The Subject: The problem of whether the current tariff should be taken as a basis for damage payments in the Turkish Catastrophe Insurance Pool (TCIP) policies issued before the Current Tariff regarding the earthquake damages in Turkey.
Insurance Arbitration Commission (IAC) Decision (05.06.2023)
The arbitration committee, competent to resolve the dispute, gave a decision which may be a precedent for future cases regarding compulsory earthquake insurance, as examined below. Before reviewing the decision, earthquake-related insurance practices in Turkey, especially the Turkish Catastrophe Insurance Pool (the TCIP) and compulsory earthquake insurance, will be explained to understand the decision.
Implementation of Compulsory Earthquake Insurance (“CEI”) in Turkey
Turkey is located in one of the riskiest regions in the world in terms of earthquake activity. The country is at frequent risk of earthquakes due to its location at the intersection of several major fault lines. These earthquakes cause material damage, loss of life and social traumas. For this reason, Turkey aims to cope with these risks through CEI and to minimize the mentioned damages.
CEI is regulated by the Turkish Catastrophe Insurance Pool (TCIP). TCIP was established in 2000 with Decree Law No. 587 in order to minimize earthquake damages after the Marmara Earthquake that occurred on August 17, 1999 and caused significant loss of life and property, and was brought into a legal framework with the Catastrophe Insurance Law No. 6305, which entered into force in 2012. TCIP is a public institution with a legal personality responsible for its activities related to CEI in Turkey. TCIP compensate for the material damages that occur as a result of an earthquake with the premiums collected through CEI. In this way, it supports the recovery of the society after the earthquake. CEI protects the real estate owners against the risks as collapse of structures, cracking of walls and similar earthquake-related damages that may be caused by an earthquake, as well as other risks that may occur as a result of an earthquake such as fire, explosion and tsunami. The payment to be made is calculated according to the cost of reconstruction/repair of the building. The scope of CEI has gained a general framework with the CEI General Conditions, which entered into force on 16.05.2011.
Purpose of Compulsory Earthquake Insurance
Earthquake insurance is a type of property insurance. There is generally no mandatory requirement for property insurance worldwide. However, considering the high potential destructiveness of the expected earthquakes in our country and the low insurance awareness of society, CEI is a compulsory insurance that homeowners should have in accordance with the principle of public interest. The fact that no penal sanction is foreseen if it is not enforced also gives the mandatory nature of the CEI a voluntary character.
1st Article of Catastrophe Insurance Law No. 6305 states that “The purpose of this Law is to determine the procedures and principles regarding compulsory earthquake insurance which will be obtained in order to cover material losses which may occur in buildings as a result of earthquakes, and the insurance and reinsurance guarantees, which will be provided to cover the material and bodily damages which may occur as a result of various disasters and risks, for which a guarantee cannot be provided by insurance companies, or which may have difficulty in providing a guarantee.”
All buildings other than the list below are covered by insurance
· Buildings and independent sections subject to Law 2946 on Public Housing dated 9 November 1983, or which are used as public service buildings,
· Buildings built in and around village settlement areas and in hamlets by those who are registered to the village population and who are permanent residents of the village,
· Buildings which are used for commercial or industrial purposes in their entirety,
· Buildings which were not designed or did not receive engineering services,
· Buildings which are found to have been modified or weakened in a manner which would adversely affect their structural integrity,
· Buildings constructed in violation of the relevant legislation and designed in a manner which would adversely affect their structural integrity.
According to Article 13 of Law No. 6305, issues such as insurance coverage and determination of premiums to be paid are determined by tariffs. In this context, the Insurance and Private Pension Regulation and Supervision Agency (IPPRSA) publishes an announcement once a year with the title of tariffs and instructions. With the latest change in the tariff, the maximum insurance amount of TRY-320,000 was determined for all building styles as of 17.11.2021 and has increased to a maximum of TRY-640,000 for all building styles with the new tariff published in the Official Gazette dated 25.11.2022.
In addition, in accordance with the Article A.6. of CEI General Conditions a deductible of 2% of the sum insured must be applied for each claim. The insurance compensation calculation, on the other hand, will be made on the basis of the reconstruction cost calculated according to the market prices of the building, taking into account the similar building characteristics at the place and date of the risk, provided that it does not exceed the maximum reconstruction cost per square meter determined by TCIP.
Summary of the Decision
The applicant demands that TCIP to compensate for the damage it suffered as a result of the Hatay earthquake that occurred on 06/02/2023 in its apartment, which is covered by earthquake insurance with the CEI policy. In the statement of the applicant’s counsel: Due to the earthquake that occurred on 06/02/2023, the house should be demolished urgently according to the determination of the Ministry of Environment, Urbanization and Climate Change, and in this context, the price found as a result of multiplying the square meter written in the policy by TRY-1,508.00 was paid by TCIP, and it was paid by calculating according to the old tariff dated 17.11.2021, whereas according to the tariff dated 25/11/2022, the gross square meter should be multiplied by 3,016.00-TL, so an underpayment was made, He claimed that the maximum coverage limit was not TRY-320,000.00, but TRY-640,000.00, and that the square meter unit costs should be paid from the limit valid on the date of the earthquake without the need to accrue additional premiums, and demanded the payment of the rest of the amount.
In his reply petition, the TCIP attorney stated:
After deducting the 2% deductible from the compensation to be paid to the plaintiff, a full damage payment of TRY-164,040.24 was made, the applicant’s loss was fully covered in accordance with the legal regulations in force on the date of the damage, the payment of the insurance amount over the current tariff without any additional premium by TCIP, that is, without making an endorsement, is incompatible with the purpose and function of the Compulsory Earthquake Insurance, and as a rule, an endorsement is made in order to adapt to the changing conditions in the insurance law, that there is an endorsement requirement for all CEI policies other than the exceptions specified in the legislation, that TCIP is not subject to the provisions of the TCC pursuant to Article 1401/2 of the TCC, since TCIP is not an insurance company and does not have a license to operate, that the benefit of all insured persons from increased guarantees without making an endorsement and increasing the premium does not coincide with the Compulsory Earthquake Insurance system, otherwise it will cause the insured to be unjustifiably enriched.
Although the TCIP attorney requested an expert in his petition, the arbitration committee did not find it necessary to conduct an expert examination and a decision was made on the dispute within the scope of the file.
The decision of the Arbitration Committee
The provisions of the relevant legislation were examined one by one, and it was determined that there was no regulation in the legislation and in the notification regarding the tariff change published in the Official Gazette dated 25/11/2022 regarding the need to issue an endorsement and pay additional premiums in order for the insured to benefit from the new tariff. In addition, since it is regulated in the relevant article of the TCC that the notification can only be made in writing and the date of notification will be the date the notification is given to the post or notary, although it was stated by the respondent that the tariff change was published in the Official Gazette in accordance with the provisions of the regulation and therefore the notification would be deemed to have been made, this objection was not accepted by the arbitral committee by taking into account the existence of an express provision and the hierarchy of norms.
When all the issues were evaluated, the arbitration committee concluded that the calculation of compensation should be made on the basis of the square meter prices specified in the tariff dated 25/11/2022 (current) and the application was accepted.
Review of the Decision
The main dispute regarding the case subject to the decision of the Arbitral Committee is whether the current tariff or the tariff on the date of policy issuance will be taken as a basis when making the claim payment in CEI policies issued before the said announcement and still in force, whether it is obligatory to make an endorsement and collect additional premiums while making this distinction, and if not, by what procedure the notification should be made regarding this issue.
At this point, within the scope of the provisions of the legislation, the obligations of the CEI insured and the insurer should be examined, and it should be examined whether there is any regulation that imposes an obligation on the insured to make an endorsement and to pay additional premiums for it, and that the old tariff is valid if there is no endorsement in the compensation account.
· When the General Conditions of CEIR are examined, Article B.1. regulates the obligations of the insured in case of the occurrence of the risk, while Article C.2. regulates the declaration obligation of the insured. In the relevant articles, there is no clarification regarding the need to make an endorsement in case of tariff change; otherwise, compensation will be paid in accordance with the old tariff, and no obligation to make an endorsement is foreseen.
· Article 10 of the Catastrophe Insurance Law No. 6305 regulates the scope of CEI and the obligation to make insurance. In Article 12, the obligations of the insured are determined. No obligation is foreseen for the insurer to make an endorsement.
· In the insurance policies issued by TCIP, there is no obligation to issue an endorsement.
· In the Compulsory Earthquake Insurance Regulation, there is no obligation to issue an endorsement to the insurer.
As seen, there is no regulation that imposes an obligation on the insured, and the old tariff is valid if there is no endorsement in the compensation account.
Another issue is whether the insurer has been duly notified of the need for an endorsement by the insurance company.
A temporary article has been added to the Tariff and Instruction Communiqué dated 2019, and the relevant article is as follows: “Insurance contracts concluded before the publication date of the Communiqué establishing this article and whose coverage start date is on or after 1/1/2020 are subject to the guarantees within the scope of this Communiqué without any additional premium.” However, this provisional clause is not included in the notification dated 25.11.2022. In addition, following the communiqué dated 2022, an SMS was sent to the phone numbers of the insured on the policies of TCIP and insurance companies to update the insurance amounts to the new tariff, and clarification was made in this way.
Article 23 of the Regulation on Working Principles of the Natural Catastrophe Insurance Institution regulates that the insurance company that issued the CEI policy will notify the contract holders of the termination of the contract and the obligation to take out new insurance via SMS, e-mail or call centre before the end of the insurance contract. It should be noted that it can be said that the obligation to inform will be fulfilled if the notifications made with the notification procedures listed in the relevant article are only related to the situations listed within the scope of the article. It is essential that notifications regarding contrary situations are made in writing within the scope of Article 10 of the Regulation on Information in Insurance Contracts and Article 1423 of the Turkish Commercial Code.
In light of the explanations, the notification made by TCIP and insurance companies via SMS is related to an issue that may cause a great loss of rights, and this notification must be made in writing, if it is not made in writing, it should be deemed that a valid notification has not been made.
As it is known, the insured is the weak party of the insurance contracts. There is a clear information asymmetry between the parties, and at this point, the insurance company, which has a much higher level of professional experience and competence than the insured, has an obligation to inform the insured in accordance with the Turkish Commercial Code and the Law on Consumer Protection, the Insurance Law and related regulations. This obligation continues during the insurance period as well as during the conclusion of the contract. As seen in the case in dispute, there is no provision in the CEI regulations regarding the fact that if the insurer does not make an endorsement, the compensation will not be calculated over the current tariff and will be entitled to compensation payment in accordance with the previous period tariff, and there is no regulation on this issue in the tariffs published by TCIP and the policies issued. With the communiqué dated 25.11.2023, it is not sufficient to notify the insured of the obligation to make an endorsement, which will cause the insured to suffer a significant loss of rights, with the reconstruction cost per m² almost doubling, but it must be notified in writing,or it must be legally regulated.
Since the notification was not made in accordance with the legal procedure and there is no regulation regarding the issuance of an endorsement within the scope of the current legislation, it can be said that the decision of the arbitral committee is appropriate.
Att. Ahmet Eren Aykut
Trainee Lawyer Atakan Köroğlu