Property insurance in Estonia: five often overlooked nuances

Almost every building or apartment owner knows that property should be insured. Far fewer think about what determines the amount paid when a loss occurs. After a fire, escape of water or storm it often turns out that a policy exists, but the payment is lower than expected or the insurer is released from performance in whole or in part. Below are five issues that recur in Estonian insurance disputes and that can be addressed with relatively little effort when a policy is placed or renewed. This is a rewritten version of an article first published in 2023, updated to November 2026.

Date note: the date of this post (9 October 2023) is the date of the original publication. This English version was written for this website in 2026.

1. Underinsurance: the sum insured must match reinstatement value

The most frequent and financially painful problem is underinsurance. Under § 482 of the Law of Obligations Act (võlaõigusseadus, VÕS), where property is underinsured the insurer is liable in the proportion that the sum insured bears to the insurable value at the time of the insured event.¹ If reinstating a building would cost EUR 100,000 but the sum insured is EUR 73,000, only 73% of the value is insured. Even a partial loss, such as EUR 10,000 of roof damage, is then paid at only EUR 7,300, although the sum insured is far from exhausted.

Underinsurance rarely results from carelessness; it results from time. Policies renew for years at the same sum insured while construction prices rise. The same happens where the building has been extended or renovated without telling the insurer. Setting the sum insured is the policyholder's responsibility: the insurer provides a form or calculator but usually does not check actual reinstatement cost.

Two qualifications matter. First, VÕS § 482 is non-mandatory: many wordings include an underinsurance tolerance (e.g. 10–20%) within which no proportional reduction applies, or a reinstatement value agreement without average. Second, the Estonian Supreme Court has explained that sum insured and insurable value are different concepts. In the case before it, the parties had agreed that the sum insured itself was the reinstatement value (VÕS § 426(2)); the sum insured was therefore equal to the insurable value at the time of the loss, and there could be no underinsurance. The lower courts had wrongly calculated a lower monetary sum insured themselves.² The judgment does not mean that underinsurance can never arise in reinstatement cover: where a fixed monetary sum insured was agreed and it is lower than the insurable value at the time of the loss, § 482 can still apply unless the policy waives average (analytical conclusion). If, however, the policyholder gave incorrect information about the insurable value, the legal consequence is different: the question becomes breach of the pre-contractual disclosure duty (VÕS § 441) or recalculation of the premium, not proportional reduction.²

Practical tip: check the sum insured before each renewal and err on the high side. If the value is hard to assess, ask the insurer in writing whether the policy contains a reinstatement value agreement and what the underinsurance tolerance is.

2. Fire safety requirements and pre-contractual information

Buildings are subject to fire safety requirements (fire compartments, fire walls, escape routes, fire alarms). Insurers generally do not inspect compliance at inception. They assume the building is built and used in accordance with the rules and price the risk on that assumption.

If after a fire it emerges that a required fire wall was missing and the fire therefore spread through the whole building, the insurer has two possible arguments. First, that the policyholder breached the pre-contractual disclosure duty by failing to disclose a circumstance material to the assessment of the risk (VÕS §§ 440–442).³ Second, it may rely on a safety requirement (a duty of care) in the wording. In neither case is the result automatic: under VÕS § 442(2) the insurer is not released if the undisclosed circumstance did not affect the occurrence of the insured event or the extent of the insurer's obligation, and for breach of a safety requirement the insurer is released only to the extent the breach affected the occurrence or size of the loss (see Duty of care and proportionality in Supreme Court practice).

Practical tip: if you know that a building does not meet fire safety requirements (particularly older production and warehouse buildings and converted commercial premises), tell the insurer in writing before inception. The premium may rise, but that is a much smaller risk than a dispute over the entire claim.

3. Insurance does not reduce the duty of care

Having insurance does not mean the policyholder may treat the property less carefully than without it. The law assumes that the probability of the insured risk remains essentially unchanged during the policy period. VÕS § 444 prohibits the policyholder from increasing the probability of the risk after conclusion without the insurer's consent, and § 445 governs the insurer's release from performance if that prohibition is breached.⁴

The Supreme Court has repeatedly stressed that an increase of risk cannot be presumed in the abstract or inferred merely from the occurrence of a loss. The insurer must prove that the risk actually and lastingly increased; a short-term change, such as being away from home for a few weeks, is not in itself an increase of risk.⁵ This keeps a balance: the policyholder must behave reasonably, but the insurer cannot look for an "increased risk" behind every loss.

Practical tip: behave as if you had no insurance. If the use of the building changes (an apartment is let short-term, a warehouse becomes a production facility, a building is left empty for a long period), tell the insurer.

4. Property insurance does not cover damage to the neighbours

Buildings or home insurance covers loss to the insured property itself. Damage may, however, spread to neighbouring apartments or buildings: a burst water pipe, a heating leak or a fire starting in one apartment. In practice there have been cases where a leak from an upper apartment caused damage to the apartments below exceeding the value of the upper apartment itself.

Liability for that damage generally rests with whoever caused it, and their property insurance does not cover it. That requires liability insurance, offered as an extension to home insurance or as a separate policy. Under liability insurance the insurer discharges, in place of the policyholder, the obligation to compensate damage the policyholder caused to a third party (VÕS § 510).⁶

Practical tip: buy liability cover together with buildings or home insurance and check that the limit is adequate for an apartment block setting.

5. Liability insurance also covers legal costs

The value of liability insurance is not only in paying compensation. Under VÕS § 510 the insurer also bears legal costs, and VÕS § 511(1) specifies that cover extends to the policyholder's legal costs to the extent the policyholder could consider them necessary to protect its rights in and out of court, even if the claim proves unfounded.⁶ In practice, if a claim the policyholder considers unjustified is made against them, the insurer defends them at its own cost or reimburses counsel's fees as provided in the policy.

This is particularly important where quantum is disputed or the basis of liability unclear. The policyholder can concentrate on work and life while specialists handle the claim.

Practical tip: check whether defence costs erode the limit or sit in addition to it, and whether choice of counsel requires the insurer's prior consent.

What to do if the insurer reduces the payment

If a loss has occurred and the insurer has reduced or declined the claim, a few steps are worth taking before accepting the decision.

1. Ask for a reasoned written decision. The insurer must state the legal basis for refusal or reduction. Note that under VÕS § 475(3) a notice of refusal can trigger a one-year period for bringing an action if the decision refers to that consequence.
2. Check the calculation. In an underinsurance case, check which insurable value was used and whether the policy contains a tolerance or reinstatement value agreement. Often the dispute is about valuation rather than law.
3. Ask for evidence. Where increase of risk or breach of a duty of care is alleged, the insurer must prove both the breach and its effect on the loss.
4. Consider an independent expert. An independent assessment of reinstatement cost or the cause of loss is often decisive.
5. Use out-of-court options. Before going to court, conciliation may be considered; the best forum depends on the nature of the dispute.

Conclusion

Of the five nuances, two (underinsurance and pre-contractual information) can be resolved before inception, one (care) during the policy period and two (liability cover and defence costs) through product choice. The common denominator is that the scope of cover is determined by the contract and the law, not by the existence of a policy. Estonian Supreme Court practice is on several points more favourable to policyholders than the wording might first suggest, so a reduction or refusal should be checked for its legal basis.

Originally published in English by WIDEN on 9 October 2023 as "Real estate insurance – five overlooked nuances", https://widen.legal/news-events/real-estate-insurance-five-overlooked-nuances/. Rewritten and updated as of November 2026.

Related pages

• Under-, over- and double insurance
• Aggravation of risk
• Pre-contractual disclosure
• Liability insurance and direct action
• Supreme Court case law

References