Insurance Litigation 2023 - Part 1



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.

* Originally published by Chambers & Partners on 26 October 2023.
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