Insurance
Under an insurance contract, one party (the insurer) undertakes, in return for an insurance premium specified in the contract, to pay the other party (the policyholder) or a third party, for whose benefit the contract has been concluded, an insurance payout as defined by law or the insurance contract. This payout is calculated according to the procedures established by law or the contract in the event that an insured event, as defined by those sources, occurs.
Insurance in Lithuania is best described by three key elements:
- Risk distribution,
- A significant number of participants,
- An insurer directly engaged in insurance activities.
(1) Risk distribution
The insurance mechanism serves to distribute economic losses among as many people as possible who face similar risks. The policyholder cannot predict in advance whether they will receive compensation greater than the amount of premiums paid or simply contribute to covering the losses of others. The primary goal is to replace uncertain losses with the ability to pay a fixed amount to a fund, representing the maximum potential loss. This economic risk-sharing forms the principle of risk distribution.
(2) A significant number of participants
This is the main difference between insurance and a contract where one party simply assumes the responsibility of another (e.g., surety). When determining the amount of premiums needed to cover all losses, administrative, and other costs for a given period, the insurer must forecast such expenses. The accuracy of these forecasts increases as the number of insurance policies sold grows.
(3) Insurer engaged in insurance activities
There are agreements in society that, although they contain elements of risk distribution, are not essentially considered insurance. Examples include guarantee agreements or service agreements providing for future services in case a certain event occurs. In such cases, the distribution of risk among a large group of individuals mainly serves to secure fixed payments for future services.
Insurance in the Republic of Lithuania can be either compulsory or voluntary. Legal relationships of compulsory insurance arise from legal facts provided for by legal norms, defining the moment of their emergence and duration, and serve as general and uniform means of protecting specific objects. Voluntary insurance relationships, on the other hand, arise from the mutual agreement of the insurer and the policyholder and the conclusion of an insurance contract according to the rules of the relevant type of insurance. These relationships are based on the voluntary will of the parties.
Insurance branches include life insurance and non-life insurance. Only interests protected by law may be insured. The insurance contract must be in written form. The conclusion of the contract is confirmed by an insurance certificate (policy).
Policyholder’s obligations before concluding the contract and the entry into force of the contract
Before concluding an insurance contract, the policyholder is obliged to provide the insurer with all known information about circumstances that may have a significant impact on the likelihood of an insured event occurring and on the potential extent of losses (insurance risk), provided that such circumstances are not and should not be known to the insurer. Circumstances deemed essential, about which the policyholder must inform the insurer, include those specified in the standard terms of the insurance contract (rules of the respective type of insurance), as well as any information the insurer has requested in writing. If the policyholder does not respond to a written inquiry from the insurer about certain circumstances, and the insurer nonetheless concludes the contract, the insurer loses the right to demand termination of the contract or to have it declared invalid based on the lack of information. If, after the insurance contract has been concluded, it is determined that the policyholder knowingly provided false information to the insurer about circumstances that could significantly affect the probability of an insured event or the extent of possible losses, the insurer has the right to request that the contract be declared invalid, except in cases where the concealed circumstances ceased to exist before the insured event or had no influence on it.
Unless otherwise specified in the contract, an insurance contract in Lithuania enters into force when the policyholder pays the full premium or the first installment. If the premium is not paid, the contract is terminated unless otherwise provided. Insurance in the Republic of Lithuania applies to all insured events that occur after the contract enters into force, unless the contract provides otherwise. If the contract stipulates that coverage also applies to events that occurred before the contract came into force, such a clause is valid only if neither party was aware of the event prior to the conclusion of the contract.