Insurance is a bilateral contract entered into with an insurer in exchange for an advance premium payment to cover any future damage to something or someone. In Turkish legislation, Turkish Commercial Code no. 6102 (“Code”) prescribes two types of insurance policies: life insurance and loss insurance.[1] A loss insurance policy reimburses pecuniary damages to the insured’s property up to the limit specified in the policy. Pursuant to the legislation, loss insurance is further categorized into property insurance and liability insurance.[2] Property insurance does not cover the property itself but the insured’s interests vested in the property. This policy may cover not only moveable or immovable property, but also intangible assets such as intellectual property and patents. Meanwhile, liability insurance protects the insured’s assets from potential losses resulting from damages to third parties and prevents aggrieved parties from being victimized. The contract signed by the insured and the insurer that details the terms and charges covered is called a policy.
Subrogation of the Insurer
In loss insurance policies, the main obligation of the insurer is to reimburse losses resulting from the materialization of a circumstance covered by the policy. One of the legally binding implications of an insurance company’s payment stems from article 1472 of the Code, regarding the insurer’s subrogation, which may not be opposed with a term in an insurance policy. As a result, the third party who must pay for the debtor’s liabilities subrogates and has the same rights as the creditor to the extent stipulated in the relevant policy. Thus, upon the payment of the insurance indemnity, the insurer legally succeeds the insured and acquires the right to claim indemnities from the responsible parties. This clause seeks to prevent the insured from being unjustly enriched by demanding reimbursement from both the insurer and the responsible party.
Conditions for the Subrogation of the Insurer
The insurer’s subrogation conditions are stipulated in the Code as follows:[3]
- Existence of a valid insurance policy: This condition mandates payments for the duration of the policy’s term and for the circumstances it covers, provided that a legally valid insurance policy exists.
- Payment of insurance indemnity: This condition concerns the payment duly made to the insured or their designated agent.
- The insured should have the right to action.
Upon meeting these conditions, the insurer becomes the legal successor of the insured. In that instance, the insured cannot seek reimbursement from individuals responsible for the damage after receiving insurance indemnity from the insurer. However, if the insurer makes a partial payment, the insured has the right to sue the responsible parties to claim the remaining amount.
What is an Ex Gratia Payment?
Insurance companies sometimes also cover damages that are not specified in a policy. This payment is called an ex gratia payment. Ex gratia means “by favor” in Latin and refers to something that is done out of kindness or grace.
This type of payment by the insurer is outside the scope of a policy, and the insurer has no legal obligation (including moral or imperfect obligation) to make such a payment. As a result, when an insurer makes an ex gratia payment, it is assumed to be acting to preserve its commercial relationship with the insured and to promote its business reputation. However, this type of payment does not entitle the insurer to subrogation since it does not arise from the insurance policy. As stated above, a valid insurance policy must be present for the subrogation of the insurer, and the ex gratia payment is not made based on a policy. As a result, the insurer cannot subrogate the insured since the condition regarding the existence of a policy is not fulfilled. In fact, the Court of Appeal has previously established that the insurer cannot claim damages from the responsible parties on account of having made an ex gratia payment.[4]
Due to lack of subrogation, the insured will have the right to claim damages from the responsible parties even after receiving an ex gratia payment. On the other hand, the insurer cannot demand the reimbursement of the payment from the responsible parties or the insured. Still, upon signing a quittance at the time of ex gratia payment, the insured may transfer their right to claim damages and take action to the insurer pursuant to article 183 ff. in the Turkish Code of Obligations.
A payment by an insurer outside the scope of a loss insurance policy is referred to as an ex gratia payment. Since the payment does not arise from the policy, the insurer will not subrogate the insured and have the right to claim the reimbursement of the payment to the insured from the responsible parties. However, as a result of the ex gratia payment, the insured and the insurer may agree to transfer the right to action to the insurer. If the insured claims indemnities from the responsible party after receiving payment from the insurer, the insurer making the payment may pursue an action for unjust enrichment.[5] In conclusion, ex gratia payments have significant implications for the insured and third parties; therefore, parties to insurance processes, including the drafting of a policy, should take measures and, if necessary, seek professional counsel to avoid any loss of rights.
Sources:
Turkish Commercial Code no. 6102, article 1453 ff. published on Official Gazette no. 27846 (14.02.2011).
Turkish Commercial Code no. 6102, article 1472, published on Official Gazette no. 27846 (14.02.2011).
The Court of Appeal, 17th Civil Chamber, decision no. 2019/6330 (20.5.2019).
The Court of Appeal, 17th Civil Chamber, decision no. 2019/4847 (16.4.2019).
The Court of Appeal, 17th Civil Chamber, decision no. 2016/1961 (18.02.2016).
[1] Turkish Commercial Code, 14.02.2011, article 1453 ff.
[2] Ibid, article 1453 ff.
[3] Ibid, article 1472.
[4] 17th Civil Chamber of the Court of Appeal, file no. 2016/3730, decision no. 2019/6330, issuance on 20.5.2019; 17th Civil Chamber of the Court of Appeal, file no. 2016/12674, decision no. 2019/4847, issuance on 16.4.2019
[5] 17th Civil Chamber of the Court of Appeal, file no. 2016/97, decision no. 2016/1961, issuance on 18.02.2016
