1. General Overlook
Measures and restrictions being gradually introduced by the government against the COVID-19 outbreak, which was announced as a pandemic by the World Health Organization and diagnosed for the first time in Turkey on 11 March 2020, aim to protect public health while sustaining employment, production and supply chains.
Restrictions, which were first imposed on flights to China in February, were introduced for flights to another 71 countries in March. These were followed by other restrictions on inter-provincial public transportation, subject to certain exemptions. Lastly, in early April, any and all entrances and departures to and from 31 cities, including 30 metropolitan cities were banned for 15 days. Meanwhile, in mid-March, both the municipalities and the government impeded access to almost all of the public areas where cultural and social activities are performed, and imposed a curfew for those that are older than 65 years old and younger than 20 years old. Finally, in mid-April, a curfew was ordered for all age groups during the weekends.
Those employed were often kept exempt from these measures, for the continuity of production, supply chain and business life. Urban public transportation services were also rearranged in consideration of the business hours. Nonetheless the upcoming days may witness heavier measures that would significantly restrict business life and production in view of the expectations of concerned community and recommendations of the Science Committee established before the Ministry of Health.
Impacts of the outbreak on businesses and associated measures become more and more apparent each day. Although postponement of credit debts of tradesmen and craftsmen, and support packages introduced for enterprises serve to ease the outbreak’s economic impacts; changing customer choices and daily habits due to COVID-19, and the measures, a part of which is summarised above, lead many enterprises’ activities to stop completely or reduce significantly.
The enterprises understandably tend to address the force majeure clauses in their contracts as a first step, especially after the World Health Organization labelled the outbreak a pandemic. However, such effort does not always yield the desired result, given that Turkish law does not provide a solid provision on the matter, and that the contracts do not always contain a wording that is responsive to the extraordinary situation we are living through. Even in the event where the contracts are deemed convenient to terminate or suspend the contractual obligation for an instance, it may still be impossible to use a legal remedy effectively and timely, as the judicial services are decelerated and even postponed due to COVID-19. Moreover, the counter party might be in financial difficulty which would render the exercise of available remedies practically impossible. Consequently the enterprises may be forced to perform their contracts, albeit being deprived of the expected profit, under such difficult circumstances. Or, they may abstain from performing their contracts on grounds of force majeure, and perhaps encounter a judicial process that may also take up to years where they may end up being found wrong and ordered to compensate the counter-party with a significant interest amount.
Particularly in such cases, it is time for the enterprises to take their insurance policies out of the dusty shelves and review them with a great attention in hopes to find a solution, as these policies may indeed cover risks such as non-payment of the insured’s receivables; interruption of operations, or cancellation of events, if they are issued in a farsighted manner.
2. Legal Framework of Insurance Contracts
Content of insurance contracts is regulated under the Turkish Commercial Code numbered 6102 (“TCC”), which entered into force in 2012. Accordingly, insurance contracts are subject to freedom of contract, except for the protective articles laid down to protect the insured, who is always at a weaker position compared to insurer. Accordingly, parties to an insurance contract are free to determine the content and exemption of the insurance policy, as long as it does not violate the mandatory rules, moral principles, public order and personal rights.
As per Article 1409 of the TCC, insurer is only liable for the damage or sum arising from the occurrence of the particular risk stipulated under the contract. With this provision, the TCC underscores that the insurer shall only be liable of the risks projected under the policy, and deliberately differs from the repealed law, which had adopted the “all risk” principle.
In the presence of TCC, the applicability of Article 11 of the Insurance Act numbered 5684 (“Insurance Act”), which mainly aims to regulate the Turkish insurance market, has become very controversial. This provision not only requires insurance contracts to comply with the general conditions approved by the Undersecretariat of Treasury, but also stipulates that all the risks that are not explicitly excluded are deemed included in the coverage.
Noting that the TCC already degraded the Insurance Act in the hierarchy of norms, the scholars, who contributed in drafting the TCC in a reformist manner by adopting the named perils principle, have been arguing since 2010 that the Insurance Act’s old fashioned provisions based on “all risk” principle are in need of a chance. However, the parliament as the legislative body has not taken any step so far.
Considering that the general conditions referred to by the Insurance Act, majority of which were not renewed since the repealed laws, are devoid of flexibility to address contemporary commercial needs; the significance of special conditions agreed by the parties increases each day. Reminding the privilege to stipulate a mandatory legal rule exclusively belongs to the parliament, not the executive body, it is argued among the scholars that the parties may explicitly or implicitly opt out the provision of the general conditions that reads “special conditions can be set forth, provided that they do not violate these general conditions” based on the freedom of contract.
This being the case, in the event where there is a dispute in scope of the contract, the special conditions of the contract will be the main reference, and where these special conditions fail to respond, an appropriate provision of general conditions, framework provisions concerning the contractual content under the TCC, and finally the general interpretation rules will apply.
The analysis herein below focuses on under which circumstances, and at what scale, the concerned policies respond to the suffered losses, in view of the measures taken by authorities and enterprises’ initiatives against COVID-19. However, it must be stressed that each policy is issued pursuant to the varying needs of each sector in which the insured party operates, and therefore there is often no such thing as a standardized policy text. Thus, each policy must be evaluated in regard to its own circumstances.
3. Insurances That May Allow the Insured Party To Have Recourse To Insurer
During the COVID-19 outbreak where the real sector has been affected negatively in spite of the incentives and support packages, there are certain insurances that may respond to risks such as non-payment of receivables, interruption of operations and cancellation of organizations. However, some of these policies have not been appealing until today due to market conditions, whereas others may not include convenient wording to cover the present conditions.
Although the concept of credit insurance, introduced with the general conditions approved by the Undersecretariat of Treasury in 2013, starts to be promoted nowadays as “the life insurance of companies”, it could not attract a noteworthy customer until today. From the first day, this type of insurance failed to show the anticipated success, both for reasons that the candidate companies lacked auditable and reliable financial statements, and that the insurance companies lacked sufficient reinsurance assurance and demanded high premium, especially during the economic slowdown. Supply of this insurance product has been short due to pro-insured and restrictive rules of the TCC, whereas the insurer seeks elbow room especially in credit insurances whereby it indeed takes over the insured’s commercial risk to a large extent.
As the desired supply and demand were not formed for the credit insurance, the government, with the Counsel of Ministers’ decision of 01.01.2019, has introduced State-Funded Trade Credit Insurance for small and medium sized enterprises (“SMEs”). However, the total number of the policies sold until today is still 6 thousands. Two new regulations issued at the end of March, 2020, aims to enlarge the target audience as well as providing government support where the products lack the necessary reinsurance protection. Nonetheless, the content of the insurance contract in the state-funded system is determined by the Extraordinary Risks Management Center as per the Insurance Act, and cannot be altered by the parties. Considering the general conditions of credit insurance as a reference point, these policies, which are already low in number, fail to respond to the present circumstances, as severe and time-consuming requirements such as exhaustion of debt collection proceedings or the debtor’s liquidation are sought to trigger the policy.
Furthermore, the challenges posed by COVID-19 outbreak are not limited to the non-collection of receivables. A great amount of enterprises have already parted their ways with some of their employees temporarily or permanently, and/or stopped their operations in order to decrease their expenses, as the demand has reduced significantly and the supply chain has been interrupted. On the other hand, organizations and events have been cancelled or postponed in service and entertainment sector for various reasons, including the ban on public gatherings.
Postponement of the UEFA Champions League Final, which was to be hosted in Istanbul on May 30th, for an indefinite time, and cancellation of the first 8 Formula 1 races, which visit many countries each year, again for an indefinite time, are two of the numerous examples indicating the seriousness of the situation. As the organizers of Wimbledon Tennis Tournament, which was cancelled recently while anticipating a revenue of 250 million Pounds, recently announced that they had purchased a supplementary coverage against the pandemic risk upon the SARS outbreak in 2003, the media started to question why the insurances covering such risks failed to be appealing until today. On the other hand, the organizers of Tokyo Olympics, after the postponement for 1 year which is expected to bring an additional cost of 2 to 6 billion American Dollars, explained that it is not clear whether the postponement falls within the scope of insurance coverage or not. This announcement indeed foreshadows the disputes we will encounter in the following days.
Clearly, the decisions of international organizations, Turkish government and local authorities have inevitably shed the spotlight on Business Interruption and Cancellation and Non-Appearance insurances. Nonetheless, there is no specific general condition prepared by the Undersecretariat of Treasury for these kinds of risks, in Turkish practice. Although the general conditions pertaining to certain insurance types such as Machinery Breakdown and Erection Insurance concern business interruption due to various reasons, their coverage excludes the damage emerging from “any loss of profit or financial liability, regardless of the reasons leading thereto”. Thus, in practice, especially where the case involves major risks, these general conditions are abandoned completely, and comprehensive wordings of reinsurance companies are transferred into Turkish insurance practice by way of fronting. Therefore, party autonomy gets even more critical in these kinds of risks.
Business Interruption and Cancellation/Non-Appearance insurances basically aim to provide the insured party with coverage for the loss of net profit for reasons such as cancellation, postponement, replacement or interruption of a specific organization (e.g. stage performance) or commercial activities due to certain causes. Additionally, both the special conditions and the articles of the TCC provide that the costs incurred by the insured party to mitigate the loss are indemnified in scope of the policy.
Causes that could trigger insurance payment can either be sorted numerus clausus under the policy, or the policy can set forth that any and all reasons preventing the organization or commercial activity from operating properly fall within the scope, “unless specifically limited, or excluded elsewhere in this insurance”. These projected exceptions must be analysed in regard to the present case, in respect of the outbreak and its direct or consequential impacts.
As per the TCC provisions adopting the “named perils” under the influence of the English practice, insurers are deemed to be providing coverage only for the risks specified under the policy. A significant part of these policies stay silent as to the losses arising from COVID-19 outbreak, and focus particularly on the physical damage to the insured party’s assets/production equipment in case of business interruption. Indeed, under the Preamble of the TCC, the law-maker indicated that the insurance contracts issued for extraordinary risks are very rare, therefore such risks must be deemed out of scope, unless explicitly agreed.
In this vein, many policies in practice are issued to be inclusive of only the direct results of the covered risks, regardless of whether they expressly exclude the extraordinary risks such as COVID-19, or not. In this respect, according to the general principles regarding liability law, an “appropriate causal link” that is convenient in view of surrounding events and rules of logic will be sought between the risk and loss, and where there are two causes that are convenient to raise the damage, the one causing the damage will interrupt the other’s possible causal link.
Court of Cassation also looks for a proximate and direct causal link between the insured risks and damage in insurance disputes. Considering that the burden to prove the causal link lies with the insured party, scholars underline that it is quite difficult to determine the appropriate causal link in cases where multiple negligent or executive acts cause the damage concurrently, and it is necessary and valid that the parties stipulate this matter under the contract.
Having said that, Court of Cassation often approaches the gaps or ambiguities in the insurance policies with particular care, bearing in mind the insurer’s information duty, and interpret the policy in favour of the insured depending on the particularities of the matter. For instance, in a dispute where a damage incurred due to a hurricane is not specified either as a damage included in the coverage, or as an exception, the Court of Cassation reversed the local court’s decision stating that “it must be evaluated whether it is necessary, or not, to explicitly and clearly set forth the ‘out-of-scope’ situations on numerus clauses basis under the general or special conditions” . General Assembly of Court of Cassation recently ruled, while acknowledging the named perils principle adopted in the TCC, that the burden to prove that an incident is excluded from insurance coverage is on the insurer (Article 1409/2 of the TCC), and hereby set forth that an incident that is not specified amongst the exceptions falls within the insurance coverage. However, it must be noted that, as particularly emphasized by the court, exceptions in the disputed policy were exhaustively sorted in detail while the scope of coverage was defined broadly as “non-performance [of the travel tour] due to the agency’s fault”; a wording which helped the court to easily draw such conclusion.
Apparently, although interpretation of insurance contracts continues to be controversial especially in face of Article 11 of the Insurance Act even after the TCC entered into force, the law-maker and the scholars who contributed in the drafting studies aimed that insurers would be obliged “to only bear the risks projected explicitly under the contract, rather than any and all risks, in case of hesitation”. At this point, it must be noted that, even the scholars who opine that the balance of interests would be distorted in favour of the insurer in case of a too strict application of the named perils principle, agree that, in terms of an insurance provided against earthquake risk for instance, there is no need to explicitly exclude an irrelevant risk such as avalanche from the scope. However, in cases where this distinction is not so clear, wording of the special conditions must be examined in each case, as the Court of Cassation does. If the incident causing the damage is not explicitly sorted as an exception, it might be considered as a silence to be interpreted in favour of the insured party where the scope of the policy is broad; whereas the insured party’s indemnity request would be rejected where the coverage is only limited to the direct results of risks listed on numerus clauses basis.
An insurance policy, rather than remaining silent, may expressly stipulate certain diseases, including COVID-19, as an exception. Having said that, Court of Cassation interprets exception clauses narrowly, and/or evaluates the damage to be within the policy scope, unless the excluded peril exclusively causes the damage. However, in cases where these exception clauses are prepared explicitly in a broad manner, the courts are expected to abide by the parties’ intent, based on the examples in practice. For instance; a wording like “Damage, costs or liabilities arising directly or indirectly from Severe Acute Respiratory Syndrome (SARS) and/or Swine Flu and/or another type of virus that is announced to be pandemic by the World Health Organization, or any threat emerging therefrom, or (even if such threat does not exist) any concern/perception pertaining thereto; or those that any of the above contributed to, shall be deemed out of scope” will not only deprive the direct results of COVID-19 outbreak from insurance protection, but also the damage incurred due to cancellation of an event in scope of the measures taken for virus-related concerns.
In such case, for instance, quarantine of the decorations that will be used during performance, or the equipment that will be used at production phase at the customs might be out of scope. Or, if mass events are cancelled for a definite or an indefinite term as in Turkey, the anticipated profit from the projected event may be deemed out of the insurance scope. In addition to that, even if the exception clause pertaining to COVID-19 outbreak does not have such comprehensive wording, indirect results of the outbreak, such as the restrictions introduced by public authorities, may constitute the subject of another exception clause in the policy.
Against this background, the measures and obstacles referred above, may preclude protection for the incurred damage in many cases where results of COVID-19 outbreak emerge directly or indirectly based on the policy wording.
When we take a look at the practice around the world, the situation is more or less similar in every jurisdiction. Indeed, in the United States of America, the law-makers of several states aim to include certain COVID-19-related losses, especially those emerging from business interruption, within the insurance scope, in spite of the existing exception clauses, with legislative studies planned to enter into force with retrospective effect. On the other hand, at federal scale, the law-maker issued a letter addressing the insurance sector inviting them to cover COVID-19-related losses.
4. Insurances That May Allow Third Parties To Have Recourse To Insurer
Turkish insurance law explicitly provides for liability insurances that third parties can directly recourse to the damaging party’s insurer, provided that they set forth appropriate causal link. If the insurance is obtained for the policyholder’s business, this insurance principally also cover the liability of the insured’s representatives, employees, and those in charge of management and audit of the business.
In liability insurances, it is extremely crucial and necessary to determine which fact or facts must occur for the insurance protection to arise for the purpose of coverage assessment, since the insurers are only liable, in principle, for the risks projected in the contract, as in the property insurances (Article 1473).
In COVID-19 days where business life is not directly interrupted by any means, and on the opposite, encouraged with the governmental announcements, one of the primary risk factors faced by the enterprises in effort to continue their operations despite all obstacles, is the employees’ health conditions. Indeed, during the swine flu outbreak in 2009, Court of Cassation qualified the incident where a truck driver in transit caught the flu as work accident. The Court, also examining the appropriate causal link, considered that the incubation period of the virus varies between 1-4 days, and found it sufficient for qualifying the incident as work accident since the truck driver was in transit until 2 days prior to his application to hospital upon the first symptoms of swine flu.
Unless the parties agree otherwise, Employer Liability Insurances subject to the general conditions approved by the Undersecretariat of Treasury cover the employer’s liability to enterprise employees in such cases. However, considering that the incubation period of COVID-19 is longer than swine flu, it is preferable that the insurer is notified of any incident that may give rise to legal liability, such as where the employees could not maintain social distancing despite all precautions, in order to preclude any issues of proof, or loss of right. In the event of occurrence of the risk, i.e. if the employee catches the disease, the notification must be made immediately. In the event where the damage is increased for not making the notification timely, the insurer may claim to be not liable for the amount increased due to the insured party’s fault.
In terms of larger-scale joint-stock companies, another issue that may arise in relation to the company’s performance during COVID-19 outbreak is liability to shareholders, besides the liability to employees. However, it must be noted that it is not sufficient that the company makes a loss or the expectations are not fulfilled, for holding the members of Board of Directors liable. At the same time, the damage must emerge from the managers’ breach of their liabilities arising from law, or articles of association (Article 553 of the TCC). To set an example to these legal duties, Boards of Directors are obliged to form an expert committee for early diagnosis of causes endangering the company’s development, implementation of necessary measures, and management of risks, by their own motion in companies with publicly-traded shares, and upon written notice of the auditor in others (Article 378 of the TCC).
Court of Cassation confirms that, not only the company, but also the investors claiming to have incurred damage can directly have recourse to negligent direcots, due to imprudent management style and causing reduction in share values. Article 361 of the TCC providing that the damage caused to the company or to third parties by Board of Directors members while on duty may be insured, in fact points out the Directors & Officers Liability insurance. Although there are no general conditions peculiar to this risk in Turkish practice, both the general terms of the TCC in regard to insurance law, and the general conditions of Financial Liability Insurance allow such insurance.
Regardless of whether it aims the liability to employees or to third parties, under such circumstances where the probability of occurrence of the risk is quite high, it is also required that the insured enterprise is in contact and collaboration with the insurer, in scope of the obligation to “prevent and mitigate the damage, and refrain from aggravating the damage” under the TCC and many insurance contracts. The insured enterprise, which is legally obliged to take preventive measures, must also abide by the “instructions” of the insurer to the possible extent (Article 1448). Refraining from taking the necessary measures or abiding by the insurer’s instructions without a just cause may lead to a deduction from the indemnity amount, depending on the severity of the fault.
Unless the present policies, and Business Interruption and Non-Appearance insurances in particular, are inclusive of the risks emerging from COVID-19 outbreak beyond any dispute, the courts must provide an answer, by way of examining the features of the present case and the wording of the policies, to the question whether there exists an insurance protection that would relieve the enterprises. It is open to discussion how the courts would, in a possible dispute, approach the issue when determining the root cause in of the context of causal link, and examining the results of not explicitly including such incident in the policy. As there are no consistent jurisprudence on the matter, the courts may opt to rule that only the losses arising from the incidents set forth under the policy can benefit from insurance protection as stipulated by the law maker, or interpret the gaps and ambiguities in the policy in favour of the insured party.
Businesses, who incur loss of profit due to direct or indirect results of the COVID-19 outbreak while struggling to find a clear policy provision that would address their needs, are also under a serious risk of third party claims, including their employees. Although a number of liability insurances provide coverage for this risk, the insured party must take necessary measures to prevent the probable COVID-19-related damage and risks, and abide by the insurer’s instructions, if any, in order to benefit from such coverage in the fullest sense. In the event where there is a relation between the insured party’s negligence and aggravation of the damage, a deduction from the insurance indemnity may come into discussion depending on the severity of the fault.
It is presumed that the tendency of the COVID-19 outbreak and administrative measures that may increase concordantly will continue to have a significant impact on the economic life for some time. As the measures that are taken and will be taken would have different results depending on the sector in which insured enterprise operates, and as each policy would respond to these results differently, the policyholders are advised to be in close collaboration with their legal consultants and their insurers.