Large risks under Estonian insurance law: VÕS § 427 and Rome I

Most of the insurance chapter of the Law of Obligations Act (võlaõigusseadus, VÕS) is written to protect policyholders. For sophisticated commercial buyers, the legislator has relaxed this protection. Three different "large risk" concepts are relevant to foreign insurers, and they do not coincide:

1. the Estonian substantive concept in VÕS § 427 lg 2–3, which removes the semi-mandatory character of the protective provisions;
2. the EU concept of large risks in art 7 of the Rome I Regulation, which determines whether the parties may freely choose the applicable law;
3. the same EU concept in art 15(5) and art 16 of the Brussels I bis Regulation, which determines whether jurisdiction agreements are free.¹²

Each must be checked separately.

1. VÕS § 427 lg 1: the semi-mandatory provisions

Section 427 lg 1 lists the provisions from which the parties may not deviate to the policyholder's detriment, on pain of nullity. The list includes, among others, the rules on pre-contractual information and the right to object (§§ 428, 432), the policyholder's withdrawal right (§ 433), the insurer's withdrawal for non-disclosure (§ 441 lg 2–3, § 442), the exceptions to release for aggravation of risk (§ 445 lg 3), notification and due date (§§ 449–450), contractual release clauses (§ 452 lg 2), premium (§ 454 lg 2, §§ 457–459, 461–462), termination (§§ 468–472, 474), limitation (§ 475), multiple insurance elimination (§ 487), mitigation costs (§ 491), the family privilege in subrogation (§ 492 lg 3), consent to settle (§ 515) and the rules on compulsory liability and legal expenses insurance (§§ 519–531), as well as numerous provisions on life, accident and health insurance.¹

2. Contracts excluded from § 427 lg 1

The protective provisions do not apply to (§ 427 lg 2):

1. reinsurance contracts;
2. insurance of railway rolling stock, aircraft and ships;
3. cargo insurance;
4. liability insurance of possessors of aircraft and watercraft;
5. credit and guarantee insurance contracts insuring risks arising from economic or professional activity.¹

3. Large commercial policyholders (§ 427 lg 3–4)

The protective provisions also do not apply to contracts in the following non-life classes listed in the Insurance Activities Act (kindlustustegevuse seadus, KindlTS) § 12 lg 1: land vehicles (p 3), fire and natural forces (p 8), other damage to property (p 9), motor vehicle liability (p 10), general liability (p 13) and miscellaneous financial loss (p 16), provided the policyholder meets at least two of the following three criteria:

• balance sheet total exceeding EUR 6,600,000;
• net turnover for the financial year exceeding EUR 13,600,000;
• an average of at least 250 employees during the financial year.

For companies belonging to the same consolidation group within the meaning of the Accounting Act, the figures in the consolidated report are used (§ 427 lg 4).¹³ The thresholds were raised with effect from 12 December 2022 (RT I, 02.12.2022, 2); the 2018 Estonian textbook still refers to the earlier figures.⁴

What this means. For a qualifying policyholder, the insurer may, for example, agree that late notification releases it irrespective of prejudice, that defined breaches of conditions release it without proof of causation, or that the limitation period is shorter. However:

• the general part of VÕS still applies, in particular good faith (§ 6) and the standard-terms rules (§§ 35–44), although § 44 relaxes the black list for business-to-business contracts;
• provisions outside the § 427 list that are mandatory in their own terms remain mandatory (for example multiple insurance in § 486 lg 5, intentional causation in § 452 lg 1 and the expert determination safeguards in § 490 if construed as mandatory);
• the classes listed do not include D&O as a separate class; whether D&O falls within "general liability" (p 13) or "miscellaneous financial loss" (p 16) must be analysed on the facts and the wording.

4. Rome I: choice of law for large risks

Under art 7(2) of the Rome I Regulation, a contract covering a large risk (as defined in art 13(27) of the Solvency II Directive) is governed by the law chosen by the parties; absent a choice, by the law of the insurer's habitual residence unless the contract is manifestly more closely connected with another country.² For mass risks situated in a Member State, the choice is restricted (art 7(3)). The Estonian § 427 lg 3 thresholds and the Solvency II large-risk definition are similar but not identical in class coverage and wording, which is why the analysis must be performed twice. See choice of law and jurisdiction.

Even where foreign law governs, Estonian overriding mandatory provisions (art 9 Rome I) and compulsory insurance rules (art 7(4)) may apply.

5. Brussels I bis: jurisdiction agreements

The protective jurisdiction rules in Section 3 of Chapter II of Brussels I bis (arts 10–16) allow the policyholder, insured and beneficiary to sue in their own domicile and restrict jurisdiction agreements. Agreements concerning large risks as defined in the Solvency II Directive are exempt (art 15(5) with art 16(5)).² For Estonian large commercial risks, an exclusive jurisdiction clause in favour of foreign courts is therefore generally effective under Brussels I bis, subject to the position of insureds described below. Arbitration clauses are a separate matter: arbitration is excluded from the Regulation altogether (art 1(2)(d); recital 12), so the large-risks exception says nothing about their validity, which must be assessed under the applicable arbitration law, in Estonia the Code of Civil Procedure (tsiviilkohtumenetluse seadustik, TsMS §§ 718–719), including the special rules on arbitration agreements with consumers (§ 718¹). The exemption binds the contracting parties only: a jurisdiction clause cannot be relied on against an insured under the policy who is not an insurance professional, has not consented to the clause and is domiciled in a Member State other than that of the policyholder and the insurer.⁵

6. IDD and distribution

The insurer's duty to establish the client's demands and needs and to recommend the most suitable product (KindlTS § 221 lg 1) does not apply where the contract covers the large or excluded risks of VÕS § 427 lg 2–3 (§ 221 lg 2).³ See insurance distribution and IDD.

7. Practical checklist

1. Classify the risk under KindlTS § 12 and check the § 427 lg 2 list.
2. Obtain the policyholder's (or group's) latest financial statements and employee numbers; record which two criteria are exceeded.
3. Separately check the Solvency II large-risk definition for Rome I and Brussels I bis.
4. Draft deviations from the protective rules expressly; do not rely on silence.
5. Revisit the classification at each renewal: a policyholder may fall below the thresholds.

Related pages

• Choice of law and jurisdiction
• Reinsurance in Estonia
• Policy wording review services
• Estonian insurance contract law: overview
• Baltic comparison

References