Reform of the Hungarian Insurance Law



                                           ATTILA VERMES

           Deák Ferenc Faculty of Law and Political Sciences, Széchenyi István University





   Abstract

   There is a relevant lawmaking process in Hungary, the codification of the new Civil Code. The
   Hungarian Ministry of Justice and Law Enforcement and its experts stated, that their work is
   in final stage, so it’s time to talk about the latest tendencies and improvements in a
   nutshell, focusing mostly on insurance contract law. In this paper I would like to deal only
   with matter of principles.

   

   Introduction

   

   There are countries with separate Act of Insurance Contract Law, for example the so called
   “Versicherungsvertraggesetz” in Germany, but in Hungary the lawmaker chose another way keeping
   the current dual system of codes: one for the private and one for the public law.

   

   The Hungarian Civil Code was enacted in 1959, but came into force in 1960. At this time only
   one insurer existed, the so called State Insurer (ÁB – Állami Biztosító), which was a part of
   the social security system. The State Insurer was a monopoly, so there was no competition
   until 1988, when ÁB divided into two state owned insurance companies (Állami Biztosító and
   Hungária Biztosító).

   

   Today there are 26 insurance private limited companies with registered office in Hungary, and
   two other companies have authorization of foundation. 35 insurer associations exist, 8 foreign
   companies have branch offices, and 200 insurers from EU member states [1] provide cross-border
   insurance services.

   

   The first Act of Insurance (Act XCVI of 1995 on Insurance Institutes and Insurance Activities)
   contained mostly rules of public law, and this act was replaced by the second Act of Insurance
   (Act LX of 2003 on Insurers and the Insurance Business), which came into force on the first
   day of Hungary’s EU membership (1 May 2004). This date was not coincidence, this act made
   Hungary’s insurance law conform to the EU rules. (This dual system was extended by the Act
   CLIX 2007 on Reinsurers.)

   

   The second Act of Insurance enables to create insurance co-operatives, but there is no one on
   the Hungarian insurance market, so we can say, that all Hungarian insurance companies are
   profit-oriented, and the principle of solidarity is almost missing. There are a few exceptions
   however, for example The Insurance and Friendly Society of the Hungarian Attorneys helps for
   the orphans of its former members. This act contained contractual and other rules of private
   law, for example the minimum content requirements for insurance contracts, duty of disclosure
   etc.

   

   The main goal of the original proposition was to separate consequently private and public
   rules, but the concept has changed during the codification, to make the Civil Code an abstract
   act, all rules with secondary importance will be promulgated on a lower hierarchical level.

   

   The rules of electronic commerce, voluntary mutual insurance funds and private pension funds
   remain the field of sector-specific lawmaking.

   

   The Hungarian Civil Code deals only with insurance contracts (characterized by the concept of
   risk-distribution), and says nothing about insurance associations with legal personality,
   which has to be revised, because there are insurance legal relationship on the ground of
   association’s membership.

   

   One-sided cogency

   

   The question of using dispositive or cogent (mandatory) rules is always hard to answer. The
   principle of freedom of contract is often competes with the principle of insurer and customer
   protection.  The definition of customer and customer contracts of the current Hungarian Civil
   Code are the followings:

   

   Section 685. d)  'consumer' shall mean any person who is a party to a contract concluded for
   reasons other than economic or professional activities.

   

   Section 685. e)  'consumer contract' shall mean any contract concluded by a consumer and a
   person acting within the scope of his economic or professional activities.

   

   There is a trend in the EU to label micro ventures, or rather small and medium enterprises
   (SME) as customers, but the insurance sector has a promise from the under-secretary of the
   Ministry of Justice and Law Enforcement to label only natural persons as customers in
   connection with insurance contract law.

   

   Of course there is a great need to create an effective customer protection but today there is
   almost a separate civil law of customer’s so it’s wise to define the requirement’s of being
   customer as precisely as possible.

   

   There are three main areas of one-sided cogency [2]: customer protection, insurance contract
   law and labour law. In all three legal fields the main goal of the regulation is to protect
   the weaker party of the legal relationship. The customer [3], the insured person and the
   employee are presumed indisputably to be weaker than the other party (insurer, employer etc.)
   from an economical point of view, but today it’s not always true in insurance contracts. The
   rules of insurance contract law was modelled for community contracts with the State Insurer in
   1959, but today in business to business (B2B) contractual relationships the insured (legal)
   persons are often stronger than the insurers.

   

   For example banks and other financial institutions have mostly more ability of economic
   interest-enforcement, which is clearly demonstrated by the fact, that only one (the largest)
   insurer (Allianz) owns a bank, but several banks own an insurer company.

   

   Insurers almost always operate with general contract terms, and a natural person can hardly
   achieve its modification, but when the insurers are contracting with powerful transnational
   companies, the high amount if premium makes it possible to create discrete contract, differing
   from general contract terms [4].

   

   Next to the economic size, the other argument of using one-sided cogency is the question of
   laymanship. The insurer is a professional, who works daily with damage statistics, mortality
   tables, using knowledge of insurance mathematic and insurance law. The insurance company is an
   employer of a leader actuary, a leader lawyer specialized in insurance law, but an average
   insured person (mostly without a university / college degree) has no experience in the field
   of insurance contracts.

   

   One-sided cogency is almost a Hungary-specific term, because it limits the freedom of contract
   of the parties, and makes is impossible to create a flexible agreement according to the
   interests of the parties.

   

   This rule is likely to by revised, and its scope will be reduced relevantly: it will be
   mandatory for costumer insurance contracts, but it will be exceptional in business to business
   contracts. Of course an insurer being a legal person will be not defenseless, in case of
   unfair contract terms he can bring an action on the court against the insurer.

   

   Formal requirements of the insurance contracts

   

   The written form is necessary to the conclusion of insurance contract, and it will remain the
   main rule for the amendment of contract and resignation too. This written form is
   indispensable to all legal statements with legal consequences, but it’s too strict rule for
   all will statements from an economic point of view. Sending letters by recorded delivery is
   very expensive considering the high amount of their clients and insurance policies (in Hungary
   the postal service is still a monopoly, but it will change in the near future). There are also
   problems with some modern ways of communication. Sending documents via fax or via email with
   qualified electronic signature is a good way to create written legal statements, but in that
   case only the date of sending is can be verified. Concerning the typical method of regulation,
   we can say, that almost all act and other legal instruments deal with the date of reception,
   so this modern ways of sending legal statements are not fully compatible with the legal
   requirements mentioned above.

   

   Formation of the insurance contract with implicit conduct

   

   In Hungary the insurer has fifteen days to answer its contractual offers, because there is a
   relevant sanction in case breaching the obligation mentioned just before.

   

   Section 537.  (2) A contract shall also be created if an insurer does not respond to an offer
   within fifteen days. In such a case, the contract shall be created retroactively as of the
   date on which the offer is conveyed to the insurer or its representative.

   

   This rule sanctions the breaching of the principle of cooperation in the civil law, if the
   insurer is lazy to answer to the proposal, then the contract will be formed as a consequence,
   and it’s irrelevant, if the proposition disagrees with the custom of trade or with the
   insurer’s commercial practice. In that case the assumption of risk in the discrete insurance
   is in contrast to the principles of insurance mathematic and statistic, so the insurer will
   probably resign the contract. Of course in the practice the insurer makes the contractual
   offer, and not the client.

   

   This rule will be reduced to customer insurance contract, and it will apply only to proposals
   which fit the general contract terms of the insurer’s. In my opinion this change is very
   rational, because in business to business relations – according to the high insured value and
   complexity of perils – there should be more time for the insurer to answer, not to mention the
   principle of freedom of contract.

   

   Liability insurance

   

   The insured party shall be entitled, under a liability insurance contract, to request the
   insurer to exempt him, up to the limit specified in the contract, from paying for damages for
   which he is legally liable [5].

   

   The liability insurance contract evolved firstly to protect the tortfeasor, it helps not to be
   cleared out in case of small negligence and high amount of damage, but today it protects the
   aggrieved person at least so much in case of the tortfeasor’s ability or will to pay is
   missing [6].

   

   Property insurance

   

   The insurance contract can cover the so called self-damages, when the tortfeasor causes loss
   to himself. At first look it seems to be a matter of liability insurance, but there is no
   legal provision to pay self-damages (an owner can do everything with his property), so it’s
   surely property insurance. The main differences between first party insurance compared with
   tort liability are the following:

   1. Insurance: almost entirely optional

   2. Insurance does not provide ‘full compensation’

   3. The negligence on the part of the insured will often not affect a first party insurance
   claim. [7]

   

   The duty of damage prevention

   

   From an economic point of view, it’s extremely important to avoid property damages. The
   doctrine of insurable interest provides that an insured person should not make any net profit
   from the event should only receive coverage for the actual loss. The duty of damage prevention
   binds the insured not only during the completion of the agreement, but before forming a
   contract too. Insurers generally make such requirements for contracting, for example the
   installation and usage of mechanical / electronical safety devices.

   

   The concrete types of the security devices mentioned above depend on the type of perils and
   the insured sum too, for example to avoid damages of theft could be useful installing a GPS
   (general positioning system), and to protect food from spoiling there can be ordered to
   install some kind of cooler device.

   

   While the installment of the safety devices is easy to verify, it’s much harder to check,
   whether this instruments were functioning or not at the time of the damage (mostly, when the
   hull was perished or stolen). The existence of the facts has to be certified by the interested
   party, but in this case in my opinion only the theft can’t conduct the failure of the
   insured’s lawsuit.

   

   Naturally the costs have to be beared by the insured, although insurers take off relevant load
   from the shoulders of their clients with  – generally together with the state authorities  -
   checking regularly the on the market buyable security devices, and giving certificate of
   „recommended”, guaranteeing the quality of the product, and the conformity with the general
   contract terms of the insurers.

   

   During the accomplishment of the contract of carriage of goods, the carrier has to follow with
   attention the duty of damage prevention in his decisions, especially in case of choosing the
   appropriate hull, direction, resting-place, and – when the goods are valuable – keeping the
   parameters (price, destination, guarding etc.) of the freight in secret. In that case special
   legal regulations concerning dangerous goods make it impossible, but insurance law shouldn’t
   tolerate marketing-inspirited steps in my opinion.

   

   The duty of damage prevention is an obligation of performance in connection with the
   installment and usage of the safety devices, thus only their lack can be labeled as a breach
   of the contract, in connection with the resulting of the insured events we can speak of only a
   duty of care, because the most careful enforcement of the duty of damage prevention is only
   capable of lowering the chance of damaging events, and not of full exclusion (especially in
   case of vis maior).

   

   “The unique characteristic of warranty is that materiality and causation are irrelevant. It is
   submitted that the rationale of warranty is that the insurer only accepts the risk provided
   that the warranty is fulfilled. The doctrine of warranty was necessary when it was introduced
   into common law over three hundred years ago; however, today it causes great hardship for the
   insured in both marine and non-marine insurance contracts.” [8]

   

   The duty of mitigation of damages

   

   Under this principle the insured is obliged to lower the amount of the damages as small as
   possible. The obligation of mitigation of damages is secondary to the duty of damage
   prevention. The period of the duty mentioned above lasts after the materialization of the
   damaging event until the termination of the insurance contract.

   

   This statement could be amazing first time, because the duty during the materialization of the
   insured event can be labeled notorious, but the other case can be grounded adequately too.

   

   Amongst the classic obligations of mitigation of damages can be mentioned the fire service,
   the pumping of leaked ship, and the traction of a stranded ship etc..  At this point the
   damaging event has occurred, but its amount can be lowered yet.

   

   In my opinion it’s useful to rule the bearing of costs to be beared by the insurer, in case of
   both successful and what is more the unsuccessful efforts to mitigate damages. It can assist
   the insured to give a rational resolution, and he shouldn’t hesitate about the economic
   efficiency and chance of his mitigation of damages.

   

   (Naturally the insurer’s mentioned obligation shall not cover irrational cases, misuse of
   rights, for example when the pilot maneuvers the burning truck straight into the river instead
   of using a fire-extinguisher.)

   

   It’s possible the reduce the damages posteriorly too, especially in case of theft / robbery
   the accusation and the seizure warrants of the hull’s, watching the parameters of the
   integrated GPS could at least partially lower the materialized damages.

   

   The duty of cooperation

   

   The duty of cooperation is a classic principle of civil law [9], which influences – to
   correspond with the duty of disclosure – the whole insurance legal relationship, from
   contract’s formation to the termination of the contract. In my opinion the most relevant form
   of this principle is the procedure of loss adjustment, where after asserting a claim the
   insured has several concrete duty to inactivity and sufferance.

   

   The insured can hardly modify the field and parameters of the insured event, only in case of
   damage prevention and mitigation of damages. The insured has to create the possibility for the
   representative of the insurer, the check the damaging event. In that case the insurer can’t
   verify the circumstances and parameters of the insured event, and can’t create the real
   calculation of the damages.

   

   According to the duty of cooperation the insured person has to provide notice of loss
   (immediately after the occurrence of a loss) and proof of loss for the insurer.

   

   Summary

   

   There is much to do with the codification [10], and of course it’s hard to choose the correct
   solutions acceptable by both insurers and – especially customer – insureds too. Their
   direction is unquestionable good, and I hope that their self-sacrificing work will be
   successful, and call forth a well-working Civil Code.

   

   Literature:

   [1] Galgano, Francesco: Globalizáció a jog tükrében, Budapest, HVG-ORAC, 82. p., 2006,  ISBN
   963 7490 41 8

   [2] Vermes, Attila: Egyoldalú (klaudikáló) kógencia a biztosítási jogban, Budapest,
   Doktoranduszok Országos Szövetsége, 2007, 575-581. p., ISBN 978-963-87569-0-9

   [3] Vermes, Attila: A biztosítási jog fogyasztóvédelmi aspektusa, Mór, KHEOPS Automobil-Kutató
   Intézet, 205-214. p., 2007, ISBN 978-963-87553-0-8

   [4] Zavodnyik, József: A biztosítási szerződési jog alapjai, Budapest, Biztosítási Oktatási
   Intézet, 95. p., 2004

   [5] Lábady, Tamás: Fejezetek a felelősségbiztosítás köréből, Pécs, Pécsi Szikra Nyomda, 13.
    p., 1989, ISBN 963 02 6788 8

   [6] Bennett, Carol S. C: Insurance of Liability, London, Witherby & Co., 1. p. 1989, ISBN 0
   948691 67 0

   [7] Cane, Peter:  Atiyah’s Accidents, Compensation and the Law, Cambridge University Press,
   2004,  245-248. p., ISBN 0 521 60610 1.

   [8] Han, Wenhao:  Warranties in Marine Insurance,
   http://www.aida.org.uk/docs/warrantiesmarineins.pdf, 2006 1. p.

    [9] Birds, John: Bird’s Modern Insurance Law, London, Sweet & Maxwell, 113. p. 2007, ISBN 978
   0421 960503

    [10] Takáts, Péter: A polgári jogi kodifikációról – biztosítási szemszögből, Budapest, Magyar
   Biztosítók Szövetsége, 1-3. p., 2008.

   

   Contact – email: vermesa@sze.hu