May 7th, 2012

Continental European Legislative and Judicial Trends: Insurance Market for Public Servants in Light of New Act on Financial Liability of Public Servants for the Grave Violation of the Law in Poland

Posted at 1:00 AM ET

GC Editor

David Lewin, Managing Director
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Introduction

A new regulation, the act on the Financial Liability of Public Servants for the Grave Violation of the Law (FLPS), may impact the Polish insurance market in the next few years. FLPS concerns the financial liability of public servants towards the State Treasury, the territorial government unit or other legal persons that bear liability for damages inflicted while exercising public authority. The Polish Parliament passed the act on January 20, 2011, and it became effective on May 17, 2011.

The main purpose of the regulation is to prevent public servants’ decisions from gravely violating the law and possibly becoming the basis for future liability of the State Treasury. Presently, public servants in Poland still commonly impose disproportionately high fines or may act negligently when interpreting existing law. There may be an incentive for this behavior. Bonuses granted to public servants for outstanding public service often depend on the volume of decisions, controls or fines levied. An individual public servant may benefit by punishing more entities in a more severe manner, rather than interpreting regulations in the entities’ favor. This behavior has contributed to declining trust in the public administration and has had a negative impact on the state’s authority.

Under the current Polish system, public servants’ behavior can easily cause irreparable damage to citizens. For example, the faulty and restrictive decisions of the Polish Internal Revenue Service have often led to unnecessary bankruptcies of companies. The owners of these enterprises can pursue claims in court and receive compensation from the state. However, the outcome is hardly beneficial to anyone - the companies are closed, and workers lose their jobs.

The new act imposes some liability on individual public servants who make decisions in the name of the state. This financial liability can be a useful instrument for balancing the motivation of public employees.

Liability of State Treasury

In the previous legislation, only the State Treasury (or territorial local unit or other legal person exercising public authority) could be held responsible for damage inflicted by unlawful activity or the cessation thereof that occurred in the course of exercising such authority (Article 417.1 of the Civil Code). The individual who suffered damage was not able to sue an individual public servant, but was required to file a claim against the State Treasury according to the seat of the unit that inflicted damage, pursuant to Article 29 of the Code of Civil Procedure (CCP). The damage could consist of the actual loss (damnum emergens) and lost profits (lucrum cessans).

According to the judgment of the Polish Constitutional Tribunal, the term “public authority” should be generally but not only understood as the competence to autonomously shape the situation of an individual.(1) The term can also be interpreted broadly and used to enhance situations that are not within the scope of this definition. However, the meaning of “public authority” does not include public services provided by the state (a sphere of the state’s activity where no prerogative for enforcement actions of the state exists).

In this judgment, the Constitutional Tribunal stated that the term “unlawful activities” needs to be understood in compliance with the constitutional regulations regarding the sources of law (Article 87-94 of the Constitution). It also stated that this term does not enhance the moral norms, customs or principles of community life. Such a view is
criticized in the literature as, for example, the principles of community life became a part of the disposition of a norm and, consequently, a part of the legal order.

For example, a public servant employed in the Polish Internal Revenue Service misinterprets law in favor of the State Treasury and renders a decision that results in a company’s insolvency. If the company wishes to recover damages, the lawsuit could be filed against the State Treasury. Under the previous regulations, the financial liability would not apply to the public servant, and the Treasury would be liable for the broad scope of the damages. After the adoption of the new FLPS act, the State Treasury may recover at least part of the damages that it was required to pay out.

Rules for Financial Liability of Individual Public Servants

The FLPS defines a public servant as a person acting in the role of an organ of public administration, acting as a member of the bodies of public administration entities or working in the public administration (either through employment contract, nomination or civil contract). A certain category of public servants is precluded from the scope of the act: employees working for the Chancellery of the Sejm, the Chancellery of the Senat, the Chancellery of the President, the Supreme Court and the Constitutional Tribunal, the office of the Public Rights Defender, the office of the Defender of Children’s Rights and several other entities.

According to Article 5 of the act, a public servant shall bear liability if three premises have been jointly fulfilled:

  1. The compensation for damages caused by a grave violation of the law in connection with the exercising of public authority stipulated in a final judgment has been paid to the claimant.
  2. The grave violation of the law has to be caused by the action of the public servant or his omission.
  3. The grave violation of the law has to be stipulated in a final judgment or final decision according to a detailed list specified in Article 6 of the act. The list includes the final decisions on the issue of the validity of the decision rendered by the public servant, according to the Code of Administrative Procedure, the Code of Procedure for the Administrative Courts or the CCP.

The grave violation of the law has not been defined in the FLPS, but can be interpreted from the rulings of the judiciary and should be an evident and clear mistake in the interpretation of the legal provisions.(2) Simultaneously, the outcome of the violation needs to be irreparable from the perspective of lawfulness. Also, according to Article 2.2 of the FLPS, the grave violation of the law also involves an exercising of the state’s authority without a legal basis.

If two or more public servants participated in rendering a decision, they will all bear liability in proportion to their contribution to the act of the grave violation of the law and to the degree of their fault. When it is impossible to establish the degree of contribution of the individual public servants, they shall bear liability in equal share.

The financial amount of liability of an individual cannot exceed more than 12 monthly salaries of the public servant (Article 9.1 of the act). The violation of the law concerns one decision made by a public servant. Therefore, it is possible that one person would be liable for an amount up to 12 monthly salaries in several cases if more than one of the individual’s acts fulfill the premises of financial liability. The liability is joint and several, meaning that multiple public servants involved in a decision can each be liable to the sum of 12 monthly salaries. Finally, the limitation does not apply in the event that the fault of the public servant (or multiple public servants) was intentional.

Procedure

The head of the entity whose liability was recognized in a final judgment has 14 days, beginning with the day the compensation was paid, to file a motion to the Regional Public Prosecutor for conducting the explanatory proceedings. Both the transfer and the final judgment have to be attached to the motion. The prosecutor’s examination of the case constitutes a premise for the successful filing of the lawsuit. If evidence is produced to support the claim, then the prosecutor calls on the public servant to pay the amount in question within one week.

The role of the public prosecutor in the proceedings is rather controversial. The function stipulated for the public prosecutor by the act includes executorial functions, which is atypical for this office. However, on the other hand, public prosecutors are independent from the public administration and guarantee the impartiality of the trial. During the proceedings governed by the CCP, the prosecutor establishes whether there are grounds for suing the public servant for damages. To ensure that the directors of liable entities file the motion, the act sanctions their negligence in doing so with a penalty of imprisonment or the restriction of liberty for up to three years (Article 10).

Insurance Industry Applications

Shortly after the act became effective, insurance companies started to advertise a new product - insurance for public servants against the financial liability for grave violation of the law. The annual premium amount for such an insurance policy depends on the sum insured. Not surprisingly, the product has not gained much popularity. This may change in the long term.

According to Article 16 of the act, the new regulations apply to actions or negligence of public servants that occurred after the act entered into force. Even under the presumption that the Treasury will have to pay for damages to citizens or legal entities based on the decision made by the public administration this year, it will take at least a year to finish the two proceedings against the Treasury and then the explanatory proceeding against the public servant.

Additionally, awareness of liability in this professional group is still quite low. According to the insurance companies, the most interest in this new insurance product has been among public servants working for the Internal Revenue Service and Customs. Unless some spectacular cases take place and gain extensive media coverage, the market for insurance policies for public servants is not likely to bloom in the next year or so. The new market’s value is estimated between EUR25 million and EUR50 million.

Notes:

1 See the Judgment of the Constitutional Court, December 4, 2001 (SK 18/2000).

2 Judgment of the Supreme Administrative Court, September 9, 1998, II SA 1249/97.

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Category: Casualty

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