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Dear clients and cooperation partners,
This Latvian Insurance Newsflash launches a series about our findings in case law and interesting judgments. This time we will cover interpretation of insurance contract terms in Latvia and the other Baltic States, as well as a notable court case. This and following insurance newsflashes will be based on research by SORAINEN about case law of the Senate and Civil Matters Court Panel of the Latvian Supreme Court between 2006 and mid-2011.
HOW SHOULD INSURANCE CONTRACT TERMS BE INTERPRETED IN LATVIA?
Some foreign laws include the contra proferentem principle – unclear contract terms should be interpreted to the detriment of the party who wrote those terms. This principle helps the insured in disputes with the insurer. However, the principle is only partially incorporated in Latvian law. Under the Civil Law, interpretation of a contract that imposes less liability on the debtor should be preferred. Therefore there is a possibility that in a dispute between an insurer and an insured, interpretation of a contract that favours the insurer is preferred, for example, by ordering the insurer to pay a smaller insurance indemnity. Undeniably, a certain injustice can be seen here because insurers involve highly qualified and experienced professionals in development of terms, while the policyholder will never be so well-informed. Even if the policyholder is a business, in most cases insurance will not be their main commercial activity and most likely they will be unable to duly assess all nuances of an insurance contract.
Regulation of Latvian law is more favourable to consumers because unclear and inaccurate terms of a written contract are interpreted in favour of the consumer. Respectively, Latvian law contains the contra proferentem principle in limited cases. Thus insurers will not have the option to refer to interpretation of terms of an insurance contract that would be more favourable to them if a dispute with a consumer occurs.
From theory to practice
In 2010, the Senate of the Supreme Court reviewed a dispute where the insurer tried to convince the court that an obvious misspelling mistake was made and that there was a need to interpret the contract terms.
During the hours of darkness in August 2003, a vehicle driven by the policyholder (a natural person) drove off the carriageway. The insurer refused to pay the insurance indemnity because the policyholder had not chosen a speed suitable for the driving conditions. The road was under repair and the speed limit was 50 km/h but the policyholder drove at 70 to 90 km/h. Under the insurance agreement terms, if the policyholder had acted with ordinary negligence then the insurer was entitled to decrease payment of insurance indemnity by 50%. The insurance terms provided that exceeding the speed limit by more than 10 km/h should be considered as ordinary negligence.
One of the insurer’s defence arguments was that an obvious misspelling had occurred. When drafting the agreement terms, the insurer’s aim was to determine that exceeding the speed limit by less than 10 km/h should be considered as ordinary negligence. It could be concluded from the insurer’s argumentation that exceeding the speed limit above 10 km/h should be considered as gross negligence that most likely would exclude payment of insurance indemnity.
The Riga Regional Court as the appellate instance did not agree with this interpretation of the agreement. The court concluded that there was no basis to consider that an obvious misspelling had occurred taking into account the character of other breaches of road traffic regulations. Under the insurance agreement terms, slight negligence is also a violation like non-observance of distance, driving and movement in the line provided for driving in the opposite direction, and driving against a traffic light signal that prohibits movement.
The Senate of the Supreme Court left the judgment by the cassation instance as it was. The parties to the insurance contract had agreed on definite insurance indemnity payment terms, including decrease of the insurance indemnity in case of ordinary negligence. The Senate concluded that the policyholder had acted with at least ordinary negligence. Here it must be mentioned that reading the judgment leaves the impression that the Senate stressed the word “at least”. Most likely the court judgment and outcome of the case would be different if the insurance terms had provided that exceeding the speed limit by less than 10 km/h should be regarded as ordinary negligence.
In its judgment the Senate mentioned an interesting argument. If it were assumed that an obvious misspelling had occurred in “more than”, it would provide the possibility to assume that the misspelling had also occurred in other insurance terms, for example, in the amount of the indicated speed.
Although in this case the court did not interpret the contract terms and did not apply the principle of contra proferentem, it still proves that in drafting insurance terms, especially the part referring to exceptions, the insurer must be very careful, precise and diligent because the court will unlikely allow an interpretation of these terms that would be broader or less favourable to the insured.
Lithuanian and Estonian regulation
Under the Lithuanian Civil Code, in case of doubt contract terms must be interpreted to the detriment of the party who requested inclusion of the term in the contract and in favour of the party who agreed to this term. Moreover, in any case contract terms should be interpreted in favour of the consumer or the party who joins the contract, ie, who agreed to previously prepared contract terms.
The Estonian Law of Obligations Act indicates that standard insurance contracts terms should be interpreted in favour of the policyholder even if the policyholder is a legal entity, that is, not a consumer.
SORAINEN'S TRANSACTION EXPERIENCE in 2010 AND 2011
Advising MetLife Amplico
Regularly advising the Latvian and Lithuanian branch of MetLife Amplico, a leading global company in life insurance and employee benefits, on a broad range of issues under Latvian and Lithuanian law. Advice covered insurance contract law, insurance regulatory matters and claims handling process, including assessment of exposure of the insurer due to a possible insured event. SORAINEN has also advised MetLife Amplico about the data protection law and employment law matters. |
