Liability insurance and direct action in Estonia (VÕS §§ 510–525)

Liability insurance (vastutuskindlustus) is regulated in §§ 510–525 of the Law of Obligations Act (võlaõigusseadus, VÕS): a general part for all liability insurance (§§ 510–519) and special rules for compulsory liability insurance (§§ 520–525).¹ For professional indemnity, D&O, general liability, product liability and cyber liability insurers, these provisions decide how defence costs are treated, when the policyholder must notify, whether consent-to-settle clauses work and whether the injured party can sue the insurer directly. The cross-border aspects of direct action are discussed in the guide direct action against liability insurers.

1. The insured event and the trigger

By a liability insurance contract the insurer undertakes to perform, in place of the policyholder, the obligation to compensate damage caused by the policyholder to a third party as a result of an insured event that occurred during the insurance period, and to bear the related legal costs (§ 510).¹ The statutory default is thus an occurrence-type trigger linked to the insured event during the period.

Claims-made, claims-made-and-notified and discovery triggers are common in financial lines. Estonian law does not prohibit them, and they are widely used. Two caveats apply. First, a claims-made clause is a standard term subject to transparency and fairness control (VÕS §§ 37, 39, 42). Secondly, a short extended reporting period, or a clause that excludes claims arising from circumstances known before inception without a fair notification of circumstances mechanism, may be challenged as unreasonably disadvantageous. A well-drafted notification of circumstances clause reduces this risk.

2. Defence costs (§ 511)

Insurance covers the reasonable costs of legal assistance, in and out of court, necessary to defend against a claim, even if the claim proves unfounded. Costs incurred to protect the policyholder's interests in criminal proceedings and in administrative court proceedings are covered if the facts established in those proceedings may become the basis of his civil liability towards the injured party, insofar as the costs are incurred in accordance with the insurer's instructions; the insurer must advance them at the policyholder's request (§ 511 lg 1–2).¹

Costs outside the limit. Costs of proceedings conducted at the insurer's request or recommendation, defence costs in such proceedings, and interest payable because of delay caused by the insurer must be paid even if they exceed the sum insured together with the indemnity (§ 511 lg 3).¹ D&O and PI wordings with costs-inclusive limits must take this into account. Section 511 is not listed in § 427 lg 1 and is therefore not semi-mandatory as such: a different allocation can be agreed, but in standard terms it remains subject to the rules on incorporation, transparency and unfair terms (§§ 37–42), and special acts on compulsory liability insurance may set their own requirements. The insurer can reduce the risk by structuring its involvement so that it does not "request or recommend" the proceedings.

3. Representatives and employees (§ 512)

Liability insurance covering the policyholder's business also covers the liability of persons who represent the policyholder or who are employed by him to manage or supervise the enterprise or part of it (§ 512 lg 1).¹

4. Intentional causation (§ 513)

The insurer is released if the policyholder intentionally and unlawfully caused the event giving rise to his liability (§ 513). In compulsory insurance, the Supreme Court has held that where the policy lawfully excludes intentional breach from the insured event, there is no insured event at all, and the injured party's protection under § 521 lg 5 does not apply. The case concerned a bankruptcy trustee's own intentional breach and a policy term permitted by the Bankruptcy Act (pankrotiseadus, PankrS) § 64 lg 2.²

5. Notification (§ 514)

The policyholder must notify the insurer of circumstances that may result in an insured event, and of a claim made against him by the injured party, within one week of learning of the circumstance or claim; sending the notice within the period is sufficient. Court or other proceedings that may give rise to the insurer's liability, and any circumstance that may form the basis of a claim against the policyholder, must be notified without delay (§ 514 lg 1–3).¹ Consequences of breach follow §§ 449 and 452 (see notification and post-loss duties).

6. Payment and consent to settle (§ 515)

The insurer must pay the indemnity within two weeks of the date on which the injured party's claim has been satisfied by the policyholder or established by a court judgment, acknowledgement or settlement (§ 515 lg 1). An agreement under which the insurer is released if the policyholder satisfies or acknowledges the claim without the insurer's consent is void if, considering the injured party's interests, refusing to satisfy or acknowledge it would have been manifestly contrary to good faith (§ 515 lg 2).¹ Section 515 is semi-mandatory (§ 427 lg 1). The Supreme Court has held that § 515 lg 1 applies in voluntary liability insurance where there is no direct claim; otherwise late payment interest follows the general rules.³

7. The injured party in voluntary liability insurance (§§ 516–518)

Estonian law does not give the injured party a general direct claim in voluntary liability insurance. Instead:

• the insurer may pay the injured party directly once the amount payable by the policyholder has been established by a court judgment or a settlement agreement and the policyholder has been informed in advance, and it must do so at the policyholder's request (§ 517 lg 1–2);
• dispositions of the policyholder's claim against the insurer are void in relation to the injured party, including in enforcement proceedings (§ 517 lg 3);
• in the policyholder's bankruptcy, the injured party has a preferential right to satisfaction from the policyholder's claim against the insurer (§ 518).¹

In practice, the injured party first establishes liability against the policyholder and then enforces against the insurance claim, or the policyholder asks the insurer to pay directly. See insolvency of the policyholder or tortfeasor.

8. Cancellation after an insured event (§ 519)

Either party may cancel the liability insurance contract if, after the insured event, the insurer has acknowledged its obligation to indemnify or has refused to indemnify after the indemnity became due. Cancellation must be declared within one month of the acknowledgement or refusal (§ 519).¹

9. Compulsory liability insurance (§§ 520–525)

Where the law requires liability insurance (motor third-party liability, advocates, notaries, bailiffs, bankruptcy trustees, healthcare providers, insurance intermediaries and others), special protective rules apply:

• Direct claim. The injured party may claim compensation from both the policyholder and the insurer; they are jointly and severally liable. Internally, the insurer alone is liable unless it is released towards the policyholder (§ 521 lg 1–2).
• Defences. The insurer may raise the defences the policyholder could raise (§ 521 lg 3); the claim against the insurer expires at the same time as the claim against the policyholder (§ 521 lg 4).
• Protection against release. The insurer may not refuse to compensate the injured party on the ground that it is wholly or partly released towards the policyholder (§ 521 lg 5). The insurer then has recourse against the policyholder.
• Deductible. A deductible does not reduce the injured party's claim; the insurer pays in full and recovers the deductible from the policyholder (§ 521 lg 8).
• Injured party's duties. The injured party must notify the insurer within two weeks of learning of the insurer's identity; late notice limits the insurer's liability to what it would have had to pay with timely notice (§§ 522–523).¹

Limits of § 521 lg 5. In 2025 the Supreme Court held that § 521 lg 5 protects the injured party against the consequences of the policyholder's breaches under a valid contract, but does not create liability where there was no insured event at all (for example where intentional breach is lawfully excluded), nor where the contract was validly avoided or is otherwise not in force.² The case concerned the compulsory liability insurance of a bankruptcy trustee, where PankrS § 64(2) allows intentional breach to be excluded; whether intent may be excluded depends on the special act, and in motor third-party liability insurance, EU law generally prevents the insurer from relying against the victim on the invalidity of the contract resulting from the policyholder's pre-contractual misrepresentation (CJEU C-287/16, Fidelidade; C-236/23, Matmut, paras 47 and 66, with an exception for abuse of rights).

Special acts may modify these rules. For motor insurance, see the MTPL and Green Card guide; for healthcare providers, the patient insurance guide.

Related pages

• Direct action against liability insurers in Estonia
• Professional indemnity in Estonia
• D&O claims services
• Supreme Court: liability insurance and direct claims
• Insolvency of the policyholder or tortfeasor

References