Under-insurance, over-insurance and double insurance in Estonia

When the sum insured does not match the insurable value, or when the same risk is insured more than once, the Law of Obligations Act (võlaõigusseadus, VÕS) §§ 481–487 decide how the loss is shared.¹ These rules matter to every property and casualty insurer writing Estonian risks, and to global programme insurers whose master policy overlaps with a local Estonian policy.

1. Over-insurance (VÕS § 481)

If the sum insured substantially exceeds the insurable value, either party may demand that the sum insured be reduced, with a corresponding reduction of the premium (§ 481).¹ Section 481 is not semi-mandatory. Over-insurance does not entitle the insured to more than the actual loss, because the insurer never pays more than the damage (§ 477). Section 481 contains no rule on fraudulent over-insurance, and a single over-insured contract is not void merely because the sum insured was inflated. The statutory nullity in § 486 lg 4 applies only to multiple insurance taken out with the intention of obtaining an unlawful pecuniary benefit (see below). Where a single contract was concluded under the influence of the policyholder's fraud, the insurer's remedy is avoidance (tühistamine) under the General Part of the Civil Code Act (tsiviilseadustiku üldosa seadus, TsÜS) §§ 90 and 94; the pre-contractual disclosure rules do not exclude avoidance for fraud (VÕS § 441 lg 5).³

2. Under-insurance and average (VÕS § 482)

If the sum insured is lower than the insurable value at the time of the insured event, the insurer pays only in the proportion that the sum insured bears to the insurable value (§ 482).¹ Mitigation costs are reimbursed in the same proportion (§ 491 lg 3).

Example. Insurable value EUR 1,000,000; sum insured EUR 600,000; loss EUR 200,000. The indemnity is 200,000 × 600,000 / 1,000,000 = EUR 120,000, before deductible.

Three points deserve attention:

• The rule is not mandatory. § 482 is not among the provisions listed in § 427 lg 1, so first-loss cover (esimese riski kindlustus), waivers of average and margin clauses are permissible.
• Reinstatement value. Where the parties agreed that the sum insured itself is the reinstatement value of the building (§ 426 lg 2), the sum insured equals the insurable value at the time of the loss and there is no under-insurance; a court may not construct a lower monetary sum insured itself. Where, by contrast, a fixed monetary sum insured was agreed and it is lower than the insurable value at the time of the loss, under-insurance can still arise (analytical conclusion). Where the sum insured itself is the reinstatement value, incorrect information from the policyholder about the building (for example its size) cannot be corrected by applying average; it is addressed under the disclosure rules (§§ 440–442) and premium adjustment (§ 460). Where a fixed monetary sum was agreed below the insurable value, inaccurate value information does not by itself exclude under-insurance under § 482.²
• Burden of proof. The insurer that invokes average must prove the insurable value at the time of the loss.

3. Co-insurance (VÕS §§ 484–485)

If the same insurance, or the insurance of risks relating to the same property, is divided among several insurers in specified shares (co-insurance, kaaskindlustus), each insurer pays only in proportion to its share (§ 484). The contract must designate a leading insurer (juhtiv kindlustusandja), who is deemed to represent the other insurers; notices are given to and through the leading insurer (§ 485).¹ Subscription market practice (lead and following underwriters) fits this model. Claims cooperation and claims control clauses in the slip should be aligned with § 485.

Co-insurance must be distinguished from a layered programme (primary and excess layers). Estonian law does not regulate excess layers specifically; their relationship is governed by the contracts. Section 484 concerns proportional sharing, not vertical layering.

4. Multiple (double) insurance (VÕS §§ 483, 486–487)

Notification. The policyholder must inform the insurer of other insurance against the same risk concluded with another insurer (§ 483).

Definition and joint liability. Multiple insurance (mitmekordne kindlustus) exists where the same interest is insured against the same risk with several insurers and either the sums insured together exceed the insurable value or, for other reasons, the total of the indemnities payable by each insurer without the other contracts would exceed the total loss. In that case the insurers are jointly and severally liable to the policyholder, each up to the amount it would owe under its own contract, but the policyholder may not receive more than the loss. Between themselves the insurers share in proportion to the amounts they would owe under their own contracts (§ 486 lg 1–3).¹

Fraudulent multiple insurance. A contract concluded by the policyholder with the intention of obtaining an unlawful pecuniary benefit through multiple insurance is void (tühine); if the insurer did not know of the nullity when the contract was concluded, it is entitled to premium until the end of the insurance period in which it learned or should have learned of the nullity (§ 486 lg 4). Any agreement deviating from § 486 lg 1–4 is void (§ 486 lg 5), irrespective of whether it favours the policyholder or the insurer.¹

Elimination of unknowing multiple insurance (§ 487). If the policyholder concluded a contract creating multiple insurance without knowing it, or if multiple insurance arose later because the insurable value decreased, he may cancel the later contract or reduce its sum insured to the amount not covered by the earlier insurance, with a corresponding reduction in premium (§ 487).¹

5. "Other insurance" clauses

London and US wordings often contain "other insurance" clauses (excess, pro rata, escape). Under Estonian law, their effect against the policyholder must be tested against the mandatory § 486:

• An escape clause (no cover where other insurance exists) would deprive the policyholder of the joint and several liability of § 486 and is likely to be ineffective where the protective scope of § 427 applies.
• An excess clause is more defensible if it is transparent and the policyholder has a clear structure of primary and excess cover, but it cannot prevent the policyholder from claiming from either insurer where § 486 applies.
• Contribution between insurers follows § 486 lg 3 unless the insurers have agreed otherwise between themselves; such agreements do not bind the policyholder.

Because § 486 lg 5 makes the multiple insurance rule mandatory in its own right, and not merely through § 427 lg 1, the large-risk exemption in § 427 lg 2–3 does not by itself remove it. Whether § 486 applies at all to reinsurance and to independent layers of a programme is a separate question: whether the same risk is insured with several insurers.

6. Global programmes and local policies

Global programmes often combine an Estonian local policy (admitted) with a master policy issued abroad (difference in conditions and difference in limits, DIC/DIL). Where both respond to the same loss, three questions arise: is there multiple insurance within § 486; does the master policy's applicable law allow the master insurer to rely on its own other-insurance clause; and how do the insurers share internally. Estonian counsel should be involved early when the local and master wordings differ in their treatment of the same loss.

Related pages

• Insurable interest, insurable value and sums insured
• Large risks
• Reinsurance
• Supreme Court: insurable value and indemnity
• Glossary

References