DIRECT ACTION AGAINST INSURERS BY THIRD PARTIES UNDER LIABILITY INSURANCE
The new Commercial Code (6102), which entered into force on July 1 2012, introduced a general provision on the right of direct action by third parties against insurers. This issue was the subject of wide-ranging debate among legal scholars and practitioners before the code came into force. The Court of Appeals had also issued a number of decisions allowing or dismissing appeals in favour of parties that had brought a direct action against an insurer.
The previous Commercial Code (6762) had no general provision regarding the right of direct action by third parties against insurers and regulated in that regard only for losses arising from fire under Article 1310:
“The insured’s right to indemnity from the insurer exclusively belongs to the person to whom the insured is responsible, the insured’s creditors may not benefit from this indemnity. If the person to whom the insured is responsible was not indemnified entirely by the insurer, his right of application to the person responsible to him for the fire is reserved for the remaining part of the damages not received.”
The Court of Appeals also allowed injured third parties to bring claims directly against insurers in cases that involved liability insurance.(1)
Further, the right of direct action against insurers was granted to injured third parties under the Highway Transportation Code (4925) and the Traffic Code (2918). Article 21 of the Highway Transportation Code provides that “beneficiaries may claim indemnity directly against the insurer within the limits of liability insurance”; while Article 97 of the Traffic Code provides that “the injured party may claim indemnity as well as initiate a lawsuit directly against the insurer within the limits of obligatory financial liability insurance”.
Legislation regarding direct action against insurers by third parties was limited to these codes.
Liability insurance is regulated by Article 1473 of the new code, under which an insurer must indemnify an insured before the latter makes a payment to an injured party:
“Together with liability insurance, the insurer pays indemnity up to the amount envisaged in the insurance agreement due to its liability arising out of an incident occurring within the terms of the insurance agreement, even if the insured’s loss arises subsequently, unless otherwise agreed.”
The code further states that, in this context, the insurer must indemnify the injured third party rather than the insured.
An injured third party’s right of direct action is established under Article 1478: “The injured party may claim indemnity of its incurred loss up to the amount of the sum insured, provided that such a claim remains within the limitation period of the insurance agreement.”
Article 1478 provides legal clarity and considerable potential advantage to injured parties that may not have the required security to enforce their claims.
The provision appears to make the ‘pay to be paid’ clause (under which the insured must pay the injured party first) irrelevant. This clause provides a valid and strong defence in jurisdictions in which disputes are generally submitted under an insurance agreement. However, public policy in Turkey suggests that the pay to be paid clause will not be favoured by the courts. The Court of Appeals has not yet considered the matter. As a result, the provision’s interpretation and application remain uncertain.
Jurisdiction of courts
It is unclear whether Turkish courts will assume jurisdiction in cases against protection and indemnity (P&I) clubs and foreign liability insurers. Under Article 1478, court actions are not limited to domestic insurers domiciled in Turkey. However, it is unclear whether the article is a substantive or procedural law provision.
If Article 1478 is considered to be a substantive law provision, the courts will examine the insurance agreement and dismiss the case due to lack of jurisdiction if the relevant agreement refers to a foreign forum or arbitration for settlement of a potential dispute. Conversely, if Article 1478 is considered to be a procedural law provision, it will be interventionist and applied by the courts in cases with a foreign component and a third party that files a direct action against an insurer. This issue is still being debated by legal scholars and there is no unanimous view as yet.
The Istanbul 17th Commercial-Maritime Court heard a case in which a P&I club was a defendant against a direct action filed by an injured third party. The P&I club argued that the court had no jurisdiction to hear the case under Article 40(2) of the Private International Law (5718), and that the case should be heard in the country in which the relevant company had its place of business – in this case, Holland. The court accepted the objection and dismissed the case due to lack of jurisdiction, basing its decision on Article 40 of the Private International Law and Articles 5(3) and 6(4) of the Civil Procedure Code (6100). This case is still before the Court of Appeals and has not been approved. However, this decision is promising for foreign liability insurers in the context of overcoming the right of direct action of third parties in Turkey.
Article 1478 may provide a solution for claimants with unsecure claims. However, the provision may also cause concern for P&I clubs and liability insurers. Arguably, the article is poorly drafted with regard to potential cases against insurers domiciled outside Turkey and may result in a period of legal uncertainty. In particular, Article 1478’s ambiguity may lead to jurisdiction defences from P&I clubs and foreign liability insurers, and the jurisdiction of the courts may be challenged as a result.
It is too early to comment on how Article 1478 will be applied in practice, but it has fostered debate regarding legal doctrine and the courts.
(1) Court of Appeals, Assembly of Civil Chambers, Decision E 1995/11-980, K 1996/18, January 31 1996; Decision T/35-41 AD 1963/3-4 p435-437, November 7 1962.
(2) “The International jurisdiction of Turkish Courts is determined by the domestic jurisdiction’s rule of law.”
(3) “The jurisdiction of the Courts is subject to the provisions of this Code without prejudice to the other provisions regarding jurisdiction in other codes.”
(4) “The general court that has jurisdiction is the court situated at the place of business of the defendant, real person or legal entity at the time that the lawsuit is filed.”
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