Court Clarifies When Insurance Payouts Can Be Reduced

The Lithuanian Supreme Court has clarified when insurance payouts can be reduced, emphasizing the need for explicit contractual terms. The ruling came in a case where an insurer had halved a KASKO insurance payout, arguing the car owner had lost the key before the theft and failed to take extra security measures or inform the insurer.

However, the courts found that these obligations were not clearly detailed in the individual insurance contract, and the general insurance terms had not been properly delivered to the policyholder. "An insurer cannot rely on client obligations that they were not clearly informed about when signing the contract. If certain situations that could lead to a reduced payout are not clearly discussed, a person is not obliged to anticipate them," commented Mantas Baigys, a lawyer at a professional law partnership.

The Supreme Court distinguished between a general duty to act diligently and an insurer's right to reduce a payout. The court stated that a vague argument that a person "should have been more careful" is not enough. If an insurer intends to limit its liability or reduce a payout due to specific circumstances, these must be clearly and individually discussed in the insurance contract.

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An insurer cannot rely on client obligations that they were not clearly informed about when signing the contract. If certain situations that could lead to a reduced payout are not clearly discussed, a person is not obliged to anticipate them.

Furthermore, the court highlighted that the provision on the duty to mitigate damages applies only after an insured event has occurred or is occurring, not before. In this case, the insurer attempted to apply this provision to the situation before the theft, when the owner had lost the key. Baigys added that the court stressed that if an insurer seeks to rely on significant customer negligence as a basis for reducing a payout, such cases must be specifically stipulated in the insurance contract itself, as required by the Insurance Law.

The ruling also reiterated a crucial rule: insurance terms that a policyholder has not been properly acquainted with do not become part of the contract and cannot be applied against them. The court gave significant attention to consumer protection principles, referencing the practice of the Court of Justice of the European Union. It emphasized that consumer contracts must be not only formally clear but also genuinely understandable to the consumer, who should be able to foresee circumstances that might limit coverage and the economic consequences of specific contract terms.

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The court stressed that if an insurer seeks to rely on significant customer negligence as a basis for reducing a payout, such cases must be specifically stipulated in the insurance contract itself, as required by the Insurance Law.