Insurance Litigation 2023 - Part 2

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.