Insurance law and regulation in Bosnia and Herzegovina

Bosnia and Herzegovina (BiH) consists of two separate and distinct administrative entities: the Federation of Bosnia and Herzegovina (FBiH) and the Republic of Srpska (RS). Formally, Brčko District is a unique administrative unit of local government under the sovereignty of BiH. The two entities and the Brčko District have their own governmental structures as well as legislation and regulations, which means that insurance, as well as some other areas of law, are subject to legal regulations at entity level and relevant state legislation, depending on applicable law.

Insurance activity in BiH can be undertaken by insurance companies established in the form of joint-stock companies. The minimum share capital requirement in FBIH ranges from BAM 4m to BAM 6m depending on the type of risk insured, and the minimum share capital requirement in RS ranges from BAM 2m to BAM 3m depending on the type of risk insured. The business of insurance is generally conducted by standard-type joint-stock companies. However, the business of insurance can be performed jointly by two or more insurance companies (co-insurance).

Co-insurance exists when two or more insurance companies jointly guarantee the financing and compensation for an agreed insured event on the basis of the ‘principle of mutuality’.

The most important prerequisite imposed on insurance companies is to obtain prior approval from the Insurance Supervisory Agency of FBiH (in the case of companies established in the territory of FBiH) or the Insurance Agency of RS (in the case of companies established in the territory of RS) (the ‘Agency’ or ‘Agencies’). An insurance company can be established by a domestic or foreign natural person or legal entity. The Agencies will review the application within 60 days from the date the application is submitted and issue a resolution approving, rejecting or requesting a change or amendment of the application. If the Agency issues an approval, the insurance company is obliged to pay them a fee for performing this business activity.

It is important to note that approval from the Agencies is a pre-condition for entering an insurance company in the Register of Business Entities. This approval becomes effective only upon the conclusion of the registration procedure for a newly-founded insurance company. Another requirement that insurance companies must meet is the obligation imposed on every insurance company to determine a solvency margin in respect of its entire operation corresponding to the total company assets. Moreover, insurance companies have to establish a guarantee fund which constitutes one third of the solvency margin. The guarantee fund in FBIH ranges from BAM 2m to BAM 6m, while in RS it ranges from BAM 1m to BAM 3m. However, the amount of the guarantee fund depends on the types of insurance offered by the insurance company. The Agencies also request companies to submit financial reports and other documents necessary to exercise detailed supervision over companies throughout the course of their business dealings and to audit them.

The legislation allows insurance companies with a corporate seat in one entity to establish a branch office in the other entity. This can be done on the condition that the Agency supervising insurance business in one entity forwards the submitted request and the relevant documents (mainly concerning the insurance company’s business operation, business plan, membership in the relevant institutions as well as its liquidity) to the Agency of the other entity which will ensure that the branch office is duly established and operates in accordance with the relevant state and entity legislation.

Current legislation provides that companies with a corporate seat outside BiH can perform insurance business activities in the form of a branch office if they obtain the approval of the Agency. In order to establish a branch office for conducting insurance business, the companies with a corporate seat outside BiH must ensure that the branch office is operated by two persons authorized by the founding foreign company, while the branch office must be properly equipped with the competent personnel and technical features required to conduct the business of insurance. Furthermore, the branch must have deposited funds amounting to one and a half times the founding capital at its disposal and must own property amounting to at least half of the guarantee fund.

The insurance-specific provisions in the law of obligations specify that in the case of an insured’s intentional, inaccurate or complete failure to provide notification of the occurrence of an insured event, the insurer may, within one month from the day of finding out about the event, terminate the contract or propose a premium increase proportionate to the increased risk. Moreover, if the insured has deliberately misrepresented or failed to disclose a circumstance of such nature that the insurer would not have concluded the contract had it known about it, the insurer can request an annulment of the insurance contract. In this case, the insurer retains the paid premiums and has the right to request payment of the premium for the insurance period within which it requested annulment of the contract.

The insured is obligated to exercise prescribed, contracted and any other measure to prevent an insured event from occurring as well as to protect and salvage insured items. If an insured event occurs, the insured is bound to limit the damage and harmful consequences as reasonably possible in order to diminish the harm incurred. If the insured fails to prevent the occurrence of an insured event and provides no reasonable justification for it, the liability of the insurer is reduced to the extent of the excess damage. If an insured event occurs and the insured has taken all reasonable measures to prevent such event, and has done everything to reduce further damage and harmful consequences, the insurer is obligated to compensate the insured for all damages incurred and further incurred costs that resulted from an attempt to prevent the occurrence of an insured event. In any case, a criminal intent by the insured is, as a general rule, a basis for non-compensation when insured events occur, if the insurer can prove that the insured acted with criminal intent. When an insured item contains defects or flaws and the damage results from them, then the insurer is not obligated to compensate the insured, unless agreed otherwise.

In the area of life insurance, a breach of warranty is constituted when the insured wrongfully states its age in a life insurance contract, since such information is important to the insurer in assessing the insurance risk. In this case, the insurer is not bound and obligated to compensate the insured. Furthermore, the insurer is not obligated to compensate the beneficiary of the life insurance contract if the insured commits suicide or if the beneficiary intentionally causes the death of the insured. The insurer is exempt from the obligation to compensate the beneficiary if the insured’s death is caused by war related actions.

The insured is obliged, except in cases of life insurance, to notify the insurer of the occurrence of an insured event within a maximum three-day period from the day it found out about the same. If it fails to do so within the given deadline, the insured is obliged to compensate the insurer for the damage which the latter incurred as a result.

The general rule is that in the case of a breach of the provisions of the insurance contract, the injured party, i.e. the insured, has a direct right of claim against the insurer. Moreover, the Law on Insurance of FBiH and the Law on Insurance Companies of RS prescribe a right of privileged claim for the insured against the investments of the insurance company with a priority over all other general or special privileged claims. The exception to this rule occurs if a liquidation or bankruptcy procedure is initiated against the insurance company whereby the claim for costs of the ‘special liquidation/bankruptcy procedure’ will be given priority. Moreover, in the case of liability-type insurance, an injured third party can file a direct request against the insurer for compensation for damage suffered as a result of an event the insured is responsible for, with the maximum amount claimed being the insurer’s limit of liability.

As a general rule, when the insured event happens, the insurer is obligated to compensate the insured within the deadline agreed in a contract which cannot be longer then 14 days from the time when the insurer was notified of the event.

Specifically, for cases of compensation for car accidents, the insurer is obligated to compensate the insured within 90 days from the time when the insurer was notified of a car accident or elaborate why it is unable to do so. If the insurer fails to fulfil its obligations for just compensation, it will be sanctioned with a monetary fine in accordance with the Law on Vehicle Insurance of the Federation of Bosnia and Herzegovina and the Republic of Srpska.

When the insurer is late with the payment of a claim, the insured is entitled to the contracted default interest as well as statutory default interest from the date of the claim maturity.

If the insurer fails to compensate the insured regarding the claim in a timely manner or fails to pay the pertaining contracted or statutory default interests, the insured is entitled to initiate a lawsuit against the insurer.

The limitation period for claims of the insured or third parties arising out of life insurance contracts against insurers is five years. The limitation period for claims arising out of other insurance contracts is three years as of the first day after the expiry of the calendar year in which the claim arised. If the interested party proves that it was not aware of the occurrence of an insured event up to a certain date, the statute of limitation is calculated from such date when the insured became aware, while the claim will become time-barred in any case after the expiry of the period of ten years (for life insurance) and five years (for other insurance claims) from the day of the general limitation period. In the case of an injured third party requesting compensation from the insured, the statute of limitation period for the insured’s claim against the insurer begins on the day the injured party requested compensation from the insured in court.

Normally, the occurrence of an insured event as specified in the policy and a beneficiary’s claim for reimbursement of damage represent a trigger for third-party liability insurance.

According to the Law on Civil Procedure of the Federation of Bosnia and Herzegovina and the Republic of Srpska, a party in a litigation proceeding who loses the lawsuit is obligated to compensate the court costs and attorney’s fees for all parties involved. If a party partially wins the lawsuit, the court can order that each party settles its own costs and fees, or that one party compensate the other only proportionate share of costs. Regardless of the outcome of a lawsuit, the party that caused costs or damage to the other party by its wrongdoing is obligated to compensate the other party that sustained the damage. If the claimant withdraws or renounces its legal claim, then the claimant is responsible for all court costs and attorney’s fees for all parties involved. If a lawsuit results in a court settlement, then each party settles its own costs. In FBIH the attorney’s fees cannot be collected from the opposing party if the fee amount is larger than the average income in FBIH according to the latest issued data. However, such limitation does not exist in RS.

As a general rule, penalties and fines are not insurable, therefore the insurance companies in BIH do not offer this type of insurance.