Notification of claims and circumstances by the insured and applicable time bars have long been under discussion under Turkish Insurance Law, in particular due to issues associated with the mandatory character of certain insurance provisions.
Especially in the case of local policies based on foreign market reinsurance wording a number of problems associated with the application of local law to those policies, questions of validity and interpretation arise. Similarly, the choice and application of foreign law, due to the mandatory character of certain statutory insurance provisions, public order considerations or lack of a foreign element, may be hindered or limited, leading to similar problems.
A new Turkish Commercial Code ("the Code") including an Insurance Section is expected to enter into force soon addressing some of the problems referred to above. Below an outline will be given in relation to questions frequently coming up in relation to notification of claims and time bars. Reference to the relevant provisions of the Draft Code provisions will also be made.
Although the general principle is the application of freedom of contract, the Insurance Section of the Code contains a number of mandatory provisions, non compliance with which renders, according to the type of the relevant provision, the entire contract or the relevant provision void. Certain other provisions are semi- mandatory i.e. the statutory provision of the Code applies automatically where the contract provision is contrary to the interests of the insured.
The approach of Turkish Courts has been mostly in favor of the insured and quite strict in relation to interpretation and application of these rules.
The Code1 in relation to the duty of notification of the occurrence of the risk under Third Party Financial Liability Policies provides that "Where the policy obliges the insurer to defend the insured, the insured shall notify the insurer within five days upon his formal notification of the court proceedings issued by the third party. Where the policy foresees direct payment by the insurer to third party, the period of five days starts on the date the insured is informed of the finalization of a court judgment against him or the date of payment by the insured to the third party where there is no court claim or on the date payment has been made by the insured without any court proceedings against him having finalized.
The above is a semi – mandatory provision as described above.
In case of non – compliance by the insured with the duty of notification of the occurrence of the risk, the insured loses his rights under the policy where he willfully failed to notify the insurer. Where the insured was negligent, insurance cover may be reduced according to the gravity of such negligence.2 This is a mandatory provision non – compliance with which renders the relevant contract provision void.
As outlined above, where the insurer has undertaken the defense of the insured, the notification period starts from the date of formal notification to the insured of the court action brought against him by third party. Where there is no such undertaking by the insurer, the period for notification starts from the date of notification of the insured of the finalization of the court judgment on his liability and where there is no court judgment for various reasons, the period starts from the date of payment by the insured to the third party.
It is not clear under the Code whether the insured can be forced to notify earlier, where e.g. the insured has not undertaken the defense under the policy, however reserved his right to do so, as is the case in many policies and claims control clauses. Where the policy has stipulated for an earlier date for the duty of notification to arise or for a shorter term than the five days for notification, the courts have tended to apply the provisions of the Code rather then the policy provisions. The Code does not foresee any duty of notification before payment or finalization of a court judgment where the insured has not undertaken the defense of the insured. However considering the importance to the insurer of the availability of such an option, it should be open to him to oblige the insured to notify at an earlier stage i.e. from the date of notification of the court action against the insured and the semi – mandatory character of article 1292 should not be a barrier in that respect.3 However it is doubtful whether a Turkish court would take the same approach.
It is neither settled under the provision of the Act what would happen if the insured before the notification or issuance of any court proceedings, settles with and pays the third party who brought a claim outside the court, despite the insurer' s undertaking for defense. In such case there is no court case and no notification of a court case to the insured, in other words the settlement would take place before the duty of notification even arises under the relevant provision of the Commercial Code. Forcing the insured to notify before that stage might trigger the defense in relation to the semi- mandatory character of the statutory provision i.e. prohibition of amendment of the statutory provision contrary to the interests of the insured. A counter argument in turn could be available to the insurer in certain circumstances to the effect that the insured failed in mitigating the loss or willfully gave rise to the occurrence of the loss in making such payment before notifying the insurer.
The draft Code explicitly provides for the burden of the insured to take the consent of the insurer before a settlement with the third party. Accordingly, upon notification by the insured of a third party claim, the insurer within five days of such notification shall inform the insured of its decision on taking any legal action and helping the defense. If the insurer has not made such notification, the insurer shall compensate the insured as soon as the liability amount has become final and conclusive against the insured under court proceedings. However where the insured has settled with the third party without the prior consent of the insurer, unless the insurer has given its consent within fifteen days of notification of such settlement, the settlement would not be binding on the insurer. The insurer cannot unreasonably withhold consent to the settlement.
The draft Code in relation to the duty of notification of the claim, provides that "the insured shall "within one week" inform the insurer of events which would lead to his liability. Where there is a claim by a third party, the insured shall inform the insurer within one week4 of such claim unless the date of start of application of the one week period has not been stipulated otherwise by contract". This is a semi – mandatory provision and cannot be amended by contract contrary to the interests of the insured.
The draft Code aims to provide the insurer with information and the ability to take requisite measures on potential claims and imposes upon the insured the duty of notification of events which would lead to his liability5". In that respect there is no difference between policies where the insurer has undertaken the defense of the insured as is the case under the current Code.
It is however yet to be seen what would be deemed as "events which would lead to liability of the insured" and at what stage the insured would be expected to have notified them to the insurer. Events such as application by the third party to the court for e.g. expert evidence or notification of the insured of court proceedings issued against the third party (in order to help the defense of the third party who could in turn have a right of recourse to the insured), shall be deemed as events which should be notified to the insurer.6
Compliance with the duty of notification especially under policies based on foreign wording or with a choice of foreign law is sometimes provided as a condition precedent to cover. Due to the mandatory character of the relevant provision in the current as well as the draft Code, it is not important what sanction is provided by the parties to the non – compliance with the relevant duty as long as Turkish Law is applied7.
The sanction to be applied under the current Code depends on whether non – compliance was willful or by negligence. The test for "willful failure to notify" where the insurer has the right to reject cover, is high and would only apply in exceptional circumstances. The court would apply the principle of good faith, how in the relevant circumstances and in the natural flow of events a person in the status of the insured would have been expected to act, and the policy wording. To name a few, failure to notify by the insured with the idea that the loss or his acts would not be noticed by the third party, making a misleading notification with the aim of effecting the insurer's judgment in relation to cover were defined by courts8 as willful failure to notify where cover can be rejected.
Where the duty of notification has not been provided under the policy in a sufficiently clear way this might prevent the finding of heavy negligence or willful failure. The conduct of the insurer or the agent can also be relevant in the determination of the existence of such negligence or willful failure.9
It is not settled whether a causal connection between the failure to notify and the loss should exist for any sanction to apply. The draft Code explicitly foresees a requirement for a causal link between failure to notify and the increase of the loss. In such case, failure in notification or late notification would, depending on the gravity of negligence, should lead to reduction in the amount of insurance compensation. Accordingly a willful failure to notify could lead to total avoidance of insurance payment.
The fulfillment of the duty of notification also affects the burden of proof such that whereas the insurer is normally under the burden of proof where there is no cover, in circumstances where the insured willfully failed in true and timely notification, the burden of proof will shift.10 The insurer is under the burden of proof of the insured's failure to notify11 and the fact that the insured was aware of the facts which were required to be notified.12
Claims arising under insurance contracts are subject to a time bar of two years13. Amendment of time bar provisions and relevant time bar periods would render them invalid.14 However there are a number of Turkish Court of Appeal precedents where provisions extending the time bar period for insurance claims over a two years period were held valid.15
The Commercial Code16 provides that the payment of the insurance amount becomes due as soon as the duty of notification under art. 1292 arises. In other words upon lapse of the five days period for notification and the period starts to run from the due date. However for an amount to become due, it has to be crystallized17, which most of the time is not the case at the time the insured has notified the occurrence of the risk. This provision does not take into account the need of the insurer for investigating the amount of the loss and evaluate his liability.
The approach of the court of appeal18 tends to hold clauses valid where the due date has been set for a later date than foreseen in the Code. However these judgments in evaluating the interest of the insured do not consider the interest of the insured in obtaining insurance payment as early as possible19 and the effect of determination of the due date to the application of interest to the compensation amount. The draft Code provides a five years time bar for claims arising from third party liability policies to run from the date of the occurrence of "the insured event." Non – compliant contract provisions shall be invalid.
The Draft Code contains a number of wording problems and it is yet to be seen to what extent it will provide satisfactory solutions.
1 Article 1292 /1
2 Article 1292 / 3
3 Ünan Samim, (Risk under Third Party Liability Policies) İstege Bagli Sorumluluk Sigortlarinda Riziko, Beta Basım Yayım Dagitim A.S, 1998, pg 25, ftnt 75
4 The period of one week shall be deemed to run from the date of knowledge by the insured.; Ünan, pg 191, ftnt 691
5 Reasoning of the Draft Code in relation to Article 1475 (1)
6 Senocak Kemal, (Professional Indemnity Insurance), Mesleki Sorumluluk Sigortası, June 2000, Turhan Yayınevi, pg 156 ftnt, 316, 317
7 A choice of foreign applicable law can be made where the policy has a foreign element. The choice of a foreign element has been considered to fulfil the requirement of the existence of a foreign element under an insurance policy in the judgment of the Court of Appeal judgment dated 17/04/2006 no 2005/233 – 2006/ 223
8 Turkish Court of Appeal 11. Chamber , 11.03.2002; 2001/9817 E; 2002/2111K; Turkish Court of Appeal 11. Chamber, 09.04.2005; 2004/6950 E. 2005/3929 K.
9 Ünan, pg 193
10 Turkish Court of Appeal 11. Chamber, 07/10/2005; 2005/10826 E, 2005/9439 K
11 Turkish Court of Appeal 11. Chamber, 11.03.2002, 2001/9716 E, 2002/2178K
12 Ünan, pg 193
13 Article 1268
14 Article 6 of the Commercial Code.
15 Turkish Court of Appeal 11. Chamber, .30.11.1979, E.1979/3501, K.1979/5473; Court of Appeal General Assembly Decision 3.11.1982, E.1981/11-34, K.1982/870
16 Article 1299
17 Atabek Resat, , (The start of time bar periods under Insurance Law) Sigorta Hukukunda Zamanaşımının Başlangıcı, Ank.1962, pg 623-646
18 Court of Appeal General Assembly Decision 3.11.1982, E.1981/11-34, K.1982/870
19 Kender Rayegan, (Due date of the insurance claim) Sigorta Tazminatının Muacceliyeti Meselesi", http://adliyem.sitemynet/sigmuacceliyeti.htm , pg 5
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.