Hungary

1. Introduction

As of 1 January 2016 a new Insurance Act entered into force in Hungary, which provides common regulation to both insurance and reinsurance companies. The new Act basically aimed to implement Solvency II regulation and modernize the insurance-related legal environment. Along with the new Civil Code (of 2014), which updated insurance contract law, the Insurance Act really streamlined the regulation of the insurance sector in Hungary.

In Hungary, insurance companies can only operate in the following forms: (i) a private company limited by shares (most common form), (ii) a European private company limited by shares (SE), (iii) a cooperative, (iv) an association, (v) a branch office of a third-country insurer. In addition, EU Member State insurers and reinsurers may provide their services through FOE or FOS protocol (branch or cross border service). In both cases, the EU Member State insurer/reinsurer can pursue its insurance activity in Hungary primarily under the supervision of its home country regulator, but the HNB also exercises supervision over the activity (in particular from the consumer protection point of view).

Going through the licensing process with Hungarian National Bank (HNB), the integrated financial services authority, is a prerequisite for both insurers and reinsurers. The full licence is provided in two phases: in the first phase, the company must submit detailed supporting documentation and an application to the HNB for obtaining a foundation licence. In the second phase, within 90 days of receiving its foundation licence, the applicant needs to submit a request for an operational licence to undertake insurance/reinsurance. 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.

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.

2. Effect of misrepresentation and/or non-disclosure

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 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. The reporting duties apply both to the policyholder and the insured person.

Nevertheless, 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.

3. Effect of breach of warranty and condition precedent

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 discussed 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 the insurance contract. From a protection perspective, consumer contracts would have limitations, to the benefit of individual (private) parties.

4. Consequences of late notification

Late claim reporting might affect the release of the payment or lead to a claims 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, 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.

5. Entitlement to bring a claim against an insurer

This depends on the specific contractual demand, as usually only the policyholder, the insured or the beneficiaries may bring a claim against the insurer. As a consequence, a third party is not entitled to make a direct claim against the insurer, irrespective of what relationship this third party holds with the insured. Liability insurance is the exception in this regard: (i) mandatory motor vehicle liability insurance automatically grants, as dictated by the law, the right to the injured third party (claimant) to bring such a claim directly against the insurer; and (ii) other liability insurance also provides such entitlement to a third party, as long as a declaration is made at the time when the damages covered by the policy are caused.

6. Entitlement to damages from an insurer for late payment of claim

In general, Hungarian law gives liberty to the parties to define the appropriate period or deadline for payment of an insurance claim. Insurers usually set a 15 day period from the date of the receipt of the last materially important document, by the end of which payment should be made. More complex contracts may require a longer period for payment. If the company fails to meet the predefined deadline and becomes delayed with the payment, the general consequences apply. Interest on delay becomes due, equals to the National Bank’s basic interest rate as officially published on the first day of the half-year when the delay occurred. The rate is recalculated in each consecutive half-year until the full payment is made. Nevertheless, the claimant may demand or file a lawsuit against the company, if the delay causes direct, indirect or even consequential damages, and the case is appropriately proven. It is worth mentioning that HNB might, upon examining a customer’s complaint or audit finding, impose fines or initiate action against the company when such delays are significant or recurring.

7. General rules concerning the limitation period for claims

The general limitation (lapse) period for claims in Hungary is five years. The law provides the possibility to shorten or extend this period according to the will of the parties, but exclusion of limitation is not permitted. For life, accident and health insurances, a two-year lapse period is generally admitted. 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:

  • if the claimant was unable to exercise his/her right within the predefined limitation period due to circumstances falling outside his/her control, then the claimant is provided with an additional one-year period to raise the claim; the additional period starts from the date when such circumstances ceased to hinder the claimant in exercising their respective rights;
  • 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).

8. Policy triggers with respect to third-party liability insurance

Indemnity policies (including PI and D&O policies) are mostly underwritten on a mixed occurrence and claims-made basis. The insured is entitled to indemnity under the policy, provided that the loss occurred and the claim was made during the policy period, even if the judgment or settlement establishing liability occurs after that period. 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. It is also common practice for the insurers to provide a discovery period provision in return for an extra premium, which extends the reporting period up to a maximum of 72 months following the expiration of the policy.

9. Recoverability of defence costs

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 insured’s or beneficiary’s principal claim previously awarded. The attorney’s fees usually represent the dominant part of such additional claims and the courts pay particular attention that these are judged in line with the aforementioned principles. The decision on fees is case specific and takes into account the nature, length and complexity of the case, as well as the amount of work performed by the acting counsel.

10. Insurability of penalties and fines

Insuring against penalties and fines are basically subject to the parties’ free will, in harmony with the principle of contractual freedom, and the law does not regulate this in detail. The need for such coverage often arises in the field of property and liability insurance, and is usually limited to civil penalties (not criminal) under special conditions, limitations and exclusions (e.g. intentional wrongdoing or 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. Nevertheless, this is a limited insurance business in Hungary and the policies need to have carefully worded language that is line with other general legal principles and requirements, such as fairness, good faith and prohibition of misuse of laws.