China Issues Interpretations on Application of Insurance Law

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Jun. 20 – With the view to better regulate the business conduct of insurers and lower policy holders’ risks in obtaining due compensation, China’s Supreme People’s Court released the “Interpretations II on Certain Issues Concerning the Application of the Insurance Law (fashi [2013] No.14, hereinafter referred to as the ‘Interpretations’)” on May 31, which came into effect on June 8, 2013.

The Interpretations have clarified the following issues regarding the application of the Insurance Law:

  • Whether or not an insurance subject can be insured by different policy holders;
  • The effectiveness of contracts signed by the insurance agents on behalf of the policy holders;
  • The disclosure obligations of the policy holders; and
  • The handling of disputes arising from liability exemption.

Detailed information can be found below.

Multiple insurances on the same insurance subject

According to the Interpretations, where different policy holders take out property insurance separately for the same insurance subject, upon occurrence of an insured event, the insured claims’ insurance compensation within the scope of the insurable interest based on the insurance contracts shall be upheld by the people’s court.

Effectiveness of contracts signed by the insurance agents

Where an insurance contract, instead of being signed or sealed by the policy holder or the agent of the policy holder, is signed or sealed by the insurer or the agent of the insurer, such insurance contracts shall not be binding on the policy holder. However, the policy holder shall be deemed as ratifying the signature or seal affixed if he/she has paid the insurance premium.

Disclosure obligations of policy holders

In practice, insurance companies often deny compensation by citing policy holders’ failure to fulfill their disclosure obligation. To prevent insurers from wantonly using this excuse, the Interpretations limit the applicant’s duty of disclosure to the contents requested by the insurer, and where the parties concerned have any dispute over the scope and contents of the request, the burden of proof lays on the insurer.

Moreover, if an insurer petitions for rescission of the contract on the grounds that the applicant violates the duty of faithfully disclosing the general terms as listed in the questionnaire under the insurance slip, the people’s court shall not uphold such petitions.

The Interpretations also limit the power of the insurers to rescind the insurance contracts. According to article 16 of China’s Insurance Law,  if the policy holder intentionally or out of gross negligence fails to perform his obligation of making an honest disclosure, thus materially affecting the insurer’s decision on whether to provide the insurance or to increase the premium rate, the insurer has the right to rescind the insurance contract.

The Interpretation puts an exception to the article by stating that if the insurer, after the conclusion of the insurance contract, knows or should know that the policy holder fails to perform the obligation for honest disclosure, but still collects the insurance premium, his request for the rescission of the contract shall not be upheld by the people’s court.

Handling of disputes arising from liability exemption

Where the insurer adopts the prohibitive circumstances prescribed in relevant laws and regulations as grounds for liability exemption under the insurance contract and has highlighted such clauses, the allegation on the ineffectiveness of such clauses filed by the policy holder, the insured, or the beneficiary on the ground that the insurer fails to perform the obligation to clearly explain such clauses shall not be upheld by the people’s court.

As a result of the development of the insurance industry and increasing awareness of civil rights across the country, China has witnessed increasing disputes arising from insurance contracts in recent years. In 2012, courts at multiple levels accepted 76,430 insurance contract dispute cases, nearly three times that of 2008.

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