Insurance law and regulation in Ukraine

An insurer has three main options for starting its full scope insurance operations in Ukraine. Those options would be: (i) to establish a ‘greenfield’ company; (ii) to acquire an existing Ukrainian insurer, or (iii) open a branch of the parent insurance company in Ukraine.

Martial Law and Force Majeure  

The President of Ukraine, Volodymyr Zelenskyy, declared martial law across the entire country after Russia attacked Ukraine on 24 February 2022. Ukraine continues to battle against Russia’s unprovoked full-scale invasion. Martial law has most recently been prolonged until 19 February 2023 and it will most probably be further extended as the war is on-going.

The war in Ukraine belongs to force majeure, which was separately confirmed by the Ukrainian Chamber of Commerce and Industry.

The parties to an insurance policy may refer to such circumstances as to the ground of exempting them from liability for non-compliance with the insurance policies.

Nevertheless,:

• force majeure does not release the party from its obligations, but is only a legitimate reason to postpone the performance of the obligation until the end of the force majeure effect;
• the mere fact of war does not release the party from liability, Instead, the party triggering the force majeure mechanism must demonstrate that the breach was a result of the force majeure event. Namely, an extraordinary and unavoidable circumstance that objectively prevented the fulfilment
• of its obligations that became due, and there is a causal link between the force majeure event and the breach.

In such circumstances, for example, the insurer may delay the insurance compensation (following the procedure of notification on force majeure and its confirmation), but shall pay it when the force majeure circumstances cease.

New Regulator and New Law 

Starting from 1 July 2020 the National Bank of Ukraine (the ‘NBU’) has become a regulator of non-banking financial services, including insurance sector. 

Recently, the Parliament of Ukraine adopted the new framework law No. 1909-IX dated 18 November 2021 ‘On Insurance’ (the ‘Insurance Law’) which restates the previous insurance law dated 1996 (however, being still valid during the transitional period). The Insurance Law will be fully effective starting from 2024 and will change the approach to regulation and supervision of insurance services, which for many years has remained conservative. 

The transitional period before the new regulations are not yet in force will allow the market to adapt to the new rules on regulation of the insurance sector as well as the NBU’s supervision powers. The Insurance Law strengthens the licensing standards and introduces formation of an effective management system to ensure transparency of the insurance market ownership structure. 

Insurance services provided by foreign insurers 

A limited scope of insurance services, subject to certain restrictions and requirements, may be directly (without establishing a legal entity or registering a permanent establishment) provided by foreign insurers in Ukraine. Foreign insurers (i.e. financial institutions established outside the jurisdiction of Ukraine and permitted under the laws of their home states to conduct insurance activities) are allowed to conduct the following direct and intermediate insurance activities (such as brokerage or agency operations) in the Ukrainian market without obtaining a license of the regulator:

• insurance of the risks under class 5 (aircrafts insurance), class 6 (insurance of water vessels), class 7 (insurance of cargo and luggage), class 11 (insurance of liability arising from the use of an aircraft (including the liability of the carrier), class 12 (insurance of liability arising from the use of a vessels vessel (including liability of the carrier);
• re-insurance.

A foreign insurer carrying out insurance activities within the above scope in Ukraine shall be subject to the following requirements (the ‘General Requirements’):

• the home state of the foreign insurer must be a member state of the World Trade Organisation. The exception is made for non-resident re-insurers;
• the home state of the foreign insurer has not received any reservations from international bodies regarding its implementation of international standards in prevention and counteraction of the legalisation of criminal proceeds, terrorism financing and the financing of the proliferation of weapons of mass destruction;
• the foreign insurer’s home state legislation provides for state regulation and supervision of insurance activities; 
• an international treaty on the prevention of tax evasion and the prevention of double taxation has been concluded between Ukraine and the foreign insurer’s home country;
• the foreign insurer’s home state is not on off-shore list according to the Ukrainian law; 
• the foreign insurer’s has the relevant permit for (re)insurance in accordance with its home country legislation;
• the financial reliability (stability) rating of the foreign insurer is compliant with the requirements set forth by the regulator; and
• the foreign insurer’s home state does not belong to the states carrying out armed aggression against Ukraine.

In Ukraine, an insurance company may be established in the form of a joint-stock company, or an additional liability company. Although joint-stock companies are most common, registration of an additional liability company is much more simple and swift.

Under the Insurance Law, the minimum amount of the charter capital of the Ukrainian non-life insurance company is approx. EUR 809K (UAH 32 million). The minimum amount of the charter capital for life insurers is currently approx. EUR 1.2m (UAH 48 million) in UAH equivalent.

To be eligible to fully carry out insurance activities in Ukraine, a company must also complete the following procedures with the NBU: (i) register as a financial institution or open a branch in Ukraine; and (ii) obtain a licence for insurance activity.

In order to obtain and maintain its financial institution status, a company must have a certain number of qualified insurance professionals, office premises, hardware and software and an operational business plan covering at least three years.

Insurers must apply to the NBU for each separate type of insurance activity, provided, however, that a life insurer is not allowed to sell any other insurance products.

Due to the lengthy, difficult and bureaucratic procedure and fees associated with establishing an insurance company in Ukraine, international insurance players often choose an easier and quicker option – to acquire a local insurance company in Ukraine.

However, in most cases. the acquisition of interest in the local insurer must be authorised by the NBU and the competition authority – the Antimonopoly Committee of Ukraine. The NBU’s approval is mandatory if the foreign insurer intends to purchase or increase its stake in the Ukrainian insurer resulting in the foreign insurer obtaining direct or indirect control over 10%, 25%, 50% or 75% of the Ukrainian insurer’s charter capital. This means that the approval will not be required if the foreign insurer already holds say 10% of the shares and intends to acquire control over another 14% (up to 24% in total).

The NBU will thoroughly inspect the foreign insurer’s financial capabilities and the reputation of its senior management personnel. The merger clearance by the Antimonopoly Committee of Ukraine (if transaction is to be notified under competition laws), also required by the NBU, should be obtained following the general procedure set forth by Ukrainian competition law.

Branch Option for the Non-Resident Insurers

Alternatively, foreign insurers may carry out full-scope insurance activities in Ukraine directly via Ukrainian branches, which are treated as resident insurance companies. Under the Insurance Law, such branches of foreign insurers must also be registered with the NBU, hold a respective insurance licence and comply both with the General Requirements mentioned above and some additional requirements, including:

• the legislation of the non-resident insurer’s home state, according to the assessment of the NBU, does not contain provisions that may hinder/limit the interaction between it and the regulator of that state or prevent the NBU from exercising its supervisory powers in relation to the branch;
• the amount of the branch’s registered capital is not less than the amount of the minimum capital of the resident  insurers;
• the foreign insurer must issue a written irrevocable commitment note to confirm the unconditional performance of all obligations undertaken by its branch in Ukraine; and
• the insurance funds of a foreign insurer must be deposited only in the territory of Ukraine.

The policyholder is obliged to disclose to the insurer all matters that may be relevant for the insurer’s assessment of risks, including, disclosure of all the relevant documents and notifying about the existence of an insurable interest,. Misrepresenting information about (i) the subject matter of the contract (object); or (ii) the insured event may constitute grounds for the insurer to refuse to provide indemnity under the policy. In case the policyholder did not inform the insurer that the object had been already insured, or about the existence of an insurable interest, such new insurance contract is voidable.

The concept of warranty as such does not exist in Ukrainian legislation. Under applicable general provisions of the civil law, the affected party may raise a claim requiring compensation of pecuniary and non-pecuniary damages from the other party, as well as payment of the liquidated damages and unilateral termination of the contract (if such consequence is directly provided in the contract). In case of breach of contractual obligations concerning misrepresentation and/or non-disclosure by the policyholder, the consequences arise as described in the Section 2 above.

Under the Insurance Law the policyholder has an obligation to notify the insurer about the insured event within a time limit and in the manner specified by the insurance policy.

The consequence of the delay of such notification should be specified in the insurance policy.

Under the general rules, only the policyholder has the right to bring a direct claim against the insurer. For third party liability insurance and insurance contracts in favour of third parties, the Ukrainian insurance legislation provides that third party, being a party which suffered the damages, or beneficiary under the insurance contract which is executed in its favour, is entitled to indemnity under the policy and therefore, may also bring a claim directly against the insurer.

In case of late payment by an insurer, the policyholder is entitled to claim payment of the liquidated damages for the whole period of such insurer’s delay. The amount of payable liquidated damages is determined by the insurance contract. In case the insurance contract does not contain provisions on the amount of the liquidated damages payable in case of late payment by an insurer, the latter shall bear liability according to general provisions of the civil law, in particular, an insurer shall pay an outstanding inflation-adjusted amount as well as 3% interest per annum from the outstanding amount.

The general limitation period in Ukraine is three years from the date when a person becomes aware (or might reasonably have been expected to become aware) of (i) a breach of his or her right to claim or (ii)  the actions of the person responsible for the breach. It is also applicable to the claims of third parties against insurers. There is no limitation period for policy-holder claims against the insurer in Ukraine.

The occurrence of an insured event is a default policy trigger in third-party liability insurance. However, the insurers can agree with the insured on other triggers in the insurance contract, provided that such triggers comply with Ukrainian legislation.

Insurance-related disputes are generally resolved by either civil courts (between individuals and legal entities) or commercial courts (between legal entities). Administrative courts consider claims against state authorities or public officers; therefore are not directly involved in insurance disputes on the commercial matters.

Defence costs shall be distributed according to the results of court proceedings. Defence costs shall be compatible with: (i) the complexity of the case and the services provided by the attorney, (ii) time spent by the attorney for the provision of services, (iii) the volume of services, and (iv) the price of the claim and (or) the significance of the case for the party, including the impact of the court decision on the reputation of the party or the public interest in the case. If the mentioned requirements are not met, the court may reduce the number of costs based on the motion filed by one of the parties. This party shall bear the burden of proving that costs are not reasonable. 

In all instances defence costs must be documented and proven in court.

Ukrainian law does not provide for a specific regulation to this particular type of insurance product. Based on the general principle, insurance may cover financial interests associated with: (i) life, health, labour capacity, pension coverage (personal insurance); (ii) ownership, use or disposal of the property (property insurance) and (iii) damages caused to third parties (liability insurance).

Hence, recovery of penalties and fines through insurance may take place if such recovery is related to either of the above insurance types, for instance, coverage of traffic fines resulting from operation of a vehicle (property insurance) or fines and penalties imposed on a legal entity as a result of negligent management – D&O insurance (liability insurance).

The insurance regulator also specifically recognises certain other insurance products, such as insurance of contractual liability (for instance, borrower’s liability under credit facility agreements, including payment of fines and penalties), investments, financial risks (business operation losses), etc.

Nevertheless, insurance of penalties and fines is not a common type of insurance on the Ukrainian market, especially taking into account that it might be difficult in certain cases for the insured to prove that an insurance event was not caused deliberately or for the insurance company to properly estimate risks and reasonably price its product.