Insurance law and regulation in the Czech Republic

In general, insurance activity in the Czech Republic can be undertaken by (i) an insurer with a Czech insurance licence granted by the Czech Insurance Market Regulator, the Czech National Bank (the “CNB”); (ii) an insurer based in another EU or EEA member state which has established a branch in the Czech Republic; (iii) an insurer based outside the EU or EEA which has established a branch in the Czech Republic and has obtained a Czech insurance licence; and (iv) an insurer based in the EU or EEA that has undertaken insurance business in the Czech Republic on a temporary basis.

The CNB (as the Czech Insurance Market Regulator) can grant a Czech insurance licence to a joint-stock company, a cooperative established under Czech law or a Czech branch of the insurance company based outside the EU or EEA. The process of establishing a Czech joint-stock company or cooperative and obtaining a Czech insurance licence from the CNB can be rather costly and may take several months.

Insurers based in EU and EEA member states can operate in the Czech Republic through a branch established in the Czech Republic. They do not need to obtain a special licence from the CNB to establish a branch. However, they must fulfil information obligations with respect to the Insurance Market Regulator in their home member state before undertaking insurance activities in the Czech Republic. It is less expensive for an insurer from the EU or EEA to establish a branch office in the Czech Republic, rather than obtaining a licence from the CNB. Insurers from countries outside the EU and the EEA can also establish a branch in the Czech Republic but this is usually rather lengthy and costly as it involves obtaining a special licence from the CNB.

The policyholder and the insured are obliged to provide true and complete answers to all of the insurer’s written questions concerning the insurance to be provided. If the policyholder or the insured provides untrue or incomplete answers either deliberately or due to negligence during negotiation of the insurance contract, the insurer is entitled to withdraw from the insurance contract (if the insurer proves that it would not have otherwise provided the cover).

The insurer can refuse to pay insurance benefits under an insurance contract if the insured event was caused by a material fact which the insured failed to disclose (either deliberately or negligently) and if the insurer would not have provided cover in knowledge of the event when concluding the insurance or if this information would have resulted in the insurer providing cover on different terms.

The insurer has the right to reduce insurance benefits accordingly, if: (i) a lower premium has been determined by the insurer as a result of untrue or incomplete answers provided by the policyholder or the insured to the insurer’s written questions concerning the insurance cover provided; (ii) the breach of obligations of the policyholder or the insured to provide true and complete information to the insurer had a material impact on the occurrence of an insured event, its course or on the increase in the scope of its consequences and/or the establishment or determination of the amount of insurance benefits.

Czech insurance law does not recognise such concepts as warranties in the insurance contract or conditions precedent to coverage.

Therefore, general civil law principles set out in the Czech Civil Code shall apply. In this respect, parties to an insurance contract may agree on conditions precedent. In cases where the parties agree on certain warranties, any breach of such clause would have similar impacts as the aforementioned breach of obligation to present true and complete information to the insurer. Czech law does not restrict usage of warranties, conditions precedent or subsequent provided that such clauses are in line with good morals and other mandatory rules of law. Every insurer should analyse usage of such clauses when dealing with consumers, considering the consumer protection laws.

The beneficiary under a contract is obliged to: notify the insurer without undue delay or within a period of time agreed in the insurance contract of an insured event; give truthful explanation of the occurrence and scope of the consequences of this event and the rights of third parties arising as a result of the event and other insurance (if any); submit necessary documents; and proceed in the manner agreed in the insurance contract. If the beneficiary is not the insured and the policyholder, the insured and the policyholder have the same obligation.

If a breach of the above obligations has a material impact on the consequences of the insured event and/or the establishment or determination of the amount of relevant insurance benefits, the insurer can reduce the insurance benefits proportionately to reflect the impact of such a breach on their obligation to provide benefits.

In general, the beneficiary (usually the insured) has the right to bring a claim resulting from an insurance contract directly against the insurer. This would be typical in liability insurance such as MTPL insurance.

Czech law establishes that the insurer is obliged to investigate the claim within three months from the notification of occurrence. The insurer may extend its inquiries and investigations if there are material reasons for doing so. In such a case, the insurer must pay an advance payment of up to 100% of the indemnity to the beneficiary upon the beneficiary’s request, although the insurer may later reject the claim and demand the advance payment back from the beneficiary.

The insurer is liable to pay damages to the insured if there is fault on the insurer’s part. Such damages may consist of the damages caused by the delay of payment or by non-performance. However, Czech practice is not very favourable to such types of claims.

In the Czech Republic the right to benefit from an insurance contract lapses after three years or after ten years for life assurance. In the case of liability insurance, the right to benefit lapses at the latest on the lapse of the insured’s right to damages under the insurance contract.

The limitation period in respect of the right to insurance benefits begins one year after the occurrence of the insured event. This applies also if the injured party became directly entitled to the payment of insurance benefits or if the insured requests reimbursement of the amount provided as compensation.

The parties to an insurance contract are free to agree the insurance as an occurrence based policy (i.e. based on the moment when the insured becomes liable for damages to a third party) or as a claims-made policy.

Claims-made coverage is not expressly envisaged by Czech insurance law. However, there are no particular difficulties regarding claims-made coverage. In practice, claims-made policies are a market standard, for example in respect of D&O insurance.

Defence costs are not standardly recoverable under Czech law. The Czech insurance practice does however recognise the insurance of legal costs.

In general, any party to court proceedings in the Czech Republic has to bear costs it has incurred during the proceedings. Following the applicable “losing party-pays-rule”, the entirely or largely losing party has to compensate the other party for all recoverable costs necessarily incurred by the winning party in taking the “appropriate legal actions”. This means, for example, costs incurred relating to court, expert and lawyer fees and expenses. Similarly, an insurer that has successfully defended a claim in court may recover its costs from the claimant.

However, courts award compensation on a fixed basis in accordance with the applicable ordinance of the Ministry of Justice. As a result, defence costs standardly do not fall into any category of damage per se.

Czech insurance regulations do not set out any explicit rule in this regard, although the Civil Code allows that under certain circumstances, insured or beneficiaries may seek payment under a policy even if they intentionally triggered the insured event. However, such type of cover is permissible only when allowed by a distinct law or if specifically agreed between the policyholder and the insurer. We note that “insurance against penalties” is reserved for rather rare situations, and it is very likely that any general coverage of fines and penalties for criminal and administrative liability would contradict public policy. Insurance terms standardly exclude coverage for any liability for criminal or administrative offence, tort etc. Although we are aware that in 2010, one Czech insurer introduced insurance against certain (unintentional) misdemeanours, prompting another renowned insurer to condemn this and state officially that they do not support or prepare such products. The Ministry of Finance of the Czech Republic commented that one of the major elements of insurance is randomness whereas actions leading to liability for torts and misdemeanours lack this element. In 2018, the Supreme Administrative Court ruled that using paid assistance against traffic fines (marketed as “insurance”) may be seen as an aggravating circumstance in administrative proceedings. The said insurer no longer offers such coverage.

On the other hand, D/O insurance or various assistance services are common parts of insurance products in the Czech Republic.