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The Directions for Improvement of Insurance Legislation and Court Practice on Insurance Disputes
The article considers major directions for improvement of insurance legislation and court practice on insurance disputes, and, among other things, criticises the activity of the Bank of Russia as a supervisory authority; suggests optimization of the current system of regulation of the licensing process by transfer from a supervisory model of licensing insurance types to a legally regulated model. The author proposes the ways to change the court practice in insurance disputes.
Concept of the Development of Insurance in Russia, unifi ed state policy in the sphere of insurance, insurance objects, licensing, supervisory authority, court practice on insurance disputes.
The Decree of the RF Government dated September 25, 2002 No 1361 adopted a special and comprehensive Concept of the Development of Insurance in the Russian Federation. Its main provisions are aimed at creating an effective system of insurance protection of property interests of individuals and legal entities in the Russian Federation. These goals and objectives can be accomplished only in conditions of an effective system to regulate insurance activities. Thus, the question of insurance activities regulation acquires fundamental importance for the implementation of the Concept adopted by the Russian Government.
The RF Law “On the Organization of Insurance Business in the Russian Federation” (hereineafter referred to as “the Law on Insurance Business”) says that the tasks of the organization of the insurance business are to implement the unified state policy in the sphere of insurance, to set principles of insurance, and to form insurance mechanisms. These tasks are to be implemented by a special federal executive authority. Art 8.1 of the Law on Insurance Business in its second paragraph defines this authority as the insurance regulatory authority.
The Law on Insurance Business says that a two-section system of regulation is necessary for the efficiency of regulating insurance activities. The sections are normative (regulating) and supervisory (controlling) ones. Their functions are to be exercised by various federal executive authorities.
So, the maximum efficiency in the system of regulating the insurance activities may be achieved only when the supervisory authority is independent from the other insurance regulating authority that drafts regulatory acts of insurers’ financial stability as well as recommendations on controlling the insurance activities. These provisions are based on the provisions of the RF Constitution about the delimitation of the subjects of authority and powers fixed by Section 3 Art. 11 of the RF Constitution.
At present, there is only one supervisory authority formed on the basis of two specialised and independent above-mentioned federal authorities. It has no authority-level independence as it is subordinated to the RF Central Bank that also “acts as” the insurance regulatory authority.
As we can see, one and the same federal executive authority – the RF Central Bank - performs two different functions. It normatively regulates insurance activities and exercises supervision (control) over its regulation of this activity. Anyway, the current system of regulation and supervision functions the way it was described.
Therefore, as there is no specialised and independent federal executive authority that regulates insurance activities, the RF Central Bank, being the insurance supervisory authority, has to perform the abovementioned functions indirectly. It also has to handle issues connected with licensing insurance activities.
The point is that what has to be licensed is not insurance activities as such but the types of insurance activities according to the classification in Art 32.9 of the Law on the Insurance Business. So, in order to obtain a license, an applicant must produce insurance rules for the types of insurance to be licensed when applying to the insurance supervision authority. The efficiency of the current regulation process is discussed below.
Art. 927.1 of the RF Civil Code says that insurance is effected on the basis of contracts of property or personal insurance, concluded by an individual or a legal entity (insurant) with an insurance company (insurer). The insurance objects within the mentioned types of insurance contracts are property interests listed in Art. 4 of the Law on Insurance Business.
Having obtained the license, the insurance organizations have the right to maintain insurance in the sphere and within the limits defined by types of insurance objects enumerated in Art. 4 of the Law. In this part, the legislator does not set any restrictions and does not grant any permissions for the implementation of a particular type of property or personal insurance. The only exception is the legislator’s requirement (Art. 25 para.3 of the Law on Insurance Business) of the minimum size of the registered capital that is necessary to maintain a certain type of insurance and ensure financial stability.
Thus, if the insurer has a license for maintaining one type of insurance, it should have the right to maintain insurance of any type on the licensed object provided by Art. 4 of the Law on Insurance Business in case it paid the necessary size of the registered capital and observes standards of financial stability.
Moreover, it is not possible to pre-define or to pre-determine (in a statutory and regulatory order) all possible property interests that consumers of insurance services may have. The sphere of the society’s property interests is so vast that it cannot be embraced by one norm of the Law on Insurance Business with a limited list of 23 types of insurance. The regulation of the current model of insurance supervision should be improved in the part of licensing of various insurance types in order to fill the needs of the insurers in acquiring necessary types of insurance services.
The current system that regulates the mentioned licensing process can be optimised by switching from the supervisory model over to a normative regulating model of licensing. Supervisory functions should be concentrated on control over the financial stability of insurers.
For example, the notification procedure of insurance types licensing should replace the current authorization-based procedure, and the latter should be kept for licensing insurance activities, as a potential insurer obtains the permission in the form of license. The notification procedure is applied only to the licensing of types of insurance.
The liberalization of the procedure by which types of insurance are licensed (by means of switching from the severe authorization-based procedure over to the notification-based one) will help to create a flexible mechanism for quick saturation of insurance market with necessary types of insurance products. In other words, the notification procedure will be oriented exclusively at consumers of insurance services. The insurance market determines the need for various new types of insurance, the list of which should be formed later.
A similar procedure is envisaged by Art. 14 of the Second Council Directive No 88/357/ЕЕС of 22 June 1988. It proclaims that the undertaking shall first inform only about the nature of the risks, the insurance of which it is going to provide within the euro zone as a Member State. The list of documents set by Articles 15 and 16 of the Directive does not include the Rules of Insurance for the insurance of the declared risks.
There are elements of the notification order in the current model of supervision over the insurance activities in the Russian Federation. But they are applied when it is necessary to specify certain terms of insurance or work out additional insurance rules for licensed types of insurance (provisions of Art 32.9 Section 3 of the Law on Insurance Business). The said order can be applied to licensing new types of insurance, as nothing will change for the worse in this situation.
The notification order of licensing types of insurance activities may include the procedure of filing an application to the insurance supervisory authority. The application contains declaration of intentions on performing certain types of insurance according to classification included in a certain group of insurance objects. In this case, there is no need to inform the supervisory authority about the rules of insurance on the declared types of insurance. The applicant can submit the list of risks, the orders of the applicant on approval of necessary insurance rules according to the types of insurance, calculation of insurance rates, and the business plan.
Insurance rules are internal local normative document of an insurer that are approved and enacted by the insurer independently in accordance with Art 943 of the RF Civil Code. So, there is no need to license insurance activities within the authorization-based procedure, enclosing the rules of insurance that may not be applied while concluding the contract according to Art. 943 of the RF Civil Code. Evidently, the requirement to apply the rules of insurance to insurance relationships should be recommendatory but not binding. The practical role of insurance rules lies in the regulation of the terms contained in the insurance contract in agreement with the insurant. Thus, the rules of the insurance are an element of regulation but not of supervision.
The above-mentioned measures will help to distinguish between the functions of supervision over insurance activities and the functions of regulation of insurance activities within the licensing of insurance types.
The current system of control over insurance activities gives the insurance authority the right to apply one of the stated below compensatory remedies upon an insurer if the latter did not produce insurance rules or amendments, or produced them untimely:
- dismissal of license – para. 3 Section 1 Art. 32.3. of the Law on Insurance Business;
- issuing of a prescriptive order with the subsequent license limitation or suspension of a license – Art. 32.6 of the Law on Insurance Business;
- revocation of a license – Section 2 Art. 32.8.
These circumstances create a serious legal problem as the Law on Insurance Business does not contain rules and procedures for applying compensatory remedies, and the insurance supervision authority has to define and set the procedures independently.
There is no organizational subordination between the insurance supervision authority and an insurance entity (which is not taken into account). So, administrative methods should be used to apply the mentioned compensatory remedies. Thus, compensatory measures in relation to the insurance entity should be applied only in strict accordance with the provisions of the RF Administrative Offences Code (hereinafter referred to as the Administrative Code).
In particular, if the suspension of an insurer’s license is used as a compensatory remedy under Art. 32.6 of the Law on Insurance Business, the insurance supervision authority should follow the provisions of the Administrative Code regulating the same procedure. The Administrative Code provides such a procedure as the administrative suspension of activities (Art. 3.12). The legal effect of this measure corresponds to suspension of a license.
If administrative suspension of activities is compared with the suspension of the insurance entity’s license, which also means the prohibition on carrying on the insurance activities, there, is no difference in legal effects for those to whom these measures are applied.
There is a significant difference in the grounds and the procedure of applying these measures to offenders. For example, administrative suspension is applied and ordered only by the judge in cases provided for by the Administrative Code if a less serious administrative penalty cannot be effective enough. Administrative suspension of activities is ordered for the period of under 90 days. The judge has the right to stop the execution of punishment in the form of administrative suspension of the activities upon the entity’s request if the circumstances that were the grounds for the administrative penalty are established to have been removed.
However, in relation to the insurance activities, this measure is exercised by the decision of the insurance supervision authority without applying the procedures of holding the insurance entity administratively liable according to the Administrative Code.
The above-mentioned problems of the current legal model of supervision over insurance activities need the following amendments and additions to the Law on Insurance Business to be passed:
(1) application of any compensatory remedies to insurance entities in keeping with the procedure of the Administrative Code;
(2) to incorporate such measures as a warning and a fine provided for by Art. 3.4 and 3.5 of the Administrative Code into the Law on Insurance Business;
(3) to apply such compensatory remedies as license limitation, license dismissal, and license revocation from an entity if these measures are agreed upon by judicial bodies. Only judicial bodies are authorised to make such decisions.
The main task of the insurance activities regulation system is normative and legal recognition and formation of the state policy in the sphere of insurance which is a macro-task. And the task of insurance activity supervision is to ensure the legality of insurance activities and to control the financial stability of insurance entities by way of ongoing monitoring for taking further compensatory measures provided for by the Administrative Code.
The year of 2013 was not easy judicial community as the existing judicial practice under the guidance of two Acts of the RF Supreme Court and several Resolutions of the Supreme Commercial Court of the RF dramatically changed approaches of the courts to estimating the circumstances of the insurance disputes.
On the one hand, the existing judicial practice has simplified and speeded up the adjudication of insurance disputes. On the other hand, this practice has created a number of significant legal problems that contradict the economic and legal essence of the insurance.
For example, the RF Supreme Court in its Review on Certain Questions of Judicial Practice in Insurance Disputes of 30 January 2013 and in Plenum Decree No 20 of 27 July 2013 did not take into account two important aspects of the insurance.
First, the insurance contract is a hazardous one, which relates to the legal essence of insurance. Second, insurance reserves are formed by insurers on the basis of all insurance contracts over a certain financial period, which concerns the economic essence of insurance. For this reason, the amount of insurance rate (tariff) is disproportionate to the size of an insurance policy.
Obviously, the RF Supreme Court and the RF Supreme Commercial Court did not take into consideration peculiarities and specific features of insurance, making it obligatory for insurers to pay out insurance compensation in cases not provided for by insurance contracts, namely:
a) hijacking of a vehicle with documents for the vehicle and a set of keys;
b) damage caused by a person not specified in the insurance policy;
c) calculation of the amount of the insurance indemnity not according to the insurance value of the property at the moment of concluding the insurance contract, but according to the market value calculated at the moment of the insurance event, excluding the calculation for the amortization of the damaged property and considering the hijacked vehicle as a real damage;
d) insurants’ violation of various rules and conditions of storage and exploitation of the insured property (including a vehicle) involving an administrative offence;
e) obligation of the insurant to pay the insurer – an individual person – a fine in the amount of 50% from the insurance compensation according to Part 6 Art 13 of Consumer Protection Law.
The courts deliver judgments on these cases contrary to the terms of insurance. This practice leads to the demolition of the Russian insurance contract law as the courts do not take into account terms of contracts and rules of insurance that are licensed through a public procedure in the insurance supervision authority. The insurers have become familiar with these terms and rules and agreed upon them. The above-mentioned terms of insurance on insurance risks are the subject of coordination between insurers and insurants while issuing an insurance policy. In this case, there is no sense in saying that insurers misinform insurants (as the weaker side in an insurance contract) about the terms of insurance settlement payment.
The courts resolve insurance disputes in public, or rather coercive, procedure. They interfere with private law relationships of the parties to a business transaction. By doing this, the courts, in fact, change the terms of insurance contracts, making the insurers pay compensation contrary to the parties’ agreement. This results in trespassing basic principles of the civil law, such as the autonomy of will, equality of the parties to a contract, and the freedom of contract. The subject of the contract changes, and the contract from a hazardous deal turns into a bank guarantee.
There would be no problem if the legal model for effectuating insurance contracts, i.e. unconditional payment of compensation, proposed by the RF highest judicial authorities, were ensured by the proportionality of the amount charged for the insurance service and the amount of insurance settlement payment. In this case, the insurance contract is to be considered and recognised as a typical (non-hazardous civil contract) contract the performance of which does not depend upon risky accidental circumstances.
Fines of 50% under the Consumer Protection Law and additional above-mentioned risky options not covered by insurance contracts are not provided for by insurance premiums and insurance reserves. This model of legal regulation of insurance relationships leads to the loss of financial stability of insurers. It may also lead to the loss of the civil institution of insurance in Russia as a type of a hazardous contract.
If courts come to the conclusion that an insurance contract is concluded under the influence of wrong belief and on crippling terms for the insurant, then they have to declare such contracts void or voidable under the rules of Chapter 9 of the RF Civil Code, but not to make the insures pay insurance claims that are not provided for by the insurance contracts. The same is true about disproportionate fines.
The following tendencies have characterised the Russian insurance market in the past year:
a) insurance service charges have been reduced, the total cumulative amount of the insurance reserves of the insurers (due to the insurance payments in accordance with court decisions) has reduced as well;
b) the insurance portfolio has switched more to vehicle insurance;
c) the amount of insurance compensation is calculated not in accordance with the value at the moment the insurance agreement was concluded, but according to the market value at the moment of the insurance event, excluding the calculation of amortization of the damaged property and treating the hijacked vehicle as a real loss;
d) the insurers’ operational expenses for the maintenance and technical support of insurance services are not reducing but rising as supporting and maintaining insurance contracts is a very labor-consuming service, etc.
These tendencies are only a part of the problem that is to be solved by insurers in the new 2014 year. Moreover, this tendency can hardly be called favourable for the Russian insurance market. So, it is necessary to understand what suddenly influenced the worsening of the general financial situation of the insurance market. Insurance reserves are temporary free funds accumulated and placed by the insurer into the national economy through the banking system, that in its turn gives credits to individuals and enterprises.
Moreover, if the recovered insurance payments (under the aegis of court rulings) were given to the insurants in full, then their amount would be lower, for sure. But, the most part of these payments lands in the hands of so-called insurance lawyers. They succeed not because of their experience and legal expertise but due to the judicial practice that favors insurants whose side courts and judges usually take.
Judicial practice in the sphere of insurance contracts shows that courts do not often examine the cause and effect relationship between losses declared by insurants and aleatory circumstances provided for by insurance contracts. Courts consider only the fact of the damage, which contradicts the rules and principles of performing an insurance contract stipulated by Art. 929 of the RF Civil Code.
Insurance compensations payouts are the main indicator of the financial stability of insurers. At present, many insurers have this index higher than the normal combined loss ratio. This fact has a negative effect on their financial stability and normative index of insurance reserves. The cause lies in inadequate, disproportional insurance payments that contradict the terms of insurance. Insurance payouts are made according to indisputable court decisions that are not provided for by the adequate insurance reserves.
In the current situation, we can only hope that in 2014 the Research Advisory Council of the joint Highest Judicial Authority of the Russian Federation will examine the problem of insurance disputes again, taking into account that an insurance contract is a hazardous deal but not a bank guarantee, and that insurance tariffs and insurance reserves are calculated and formed by insurers with due regard for all risky circumstances provided for by terms of insurance contract. The council will also have to understand that the insurance premium is not proportionate to the amount of the insurance compensation and is calculated with consideration for risky components of insurance contracts.