Recommendations for Insurance Undertakings Regarding the Process of Determining and Paying Compensation for Non-Pecuniary Damage from Motor Vehicle Third-Party Liability Insurance

Warsaw, June 2016

Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

Table of Contents

I. Introduction......................................................................................................................................................... 3
II. Glossary of Terms............................................................................................................................................ 6
III. List of Recommendations ................................................................................................................................. 8
Organization, management, supervision and control of the compensation determination process.............................. 8
Method of conducting proceedings regarding the determination and payment of compensation .................................... 10
Method of determining the amount of compensation ................................................................................................ 12
IV. Recommendations ........................................................................................................................................ 13
Organization, management, supervision and control of the compensation determination process............................ 13
Method of conducting proceedings regarding the determination and payment of compensation .................................... 22
Method of determining the amount of compensation ................................................................................................ 28

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

I. Introduction

The supervisory authority, in order to ensure the compliance of insurance undertakings' activities with legal provisions, prevent violations of the interests of policyholders, insured persons, or beneficiaries under insurance contracts, and limit the risks occurring in the activities of insurance undertakings, issues, pursuant to Article 365(1)(2)(a-c) of the Act of 11 September 2015 on insurance and reinsurance activities (Journal of Laws No. 1844, as amended) the Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts (hereinafter: the Recommendations).

The Recommendations also aim to realize the goals set for financial market supervision, as specified in Article 2 of the Act of 21 July 2006 on financial market supervision (Journal of Laws of 2016, item 174, as amended), such as ensuring the proper functioning, stability, safety, and trust in the financial market, as well as protecting the interests of its participants. Furthermore, they aim to undertake actions indicated in Article 4(1)(2) of the Act on financial market supervision, which serve the proper functioning of the financial market.

The Recommendations indicate supervisory expectations regarding the prudent and stable management of the process of determining and paying compensation for non-pecuniary damage, including the risks associated with this process. This risk can be defined as the uncertainty related to the proper and efficient functioning of the process of determining and paying compensation for non-pecuniary damage in insurance undertakings. It should also be noted that irregularities in the process of determining and paying compensation for non-pecuniary damage expose the insurance undertaking to specific financial losses related to the necessity of incurring legal costs for litigation in court and, in case of defeat, the necessity of paying court costs and legal representation fees, as well as interest for delay in paying compensation.

The Recommendations address the need to ensure predictability in the process of determining and paying compensation for non-pecuniary damage, given that legal provisions do not contain any criteria to be followed when determining (moderating) the amount of compensation. Insurance undertakings do not present a uniform approach to the catalog of circumstances that should be taken into account when assessing non-pecuniary damage, nor to the valuation of these circumstances, which effectively leads to unjustified discrepancies in the amounts of compensation awarded in similar cases. Furthermore, there are significant disparities between the amounts of compensation paid by insurance undertakings and the amounts of compensation awarded by common courts in the same cases. In light of the above, there is undoubtedly a need to standardize the process of determining and paying compensation for non-pecuniary damage, with particular emphasis on the adoption by insurance undertakings of solutions that guarantee victims the payment of compensation amounts that fully compensate for the non-pecuniary damage suffered.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

The Recommendations also aim to increase the transparency of the process of determining and paying compensation for non-pecuniary damage.

The Recommendations are addressed to domestic insurance undertakings within the meaning of the Act on insurance and reinsurance activities. In the areas of the method of conducting proceedings regarding the determination and payment of compensation and the method of determining the amount of compensation, the Recommendations should also be applied by foreign insurance undertakings that conduct insurance activities on Polish territory under the terms specified in the Act on insurance and reinsurance activities, regarding third-party liability insurance of motor vehicle owners for damages arising in connection with the movement of these vehicles, as referred to in Article 4(1) of the Act of 22 May 2003 on compulsory insurance, the Insurance Guarantee Fund, and the Polish Motor Insurance Bureau (Journal of Laws of 2013, item 392, as amended).

The document contains 21 Recommendations, which are divided into the following areas:

• organization, management, supervision, and control of the compensation determination process,
• method of conducting proceedings regarding the determination and payment of compensation,
• method of determining the amount of compensation.

The Recommendations were issued to emphasize the importance that the supervisory authority attaches to the proper functioning in insurance undertakings of the process of determining and paying compensation. This process functionally constitutes part of the motor insurance claims settlement process, regarding which supervisory authority expectations were expressed in the Guidelines on claims settlement for motor insurance, adopted by the Financial Supervision Authority on 16 December 2014. The Recommendations should therefore be applied taking into account the rules functioning in the aforementioned Guidelines and the specificity of the compensation determination and payment process.

It should be emphasized that the Recommendations contained in the area regarding the method of determining the amount of compensation take into account the case law of the Supreme Court and the established case law of common courts.

The supervisory authority expects that decisions regarding the method of implementing the solutions indicated in the Recommendations will be preceded by in-depth analysis and supported by appropriate argumentation.

Furthermore, the supervisory authority recommends that in the event of implementing outsourcing, the insurance undertaking should make every effort to ensure that service providers perform entrusted activities in accordance with the scope of the Recommendations. The supervisory authority indicates that insurance undertakings should include appropriate clauses in contracts with service providers, guaranteeing that the activities of the insurance undertakings, also in the scope entrusted to these providers, will meet the standards specified in the Recommendations.

The supervisory authority expects that the standards indicated in the Recommendations will be implemented by supervised entities no later than 31 December 2016. The Recommendations

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

are applied according to the "comply or explain" principle. According to Article 365(5) of the Act on insurance and reinsurance activities, insurance undertakings that do not apply the recommendations nor intend to apply them shall inform the supervisory authority of the manner in which they intend to achieve the goals for the realization of which the supervisory authority issued the recommendations. Information on the application of the Recommendations should be transmitted on a form that insurance undertakings will complete as part of their own assessment of compliance with the Recommendations and which will constitute one of the forms of verification by the supervisory authority of whether and how insurance undertakings have implemented the Recommendations. The insurance undertaking is responsible for meeting the standards contained in the Recommendations.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

II. Glossary of Terms

Management Team – persons managing areas of activity of an insurance undertaking (including members of the Management Board), in whom knowledge regarding the process of determining and paying compensation is utilized and who direct organizational units engaged in this process.

Civil Code – the Act of 23 April 1964 Civil Code (Journal of Laws of 2016, item 380, as amended).

Claims Adjuster – a person performing activities during the proceedings regarding the determination and payment of compensation, in particular consisting of: collecting necessary documentation in these proceedings, determining the scope of the insurance undertaking's liability, determining the amount of compensation, contacting entities during the proceedings regarding the determination and payment of compensation (e.g., the injured party, the tortfeasor, courts, prosecutor's office, police, medical facilities), to the extent necessary for conducting the proceedings. Whenever the Recommendations refer to a claims adjuster, this shall also be understood to mean a team of persons performing activities in the proceedings regarding the determination and payment of compensation, if in a given insurance undertaking this proceeding is realized by a team of persons.

Supervisory Authority – the Financial Supervision Authority.

Outsourcing – a contract between an insurance undertaking and a service provider, on the basis of which the service provider performs a process, service, or action that would otherwise be performed by the insurance undertaking, as well as a contract on the basis of which the service provider entrusts the performance of such a process, service, or action to other entities, through which it performs the given process, service, or action.

Process of Determining and Paying Compensation – the entirety of actions taken by an insurance undertaking to ensure the proper performance of its insurance activities in the area of determining and paying compensation within the scope of third-party liability insurance of motor vehicle owners.

Proceedings Regarding the Determination and Payment of Compensation – activities aimed at clarifying circumstances necessary to determine the insurance undertaking's liability for a random event and potentially the amount of compensation, and the payment or refusal to pay compensation within the time limits required by legal provisions regarding third-party liability insurance of motor vehicle owners.

Injured Party – a person who has filed or had filed on their behalf a claim for payment of compensation.

Procedure – an internal document regulating the method of conduct, adopted by the competent body of the insurance undertaking, ensuring clear determination of the scope and period of its validity, distributed in a manner established by the insurance undertaking.

Internal Control System – a system including in particular administrative and accounting procedures, organization of internal control, appropriate arrangements

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

regarding the preparation of reports at all levels of the organizational structure of the insurance undertaking, and the compliance function.

Management System – a system including the risk management function, the compliance function, the internal audit function, and the actuarial function, which ensures proper and prudent management of the insurance undertaking.

Third-Party Liability Insurance of Motor Vehicle Owners – third-party liability insurance of motor vehicle owners for damages arising in connection with the movement of these vehicles, as referred to in Article 4(1) of the Act on compulsory insurance.

Act on Insurance and Reinsurance Activities – the Act of 11 September 2015 on insurance and reinsurance activities (Journal of Laws No. 1844, as amended).

Act on Compulsory Insurance – the Act of 22 May 2003 on compulsory insurance, the Insurance Guarantee Fund, and the Polish Motor Insurance Bureau (Journal of Laws of 2013, item 392, as amended).

Accident – in third-party liability insurance of motor vehicle owners, a random event, the consequence of which is death, bodily injury, or causing a disturbance of health.

Compensation – monetary compensation for non-pecuniary damage suffered, claimed on the basis of Article 445 § 1, Article 446 § 4, Article 448 in conjunction with Article 24 § 1 of the Civil Code.

Insurance Undertaking – a domestic insurance undertaking and a foreign insurance undertaking that conducts insurance activities on Polish territory in the scope of third-party liability insurance of motor vehicle owners.

Principle of Full Indemnification – in third-party liability insurance of motor vehicle owners, a principle specified in Article 361 § 2 of the Civil Code, according to which, within the limits of an adequate causal link, compensation should, in principle, correspond to the extent of the damage suffered by the injured party and compensate for the detriment that affected their legally protected goods or interests.

Notification of Claim – notification to the insurance undertaking of the occurrence of non-pecuniary damage to the injured party from third-party liability insurance of motor vehicle owners.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

III. List of Recommendations

Organization, management, supervision and control of the compensation determination process

Recommendation 1
An insurance undertaking should have an organizational structure serving the proper functioning of the process of determining and paying compensation.

Recommendation 2
The Management Board should ensure effective management of the process of determining and paying compensation.

Recommendation 3
The Supervisory Board should supervise the functioning of the process of determining and paying compensation to the extent adapted to the scale of the activity conducted and the size and risk profile associated with this activity.

Recommendation 4
An insurance undertaking should develop, adopt, and ensure the functioning of procedures covering the process of determining and paying compensation.

Recommendation 5
An insurance undertaking should ensure the functioning of an effective internal control system and an effective internal audit function covering the process of determining and paying compensation, designed and managed in such a way as to support the management team and the Supervisory Board in fulfilling their obligations related to the management and supervision of this process.

Recommendation 6
An insurance undertaking should develop, adopt, and ensure the functioning of a management information system regarding the process of determining and paying compensation, adapted to the scale of the activity conducted and the size and risk profile associated with this activity, being an integral part of the insurance undertaking's management system, allowing for the identification of risks occurring in this process.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

Recommendation 7
An insurance undertaking should ensure that outsourcing does not lead to a deterioration in the quality of functioning of the process of determining and paying compensation and the insurance undertaking's management system, in particular excessive exposure to operational risk and reputational risk, as well as a deterioration in the ability of the supervisory authority to monitor the insurance undertaking's compliance with its obligations in this regard.

Recommendation 8
An insurance undertaking should develop, adopt, and ensure the functioning of a compensation system for claims adjusters, ensuring an efficient course of the process of determining and paying compensation.

Recommendation 9
An insurance undertaking should ensure that employees performing activities within the process of determining and paying compensation possess the competencies and knowledge regarding the activities performed, in particular through access to training regarding this process.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

Method of conducting proceedings regarding the determination and payment of compensation

Recommendation 10
An insurance undertaking should conduct proceedings regarding the determination and payment of compensation in a manner ensuring the payment of compensation or the final decision on the refusal to pay compensation in whole or in part within the time limits resulting from legal provisions.

Recommendation 11
Communication by the claims adjuster with entities during the proceedings regarding the determination and payment of compensation (in particular with the injured party, the tortfeasor, courts, prosecutor's office, police, medical facilities) should be conducted with due care related to the professional nature of the insurance activity conducted by the insurance undertaking.

Recommendation 12
An insurance undertaking should develop, adopt, and ensure the functioning of procedures specifying the method of contact between the claims adjuster and entities during the proceedings regarding the determination and payment of compensation (in particular with the injured party, the tortfeasor, courts, prosecutor's office, police, medical facilities), which are an element of the insurance undertaking's management system.

Recommendation 13
An insurance undertaking should collect documentation regarding the proceedings for the determination and payment of compensation, including in particular documentation collected during these proceedings and the justification for the amount and updating of the reserve for unpaid indemnities and benefits, with due care related to the professional nature of the insurance activity conducted by it.

Recommendation 14
An insurance undertaking should provide the injured party with full and understandable information about the method of determining the amount of compensation.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

Recommendation 15
When proposing the conclusion of a settlement, the insurance undertaking should ensure that the injured party receives full and understandable information about the method of determining the amount of compensation proposed for payment.

Recommendation 16
An insurance undertaking in proceedings regarding the determination and payment of compensation should act objectively, considering the entirety of the circumstances of the case, while respecting the life situation in which the injured party found themselves.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

Method of determining the amount of compensation

Recommendation 17
An insurance undertaking should individually consider circumstances affecting the amount of compensation and apply criteria for their assessment.

Recommendation 18
An insurance undertaking when determining the amount of compensation should, considering the entirety of the circumstances of the case, take into account circumstances significant in assessing the extent of non-pecuniary damage.

Recommendation 19
An insurance undertaking when determining the amount of compensation should individually assess the existence of an emotional bond justifying obtaining compensation and its extent.

Recommendation 20
An insurance undertaking may reduce the compensation due to the injured party by an appropriate amount resulting from the determination of the injured party's or deceased's contribution to the occurrence of non-pecuniary damage or increasing its extent.

Recommendation 21
An insurance undertaking should pay, upon the request of the injured party, interest for delay in the payment of compensation.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

IV. Recommendations

Organization, management, supervision and control of the compensation determination process

1. Recommendation 1
An insurance undertaking should have an organizational structure serving the proper functioning of the process of determining and paying compensation.

1.1. An insurance undertaking should have documentation specifying the organizational units responsible in particular for the process of determining and paying compensation, along with the indication of scopes of responsibility and rules of subordination to the management team.

1.2. Employees of the insurance undertaking responsible for making declarations of intent on behalf of the insurance undertaking regarding the acceptance or refusal to accept a claim in whole or in part should possess powers of attorney specifying the scope of their authority in an unambiguous manner.

2. Recommendation 2
The Management Board should ensure effective management of the process of determining and paying compensation.

2.1. The Management Board should take actions necessary for the proper and prudent management of the process of determining and paying compensation, including for the identification, measurement, monitoring, and management of risks associated with this process.

2.2. If justified by the scale of the activity conducted and the size and risk profile associated with this activity, a person responsible for supervising the process of determining and paying compensation should be designated from among the management team, possessing competencies in this area resulting from professional knowledge and experience.

2.3. The Management Board should regularly familiarize itself with the current situation in the process of determining and paying compensation, in particular it should analyze reports containing aggregated information of significant character from the perspective of the activity profile of the insurance undertaking.

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Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from motor vehicle third-party liability insurance contracts

3. Recommendation 3
The Supervisory Board should supervise the functioning of the process of determining and paying compensation to the extent adapted to the scale of the activity conducted and the size and risk profile associated with this activity.

3.1. The Supervisory Board