In this article we would like to draw the reader’s attention to the topical problems of real estate insurance and indemnification of damages on the basis of insured events with real estate objects. The topics highlighted by the author require consideration due to unclear legal regulation and many controversial issues in the field of real estate insurance.
Indemnification of damage
Let us start with the understanding of what ‘indemnification of damage’ is. Art. 127 par. 1 of the Law of Obligations Act (LOA) defines that the purpose of indemnification is to put the injured person in a position as close as possible to the position he would have been in if there had not been the circumstance that serves as the basis for the obligation to indemnify. In other words, from the point of view of the law, only the damage that has been caused is subject to indemnification.
However, since the object of insurance is real estate, such circumstances as wear and tear, possibility or impossibility to restore the real estate object, etc. must be taken into account.
A dispute with the insurance company arises over the amount of indemnity, even if there is no dispute over the insured event. Firstly, it is up to the insurance company to determine the amount of damage and the causes of the insured event. In order to establish the amount of damage, it is usually necessary to have an expert examine the amount of damage, depreciation of the property and other aspects that are relevant to the issue of correctly determining the damage caused. The insurance company, while engaging an expert to establish the factors, cannot help but be interested in the result of the expertise. Therefore, the objectivity of the consideration of the insurance case is already in question at this stage.
The second aspect is how the insurance company will assess the amount of damage – whether depreciation will be taken into account, whether the amount of compensation will include turnover tax and other factors. This raises a number of questions about the nature of a potential dispute between the insurance company and the policyholder. Let’s focus on some important points of consideration of the insurance case and the potential dispute.
As a small digression, let it be mentioned that the insurance company protects its interests by standard terms and conditions. The standard terms and conditions, in turn, limit or exclude the liability of the insurance company.
Depreciation
Depreciation is inherent in probably all buildings – from the time they are built. The insurance company usually comes to the conclusion that it should not pay full compensation, i.e. the compensation to be paid is less the depreciation of the object. According to Art. 479 par. 3 of the LOA, the insurable value of a building is its usual local construction value less a reasonable amount expressing the condition of the building, primarily its age and depreciation.
If the building is 20% depreciated, the policyholder will receive only 80% of the property’s value when assessed (because the insurance company will take depreciation into account). A fair question arises as to how the policyholder should rebuild their property if they are only paid 80% instead of 100%. Restoring a building with 20% depreciated materials is usually not technically feasible.
Therefore, the State Court, interpreting the rules of law, concluded that the compensation must be aimed at restoring the real estate, i.e. at preserving the composition of the property (State Court judgement 3-2-1-121-08). Art. 132 par. 1 of the LOA says that the compensation must correspond to the reasonable expenses incurred for the acquisition of a new equivalent thing. Thus, despite the general rules on compensation for damages, Art. 132 par. 1 of the LOA represents a kind of exception to the rules and gives the policyholder the possibility to claim compensation in full, without paying attention to the depreciation of the real estate object.
It should also be noted that a claim for compensation can be made even if the policyholder has not yet incurred expenses in connection with the restoration of the real estate object (i.e. before the actual restoration of the building). It will be sufficient to submit a calculation of the restoration work.
Sales tax
Sales tax is another issue that the policyholder may face. Generally, the policyholder has an interest in restoring the building if it is technically feasible to do so. The State Court in 3-2-1-133-12 concluded that when an insured event occurs, it should be assumed that the policyholder will rebuild the building in the future and sales tax should be paid on the rebuilding work. Therefore, compensation for an insured event should include turnover tax.
It should also be noted that if the policyholder does not start restoring the building within a reasonable time, the insurance company is entitled to claim the amount of turnover tax back, as otherwise the policyholder will be unjustly enriched at the expense of the insurance company (Art. 1028 par. 1 LOA).
The article was published in Delovye Vedomosti, www.dv.ee.
Autor: attorney at law Ilya Zuev
