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.
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. According to Ukrainian insurance law (the ‘Insurance Law’) foreign insurers are allowed to conduct the following direct and intermediate insurance activities (such as brokerage or agency operations) in the Ukrainian market:
- insurance of the risks related to marine transportation, commercial aviation, launches of space craft (including satellites), and freight, if the object of insurance is a property interest in the goods to be transported and/or in the transport vehicle, and/or a liability arising out of such transportation of goods;
- re-insurance (including insurance mediation); and
- ancillary insurance services, such as advisory services, actuarial risk assessment and claims settlement.
A foreign insurer (i.e. a financial institution established outside the jurisdiction of Ukraine and permitted under the laws of its home state to conduct insurance activities) 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 that does also take part in the international co-operation in the field of the prevention and counteraction of the legalisation (laundering) of profits and the financing of terrorist activities, and cooperates with the Financial Action Task Force (FATF). The exception is made for non-resident re-insurers, which can be based in non-WTO countries, being however FATF members;
- a memorandum on information exchange has been signed (or a respective agreement has been concluded) between the authorised insurance regulator of the home country of the foreign insurer, and the National Commission that regulates financial services markets (the ‘Commission’). Unfortunately only a few such memorandums, in particular with Armenia, Poland, Latvia and Lithuania (as reported by the Commission on 29 November 2013) have been signed so far by the Commission and Ukraine is also not a member of the International Association of Insurance Supervisors. The Commission expects to sign memorandums with Moldova, Turkey, Macedonia, Belarus, Israel, Australia, Czech Republic and Hungary in the near future;
- the insurance business of the foreign insurer is supervised by the state authorities in accordance with the legislation of the home country of the foreign insurer;
- an international treaty on the prevention of tax evasion and the prevention of double taxation has been concluded between Ukraine and the home country of the foreign insurer;
- the foreign insurer is located in a country or in a specific territory that does not have an off-shore status in accordance with the Ukrainian law; and
- the financial reliability (stability) rating of the foreign insurer is compliant with the requirements set forth by the Commission.
In Ukraine, an insurance company may be established in the form of a joint-stock company, a full partnership, or an additional liability company. Although joint-stock companies are most common, registration of a full partnership or an additional liability company is much more simple and swift.
There are certain specific requirements regarding the composition of shareholders (there must be at least three), the structure of the charter capital (100% in cash or 25% max in state bonds) and the minimum amount of the charter capital of the Ukrainian insurance company (EUR 1m in UAH equivalent is set for non-life insurers).
The minimum amount of the charter capital for life insurers is currently EUR 10m (in UAH equivalent), a substantial increased from EUR 1.5m in May 2013. This increase is mostly relevant for life insurance companies licensed after May 2013, as the already-existing life insurers were not required to make any revisions to their charter capitals. However, insurers required to re-apply for their insurance licence, for example due to a change of the company’s legal form, will also be required to increase their charter capital in compliance with the current statutory level.
To be eligible to carry out insurance activities in Ukraine, a company must also complete the following procedures with the Commission: (i) register as a financial institution; (ii) obtain a licence for insurance activity; and (iii) submit its approved insurance product rules.
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 Commission for each separate type of insurance activity, provided, however, that a life insurer is not allowed to sell any other insurance products.
A financial institution must adopt and register its insurance product rules (the ‘Insurance Rules’) for each of its products. The Insurance Rules must be developed and submitted by the insurer to the Commission simultaneously with the submission of the documents for the insurance licence and each time these rules are changed or a new type of insurance activity is added to the insurance licence.
Due to the lengthy, difficult and bureaucratic procedure and fees associated with establishing a greenfield 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 Commission and the anti-trust authority – the Antimonopoly Committee of Ukraine. The Commission’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 Commission will thoroughly inspect the foreign insurer’s financial capabilities and the reputation of its senior management personnel. The preliminary conclusions of the Antimonopoly Committee of Ukraine, also required by the Commission, should be obtained following the general procedure set forth by Ukrainian anti-trust law.
New Options for the Non-Resident Insurers
Alternatively, as of 17 May 2013 (five years after the date Ukraine joined the WTO) foreign insurers have been able to carry out full-scope insurance activities in Ukraine directly via Ukrainian branches, which are treated as resident insurance companies. Such branches of foreign insurers must also be registered with the Commission, hold a respective insurance licence and comply both with the general requirements mentioned above and some additional requirements, including:
- the foreign insurer must issue a written irrevocable commitment note to confirm the unconditional performance of all obligations undertaken by its branch in Ukraine;
- since under Ukrainian law permanent establishments are not separate legal entities and thus do not form a charter capital, foreign insurers must place a guarantee deposit (at least equal to the minimum amount of the charter capital established for resident insurers, as specified above) with a Ukrainian bank;
- the insurance funds of a foreign insurer must be deposited only in the territory of Ukraine.
Ukrainian insurance law includes the reciprocity principle, according to which foreign insurers are allowed to open branches in Ukraine only if the foreign insurer’s home country permits the same to Ukrainian insurers.
2. Effect of misrepresentation and/or non-disclosure
The policyholder is obliged to disclose to the insurer all matters that may be relevant for the insurer’s assessment of risks and inform the insurer if the risks may have changed. 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, such new insurance contract is void.
3. Effect of breach of warranty and condition precedent
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.
4. Consequences of late notification
Under the Insurance Law the policyholder has an obligation to notify the insurer about the insured event within a time limit specified by the Insurance Rules. In the case of late notification of the insured event (without any reasonable excuses) the insurer is allowed to refuse to provide indemnity under the policy.
5. Entitlement to bring a claim against an insurer
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 a 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.
6. Entitlement to damages from an insurer for late payment of claim
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.
7. General rules concerning the limitation period for claims
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 a breach of his or her right to claim or of 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.
8. Policy triggers with respect to third-partyliability insurance
The occurrence of an insured event is a default policy trigger in third-party liability insurance. However, the insurers are free to set other triggers in the Insurance Rules or agree on them directly in the insurance contract, provided that such triggers comply with Ukrainian legislation.
9. Recoverability of defence costs
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.
In civil cases recovery of the defence costs is allowed only within certain limits established by law. A winning party is entitled to not more than 40% of the subsistence minimum (as of 1st January of the relevant year) per one hour of legal assistance in court hearings, various procedural actions and case studies, provided that the defeated party is not exempt from payment of the defence costs, in the latter case up to 2.5% of the same can be compensated from the state budget.
In turn, there is no upper celling for recovery of the defence costs in commercial proceedings. However, the court may reduce the amounts claimed to the reasonable market level and unlike in civil proceedings will only recover attorney fees, i.e., legal assistance provided not by professional lawyers (certified “advocates”) will not be subject to compensation.
Such practice also corresponds to the principles of the on-going court system reform. According to the recent changes to the Constitution of Ukraine from 1 January 2019 only advocates will be allowed to represent clients in all Ukrainian courts.
In all instances defence costs must be documented and proven in court.
10. Insurability of penalties and fines
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.