In this article, the author aims to draw the reader’s attention to current issues in real estate insurance and damage compensation based on insurance claims involving real estate. The topics highlighted by the author require consideration due to unclear legal regulations and numerous contentious issues in the field of real estate insurance.
Damage Compensation
Let’s begin by explaining what “damage compensation” means. Section 127(1) of the Law of Obligations Act stipulates that the purpose of compensation for damage is to place the injured party in a position as close as possible to the one they would have been in if the circumstance that caused the obligation to compensate had not occurred. In other words, according to the law, only the damage that was caused is subject to compensation.
However, since the insured object is real estate, it is necessary to consider factors such as depreciation, the possibility or impossibility of restoring the real estate object, and other such factors.
A dispute with the insurance company often arises over the compensation amount, even when there is no dispute about the fact of the insurance claim. Firstly, the determination of the amount of damage and the cause of the insurance claim is the responsibility of the insurance company. Determining the amount of damage typically requires an expert assessment regarding the extent of the damage, the depreciation of the property, and other aspects relevant to correctly assessing the damage caused. The insurance company, which hires the expert to determine these factors, cannot be completely independent from the outcome of the expert’s findings. Therefore, the objectivity of reviewing the insurance claim is already in question at this stage.
The second issue relates to how the insurance company evaluates the compensation amount – will depreciation be taken into account, will the compensation include value-added tax (VAT), and other such factors. This raises several questions regarding the potential dispute between the insurance company and the insured. Let’s focus on some important points related to the review of the insurance claim and the possible dispute.
As a brief aside, it should be noted that the insurance company protects its interests with standard terms and conditions. These standard terms often limit or exclude the insurance company’s liability.
Depreciation
Depreciation is inherent in nearly all buildings from the moment they are constructed. The insurance company typically takes the position that it should not pay full compensation, meaning compensation is paid minus the depreciation of the object. According to Section 479(3) of the Law of Obligations Act, the insurance value of a building is considered to be its usual local construction value, less a reasonable amount reflecting the condition of the building, primarily its age and depreciation.
If a building has depreciated by 20%, the insured will receive only 80% of the property’s value (since the insurance company will account for the depreciation). A reasonable question arises: how is the insured supposed to restore their property if they are paid only 80% instead of 100%? It is generally not feasible to restore a building with materials that are 20% depreciated.
For this reason, the Supreme Court, interpreting the law, has concluded that compensation should be aimed at restoring the property, meaning the preservation of the asset (Supreme Court decision 3-2-1-121-08). Section 132(1) of the Law of Obligations Act states that compensation must cover reasonable expenses incurred for acquiring a new equivalent item. Thus, despite the general norms for damage compensation, Section 132(1) of the Law of Obligations Act serves as an exception to the rules and allows the insured to claim full compensation, regardless of the property’s depreciation.
It should also be noted that compensation can be claimed even if the insured has not yet incurred any expenses related to the restoration of the property (i.e., before the actual restoration of the building). It is sufficient to present a calculation of the restoration work.
Value-Added Tax (VAT)
VAT is another issue that the insured may encounter. Generally, the insured is interested in restoring the building if it is technically possible. In its decision 3-2-1-133-12, the Supreme Court concluded that in the event of an insurance claim, it should be assumed that the insured will restore the building in the future, and for restoration work, VAT must be paid. Therefore, the compensation for the insurance claim must include VAT.
It should also be noted that if the insured does not start restoring the building within a reasonable time, the insurance company has the right to demand the VAT amount back, as otherwise, the insured would be unjustly enriched at the expense of the insurance company (Section 1028(1) of the Law of Obligations Act).
Ilya Zuev, sworn advocate,
Law Office Grandman
This article was published in the newspaper “Äripäev.”
