Impact of COVID-19 on the insurance industry from a Turkish Law perspective

Date: Tuesday, November 10th, 2020 by Mahmut Barlas.

Abstract

Since February 2020, different measures and restrictions are being implemented by the Turkish government to control the effects of the COVID-19 pandemic and to protect public health while answering the sustainability and the continuity of businesses varying from official curfews, travel restrictions, lockdowns etc.
Insurance industry is one of the industries that emerged a number of grey areas in terms of coverages and disputes because of COVID-19 related losses under some insurance contracts like business interruption, employer’s liability, D&O become a matter of discussion in Turkey.
In this article, we aim to explain the legislative changes related to COVID-19 and the impact of the pandemic on Turkish insurance contracts.

 

1. Legislative Changes Related to COVID-19 Measures in Turkey

Two major laws (Omnibus Law No. 7226 and the Law on Mitigating the Effects of The Novel Coronavirus No. 7244) have been encated by the Turkish parliament to mitigate the effects of COVID-19 pandemic.

In addition to these laws, many administrative circulars have been issued by the Turkish governmental authorities to protect the public health and sustain business at the same time.

Below you may find the legal measures regulated by the Turkish parliament and the governmental authorities.

1.1 Omnibus Law No. 7226

First being an omnibus law (“The Omnibus Law No. 7226”) dated 26 March 2020 introduced various new rules in order to reduce the potential negative effects of the COVID-19 of which some of the most significant ones are stated below:

(I) Suspension of Legal Proceedings

All legal periods regarding the establishment, exercise, or abolishment of a right, periods for filing lawsuits, the initiation of execution proceedings, applications, objections, notifications, submissions, and periods of limitation, as well as all procedural periods and periods for mediation and conciliation have been suspended from 13 March 2020 (included) until 30 April 2020 (included).

This legislative suspension was followed by an extension until 15 June 2020 by a presidential decree.

(II) Prohibition on Tenant Eviction

The eviction of tenants for defaulting on the payment of workplace rentals due to financial problems have been prohibited. The inability to pay workplace rental from 1 March 2020 until 30 June 2020 shall not constitute a reason to terminate the agreement or to evict the tenant.

(III) Short-Term Working Allowance

In case of the working hours are temporarily decreased by at least a one-third or if work is temporarily closed, workers will be paid a short-term working allowance by the Turkish government up to three months, which later has been extended to until 17 January 2021.

1.2 The Law on Mitigating the Effects of The Novel Coronavirus No. 7244

In addition to the above stated, the Law on Mitigating the Effects of The Novel Coronavirus No. 7244 (“The Omnibus Law No. 7244”) has been enacted on 17 April 2020 and introduced many new rules and amendments of which some of the most significant ones are stated below:

(I) Interim Restrictions on Dividend Distribution

The Omnibus Law No. 7244 added a rule to restrict companies for dividend distribution until 31 December 2020.

With the restriction, the dividends to be distributed by the Turkish companies  cannot exceed twenty-five percent (25%) of the company’s net profits generated in the 2019 fiscal year, the previous years’ profits and free reserves cannot be distributed, and the general assembly cannot authorize the board of directors to distribute advance dividends.

(II) Prohibition of Termination of the Employment Contract by the Employer

The Omnibus Law No. 7244 imposes restrictions on the termination of employment contracts by employers due to the negative impact the COVID-19 pandemic to protect employment continuity.

In this regard, employers are prohibited from terminating employment contract for a term of three months (which have been extended to six months) for any reason other than immoral or malicious conduct that stated under the Turkish Labor Law[1].

1.3 Administrative Circulars

In addition to the above stated laws, the Turkish governmental authorities introduced many circulars, which are generally related to regulate the (i) declaration of official curfews, (ii) restriction of social gatherings and meetings, (iii) prohibition on local and global travels, (iv) shut down of public recreation and entertainment places.

 

2. Effects on Insurance Policies

Even though there are no direct laws or regulations concerning mitigation of COVID-19’s effects on insurance contracts, most of the legislations and administrative circulars introduced in that sense have an effect on insurance industry.

Below you may find the effects of COVID-19 related Turkish legislation on insurance contracts in Turkey:

2.1 Employers’ Liability Insurance

According to Article 52 of the Turkish Law of Obligations, the liability insurance indemnity is subject to apportionment pro rata with the fault and/or contributory negligence the policyholder. Therefore, it is a crucial to determine the fault/negligence of the parties. For this purpose, Turkish Social Security Institution, the authorized governmental body, is obliged to carry out an investigation following an occupational accident and in case it determines a fault on the employer, it would be a very concrete proof in favor of the employee/insured.

This has been the case for H1N1 virus back in 2009 in which the Turkish Court of Appeals have ruled in favor of the employee/insured relatives, where the insured truck driver has passed away while in transit during the swine flu outbreak in 2009.

However, on 7 May 2020, Turkish Social Security Institution published a circular[2] ruling that COVID-19 related physical damages shall not be deemed as a cause for occupational accidents. This means that employers are very likely not to be deemed as the faulting party because of COVID-19 related losses, save for very exceptional cases. However, there is no Court of Appeals decision in this regard yet.

All that being said, it is safe to state that the employer’s liability insurance contracts have not been affected by the COVID-19 pandemic as many expected in mid-March.

2.2 Business Interruption Insurance

Many circulars have been published by the Ministry of Health and the Ministry of Interior Affairs in order to impose lockdowns for prevention of spread of COVID-19.

With these administrative circulars, many entertainment and service industry players are suspended to open for business such as gyms, hairdressers, restaurants and cafes, game centers and some other non-essential businesses.

Even though there are no court precedents like the test case of FCA vs 10 different UK insurers[3], we consider that these official lockdowns may be a cause to trigger business interruption insurance indemnity under Turkish law.

2.3 Non-Appearance / Event Cancellation Insurance

There is no direct regulation on event cancellation / non-appearance insurance complementing the Turkish Commercial Code (the “TCC”), which regulates the insurance contracts and adopts the “named perils” principle. This lead to the fact that all the special provisions and coverages as well as deductibles and other clauses, which might include transmissible disease coverage, must be included under the insurance contact.

In addition to the lack of legislation, to the best of our knowledge, there is no high court decision on the validity of event cancellation / non-appearance insurance coverage for transmissible diseases.

In light of all of these the wording of each event cancellation / non-appearance insurance will be vital in case of a handling a COVID-19 related claim.

2.4 D&O Insurance

Similar to employer’s liability insurance, the notion of fault is crucial in D&O too. In a hypothetical case where if employer’s liability insurance is not existent but D&O insurance is, and in case of an occupational accident in the midst of COVID-19 pandemic, it will be hard to set a direct fault on the instructing director because of the above stated Social Security Institution’s circular.

That being said, the directors and officers shall still be liable and thus the D&O insurer, if the director or officer instructs in contrary to governmental authority’s circulars or instructions. A hypothetical case may be forcing an employee to work at the workplace even though there is an official curfew or an already known COVID-19 diagnosed at the workplace.

In light of the above, we consider that the Turkish Social Security Institution’s circular dated 7 May 2020 is a lifeguard for COVID-19 related losses D&O insurance in Turkey but still all claims must be must be determined on a case-by-case basis evaluation by considering many aspects.

2.5 Health Insurance

According to the Private Health Insurance Regulation, any loss arising from transmissible diseases are within the insurance coverage, save for it is specifically excluded under the policy. That being said, transmissible disease losses are generally excluded under most of the major insurer’s template insurance contracts.

During COVID-19 pandemic, most of the major insurance carriers declared that COVID-19 related physical treatments shall be paid ex-gratia[4] to maintain customer satisfaction and retain customers.

Therefore, the COVID-19 related treatment expenses can be paid by the insurers, which have publicly declared ex-gratia intention.

2.6 COVID-19’s Indirect Impact in Terms of Underinsurance

According to Article 1462 of the Turkish Commercial Code, underinsurance shall be in consideration when the sum insured is less than the insurance value, which results in the insurance indemnity to be paid in the proportion of the underinsured value.

In Turkey, the average exchange rate of the USD was TRY 5,90 on 01 January 2020. As of 10 October 2020, the average USD rate is TRY 7,90. Between January and October, the USD rate increased approximately 34%.

The FX fluctuation, an indirect effect of COVID-19 in addition to many other aspects, will have an impact on all property insurances, which are denominated with Turkish Lira but insuring products, which have variable market value subject to FX rates.

In such cases, the policyholders are advised to addend the insurance contracts with increased premiums.

2.7 Cyber Attacks Increased During COVID-19 Outbreak

The increase of cyber-attacks during the COVID-19 breakdown cannot be ignored. According to president of Turkish Information Security Association (ISA), cyber-attacks increased 300% and cyber criminals are attacking once in every 39 seconds in Turkey[5].

We had some busy months over the summer of 2020 as there were several notable cyber-attacks all over the news in Turkey of which we listed some of those below:

  • Penti Attack: Penti, a Turkish underwear manufacturing giant has been paralyzed with a cyber-attack[6]. The company issued a press release right after the attack and notified the regulator, but the loss is unknown.
  • e-bebek Attack: E-bebek, one of the largest maternity products platforms in Turkey, has been paralyzed with a cyber-attack on 5 July 2020 according to the public disclosures. Access to websites and network systems has been denied for 9[7] The denial of service also caused network interruption in the physical stores during the attack as well[8].
  • net Attack: One of the largest job search platforms in Turkey kariyer.net also been subject to a cyber-attack. The company stated that the personal data of 50.000 individuals had been stolen. Immediately after the incident the regulator has published a public announcement and we are waiting for its decision[9].

As can be seen, cyber-attacks are emerging in Turkey as in the world and the need for cyber insurance has become much clearer.

2.8 Lease Receivable Insurance

Even though the lease receivable insurance is not a very common insurance coverage in Turkey, the need for it cannot be ignored.

With the Omnibus Law No. 7226, eviction of tenants for defaulting on the payment of workplace has been restricted once. Additionally, there is a huge increasing number of case files for eviction and lease collection.

Similar to the cyber insurance, the need for lease receivable insurance has become much clearer.

 

3. Conclusion

The COVID-19 pandemic is nowhere near over and we all know that there will be significant impact on commercial life for some time. Businesses must not give up taking on all necessary precautions and adapt measures to minimize the potential negative effects.

In order to mitigate these losses, right insurance coverage will play vital role in the upcoming years for all businesses and in order to maintain that, the insurers and the policyholders are advised to keep an eye on the developing trends and consult their legal advisors.

 

DURUKAN LAW FIRM

Mahmut Barlas, Partner, Istanbul

[email protected]

Çağdaş Altınova, Junior Associate, Istanbul

[email protected]

 

This article was first published by the International Bar Association.

 

[1] Turkish Labor Law no. 4857, which was published in the Official Gazette dated 10 June 2003 and numbered 25134.

[2] The Social Security Institution’s Circular on Novel Coronavirus dated 7 May 2020 and numbered 96597630-010.06.02-E.5852699

[3] https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf

[4] https://www.milliyet.com.tr/sigorta/saglik-sigortasi-sahiplerinin-corona-virus-tedavi-giderleri-karsilanacak-6181619

[5] https://www.hurriyet.com.tr/teknoloji/koronavirus-surecinde-39-saniyede-bir-siber-saldiri-gerceklesiyor-41604647

[6] https://www.haberturk.com/son-dakika-penti-ye-siber-saldiri-2764664-teknoloji

[7] https://www.milliyet.com.tr/ekonomi/e-bebek-geri-dondu-6257798

[8] https://www.hurriyet.com.tr/teknoloji/e-bebek-hack-olayini-dogruladi-iste-ilk-aciklamalar-41559382

[9] https://www.superhaber.tv/son-dakika-haber-kariyernet-hacklendi-haber-293810

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