During the course of the draft of Insurance Law of PRC, the presence of an "Incontestability" clause has come under fierce debate.Last night, I received a call from a CIRC (China Insurance Regulatory Committee) official, who asked my opinion on the highly debated clause.
An Incontestability clause is a standard clause in life insurance policies, which stipulates, if a certain period, normally two years of time passes from the inception of the policy to the death of the cestui que vie , the validity of the life policy cannot be contested by the insurer.
From my point of view, the reasons supporting the insertion of an incontestability clause are multiple.
First, in life insurance, there are investment elements and protection elements. When the insured purchased the life insurance, the insured would have constructed a financial plan for themselves or the beneficiaries of the policy. After a lapse of two years, it will be unexpected and will have a fundamental impact on the beneficiary if an insurer is capable of challenging the validity of the policy.
Secondly, if an insurer wants to find a misrepresentation within the application of policy of the insured, two years is adequate. We cannot allow an insurer to speedily take premiums, and process their investigation regarding policy issues in a slow way.
Lastly, even the doctrine of reasonable expectation has not been applied in Chinese Court or Arbitration Institution, the expectations of the insured should be protected, particularly after a two year benchmark.
Notwithstanding reasons mentioned herein, I remain concerned about the incorporation of an incontestability clause within the new Insurance Law of the PRC.
The Chinese insurance market has always been disturbed by the problems of bad faith and fraud, especially on part of the insured. On occasion, the fraudulent action of an agency of an insurance company further compounds the problem. If the new Insurance Law incorporates an incontestability clause, life insurance companies, health insurance companies and accident insurance companies will face huge challenges. Thus, it is my opinion that the new law will not require such a clause, though in practice, if any policy uses an incontestability clause, it should be enforceable in accordance to Chinese Contract Law.