Insurable interest, insurable value and sums insured in Estonia

Property and other indemnity insurance in Estonia rests on the indemnity principle: the insured should be put in the position he would have been in had the insured event not occurred, but not in a better one. The Law of Obligations Act (võlaõigusseadus, VÕS) implements this through the concepts of insurable interest (kindlustushuvi), insurable value (kindlustusväärtus) and sum insured (kindlustussumma) in §§ 476–480.¹ These concepts are the starting point for any quantum discussion with an Estonian policyholder or loss adjuster.

1. The indemnity principle (VÕS §§ 476–477)

In indemnity insurance (kahjukindlustus) the insurer compensates the damage caused to the insured person by the insured event in accordance with the contract. This includes damage caused by reasonable measures taken to deal with the consequences of the event and the loss of insured items in the course of the event. Loss of profit is compensated only if expressly agreed (§ 476).² Business interruption cover must therefore be granted expressly.

The insurer is not obliged to pay more than the actual damage, even if the sum insured is higher than the insurable value at the time of the insured event (§ 477).¹ The sum insured is thus the upper limit of the insurer's liability, not a measure of the loss.

2. Insurable interest (VÕS § 478)

Insurable interest is the policyholder's interest in insuring himself against a particular risk (§ 478 lg 1). The consequences of its absence are regulated in detail:

• If the insurable interest does not exist when cover begins, or does not arise where a future risk was insured, the policyholder is released from the obligation to pay premium; the insurer may claim reimbursement of reasonable administrative expenses (§ 478 lg 2).
• If the interest ceases after cover has begun, the insurer is entitled to the premium it could have charged had the insurance been taken out only until it learned of the cessation (§ 478 lg 3).
• A separate rule applies where the interest ceases as a result of the insured event itself (§ 478 lg 4).¹

Estonian law recognises that several persons may have insurable interests in the same property (owner, lessee, lessor, pledgee, contractor). The interest of a person other than the policyholder can be insured as insurance for the account of a third party (§ 463). The author has analysed the role of insurable interest in Estonian law in comparative perspective.³

Transfer of the insured object. If the insured property is transferred, the insurance continues for the acquirer, who takes the transferor's place in the contract; both the insurer and the acquirer have special cancellation rights and the transfer must be notified (§§ 494–498).¹ For mortgagees, VÕS §§ 499–503 provide protection, including notification duties of the insurer and the continued validity of the insurance in relation to the mortgagee in some cases of the policyholder's breach.

3. Insurable value (VÕS § 479)

The insurable value is the value of the insurable interest at the time of the insured event (§ 479 lg 1). Unless agreed otherwise:

• for replaceable movables, it is the amount needed to acquire a similar new item, with a reasonable deduction for the difference between new and old (depreciation);
• for buildings, it is the usual local construction value, with a reasonable deduction for age and wear (§ 479 lg 2–3).¹

The statutory default is thus "new for old minus depreciation". Wordings that provide for "new for old" without deduction, or for actual cash value, are agreed values or valuation rules and are generally valid.

4. Agreed value and reinstatement value (VÕS § 480)

The parties may agree the insurable value in advance (kokkuleppeline kindlustusväärtus). An agreed value is disregarded if it substantially exceeds the actual insurable value at the time of the insured event. For buildings, the parties may agree that the insurable value is the cost of restoring the building (reinstatement value).¹

The Supreme Court has addressed both rules. It distinguished between an agreed insurable value and a reinstatement value agreement for buildings, emphasising that under a reinstatement agreement the insured must be put in a position to rebuild.⁴ In 2016 it confirmed the applicability of the reinstatement value rule.⁵ In 2024 it held that the sum insured and the insurable value are different concepts: where the parties agreed that the sum insured is the reinstatement value (§ 426 lg 2), the sum insured equals the insurable value at the time of the loss and there is no under-insurance, so the courts could not calculate a lower monetary sum insured themselves (a fixed monetary sum insured below the value can still lead to under-insurance); and incorrect information provided by the policyholder at conclusion is to be dealt with under the disclosure rules (§ 441) or the premium adjustment rule (§ 460), not by applying average.⁶

5. Sum insured, limits and sub-limits

The sum insured (kindlustussumma) is the amount agreed as the upper limit of the insurer's performance (§ 426 in the general part). Commercial wordings use limits per event, aggregate limits, sub-limits (alamlimiidid) and deductibles. Estonian law contains few specific rules on these mechanisms, but three general points apply:

1. Transparency. Sub-limits and aggregation clauses are standard terms and must be clear (VÕS §§ 37, 39). Ambiguities are resolved against the insurer.
2. Costs outside limits. In liability insurance, certain defence costs and interest are payable even beyond the sum insured (§ 511 lg 3). See liability insurance and direct action.
3. Mitigation costs. Costs incurred on the insurer's instructions are payable even beyond the sum insured (§ 491 lg 2).

Limits, sub-limits and towers must never be added together automatically. Whether limits of several layers or policy periods can be accessed for one loss depends on the trigger, aggregation and "related claims" clauses.

6. Practical points for loss adjusters and claims handlers

• Establish the insurable value at the date of loss on the basis agreed in the policy (actual value, agreed value, reinstatement value).
• Check whether loss of profit or business interruption is expressly covered (§ 476).
• Consider who holds the insurable interest and whether a mortgagee or lessor has rights under §§ 499–503 or by endorsement.
• First determine how the sum insured was agreed. Where the sum insured itself was agreed as the reinstatement value and the policyholder's information on values was wrong, analyse it under §§ 440–442 and 460 rather than as under-insurance; where a fixed monetary sum insured was agreed below the insurable value, inaccurate value information does not by itself exclude under-insurance under § 482 (see under-, over- and double insurance).
• Document depreciation deductions with reasons; Estonian courts expect a reasoned, not a tabular, approach.

Related pages

• Under-, over- and double insurance
• Pre-contractual disclosure
• CAR/EAR and construction claims
• Supreme Court: insurable value and indemnity
• Glossary

References