Insurance Litigation

Law and Practice

1. Rules Governing Insurer Disputes

1.1 Statutory and Procedural Regime

Türkiye adopts a continental law system and legislates many of its primary laws in lieu of Swiss law. Therefore, the main piece of legislation is the codified law.

The Turkish insurance system is mainly codified in the Turkish Commercial Code (TCC). In light of this, insurance has been defined as a contract by which the insurer undertakes to indemnify the insured in case of damage which harms an interest of the person that can be measured monetarily, in exchange for the payment of an insurance premium under Article 1401 of the TCC.

Due to the nature of being a contract, Turkish Code of Obligations (TCO) articles governing contracts is applicable for insurance contracts as the main source of legislation in addition to specific insurance articles under the TCC and other legislation, where applicable.

In accordance with the main Codes, Communiqués published by the Ministry of Treasury and Finance named as “General Conditions of Insurance Contracts” are the mandatory terms to be included under specific types of insurance to complement the TCC. These General Conditions may vary depending on the type of insurance product. Please note that there are no published General Conditions for all insurance types and these cannot expected due to insurance being contractual in nature. Since there are no published General Conditions, freedom of contract principles apply to insurance contracts, save for public policy and similar restrictions stated under TCC and TCO.

In addition to the insurance contract between insurers and the insured, there is an Insurance Code which governs the regulatory framework of the insurers and insurance market players such as reinsurers, brokers, agents and loss adjusters.

As for the regulator, according to the Presidential Decree dated 2019, the Insurance and Private Pension Regulation and Supervision Agency has been formed to prepare and implement the legislation and to monitor and direct its implementation to these parties.

1.2 Litigation Process and Rules on Limitation

According to Article 9 of the Turkish Constitution, the conventional dispute resolution mechanism is court litigation in Türkiye, and such authority cannot be outsourced or transferred to third parties.

Based on the Civil Procedural Code (CPC), classifying claims based on value, matter of dispute and jurisdiction and TCC ruling insurance disputes within commercial disputes, insurance disputes are principally held before the commercial courts of first instance, save for an exception in which certain personal insurances can be disputed before the consumer courts as per Article 3 of the Consumer Protection Law. In the jurisdictions where no commercial court has been established, civil courts are competent.

Commercial disputes are subject to following litigation stages determined by the CPC:

• application to the mandatory mediator and failing to settle;
• submission of written statement of claims, defence, proofs;
• preliminary hearing, in which certain procedural matters must be resolved, such as limitation period, case conditions, preliminary objection, competence of the court, jurisdiction of the court, objections on existence of arbitration agreements and similar;
• judge’s assessment of submitted proofs and collection of additional proof from third parties such as court-appointed experts;
• court of first instance decision;
• parties’ right to appeal to the first appeals court (İstinaf) for claims having value over TRY17,830.00; and
• parties’ right to appeal to the second appeals court (Yargıtay) for claims having value over TRY238,735.737.

Filing the claim before the court is subject to upfront payment of ¼ of 6.831% of the total claimed value. The remaining ¾ is subject to payment during the appeals stages separately, or if the case is not appealed, with the definitive resolution. In addition to this, according to CPC, attorney fees are borne by the side in whose favour the case is not resolved in line with the official tariff published by the Turkish Bar Association. There are other court expenses such as expert fees, examination fees and postal fees to be taken into consideration. All of these litigation cost can be reclaimed.

1.3 Alternative Dispute Resolution (ADR)

Insurance Arbitration Commission

According to Article 30 of the Insurance Code, insurance arbitration is an alternative dispute resolution method that has been established by law for the resolution of disputes between the insurers and the policyholder or third parties, who benefit from the insurance contract. For this purpose, the Insurance Arbitration Commission was established under the Association of Insurance and Reinsurance Companies to resolve insurance disputes.

Arbitration in insurance differs from arbitration regulated under the CPC. According to the CPC, an arbitration agreement or arbitration clause is a precondition for the parties to apply for arbitration. Contrary to this legislation, in insurance disputes, parties can apply for arbitration without an arbitration agreement and/or clause.

This specific arbitration method was legislated in 2013 as a result of demand by insurers, mostly because of IBNR-related complains and lengthy management of a massive of volume cases. Insurers do have the right to voluntarily participate and have themselves challenged by third parties to this alternative method, save for mandatory insurance contracts such as motor third-party liability insurance.

The Commission offers a new and practical alternative to insurance disputes that allows applicants to get results faster than they would through court litigation. In this framework, disputes before the commission are resolved by independent arbitrators. The structure and duties of the Commission, such as participation fee, principles of application, procedures and principles have been determined by the Regulation on Arbitration in Insurance. The average time to resolve a dispute was 89 days in 2022.

The insurance arbitration procedure is subject to the following stages, determined by the Insurance Code:

• submission of one written statement of claim and one statement of defence along with proof
• arbitrator’s assessment of submitted proof and collection of additional proof from third parties such as court-appointed experts;
• Arbitration Commission’s first decision;
• appeals to the Arbitration Commission (İtiraz Hakem Heyeti), if the claim has value over TRY15,000; and
• appeals to the Appeals Court (Yargıtay), if the claim has value over TRY238,731.

The first instance must be finalised within four months, as per Article 30/16, and appeals to the Commission must be finalised within two months, as per Article 30/12 of the Insurance Code. These timelines can be extended by the mutual agreement of the parties.

There were more than 500,000 applications made to the Insurance Arbitration Commission in 2022.

Mediation (Voluntary and Mandatory)

According to the Turkish Mediation Law No 6325 (the “Mediation Law”), mediator has been defined as a licensed, independent, and impartial licensed third party, whose objective is to bring the parties to a dispute together for the purpose of facilitating the communication between them and in order for them to reach a settlement.

The settlement agreement before the mediator has the effect of a court judgment and any settled matters cannot be litigated again.

The Mediation Law has been amended effective as of 2018 introducing a new principle: “Mandatory Mediation”, which was broadened to be effective for commercial disputes as of 1 January 2019. The difference between voluntary and mandatory mediation relates to the mediators’ appointment procedures. The mandatory mediator is appointed by the government (The Mediation Bureau in each courthouse) in case it is appointed only by one of the parties. However, in case the parties mutually agree on appointment of a specific mediator, it is allowed by law that such mediator can act as the mandatory mediator as stated by the law.

That being said, insurance disputes are mainly connected to disagreements on either (i) the scope of the insurance coverage, (ii) existence of claims-handling documents, or (iii) the amount of insurance indemnity. The latter two generally do not mandatorily require the involvement of a judge and therefore it is more likely that the parties may reach a mutual understanding once the missing document is submitted and/or the calculation principles are agreed upon.

Compared to arbitration, mediation may be a more cost and time-efficient dispute resolution mechanism. However, the settlement minutes executed by way of international mediation cannot be enforced as easily as arbitral awards, which are subject to a regulated enforcement practice under the New York Convention. However, the Singapore Convention, which entered into force on 11 April 2022 in Türkiye and provides an international set of rules facilitating the enforcement of settlement minutes, is expected to pave the way for mediation to become more appealing for cross-border commercial disputes.

Considering the lengthy court litigation process in Türkiye and economic risks such as devaluation and FX fluctuation, need for capital, etc, out-of-court settlements have been quite popular in the past. Mediation gained some momentum following the introduction of mandatory practice by law in 2018, and from there maintained its presence in the insurance industry as well.

2. Jurisdiction and Choice of Law

2.1 Rules Governing Insurance Disputes

Insurance Policies

According to Article 3 of the Insurance Code, insurers and/or reinsurers that are to operate an insurance business, which can be defined as an insurance operation, which undertakes to indemnify individuals and legal entities in case of damage, can be measured monetarily in exchange for the payment of premium for business operations purposes, within the country borders of Türkiye, must be established locally in the form or either a joint-stock company or a co-operative. In addition to this, as per Article 5 of the Insurance Code, insurers and reinsurers must obtain a licence to ensure their operations for each insurance branch they want to operate within the country borders of the Republic of Türkiye.

According to Article 15 of the Insurance Code, residents in Türkiye are obliged to take out their insurance regarding risks within the country’s borders from insurance companies operating in Türkiye. Exceptions to this article are as follows:

• transportation insurance for export and import goods;
• hull insurances to be taken out for airplanes, ships and helicopters, when purchased with foreign loans, exclusively limited to the amount of the foreign loan and until the foreign debt is repaid, and limited to the duration of the financial leasing agreement when they are brought from abroad through financial leasing;
• liability insurance arising from the operation of ships;
• life insurances; and
• personal accident, sickness, health and motor vehicle insurance for only the period that they will be outside of Türkiye, limited to this period or during their temporary stay abroad.

Consequently, the general rule for insurance policies is that they will be governed by Turkish law for the residents in Türkiye, covering a risk within borders of Türkiye, excluding the above-mentioned exceptions.

Reinsurance Contracts

According to Article 1403 of the TCC, insurers can reinsure the insured risk under the conditions as it likes. In addition, reinsurance, doesn’t remove the liabilities and debts of the insurer against the policyholder and doesn’t give the rights to the policyholder to take an action and make a claim against the reinsurer.

In Türkiye’s reinsurance system, reinsurance contracts are only binding for the insurer and reinsurer. The policyholder or the insured is not party to this reinsurance agreement. For this reason, the policyholder or insured may not direct a claim to the reinsurer. For this reason, regarding the reinsured policies, two different contracts would be constituted: (i) the insurance policy between policyholder/insured and insurer, and (ii) the reinsurance contract, between insurer and reinsurer.

According to the governing law for reinsurance contracts, as per Article 24 of the International Private and Civil Procedure Law (IPCPL), contracting parties have the freedom to choose foreign law to be applied to their contract, only if such contract contains a foreign element, which can be described as the element that qualifies a legal relationship in connection with at least two legal systems.

In this case, it is possible to choose another governing law besides Turkish law between the reinsurer and insurer.

2.2 Enforcement of Foreign Judgments

The conditions for the recognition and enforcement of foreign judgments are regulated between Articles 50 and 59 of the IPCPL. Accordingly, it is possible to enforce a foreign judgment in Türkiye with following conditions:

• reciprocity (bilateral or multiple agreements between countries should be considered);
• Turkish courts should not have exclusive jurisdiction over the legal dispute subject to recognition or enforcement;
• the judgment of the foreign court should not be excessive of jurisdiction;
• foreign judgment should not be contrary to public order or Turkish legislation; and
• the right of defence must be respected in the foreign judgment.

Moreover, for the recognition and enforcement of the foreign judgment a lawsuit must be filed before Turkish courts to determine whether the foreign judgment met these conditions. In that lawsuit, the Turkish judge will examine whether the relevant foreign judgment meets the above conditions.

Therefore, the recognition and enforcement of foreign judgments for insurers will be considered within the same scope, which is whether the foreign court judgment met the required conditions or not. If the foreign judgment meets the conditions then it would be enforced in Türkiye.

2.3 Unique Features of Litigation Procedure

Mandatory Mediation

Court litigation procedure in commercial disputes takes four to five years on average in Türkiye.  This is because there are almost 200,000 commercial disputes per year litigated before the courts. Legislation attempts to reduce this number by encouraging parties to make use of alternative dispute resolution methods.

There is a new unique feature called “mandatory mediation” in the litigation process in Türkiye, in terms of which parties must apply to mediation before they apply to court litigation. It is a prerequisite to bring any disputes to the civil courts. Insurance disputes and commercial disputes have been subject to this “mandatory mediation” since 1 January 2019. There were 483,702 applications to the mandatory mediation procedure regarding commercial disputes between 1 January 2019 and 4 May 2022, and 227,196 (52%) settlements have been made through mediation.

For this reason, out-of-court settlements have been quite popular in the past. Both mandatory and voluntary Mediation gained some momentum following the introduction of mandatory practice by law in 2019 and from there maintained its presence in the insurance industry as well.

Insurance Arbitration Commission

As mentioned in 1.3 Alternative Dispute Resolution (ADR), according to Article 30 of the Insurance Code, insurance arbitration is an alternative dispute resolution method that has been established by law for the resolution of disputes between the insurers and the policyholder or third parties, who benefit from the insurance contract.

Arbitration through the Insurance Arbitration Commission is much more common than court litigation in Türkiye. 72% of the insurance disputes in 2022 were solved through ADR methods such as through the Insurance Arbitration Commission or mediation.

Important Notes for Claims Handling

Notice of claims

According to Article 1446 of the TCC, the policyholder is obliged to note a claim as soon as it gets aware of it. Any indemnity obligation shall become due once the insurer’s claim review is finalised, but in any event within 45 days (15 days for life insurance claims).

Once the 45- or 15-day (depending on the insurance product) mark is surpassed and a claim review has not been finalised, principally, the insurer defaults.

Limitation period

According to Article 1420 of the TCC, claims arising from insurance contracts and claims for reimbursement of unnecessarily paid premiums or insurance amounts shall be time barred in two years from indemnity becoming due and payable.

Any third-party liability claims directed to the insurer shall be time barred in ten years from the indemnity becoming due and payable.

In case the basis of the insurance indemnity is a tortuous act, which is also deemed a crime, the limitation period shall be extended in line with the punishment sentence stated under the TCC.

In this regard, the limitation period for specific claims should be calculated based on the nature and elements of the claims. A uniform statute of limitations has not been foreseen, and it can change depending on the basis of the indemnity.

3. Arbitration and Insurance Disputes

3.1 Enforcement of Arbitration Provisions in Commercial Contracts

There are various arbitral provisions in legislation and practice in Türkiye. The most fundamental rules are regulated between Articles 407 and 444 of the CPC, which constitutes the national arbitration system. Accordingly, an arbitration agreement is an agreement by the parties to submit to an arbitrator or arbitral tribunal the resolution of all or part of the disputes that have arisen or may arise out of a contractual or non-contractual legal relationship. According to the same law, arbitral awards have the force and effect of court judgments and may only be subject to annulment for certain reasons.

In addition, Türkiye has an International Arbitration Code for disputes involving a foreign element. This Code is applicable to disputes that have a foreign element or disputes where the provisions of this Code have been chosen by the parties and where the seat of arbitration is determined as Türkiye.

Türkiye is also a member of the New York Convention on the enforcement of foreign arbitral awards and recognition of foreign arbitral awards is included in Articles 60 and 63 of the IPCPL in the country’s domestic legal system.

The Istanbul Arbitration Centre (ISTAC) is an institution providing dispute resolution services for both international and domestic parties. The ISTAC’s dispute resolution services are available to all contracting parties, including insurance or reinsurance companies.

While arbitration clauses in basic and uncomplicated insurance policies are not very common, complex insurance or reinsurance contracts do contain these clauses, for example, in respect of the recent large, publicly funded projects in Türkiye.

3.2 The New York Convention

Türkiye has been a member of the New York Convention since 1991. However, Türkiye signed the multinational treaties with the reservation that the Convention would only apply to disputes of a commercial nature.

In addition to the New York Convention, the enforcement of foreign arbitral awards is also regulated between Articles 60 and 63 of the IPCPL.

According to the IPCPL, to enforce foreign arbitral awards a lawsuit must be filed before Turkish Courts to determine whether the foreign arbitration award satisfies the conditions in Article 62 of the IPCPL, such as whether there was an arbitration agreement between the parties or whether the arbitral award was contrary to Turkish public order, etc.

3.3 The Use of Arbitration for Insurance Dispute Resolution

There are two types of arbitration practice in insurance law in Türkiye: (i) through the Insurance Arbitration Commission and (ii) through alternative arbitration centres or clauses.

Insurance Arbitration Commission

As mentioned previously, litigation procedures provide a very slow solution to any dispute in Türkiye, and ADR is provided for as an alternative. See 1.3 Alternative Dispute Resolution (ADR) for further discussion.

When the proportional distribution of the objection applications made against the decisions made in 2020 is examined by branch, it is seen that the highest number of objection applications are made against the decisions on motor third-party liability insurance with 89%.

Use of the Insurance Arbitration Court is much more common considering the litigation process in Türkiye. Besides being a lengthy process, there is also a risk of devaluation since there is ongoing high inflation in Türkiye which affects insurance companies directly for forex fluctuation and capital reserves.

72% of the insurance disputes in 2023 have been solved with alternative dispute resolution methods such as through the Insurance Arbitration Commission or through mediation. Insurers have been very supportive of the former.

Alternative Arbitration Centres for Insurance Disputes in Türkiye

Alternative arbitration practice in basic and uncomplicated insurance policies is not very common in Turkish insurance practice. However, complex insurance or reinsurance contracts frequently have chosen arbitration clauses.

In particular, there have been a lot of large, publicly funded projects in Türkiye recently. Since the insurance and reinsurance contracts of these projects are quite large and complex, they mostly contain arbitration clauses. For all other matters, particularly concerning insurance disputes of lesser value, Turkish parties tend to apply to the Insurance Arbitration Commission.

In this arbitration practice, international and domestic arbitrations are governed by different Codes. The International Arbitration Code applies to arbitration of an international nature, seated in Türkiye, or where its application is agreed to by the parties or arbitrators. Domestic arbitration is subject to the CPC, which only applies to arbitrations seated in Türkiye with no foreign element. Both laws are essentially based on the UNCITRAL Model Law.

The main arbitration organisations located in Türkiye are the:

• Istanbul Arbitration Centre (ISTAC);
• Istanbul Chamber of Commerce Arbitration and Mediation Centre (ITOTAM);
• Turkish Union of Chambers and Commodity Exchanges Court of Arbitration; and
• Istanbul Chamber of Commerce Arbitration Institution.

The International Court of Arbitration is often preferred, especially for cross-border insurance/reinsurance policies. Among the arbitration institutions in Türkiye, besides the Insurance Arbitration Commission, ISTAC is most often preferred by parties.

If the number of arbitrators is not agreed on by the parties, then the number of arbitrators must be three. Each party appoints one arbitrator, and then the two arbitrators determine the third arbitrator, who acts as the chairman. If one of the parties fails to appoint the arbitrator within 30 days (one month under the Civil Procedure Code) of receipt of the notification, or if the appointed two arbitrators fail to appoint the third arbitrator, the civil court of first instance appoints a third arbitrator at the request of a party.

If the parties agreed to have more than three arbitrators, the arbitrators who will appoint the last arbitrator are determined according to the paragraph above.

Where the parties agreed to have a sole arbitrator but failed to appoint the arbitrator, the civil court of first instance appoints the arbitrator at the request of a party.

Arbitral awards cannot be appealed, however cancellation of an award is possible. According to Article 15 of the International Arbitration Code and Article 439 of the Civil Procedure Code there are numerous grounds for the cancellation of an arbitration award such as:

• lack of legal standing of a party;
• invalidity of the arbitration clause;
• procedural errors in the appointment of arbitrators;
• failure to grant the arbitral award within the legal period;
• incompetence by the arbitrator or arbitral tribunal, or an incompetent decision contrary to law;
• failure to grant the arbitral award for part or the entire claim;
• procedural errors in the conduct of the arbitration proceedings;
• unfair treatment of the parties;
• the subject matter of the dispute not being appropriate for arbitration under Turkish law; and
• the award being contrary to public order.

Consequently, alternative arbitration practice in basic and uncomplicated insurance policies is not very common under Turkish insurance practice, however, complex insurance or reinsurance contracts frequently have chosen this alternative arbitration clause.

4. Coverage Disputes

4.1 Implied Terms

Turkish courts give particular importance to public order. The term “public order” is not explicitly defined in Turkish legislation. However, the concept of public order is interpreted narrowly in the Supreme Court decisions. Insurance contracts that contradict indispensable and fundamental Turkish legal principles are considered to violate public order.

Also, according to Article 2 of the Turkish Civil Code, everyone is obliged to abide by the rules of good faith when exercising their rights and fulfilling their obligations, and the law does not protect the abuse of rights. This article defines the basic concept of the Turkish legislation regarding “good faith”.

Besides these, the TCC sets general rules of an insurance policy and governs the rights of the parties to an insurance contract. There are some implied terms which parties cannot agree on the contrary. For example, according to Article 1404 of the TCC, the insurance policy must comply with the mandatory provisions of the law, and should be in order with public morality, public order and personal rights. As another example, a clause which limits the legal interest responsibility of the insurer is invalid.

4.2 Rights of Insurers

According to the Articles between 1435 and 1445 of the TCC, the policyholder is obliged to notify the insurer of all important matters that they know of or should know of before the constitution of the contract. In the case of failure to notify the insurer or giving incomplete or incorrect information about subject of the insurance policy, the insurer may withdraw from the contract within the period specified in Article 1440 or request a premium difference. According to Article 1440 of the TCC, withdrawal shall be notified to the policyholder within 15 days. This period starts with the insurer learning that the obligation has been breached. If the insurer requests a premium difference from the insured party, if the requested premium difference is not accepted within 10 days, the contract shall be deemed to have been withdrawn.

Besides, if the declaration obligation had been breached after the risk occurred with the negligent act of the insurer, if this breach would affect the amount of compensation or premiums of a risk, a deduction shall be made from the compensation according to the degree of negligence. If the fault of the policyholder is of the degree of intent, and there is a connection between risk and intent, the insurer’s obligation to pay indemnity shall be terminated.

On the other hand, if there is no connection between the negligence of the insured in not making the declaration and the risk occurring, the insurer shall pay the insurance indemnity or consideration by taking into account the ratio between the premium paid and the premium due.

4.3 Significant Trends in Policy Coverage Disputes

“Kahramanmaras Earthquake” and its Effects on Policy Coverage Disputes

Türkiye is located between African, Arabian, Eurasian and Anatolian tectonic plates, which are actively dynamic and generate active fault lines throughout the country. Due to its geological structure, earthquake risk has been continuously very high in Türkiye’s history.

Türkiye experiences an earthquake of >7.0 magnitude approximately every 20 years in its different regions. Therefore, when it comes to insurance, earthquake risk is actually expected, but not well prepared for. Earthquake risk is mostly managed by the Turkish Catastrophe Insurance Pool (TCIP) which has established a compulsory coverage that individuals can supplement by underwriting additional cover with local insurance companies. This compulsory earthquake coverage is limited to building damage, not business interruption or profit loss damages, etc.

However, since there has been a high inflation rate in Türkiye for two years, and the fact that building construction costs are increasing almost every month, the capability and sufficiency of the compulsory earthquake coverage has become highly controversial.

Besides requiring compulsory earthquake coverage, Türkiye has become one of the largest producers in Europe in the last 20 years. On 6 February 2023, the “Kahramanmaras earthquake” effected ten different cities with massive production facilities. Since the earthquake, there has been much debate among insurers and policyholders about the compensation and coverage of earthquake-related profit loss or business interruption insurance.

Since the presence of earthquakes is a harsh reality in Türkiye, it is likely that the broadening of the scope and coverage of compulsory earthquake insurance or other earthquake-related insurance will continue to be discussed in the near future.

Cyber-Insurance

According to the president of the Turkish Information Security Association (ISA), cyber-attacks increased 300% and cyber criminals are attacking once in every 20 seconds in Türkiye. The country ranked sixth among the countries most exposed to cyber-attacks worldwide.       

The methods of cyber-attacks have also diversified considerably in recent years. According to the ISA, the most common cyber-attack methods are listed as follows:

• malicious software (malware);
• DDoS and DoS (distributed denial of services and denial of services);
• phishing;
• SQL injection;
• man in the middle;
• cryptojacking;
• zero-day gap;
• passwords attack;
• wiretapping/eavesdropping attack; and
• supply chain attack.

As can be seen, cyber-attacks are emerging in Türkiye as in the rest of the world and the need for cyber-insurance has become much clearer.

Recent and notable cyber-attacks include the following.

• Yemeksepeti cyber-attack 2022 – Yemeksepeti is DeliveryHero’s food delivery subsidiary in Türkiye, which has over 20 million users. A cyber-attacker, who claimed to have obtained the information of millions of users from Yemeksepeti, shared the full data of 20,000 users.
• Penti attack – Penti, a Turkish underwear manufacturing giant has been paralysed with a cyber-attack. The company issued a press release right after the attack and notified the regulator, but the extent of the loss is unknown.
• E-bebek attack – E-bebek, one of the largest maternity products platforms in Türkiye, was paralysed with a cyber-attack on 5 July 2020, according to the public disclosures. Access to websites and network systems was denied for nine days. The denial of service also caused network interruption in the physical stores during the attack.
• Kariyer.net attack – one of the largest job search platforms in Türkiye, kariyer.net, has also been subject to a cyber-attack. The company stated that the personal data of 50,000 individuals had been stolen. Immediately after the incident the regulator has published a public announcement, and a formal decision is awaited.

Even though cyber-attacks are on the rise and the need for cyber-insurance has increased, the coverage of cyber insurance is still not clearly defined and this is causing controversy between insurers and policyholders.

4.4 Resolution of Insurance Coverage Disputes

An insurance policy is a sui generis contract in which the insurer assumes a risk in exchange for a premium. Mostly, insurance contracts are very detailed and have technical clauses, and the insurer is in the best position to know the details of the contract due to its position in the contract. Due to the insurer’s dominance in the preparation of the contract and its knowledge of the technical aspects and details of the contract, the policyholder (insured) is on the side that needs to be protected. In this respect, pursuant to Article 1423 of the TCC, insurers have an obligation of disclosure. This disclosure obligation requires that the insurer should inform the insured about the clauses of the insurance policy and what they mean, before the constitution of the insurance contract. The insurer and its agent shall inform the policyholder in writing of all information regarding the insurance contract to be established, the rights of the insured, and the provisions that the insured should pay special attention to.

In the event that this disclosure is not given, if the insured does not object to the conclusion of the contract within 14 days, the contract shall be concluded on the terms written in the policy. The burden of proof that the disclosure statement has been given belongs to the insurer.

The insurer’s obligation of disclosure is not only regulated in the Article 1423 of the TCC, but also by the Regulation on Disclosure in Insurance Contracts, which has been enacted to regulate the insurer’s obligation of disclosure in insurance contracts.

Since most insurance policies are produced and underwritten electronically today, informing customers clearly and proving that they have been informed sufficiently is very difficult for insurers. That is main reason for the article in TCC which states that if disclosure is not given by the insurer, and if the insured does not object to the conclusion of the contract within 14 days, the contract shall be concluded on the terms written in the policy.

In Türkiye, disputes between insurer and insured party about insurance coverage mostly arises after the risk occurred. At the underwriting stage, mostly brokers or agents guide the insured or reinsured parties.

4.5 Position if Insured Party Is Viewed as a Consumer

The insured party is considered a consumer according to Turkish law and needs to be protected from the technical details of an insurance policy. However, if the insurance policy is made through a broker, it would be not possible to say that the insured is a consumer. In this event, the insured might not argue their rights arising from the law.

4.6 Third-Party Enforcement of Insurance Contracts

As a basic principle, parties to an insurance policy are the insured and insurer. However, in addition to this, it is possible to make an insurance policy in favour of a third party in accordance with Article 1454 of the TCC. In this case, an insurer may insure the interest of a third party by specifying their name in the insurance policy. In this situation, the insured third party may demand the payment of the insurance indemnity from the insurer and make a claim.

Besides this, if there is a limitation of the property right on the insured property such as mortgage or pledge, the right of the owner of the mortgage or pledge also may claim the insurance indemnity from the insurer. Furthermore, in this case, the insurer may not pay insurance indemnity to the insured before receiving the written consent of the mortgage or pledge creditor.

In addition, since the damage suffered by the third party is covered in liability policies, the third party has the right to make a direct claim from the liability policies in accordance with Article 1478 of the TCC.

However, apart from in these instances, it is not possible for third parties to benefit from the policy to which they are not entitled and to make a claim to the insurer.

4.7 The Concept of Bad Faith

There is no direct legal regulation on “bad faith” in Turkish legislation, but instead, according to Article 2 of the TCC, everyone is obliged to abide by the rules of good faith when exercising their rights and fulfilling their obligations, and the law does not protect the abuse of rights. 

A consequence of an insurers’ failure to pay a covered debt would be legal interest and possible litigation. Besides, since the Turkish insurance market is highly regulated and supervised, insureds and consumers can file complaints against insurance company to the Insurance and Private Pension Regulation and Supervision Agency directly for insurers who act in bad faith, and the insurance company may face administrative fines.

4.8 Penalties for Late Payment of Claims

Pursuant to Article 1427 of the TCC, insurance indemnity is due after 45 days and the documents related to the risk are submitted to the insurer. After this 45-day period, the insurer would be in default and liable to pay legal interest. Clauses which limit the payment of legal interest by insurers are invalid.

Therefore, consequences for late payment of claims for insurers is to face legal interest and possible litigation costs.

Besides this, insurance companies regularly report to the Insurance and Private Pension Regulation and Supervision Agency about the time taken to conclude their claim in order to prevent any bad faith on the part of the insurer.

4.9 Representations Made by Brokers

A broker is defined in the Insurance Code as a person who represents the policyholders in the preparation phase of the insurance contract with the interests of the insured prior to the constitution of the insurance contract.

Brokers are obliged to obtain an authorisation from the insured to represent them before insurers. However, brokers are not party to the insurance agreement. An insurance policy is only constituted between an insurer and insured. Brokers do not have power to sign an insurance policy without the approval of insured, who much sign and approve their own contract.

Therefore, if the broker acts without the authorisation of the insured, the policy would not be constituted as it was not approved or signed by the insured. However, if the policy was approved or signed by the insured, it would be binding and the insured may take recourse against the broker because of its professional liability.

According to Article 1406 of the TCC, when a person concludes an insurance contract on behalf of another person, and if the representative is unauthorised, they shall be liable for the premiums of the first insurance period.

In addition to unauthorised representation, there is a relatively new regulation which has been in force in Türkiye since 2015 regarding brokers collecting premiums from insurers. According to Article 16 of the Insurance and Reinsurance Brokers Regulation, insurers may authorise brokers to collect premiums from an insured. In this event, and in order to protect the insured, the policy will be deemed to have been constituted even though the insurance company did not receive the premiums, while the authorised broker did receive them. This is a very exceptional position and is not covered by other legislation.

4.10 Delegated Underwriting or Claims Handling Authority Arrangements

There is not any practice regarding delegated underwriting in Türkiye. 

5. Claims Against Insureds

5.1 Main Areas of Claims Where Insurers Fund the Defence of Insureds

Situations where insurers fund the defence of insureds depends on the claim control clause in the policy. If the insurer has the right to a claim control clause than they manage the disputes against the insurer, which will affect the risk. If there is not any claim control clause in policy, then the insured may appoint their own attorney and would bear litigation costs. Besides that, insureds may buy protection against insurance costs.

For example, in almost every liability policy, if a lawsuit is filed against the insured, the control of that lawsuit, the appointment of an attorney, settlement, etc, decision belongs to the insurer. The insurer has the claims control clause. Since the claims control belongs to the insurer, the insurer also bears those costs like legal interest, attorney fees and expenses. However, if the insured appoints its own attorney, the insurer will not bear insured’s attorney fees.

5.2 Likely Changes in the Future

It is not very likely to change in the future. Insurance companies wish to control the claims/lawsuits against insureds, and also wish to reduce risk.

5.3 Trends in the Cost or Complexity of Litigation

As mentioned in 1.3 Alternative Dispute Resolution (ADR), because of the lengthy litigation process in Türkiye, the importance and costs of mediation will increase.

However, the biggest complexity in Turkish insurance litigation is the Motor Vehicles Compulsory Third Party Liability Insurance and its heavy burden on the litigation system. Every year, more than 500,000 motor liability claims are pursued via insurance litigation. ADR has a very significant role to solve this issue.

5.4 Protection Against Costs Risks

If the insurer does not have a claim control clause over risk or litigation cost, this would be an exception in the policy wording, and the insured may buy litigation cost coverage, which would cover the costs of litigation in respect of third parties, such as attorney fees and legal expenses.

6. Insurers’ Recovery Rights

6.1 Right of Action to Recover Sums From Third Parties

The insurer’s succession is successio singularis and the insurer shall have the right to recourse in case of indemnity payments because of third parties’ illegal intervention.

The underlying reason for granting this right to the insurer is the prohibition of enrichment in casualty insurance. In the event of the realisation of the risk that the policyholder has covered with insurance, the losses incurred will be compensated by the insurer within the scope of the provisions of the insurance contract.

The necessary conditions for the succession principle are (i) valid insurance contract, (ii) incurred loss within the scope of the insured risk, (iii) insured’s right to claim compensation against third parties, (iv) payment of the insurance indemnity made by the insurer to the insured.

Insured rights to file a lawsuit and claims against third parties responsible for the hazard can be used by the insurer as a successor. If a third-party causes damage, the insurer can claim compensation up to the amount of the indemnity. In a case of a proceeding where the is insured is the subject, the insurer may continue to the proceeding.

6.2 Legal Provisions Setting Out Insurers’ Rights to Pursue Third Parties

As mentioned in 6.1 Right of Action to Recover Sums From Third Parties, Article 1472 of the TCC gives subrogation right to insurers.

7. Impact of Macroeconomic Factors

7.1 Type and Amount of Litigation

The Kahramanmaras earthquake on 6 February 2023 affected and still will affect insurance litigation enormously considering that 59,000 people lost their lives, an estimated 35,000 buildings totally collapsed just after the earthquake and more than 150,000 buildings were identified as heavily damaged. Moreover, thousands of production facilities and manufacturing lines’ businesses were interrupted. More than a million claims are expected regarding insurance policies.

In addition, a nationwide mourning period was declared due to the earthquake and all litigation trials were suspended between 6 February 2023 and 15 June 2023. In many of the cities affected by the earthquake, the state of emergency continues.

In every aspect, the Kahramanmaras earthquake heavily affected the Turkish insurance sector and litigation.

7.2 Forecast for the Next 12 Months

The impacts on insurance litigation of the Kahramanmaras earthquake should decrease eventually, with indemnity payments made by insurers.

7.3 Coverage Issues and Test Cases

Business interruption coverage becomes very controversial because of the duration of the business interruption and when it is unclear when the insured companies will be able to resume operations. In addition, since there are not enough sample cases for the calculation of business interruption compensation, claims become open to interpretation, which causes disputes between insureds and insurers.

The fact that approximately 35,000 buildings collapsed immediately after the Kahramanmaras earthquake on 6 February 2023, and more than 150,000 remaining buildings were damaged, disputes have arisen between insurance companies, municipalities and homeowners regarding the damage assessment of the remaining buildings. Such problems are expected to increase insurance disputes considerably. Moreover, due to the economic conditions in Türkiye in recent years, building costs are still increasing considerably, and since the reconstruction of many buildings has not yet started, the indemnities to be paid would be very insufficient. This will be a point of disagreement between insureds and insurers and may lead excess damages claims.

There are no sample cases regarding the impacts of the Kahramanmaras earthquake in insurance.

7.4 Scope of Insurance Cover and Appetite for Risk

After the Kahramanmaras earthquake, awareness about the necessity and importance of insurance has been raised again. For this reason, the amount of insurance policies taken out has broken records since the earthquake, and demand is expected to continue in future years. Therefore, premium income of insurers is expected to increase.

8. Emerging Risks

8.1 Impact of ESG on Underwriting and Litigating Insurance Risks

The authors have not noticed any specific changes to the underwriting and litigation of insurance risks within the country as a result of climate change events.

8.2 Data Protection Laws

Data protection and privacy are primarily governed by Turkish Personal Data Protection Law which was enacted on 24 March 2016. This relatively new law has had an impact on insurers in terms of assessing risks and collecting the necessary documents during the underwriting phase. Also, the swiftness of insurers’ claim assessment and payment has changed depending on their ability to obtain personal data quickly.

In addition, the main impact of the data protection law has been to make it difficult for insurers to obtain the necessary information and documents during the subrogation stage, obtaining information regarding person/entity to be subrogated.

However, despite these effects, insurers have adapted to the Law on the Processing of Personal Data and organised their internal operations accordingly.

9. Significant Legislative and Regulatory Developments

9.1 Developments Affecting Insurance Coverage and Insurance Litigation

Constitutional Court’s Annulment of the General Conditions of Motor Vehicles Compulsory Third Party Liability Insurance (MTPL)

The Turkish Statistical Institute (TUIK) announced that 1,232,957 traffic accidents occurred in 2022, 197,261 of which were fatal or injury accidents, and a total of 5,229 people lost their lives in these accidents.

One can imagine that the MTPL in Türkiye is a highly controversial policy and MTPL generates a lot of dispute in the litigation system.

The Ministry of Treasury and Finance tries to regulate the compensation to be paid to third parties through General Terms and Conditions of the MTPL. However, the Constitutional Court, in its decisions dated 10 June 2020, and later dated 29 December 2022, briefly ruled that the compensation of the third party cannot be determined by the General Terms and Conditions; the framework should be regulated with the Code of Obligations according to the hierarchy of laws.

Therefore, with these decisions of Constitutional Court, the expected risk of insurers in MTPL increased by 20–30%.

Regulatory Changes Regarding the Kahramanmaras Earthquake

Insurers have been most affected by the Kahramanmaras earthquake recently and regulatory changes related to that catastrophe. The insurance industry loss is estimated at USD5 billion from the earthquake. After its occurrence, the Insurance and Private Pension Regulation and Supervision Agency issued approximately 20 Circulars and Announcements on various dates.

Among the most important of these announcements is the one regarding the determination of the advance payments to be made from the Compulsory Earthquake Insurance in order to ensure unity in practice. Accordingly, buildings damaged in the earthquake were categorised as collapsed/heavily damaged, moderately damaged and slightly damaged, and advance payments were determined on a pro rata basis.

In addition, the Insurance and Private Pension Regulation and Supervision Agency announced the postponement of premium collections for ten cities that suffered from the earthquake. This is another important issue that affects insurers’ revenues.

Finally, after the earthquake, litigation processes were suspended in the ten earthquake-hit cities for four months, which reduced the subrogation collections of insurers.

In every respect, this catastrophic event had a huge impact on insurance sector in Türkiye, and has raised the necessity and importance of insurance once again. For this reason, the number of insurance policies taken out has broken records after the earthquake. This demand is expected to continue in future years. Therefore, premium income of insurers is expected to increase.

Av. Kerem Karabucak

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Published : October 26, 2023
Categories: Insurance & Reinsurance