Mutual insurance for insolvency practitioners

Insurance market crisis

The permanent crisis in the market for compulsory liability insurance of insolvency practitioners has been nothing new for several years, either for insolvency practitioners or for other participants in insolvency proceedings in Russia.⁠ .

Major players in the insurance market have long stopped insuring the liability of insolvency practitioners. Thus, Ingosstrakh stopped insuring the liability of insolvency practitioners back in 2014, and VSK - in 2016. Similarly, AlfaStrakhovanie and Guta-Strakhovanie stopped insuring this type of risks.

Currently, not a single insurance company from the TOP-10 provides civil liability insurance for insolvency practitioners due to the catastrophic unprofitability of this type of insurance and the lack of proper legislative regulation in this area.

In recent years, the market has been served exclusively by niche insurers that typically cease operations after one or two years. During that period, insolvency practitioners were insured by:

• LLC Insurance Company "ORBITA" (license suspended in 2019),
• LLC "INKOR Insurance" (license revoked in 2020),
• SO Pomoshch (stopped insuring insolvency practitioners in July 2020, transferring its portfolio to RIKS),
• JSC "Borovitsky Insurance Company" (portfolio transferred to RIKS),
• "RIKS" (license revoked on December 25, 2020),
• LLC IC "Arsenal" (ceased insuring insolvency practitioners from 03/01/2022),
• United Insurance Company JSC (stopped insuring insolvency practitioners in 2021),
• CJSC "Insurance Group "Spasskiye Vorota" (stopped insuring insolvency practitioners in 2021),
• LLC Insurance Company "Verna" (portfolio transferred to IC "Helios" in 2021),
• IC Helios LLC (stopped insuring ACs in 2021),
• LLC IC "Paritet-SK" (stopped insuring insolvency practitioners in 2021)⁠ ,

As of the date of writing of this article, five insurance companies provide insolvency-practitioner liability insurance: LLC International Insurance Group, LLC Ak Bars Insurance, LLC Insurance Company TIT, JSC D2 Insurance, LLC IC Askor.⁠ .

As the insolvency-practitioner liability insurance market became increasingly marginalised, premiums began to rise several-fold⁠ . This may have resulted either from the dwindling number of insurers in the market or from collusive pricing.

In connection with the aggravation of the problem of insurance tariffs for insolvency practitioners, the All-Russian Trade Union of Insolvency Practitioners (ORPAU) achieved the inclusion of this issue in the Unified Plan of Priority Measures of the Russian Tripartite Commission for February 2021⁠ .

On March 17, 2021, the RTC adopted the following decisions:

The Commission proposed that the Ministry of Finance of Russia (A. Siluanov) establish a working group to improve the regulation of mandatory liability insurance for insolvency practitioners and advocates. The group was to include representatives of the Ministry of Economic Development, the Bank of Russia, nationwide trade-union associations and nationwide employers’ associations, and was tasked with the following:

• consider proposals from the Commission representing all-Russian trade union associations on the issue of compulsory liability insurance for insolvency practitioners;
• to form a pool of insurance organisations to provide this type of compulsory insurance;
• develop uniform rules, uniform tariffs, a single policy and an insurance compensation mechanism when revoking the license of an insurance organisation for this type of compulsory insurance;
• develop a procedure for admitting insurance organisations to this pool⁠ .

To date, no decisions have been made by this working group.

The Bank of Russia, in a letter dated March 16, 2021, expressed the opinion that the creation of mutual insurance societies in the liability insurance market in the long term is not capable of solving the problem of insurance availability, since mutual insurance societies will face the same problems as insurance organisations that refuse to provide this type of insurance. At the same time, the Bank of Russia sent a letter to the Ministry of Finance with a proposal to develop alternative methods to insurance to ensure the liability of insolvency practitioners⁠ .

The Ministry of Economic Development in a letter dated 04/09/2021 noted that Bankruptcy Law does not contain all the necessary provisions provided for in paragraph 4 of Art. 3 of the Law “On the Organization of Insurance Business in the Russian Federation”, such as setting tariffs or delegating powers to set them to federal executive authorities.

Causes of the insurance crisis

The Ministry of Economic Development also reported that the Ministry of Finance considered it permissible for insolvency practitioners and their self-regulatory organisations to establish mutual insurance societies for professional-liability cover, provided that all statutory requirements applicable to such societies were met.

This can be considered as an additional guarantee of ensuring the property liability of insolvency practitioners to persons participating in the bankruptcy case, or other persons in connection with the failure or improper performance by the insolvency practitioner of the duties assigned to him in the bankruptcy case.⁠ .

On July 5, 2021, ORPAU submitted proposals to the Ministry of Finance for reforming mandatory liability insurance for insolvency practitioners. The proposals were prepared during meetings held at the Ministry on behalf of the Russian Tripartite Commission:

• extend the application of paragraph 1 of article 60 of the Bankruptcy Law by allowing an insolvency practitioner to apply to the court not only when a disagreement has arisen, but also in advance to clarify the court’s position on a disputed issue. The practitioner could then rely on that position when making a decision.
• establish that an insolvency practitioner cannot be held liable where the enforceable judicial act relied on when making a decision is subsequently set aside;
• provide that when considering a dispute regarding the recovery of damages, the court evaluates the actions of the insolvency practitioner based on the information and case law available to the insolvency practitioner on the date of the decision⁠ .

In a letter to the Bank of Russia dated February 18, 2021, the All-Russian Insurance Association called for alternative statutory mechanisms for securing insolvency-practitioner liability to be introduced urgently. It noted that insurers were effectively being required to cover deliberate acts by practitioners. That exposure is inconsistent with the principles of fortuity and probability underlying insurance and inevitably discourages insurers from entering the segment.

The All-Russian Insurance Association argued in favor of the introduction of alternative methods of financial support for the liability of insolvency practitioners - including the establishment, along with insurance of bank guarantees, joint liability of insurers and self-regulatory organisations of insolvency practitioners, as well as expanding the basis for payments from the compensation funds of the self-regulatory organisations of insolvency practitioners⁠ .

In the context of the collapse in the civil liability insurance market for insolvency practitioners and the refusal of insurance organisations to insure this type of activity, the vacuum is gradually beginning to be filled by mutual insurance societies (MIS)⁠ .

Thus, as of the date of publication of this article, two mutual insurance societies began to provide liability insurance for insolvency practitioners:

• Non-profit corporate organization Consumer Mutual Insurance Society "ETALON" (Insurance company "Etalon");
• Consumer Mutual Insurance Society "COMMONWEALTH" (mutual insurance society "Commonwealth").

Moreover, the mutual insurance society "Commonwealth" is accredited by the self-regulatory organisation of insolvency practitioners "Commonwealth"⁠ , in connection with which members of this SRO can insure their liability in this mutual insurance society.

Legal arguments against liability insurance through mutual insurance societies

It should be noted that insurance of civil liability of insolvency practitioners of the mutual insurance society may conflict with paragraph 3 of article 20, paragraph 1 of article 24.1 of the Bankruptcy Law and paragraph 1 of Article 6 of the Insurance Law if the terms “insurer” and “insurance organisation” are construed narrowly. Case law on disputes involving liability insurance obtained by an insolvency practitioner from a mutual insurance society will therefore be decisive.

So, in accordance with paragraph 3 of article 20 of the Bankruptcy Law, membership in a self-regulatory organisation requires an insolvency practitioner, among other things, to hold a mandatory liability policy meeting the requirements of Article 24.1 of that Federal Law.

Legal basis for mutual insurance

Under paragraph 1 of Article 24.1 of the Bankruptcy Law, a mandatory policy covering an insolvency practitioner’s liability for losses caused to participants in insolvency proceedings or other persons through non-performance or improper performance of statutory duties must be concluded with an insurance organisation accredited by the practitioner’s self-regulatory organisation.

In addition, paragraph 5 of Article 3 of the Federal Law On Mutual Insurance provides that a society may not offer mandatory insurance unless that right is granted by the federal law governing the particular type of mandatory insurance. This can be read as permitting a mutual insurance society to provide mandatory cover only where the relevant law expressly allows it, while the Bankruptcy Law does not expressly provide for an insolvency practitioner to obtain liability insurance from a mutual insurance society.

Mutual insurance model

Legal arguments supporting liability insurance through mutual insurance societies

According to paragraph 1 of article 6 of the Law of the Russian Federation No. 4015-I of November 27, 1992, On the Organisation of Insurance Business in the Russian Federation, an insurance organisation and a mutual insurance society are legal entities established under Russian law and duly licensed to conduct insurance and/or reinsurance in the first case, and mutual insurance in the second.

Because the distinction between an insurance company and a mutual insurance society lies in their purpose—covering third parties or their own members—it follows that where federal law authorises a mutual insurance society to provide insurance beyond purely mutual cover, the society acts as an insurance organisation in that relationship.

Federal law permits mandatory insolvency-practitioner liability insurance to be provided through a mutual insurance society for the following reasons.

According to paragraph 4 of article 24.1 of Federal Law No. 127-FZ of October 26, 2002, On Insolvency (Bankruptcy) (the Bankruptcy Law), the insured interest is the practitioner’s obligation to compensate participants in insolvency proceedings or other persons for losses caused by non-performance or improper performance of the duties imposed on the practitioner in those proceedings.

Those duties are established by paragraph 2 of article 20.3 of the Bankruptcy Law.

According to paragraph 3 of article 20 of the Bankruptcy Law, holding a mandatory policy that meets the requirements of Article 24.1 of the Bankruptcy Law is a prerequisite for membership in a self-regulatory organisation.

According to paragraph 1 of article 24.1 of the Bankruptcy Law, that mandatory insurance agreement must be concluded with an insurance organisation accredited by the self-regulatory organisation.

However part 4 of article 968 of the Civil Code of the Russian Federation provides that mandatory insurance may be arranged through mutual insurance in the cases specified by mutual-insurance legislation. That permission cannot be directly restricted by other federal laws, including the Bankruptcy Law.

Article 4 of Federal Law No. 286-FZ of November 29, 2007, On Mutual Insurance (the Mutual Insurance Law), identifies the interests that may be covered by mutual insurance.

Subparagraph 2 of Article 4 provides that mutual insurance may cover members’ property interests connected with liability for harm caused to the life, health or property of other persons.

The interests covered by mandatory insolvency-practitioner liability insurance under paragraph 4 of article 24.1 of the Bankruptcy Law therefore satisfy Article 4 of the Mutual Insurance Law.

Legal requirements

At the same time, subparagraph 2 of Article 4 requires separate statutory authorisation only for civil liability arising from breach of contract.

However, the procedure for appointing an insolvency practitioner under Article 45 of the Bankruptcy Law does not involve entering into a contract with the practitioner. Accordingly, points 1, 4, 5 Article 24.1 of the Bankruptcy Law provide that liability arises not from breach of contract, but from non-performance or improper performance of the duties imposed by paragraph 2 of article 20.3 of the Bankruptcy Law.

In light of the above, paragraph 1 of article 24.1 of the Bankruptcy Law cannot be interpreted as prohibiting an insolvency practitioner from obtaining mandatory liability cover from a mutual insurance society, which acts as an insurance organisation in this relationship.

It will be important to observe how the courts resolve disputes involving insolvency-practitioner liability insurance provided by mutual insurance societies.

In any event, the legislature should amend the law to state clearly and unambiguously whether, and under what conditions, mutual insurance societies may provide this cover.

FOOTNOTES

1. Bank of Russia report (pp. 62–67); Insurance Today overview; review of insolvency-practitioner liability insurance; Kommersant’s insurance-market report; Insurance News Agency overview. ↩
2. Information about insurers was obtained from open sources. In fact, at different times, a much larger number of insurers were involved in insolvency-practitioner liability insurance than indicated in this article; see also the RSSOAU market document. ↩
3. Information about existing insurers was obtained from open sources on the Internet. The author would be grateful if readers would inform us about other currently operating insolvency practitioners liability insurers, in addition to those indicated in the article. ↩
4. Publication in ORPAU’s Telegram channel, Finmarket material, Insurance News Agency ↩
5. Publication in ORPAU’s Telegram channel, continuation of the publication of ORPAU ↩
6. Publication in ORPAU’s Telegram channel ↩
7. ORPAU's position on mutual insurance ↩
8. Material from ORPAU’s Telegram channel ↩
9. ORPAU insurance proposals ↩
10. Finmarket material, UrFAU Telegram publication, Pravo.ru report, Company Lawyer report. ↩
11. Overview of mutual insurance societies in ORPAU’s Telegram channel. Information about existing mutual insurance societies was obtained from open sources on the Internet. The author would be grateful if readers would inform us about other mutual insurance societies currently in operation that insure the liability of insolvency practitioners, in addition to those indicated in the article. ↩
12. Information about the accredited insurance organisation ↩