April 30th, 2012

Continental European Legislative and Judicial Trends: Admissibility of Third Party Liability Insurer Paying Indemnification to Insured in Austria

Posted at 1:00 AM ET

David Lewin, Managing Director
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In exceptional cases under Austrian law, a third party liability insurer may be obligated to pay an indemnification to an insured party. Such cases exist where the insured settled damages with an injured third party or where the injured third party agreed to a payment to the insured. The latter situation must be stated in a civil proceeding and has to be proven in court (OGH 30.3.2011, 7 Ob 241/10g).

Relevant Legal Provisions

Section 154 Paragraph 1 of the Austrian Insurance Contract Act (AICA; Versicherungsvertragsgesetz, VersVG) stipulates that the insurer must transfer an indemnification within two weeks of: 1) the insured fulfilling a third party’s claim, or 2) the validity of the third party’s claim being determined by a legally binding judgment, an acknowledgement or a settlement. According to Section 156 Paragraph 1 of the AICA, dispositions over and above the claim for compensation are legally void in relation to a third party.

In the event that the insured requests a payment that obligates the insurer to pay an indemnification to a third party, Section 154 Paragraph 2 of the AICA allows for the possibility that a settlement, acknowledgement or court judgment establishes the compensation to be paid to a third party.

Facts of the Case

The underlying case was a dispute over structural refurbishment work for a shopping mall in Austria. Both parties in the civil proceedings before the Austrian Supreme Court (ASC; Oberster Gerichtshof, OGH) were insurance companies. The claimant was the third party liability insurer of the principal (Werkbesteller), which was in charge of doing electrical work at the mall and subcontracted that work to an external party. The defendant in the case was the subcontractor’s third party liability insurer.

The subcontractor negligently caused water damage to the ventilation system of the shopping mall. Because the subcontractor was fully liable for the damage, it notified its third party liability insurer (the defendant) and requested an indemnification. The subcontractor confirmed in writing to its insurer (the defendant) that it would deduct the damage amount from its final invoice to the principal. The defendant then issued the indemnification to the subcontractor under the assumption that the subcontractor would indemnify the third party correctly. At a later point, the subcontractor and principal disagreed on the final payment for the work.

Meanwhile, the principal reported the loss from the water damage to its own third party liability insurer (the claimant) without knowing that the defendant had already paid the subcontractor, and the claimant indemnified the principal as well. Consequently, the claimant requested payment from the defendant for the indemnification payment to the principal based on Section 67 of the AICA that stipulates an assignment by law of the damage claim from an insured to its insurer to the extent of that claim. The defendant rejected the request, referring to its own compensation payment to the subcontractor.

Finally, insolvency proceedings had been opened over the assets of the subcontractor, and the claimant filed a claim in the insolvency proceedings. Although the insolvency liquidator rejected this claim, the claimant succeeded in a subsequent court proceeding. Based on this judgment, the claimant filed a motion for attachment and transfer of
garnished claim against the subcontractor’s third party liability insurer, according to Section 157 of the AICA. The defendant still refused payment to the claimant, thereby forcing the claimant to file a claim in court against the defendant.

The court of first instance, the District Court in Linz, granted the claim, and the Court of Appeals confirmed this decision. The ASC, however, accepted the defendant’s appeal but rejected the defendant’s motion on the merits.

Findings

Initially, the ASC analyzed the legal basis of an insured’s claim against an insurer arising out of third party liability insurance. In casualty insurance, according to the ASC, such claims consist basically of the right of exemption (Befreiungsanspruch) and may be directed to the exemption of a justified claim, as well as to the defense of an unjustified liability claim. The right of exemption of the insured becomes due as soon as a third party issues a claim against the insured based on a risk covered by the third party’s liability insurance.

According to Section 154 Paragraph 1 of the AICA, a right of exemption becomes a pecuniary claim only in the event that the insured fulfilled the claim of the third party or the claim of the third party has been assessed by a binding court judgment, acknowledgement or settlement (cf, inter alia, case file no. 7 Ob 84/08s of the ASC). An acknowledgement under Austrian civil law may have declaratory or constitutive effect depending on the parties’ intentions (cf Kajaba in Kletečka/Schauer, ABGB-ON 1.00 [Stand 1.7.2010] § 1375 Rz 2 ff [www.rdb.at]). According to the facts of this particular case, the damage claim of the subcontractor had been acknowledged by consent of the defendant, and the right of exemption was turned into a pecuniary claim.

However, Section 154 Paragraph 1 of the AICA regulates neither the due date nor the recipient of such due payment. In this regard, the ASC takes into consideration the intention of the AICA in making its decision, especially the fact that a third party shall be specifically protected in case of third party liability insurance. In the event that an insolvency proceeding is pending over the assets of an insured, a third party may claim a separate settlement of claims directly against the third party liability insurer based on a claim for compensation of the insured (cf Section 157 of the AICA).

Even though a third party has no direct claim against a third party liability insurer, except in automobile third party insurance, a third party may claim damages by way of attaching the insured’s claim for indemnification against the insurer. In so doing, the third party may directly claim from the third party liability insurer and, therefore, enters into the legal position of the insured.

Remarks

Undoubtedly the ASC’s decision in this regard is neither surprising nor inconsistent. Nevertheless, it may serve as a reminder to the insurance industry that a third party’s rights must be strictly observed.

In third party liability insurance, the insured has to allege and prove the consent of a third party to obtain indemnification from the insurer. Therefore, in this case, the defendant had to allege and prove in court that the principal agreed to the payment of an indemnification to the subcontractor. Any conversation between the insured and the third party regarding compensation at a later date is not interpreted as consent to a payment to the insured, taking into consideration the insolvency risk of the insured for the third party.

For these reasons, it is strongly recommended that the Austrian casualty insurance market request a duly signed confirmation in writing from a third party that it agrees to payment of the insurance proceeds to the insured.

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