On 1 June 2018, the new Insurance Contracts Law (Apdrošināšanas līguma likums) will come into force replacing the Law on Insurance Contracts (likums “Par apdrošināšanas līgumu”) that has been in force since 1998. The new law is based on the previous law, however, the many amendments of the wording and supplements and new regulations suggest that the changes and improvements are quite significant and will force the market to adjust.
A rather essential development concerns the notion of the recourse action. The previously applicable Art. 40 (1) of the Law on Insurance Contracts generally provided that a recourse action can be brought against the person liable for causing the damages to the insured, insofar the losses were covered by the insurance indemnity.
The new Insurance Contracts Law differentiates between (i) recourse action (by attaching a different meaning to the term than old law) and (ii) subrogation of rights. Now, it will be possible to bring a recourse action against the insured, whose civil liability has been insured, when permitted by the law or the insurance contract according to Art.54 (1) of the new law. Such claim will become time-barred. However, the right to obtain the claim of the insured in the amount of the paid-out insurance indemnity against the person liable for the damages is defined as a ‘subrogation right’. Although, the distinction is clear under the new legal framework, it is predictable that the change in the meaning of the term “recourse action” will initially create some confusion. Interestingly, the law addresses the subrogation as a right of the insurer rather that ipso iure subrogation (cessio legis).
Although, it is debatable, if and to what extent the notion of recourse action under old Insurance Contracts Law overlaps with the one of the subrogation right provided by the new legal framework, one of the particularities specifically addressed by the new law regarding the subrogation rights should be pointed out. According to Art. 45 (5) of the Insurance Contracts Law the general rules of assignment of rights are, mutatis mutandis, applicable to subrogation rights of the insurer addressed thereunder. Most importantly, it means that the validity and the strength of the claim assumed (subrogated) by the insurer will depend on the validity and strength of the claim that the insured had against the liable party. The subrogation per se would not alter the claim and would not affect the time bar period that is specifically mentioned by the aforementioned article.
The beginning of the time bar period usually starts when the losses have been incurred by the insured. Therefore, by the time of subrogation the time bar period has started to run. It means that diligent insurers will notify all possible defendants (and their insurers) by sending notices to stop the time bar.
Since it is almost always possible to stop the time bar from expiring, it should be done in a manner set forth by the general rules of Civil Law (Art. 1902-1906) taking into account the case law in this regard developed by the Supreme Court.
Although, the new legal framework undoubtedly provides improvements and clarity to various issues concerning insurance contracts, a certain adjustment period will be necessary for all, including legal practitioners and courts. This is indeed the case when it comes to the coexisting right to bring recourse action and subrogation right under the new Latvia’s Insurance Contracts Law. Also, depending on what the prescription period for the particular claim to be subrogated is and considering the importance of the ability to recover the insurance indemnity, the insurers should approach this issue most cautiously before and after payment of insurance indemnity in the light of the new rules of Insurance Contracts Law. What appears unavoidable that the insurers shall review their standard terms and claim handling procedures.