Insurance law and regulation in Hungary

The operation of the Hungarian insurance industry is basically determined by the Insurance Act (of 2016), the Civil Code (of 2014) and the relevant EU directives and regulations. In addition, the regulatory guidelines, issued by the Hungarian National Bank (HNB) on frequent basis, are of great importance for the local market players. The insurance industry is extensively regulated with strong emphasis and regulatory attention to the consumer protection concerns.

Several different forms of operation are available in Hungary to start the insurance business locally: (i) a private company limited by shares (subsidiary), (ii) a European private company limited by shares (SE), (iii) a cooperative, (iv) an association,

In addition, EU Member State insurers and reinsurers may provide their services through FOE (branch) or FOS (cross border service) protocol.  Only branch office is allowed for third-country insurers. While the subsidiaries hold the majority of market shares, the FOS operators are more vital in many respects.

For FOS/FOE players, the prudential regime of their home country applies in many respect, however the HNB also exercises extensive supervision over the activity under the general good (host country) regime with focus on consumer protection. HNB guideline of 2019 gives direction of matters falling within the general good.

HNB, the integrated financial services authority, provides the license for subsidiaries in two phases: (i) in the first phase, the company must submit detailed supporting documentation and an application for a foundation licence, (ii) in the second phase, within 90 days of receiving the foundation licence, the applicant needs to submit a request for an operational licence. The administrative deadline for each phase is three months, however the HNB may extend the review period in each phase to an additional three months. The foundation of a composite company, conducting both life and P&C insurance, is not permitted.

Reinsurance companies can operate in the form of a private company limited by shares, a European private company limited by shares (SE), a cooperative or a branch office of a third-country reinsurer.

Third-country reinsurers may also provide reinsurance services in Hungary without having a local branch provided that an international agreement enables them to do so.

As an overall rule for all types of insurance, the contracting party (policyholder) must disclose, at the time of conclusion, all relevant and important circumstances that are known or should have been known by the party. The same duty applies to the insured(s).

The policyholder can make this declaration by virtue of truthfully filling out the questionnaire provided by the insurance company that is otherwise fully in line with market standards. As a special condition, simply leaving the questions unanswered (blank) does not constitute a violation of the disclosure obligation.

Similar liability applies to notification of changes during the policy period. The breach of those obligations would lead to the insurer’s exemption from its payment obligation unless the policyholder proves that the company was aware of the concealed or undisclosed circumstance at conclusion, or such circumstance did not impact the occurrence of the insurance event at all.

For life and health insurances, the law stipulates a five-year period as term of preclusion. If the insurer later gains knowledge of any material circumstance that existed at the date of conclusion, the company is entitled to exercise its related rights arising therefrom only during this first five-year period. If the insurance event occurs after this five-year period, the company’s obligation takes effect notwithstanding any infringement of the disclosure obligation.

If a warranty or condition precedent are associated with an insurance contract (policy), the effect of any respective breach might impact the policy, basically under conditions as freely set by the parties. The legal terminology for insurance does not use the term "warranty" and this needs to be rather interpreted as misrepresentation, with consequences as explained earlier.

Unlike warranty, the condition precedent impedes a right or duty to be fulfilled, until the certain conditions are met. Any respective breach might lead to the cancellation of the underlying provision or liability of their policy, which may result in consequences either set by the law or by the policy. From a protection perspective, consumer contracts would have limitations, to the benefit of individual (private) parties.

Late claim reporting may trigger the insurer’s release from payment or lead to claim rejection if either the policyholder or the insured person fails to (i) report the occurrence of an insured event within the time period stated by the contract (practically for short-term policies like travel insurance), or (ii) provide sufficient information, or (iii) facilitate verification of the information provided if a lapse in time makes the material circumstances unclear to the insurer. Either deliberate or negligent misconduct will give grounds to such a claims rejection.

In general, only the policyholder, and/or the insured or the beneficiaries (death claims) may bring a claim against the insurer. Third parties are not entitled to make a direct claim against the insurer, regardless of what relationship the third party holds with the insured.

Liability insurance manifests an exception in this regard: (i) motor third party liability insurance automatically grants, as dictated by the MTPL Act, the right to the injured third party (claimant) to bring such a claim directly against the insurer; and (ii) other liability policies may also provide such entitlement to the claimant if the insurer provides this possibility in its policy conditions.

Claim payment becomes due when the claims process is completed. Hungarian law gives liberty to the insurers to define the appropriate period or deadline for claim payment, but the applied deadline must be disclosed in the conditions, along with all type of claim documents which the insurer may require for the specific policy.

Insurers usually set a 15 day period from the date of the receipt of the last materially important document, by the end of which the payment should be made. More complex contracts may determine a longer period for payment.

Since 2021, and for non-life classes only, all insurers must publish on their website a so-called Claim Settlement Notice for all their products. This separate, mandatory document should disclose the possible ways of making a claim, the conditions of arrangements, the relevant time limits, and the possible forms of payment including settlement. Under any circumstances, the insurer must also respond to the claim within 30 days from the submission by providing either a duly substantiated proposal for the service, or a reasoned claim rejection or postponement of decision if not all conditions are clear.

If the insurer fails to meet the predefined deadline and becomes delayed with the payment, the general indemnity consequences apply, including default interest. The consumers may also turn to the Financial Arbitration Body with complaints or may initiate consumer protection proceedings before the HNB. The regulator would initiate disciplinary or corrective actions against the insurer when such delays are significant or happen on recurring basis and may also impose regulatory fines.

The general limitation (lapse) period for claims in Hungary is five years. The law provides the possibility to shorten this period according to the parties’ mutual will but the exclusion of limitation is not permitted. For life, accident and health insurances, a two-year lapse period is generally admitted on the market. Any alteration from basic 5 years should be separately disclosed in the conditions to ensure legal effect.

The limitation period starts on the date on which the relevant event occurs and the claim becomes due. In respect of claims for compensation the limitation period commences upon the occurrence of the damage / loss.

However, a couple of complementary rules also apply to grant some extension of limitation periods:

(i) if the claimant was unable to exercise his right within the predefined limitation period due to external circumstances, the claimant is provided with an additional one-year period to raise the claim which period starts from the date when such circumstances ceased to hinder the claimant in exercising their respective rights; (ii) some events interrupt the ongoing lapse period which later, once the interruption ends, recommences (for instance, if an action is brought for the enforcement of the claim and the court has adopted a final and binding decision).

Similarly to other jurisdictions, the local indemnity policies (including PI and D&O policies) are mostly underwritten on occurrence or claims-made basis. Sometimes a combination of these two is available within the same policy.

The occurrence-based policy provides coverage if the loss occurred during the policy period even if the claim is reported later in time, practically up to the end of limitation period. This type of liability is less popular and more expensive.

The claims-made policies dominate the market. Under this liability scheme, the claim notification must be made withing the policy period to secure the cover. Additional features are the retroactive period which may extend the cover retroactively prior to the commencement date and the extended reporting period (ERP) which provides the similar effect by extending the notification period even with years after the policy expiration for extra premium.

Liability policies may contain a ‘deeming’ provision which enables the insured to notify the insurer of circumstances that are likely to give rise to a claim and to have insurers provide cover in relation to any later claim arising out of the circumstances within the policy period during which they were notified.

Defence costs are generally recoverable by court decision provided that the cost is proven, reasonable and proportional. Upon request, those expenditures are added to the principal claim previously awarded.

Unless otherwise agreed by the parties, the defence costs to be reimbursed in excess of the liability limit. The insurers usually restrict this excess in the conditions by applying the limits to all and any obligations.

The attorney’s fees usually represent the dominant part of such additional expenses and the courts pay particular attention that these are judged in line with the aforementioned principles. The decision on fees is case-sensitive by taking into account the nature, length and complexity of the specific case and the amount of work performed by the acting counsel.

Insuring against penalties and fines are basically subject to the parties’ free will, in harmony with the principle of contractual freedom. The laws do not regulate this in detail. The need for such coverage typically arises under liability insurances and usually limited to civil penalties, not criminal ones. Specific imitations and exclusions may further restrict the applicability of such covers (e.g. intentional wrongdoing or gross negligence will not be covered).

Policies consider such coverage as auxiliary loss or damages, in connection with the principal risk, under the condition that such exposure is insurable by the applicable laws. Accordingly, the policies need to have carefully worded languages that are in line with other general legal principles and requirements such as fairness, good faith and prohibition of misuse of laws.