Property and personal insurance policies taken out after 9 August 2007 are affected by changes to the Civil Code.

The changes affect the conclusion, performance and contents of both property and personal insurance policies, but particularly affect property insurance.

They were intended to reflect economic conditions and the needs of the insurance market, improving protection for policyholders, insured parties and injured parties while at the same time guaranteeing the interests of insurers. However, they have only been partially successful.

The basic changes affecting property insurance policies and their implications for insurers and brokers are discussed in eight parts:

  • Insurable interests in property insurance

  • Termination of property insurance

  • Refunding the premium on termination

  • The obligation to disclose circumstances relevant to assessment of the risk

  • Changes in the likelihood of an insured event occurring

  • The obligation to notify the occurrence of an insured event

  • The obligation to mitigate loss

  • Changes affecting civil liability insurance

Insurable Interests In Property Insurance

There is a new definition of insurable interest in property insurance. Previously, policies could cover either a property or civil liability. That principle reflected "the theory of property" prevailing under the old socialist regime. In accordance with that theory, only physical creations could be covered by insurance. Now, insurance can cover any property interest that is not in conflict with the law and can be given a monetary value. This means, that "the theory of interest", which assumes a relationship between the policyholder and the interest being insured, has been recognised by Polish law.

The change is largely symbolic as the theory of interest was already in use in the Polish legal system and had also been confirmed by decisions of the Polish Supreme Court. For example, risks of loss of profits or insufficient income could be covered under the Insurance Activity Act even though they were not risks which fell within the old socialist theory of property.

However, the express recognition of the theory of interest may give the insurance market more flexibility to develop new types of insurance to meet the needs of customers and not be restricted by the old socialist definition of property.

Law: Civil Code, Article 821

Termination Of Property Insurance

Under the new provisions, fixed-term property insurance policies — which most property insurance policies are — may only be terminated by the insurer in certain circumstances specified by law or for material reasons contained in the policy document or the insurer's general terms and conditions.

Insurers wishing to be able to terminate in more than just the statutory circumstances must therefore take care to ensure that any additional circumstances are clearly specified as material reasons in the policy document or the general terms and conditions.

Curiously, the new provisions do not give policyholders any express right to terminate fixed-term policies. This could be interpreted as meaning that they are not entitled to terminate but it might also be argued, given that the changes were intended to increase protection for policyholders, that they are able to terminate at any time for any reason and to receive a refund of the premium for the unexpired period.

Law: Civil Code, Article 812 § 5

Refunding The Premium On Termination

Where a policy is terminated before expiry of the fixed term, the new provisions entitle the policyholder to be reimbursed the portion of the premium corresponding to the unexpired part of the term. The only instance where this does not apply is where the sum insured has been exhausted.

Under the Polish legal insurance framework, the policyholder's payment of a premium is equivalent performance to the insurer's provision of insurance coverage for the insurance period. Therefore, any repayment is made pro rata, reflecting the number of unused days as a proportion of the whole insurance period.

Law: Civil Code, Article 813 § 1

The Obligation To Disclose Circumstances Relevant To Assessment Of The Risk

Before taking out a policy, policyholders must disclose all matters raised in the proposal form (or other insurer-produced document) which are relevant to the insurer's assessment of the risk. The policy may also require them to notify the insurer immediately on becoming aware of any changes in such circumstances during the insurance period.

These obligations previously applied to policyholders but now also apply to the insured (where different) except where the insured is unaware of the policy, and to the policyholder's representative (in practice, the broker). Non-disclosure of material circumstances will release the insurer from the obligation to cover the loss suffered where there is a causal connection between the undisclosed circumstances and this loss.

The burden of proof rests with the insurer unless the non-disclosure is deliberate, in which case there is a presumption that the insured event and its consequences (ie. the loss suffered) are due to the undisclosed circumstances, and the burden of proving otherwise rests with the policyholder or insured.

Insurers may have serious difficulty obtaining evidence necessary to prove a causal connection and they may find it equally difficult to prove intentional non-disclosure, where they wish to reverse the burden of proof.

Law: Civil Code, Article 815

Changes In The Likelihood Of An Insured Event Occurring

Where circumstances are identified which make an insured event materially more or less likely to occur, either party can seek a change in the premium to reflect the changed circumstances. Where this happens, the other party has 14 days within which it may terminate the policy with immediate effect. If it contests the grounds for changing the premium, the dispute may be resolved by court proceedings.

Previously, the right to alter the premium was only available to insurers in circumstances increasing the likelihood of an insured event. The change prevents insurers from reducing the insurance indemnity, where circumstances which increase the likelihood of an insured event were indentified after the event occured.

The change also prevents the insurers from rescinding the policy where they would not have entered into it, had the likelihood of an insured event been as great at the outset as it became after the change in circumstances.Similarly, insurers can no longer refuse to pay the claim when an insured event occurs which is entirely due to such circumstances and those circumstances were identified after the event occurred or within a month before it occurred.

The idea behind this change was to balance the rights of the parties but it actually gives policyholders a very easy way to end a policy. For example, if a policyholder installs additional security devices on the insured property and asks for the premium to be reduced, an insurer which disagrees with such a request would either have to terminate the policy or start costly and time-consuming legal proceedings.

Law: Civil Code, Article 816

The Obligation To Notify The Insurer Of An Insured Event

The changes include comprehensive provisions (previously lacking) for notifying insurers when an insured event has occured:

  • allowing the obligation to be included in the policy or general insurance terms and conditions with a specified time limit for notification, if required

  • allowing the obligation to apply to both policyholder and insured (where different), except where the insured is unaware of the policy

  • allowing the insurer to reduce the indemnity in cases of intentional or grossly-negligent failure to notify an insured event as required, as long as:

  • the failure either increased the loss or made it impossible for the insurer to establish the circumstances of the event's occurrence and its consequences, and

  • the insurer did not receive notification of the circumstances within the time limit via other sources

This change is welcome in that it not only reflects previous decisions by the courts on the appropriate sanctions for failure to notify but should also help the insurance industry to arrive at common general terms and conditions of insurance.

The only uncertainty concerns whether insurers can reduce the insurance indemnity to nil in cases of failure to notify or late notification of the occurrence of an insured event which makes it impossible to establish the circumstances of the event's occurrence and its consequences. The answer is probably that they can but the Civil Code does not say so expressly.

Law: Civil Code, Article 818

The Obligation To Mitigate Loss

The new provisions state that, if an insured event occurs, policyholders are obliged to use the means (not "any means", as previously) available to them to rescue the insured property and prevent or minimise their loss. Insurers are not liable for any damage resulting from policyholders' intentional or grossly-negligent failure to use the means available them. Where policyholders do use expedient and available means, insurers are liable to reimburse them for their costs of doing so, whether or not those means are effective.

The new provisions reflect terms previously appearing in general insurance terms and conditions by allowing insurers to require policyholders (and insureds, where different) to secure the possibility of pursuing claims for damages against the parties responsible for any loss resulting from an insured event. They do not, however, mention any sanctions for breach of this requirement – an omission which may need to be rectified by further legislation.

These changes are intended to protect policyholders and insureds by limiting the insurer's ability to exempt itself from liability for those losses which result from the failure to mitigate. This means insurers wishing to exempt themselves will not only have to establish and prove the extent of each loss but also prove that it resulted from the failure to mitigate.

Law: Civil Code, Article 826

Changes Affecting Civil Liability Insurance

Unless the parties agree otherwise, civil liability insurance policies will cover losses inflicted on third parties for which the policyholder or insured is liable and which result from an insured event occurring during the insurance period. The parties may also extend cover to include losses occurring, identified or reported during the insurance period.

The occurrence of an insured event is still the default trigger for claims but this change makes it possible for the parties to base insurance entirely on other triggers, such as when the loss occurred or manifested itself or when a claim is made.

There are concerns that this may not comply with other provisions of Polish law: for example, insurance which is triggered when a claim is made may not comply with compulsory limitation periods. The usual limitation period for claims by policyholders against insurers is three years whereas the period for claims by third parties against insureds could be as long as 10 years.

The new provisions also increase protection for injured third parties who already have the right under Polish law to pursue their claim directly against the insurer rather than via the party responsible for the loss (ie the insured). Insurers are no longer able to resist liability by relying on the policyholder's or insured's breach of their obligations under the policy or general insurance terms and conditions, where the breach occurred after the insured event.

This change may go too far, as it puts insurers in the position of having to indemnify third parties for events of which it has not even been notified by the policyholder or insured.

Law: Civil Code, Article 822

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The original publication date for this article was 21/07/2008.