in this sphere serves a significant purpose.
Legal regulation of Motor third party liability insurance in Ukraine is provided in the main by the Law of Ukraine On Obligatory Insurance of Civil Liability of the Owners of Motor Vehicles (hereinafter — the Law), which was adopted in early 2004. The practice of application of the Law discovered all defects and vulnerabilities, which need to be governed in the right manner.
It was for this purpose that the Draft Law On Obligatory Insurance of Civil Liability of the Owners of Motor Vehicles No. 3670-d (hereinafter — the Draft) was registered.
The authors of the Draft justify the necessity of its adoption by certain defects in the system, and refer to common and unjust claim denials and delay of payments, forgery of insurance policies, insolvency of insurers, etc.
Analysis of the Draft demonstrates a lack of essential amendments, since many of its provisions duplicate the provisions of the current Law. However, if the Draft is adopted, certain issues, which have been high on the agenda for a long time, will finally be governed.
Certain novelties introduced by the Draft, e.g. an e-insurance policy and implementation of direct settlement of loss, can be partially be considered as novelties, since they are already applied on the market.
The option to conclude an insurance agreement in e-form appeared in February 2018, after the relevant amendments to the Regulation on peculiarities of conclusion of obligatory liability insurance of owners of vehicles came into force.
It is worth mentioning that it could have happened earlier, since the Law of Ukraine On E-Commerce, which also allows the conclusion of e-agreements, including insurance agreements, was adopted in September 2015. However, the regulator and market needed 2.5 years from the time of appearance of the required legal basis to reach the capacity to conclude this type of agreements in e-form.
However, while currently such agreements are available for conclusion both in paper and in e-form, the Draft only contains an e-form option. To implement such option, the Draft provides a 12 month transition period, where the conclusion of agreements will be still available in paper form. In this respect, it is expected that in approximately 2 years after the adopted amendments have come into force, the insurance market will get rid of paper agreements.
It is planned that full implementation of e-form agreements will have a positive effect. Firstly, it will minimize the risks connected with the sale of forged insurance policies, policies of insolvent insurers, and backdated policies, since all relevant information on concluded agreements is to be filed by the insurer to the Unified database. Furthermore, the option to conclude agreements in e-form is tritely more convenient and less resource-consuming compared to paper form.
As to implementation of direct settlement of loss, its mass application began at the end of 2016.
The core point of direct settlement is that a payment to an insurance claim to an aggrieved person is to be made not by the insurer of the guilty person, but by the insurer of such aggrieved party, who insured his/her civil liability. Thereafter, the insurer of the aggrieved party is to receive the relevant compensation from the insurer of the guilty person.
Such procedure is to be considered as more client-oriented, since in Ukraine insurers are not much concerned with the proper performance of services to aggrieved persons (insurance claim payments are not always made in full and in fixed terms), since they do not consider such persons as their client. In case of direct settlement, the insurer make a payment in favor of its client, and the quality of services affects their further cooperation, which consequently is a topic of concern for the insurer.
In this respect, implementation of direct settlement system, which is to involve all insurers who provide obligatory Motor third party liability insurance, will certainly have a positive impact and will enable the quality of provided services to be improved.
Solutions for Old Issues
The Draft also provides a range of
novelties, which are to more properly protect the rights of policyholders and aggrieved persons.
Firstly, the terms are arranged for the insurer’s decision on whether or not to pay out under an insurance policy. Moreover, the Draft also sets out a fine for a delay of paying out of more than 5 working days at the rate of 20% of the delayed payment (at the moment the law envisages the liability only in the form of delay interest per whole period of delay).
Secondly, the Draft provides for the evaluation of damages without taking into account “wear and tear” and non-application of franchise (the part of damages not to be covered by the insurer).
As practice shows, calculations based on “wear and tear” can significantly decrease the sum of pay out.
As for the franchise, the damages in this amount are not covered by the insurer and are to be compensated to the aggrieved person directly by the guilty person. Herewith, the maximum amount of franchise is limited by 2% of the amount of coverage. However small the amount of the franchise is, the guilty persons usually refuse compensating it voluntarily.
Consequently, the proposed amendments are to improve protection of the rights of both aggrieved persons and guilty persons.
Thirdly, the Draft governs the issues of compensation by an insurer of the policyholder’s expenses, in the event that the policyholder solely recovered the caused damages to the third person.
An element of uncertainty in this issue appeared several years ago. The Supreme Court of Ukraine ruled that an aggrieved third person is entitled to be compensated for damages not only by an insurance company, but also at the expense of the policyholder, who is further to obtain the right to claim for reimbursements from his/her insurer.
However, in practice, after compensation of damages, the policyholders usually experience difficulties in claiming the refund from their insurance companies. The point is that in accordance with the Law, the policyholder responsible for the loss can receive claim denial if the damages were recovered without prior approval from insurer. In other words, the only fact of non-approval of expenses can be a reason for denial of claim, despite the probable relevance of such expenses.
Thus, on the one hand, the policyholder is obliged to recover damages; while on the other hand, the sum of loss should be previously approved by the insurer. So, if in certain circumstances, e.g., a third person claims the amount of damages in court proceedings, any prior approval of the insurer is impossible.
The Draft, in fact, solves this problem, since it does not prescribe an insured party to obtain prior approval of an insurer to recover damages. In this respect, the insurer decides on whether to issue a payment or not upon the existence of documents. Notwithstanding the above-mentioned, the risk still exists that the insurer will make his/her own calculations and will pay the lower amount of compensation compared to the amount recovered to the aggrieved person.
Fourthly, adoption of the Draft should have a positive impact on a situation with insolvent insurers.
The Law in force prescribes that the Motor (Transport) Insurance Bureau of Ukraine (hereinafter — MTIBU) makes claim payments under insurance policies in case of insufficiency of funds and assets of an insurer or if the insurer has been declared bankrupt. However, the bankruptcy procedure involving an insurance company is a long-running procedure. As an example, the bankruptcy of one insurance company began in early 2010 and is still ongoing.
As a result, a third party is still unable to obtain recovery of their damages.
Such a situation is obviously unacceptable. In order to solve this issue partially, the MTIBU adopted a Regulation, which allows aggrieved persons to obtain partial compensation from MTIBU before the insolvent insurer is declared bankrupt.
Adoption of this Draft will improve the existing situation. The Draft provides that the ground to pay for insolvent insurance company is termination of its membership in the MTIBU (for reason of existence of contribution debts to MTIBU, violation of legislation, articles of association or decisions of the MTIBU) on condition that court proceedings on the bankruptcy of an insolvent insurer have been initiated.
Such amendments are to ensure protection of the right of an aggrieved person to obtain compensation quickly in case of financial insolvency of the insurer.
By way of summary, it can be concluded that although the Draft does not cure all existing issues, the suggested amendments generally consider the main global trends, which have formed in the sphere of insurance of civil liability, and the interests of consumers of this type of insurance.