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Maximum liability of an insurance company

12.12.2006

A recent judgement of the Supreme Court regarding non-life insurance contracts (judgement No. 3-2-1-90-06, dated 25 October 2006) may bring about rewrites of standard-term insurance contracts used by insurance companies.

The issue placed before the Civil Chamber of the Supreme Court revolved around the amount of insurance indemnity paid under a non-life insurance contact. The Civil Chamber gave guidance inter alia on the question whether it is possible under Estonian law to agree upon multiple or alternative sums insured (maximum amounts payable by the insurance company upon the occurrence of the insured event) in an insurance contract?
The Civil Chamber answered the question in the affirmative and gave indications to insurance market participants as to the wording and representation on such agreements in standard-term insurance contracts.

Facts of the Case

A company (the plaintiff) had concluded an insurance contract with an insurance company (the defendant) whereby all the assets (buildings, machinery and goods) of the plaintiff had been insured against damages. Characteristically to the market practice, the insurance contract consisted of various documents such as risk assessment questionnaire, insurance offering and standard terms used by the defendant for non-life insurance contracts. The sum insured, however, was agreed upon somewhat ambiguously - the insurance policy and some other documents (e.g. the insurance offering) set forth the sum insured as a maximum amount of money in respect of all the plaintiff's assets, but the standard terms referred to in the policy provided that each item belonging to the assets of the plaintiff will be deemed as a separate insured object and that the sum insured will be equal to the balance sheet acquisition cost for each respective item.

Shortly after the conclusion of the insurance contract, a fire broke out on the insured object and the machinery of the plaintiff was destroyed. The defendant paid out the insurance indemnity according to the provision in the standard terms, i.e. considering the sum insured to be the aggregate sum of the balance sheet acquisition costs of separate machines destroyed by the fire.

Procedural History

The plaintiff turned to the court of first instance arguing that the basis for insurance indemnity should have been the maximum amount as shown in the insurance policy. The court of first instance satisfied the plaintiff's claim. The court of second instance overruled this decision and held that the agreement contained in the standard terms applies. It further held that the agreement on maximum sum insured as shown in the insurance policy does not exclude the possibility to agree within the standard terms that the sum insured will be determined for each separate item insured in the framework of general asset insurance.

Supreme Court Judgement

The dispute reached the Supreme Court where the plaintiff argued that the maximum liability amount of an insurance company (sum insured) cannot be agreed upon alternatively in an insurance contract.

The Civil Chamber disagreed with the plaintiff and stated that the agreements on "multi-stage" maximum liability of an insurance company are lawful. However, the Civil Chamber disagreed with the court of second instance as well and held that the latter's argumentation had been insufficient. The Civil Chamber stated that the court of second instance superficially based its conclusion on the provision in the standard terms whereby the sum insured was determined separately for each insured object. The judgement of the Civil Chamber orders the court of second instance to analyse the case in the light of the regulation of standard term contracts.

In the opinion of the Civil Chamber, the agreement on "multi-stage" maximum liability of an insurance company may be contained in the standard terms that will be deemed part of the insurance contract. However, such an agreement must be worded in understandable manner to the policyholder. The agreement will be considered understandable if a reasonable policyholder can clearly understand at the conclusion of the insurance contract how (based on which sum insured) the insurance indemnity will be calculated upon occurrence of the insured event. The agreement on "multi-stage" maximum liability of the insurance company will be considered unreasonably harmful for the policyholder and thus void if the insurance premiums are not connected to the sum according to which the insurance indemnity will be calculated upon occurrence of the insured event.

The Civil Chamber referred to the provision of law stating that in case of doubt, the standard terms will be interpreted to the detriment of the party supplying the terms, i.e. an insurance company. The insurance companies should therefore better their standard terms in line with the arguments of the Civil Chamber if needed.

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