After fundamental amendments in 2009, the Insurance Law of the People’s Republic of China (“Insurance Law”) better regulates the promising and fast-developing Chinese insurance industry as the main legal framework, and plays a positive role in maintaining the stability of the financial order (protecting the interests of applicants, the insured and beneficiaries) while promoting the healthy development of the Chinese insurance business. Nevertheless, the internal structure and external environment of the insurance business have undergone many changes since the 2009 Insurance Law amendments. Some fresh problems have emerged, such as the inception of the insurance liability, performance standards for the duty of explicit explanation of the clause exempting the insurers’ liability, the scope and extent for the duty of disclosure of the applicant, etc. Given the complexity of these problems and the discrepancies in understanding the Insurance Law, the judgment criteria for the aforementioned issues vary from court to court. If such problems cannot be solved promptly, judicial authority could be undermined, and the development of the insurance business could be adversely affected.
Under such circumstances, the Interpretation II of the Supreme People’s Court on Several Issues Concerning the Application of the Insurance Law of the People’s Republic of China (“Interpretation II”) was enacted by the Supreme People’s Court (“Supreme Court”). It aims to lay down some definite and feasible rules concerning the application of the general provisions in the Insurance Law.
From my point of view, particular attention should be given to the following significant portions of the judicial interpretation:
1. For the purpose of better regulating insurers’ acts of acceptance in the insurance application, Article 4 of Interpretation II requires the insurer assume the insurance liability where an insurance accident occurs after the insurer received premium, but before its explicit acceptance of such application provided that the insurance application fulfills the insurance conditions.
Technically, the conclusion of a contract shall include the full phases of offer and acceptance. Under an insurance contract, the application for an insurance policy by the applicant amounts to the offer, and the expression of its will to accept the application by the insurer shall constitute the acceptance, which is always in the form of issuing the insurance policy or certificate by the insurer to the applicant. In spite of this, Article 4 of the Interpretation II treats the receipt of the insurance premium as the acceptance expression provided that the insurance conditions have been satisfied. This change in the procedure of the acceptance shall certainly benefit the applicant and the insured, and greatly affect insurance market practices in the Chinese market.
For instance, especially in the life insurance sector, when the agents of insurers successfully persuade the potential applicant to buy the policy, they usually will let the applicant fill in the application form or inquiry form and pay the premium in advance, and then forward the application form and premium to the underwriting department of insurer for check and confirmation. When applicants pay the premium to the agents, these agents will issue a temporary receipt for the premium, and in practice such temporary receipt does not constitute the acceptance of the insurance contract. If after the check and evaluation by the insurers, insurers do not want to accept the application, insurers could refuse to issue policy, and ask agents to refund the premium.
But according to Interpretation II, the discretion of insurers will be restricted, and as a result, insurers shall rethink and rearrange the application process in order to protect themselves.
2. Articles 9, 10, 11 and 12 of Interpretation II specify the insurer’ duty to remind applicant of and explicitly explain the policy clauses exempting insurer’s liability (“Reminding and Explicit Explanation Responsibility”), as well as enhance the criteria for performance of the aforementioned responsibility in order to urge the insurer to effectively and expressly explain the standard terms exonerating the insurer from liability. These articles, therefore, seek to protect the rights of applicants and the insured.
3. In accordance with Article 9 of Interpretation II, the clauses of deductible ( self-retention ), deductible ratio, principle of average, etc. now shall fall under the scope of clauses exempting the insurer from the liability as well which increases the liability of the insurer in this regards with on doubt.
In the practice of the Chinese insurance market and oftentimes other markets, usually the Court will adjust or intervene with the use of Exclusion Clauses in policies, on the ground that those clauses are deemed as the standard terms, not familiar to applicant, and shall be explained clearly to applicant. After the enforcement of Interpretation II, the burden on companies to remind and explain will be obviously enlarged.
On the other hand, the new judicial interpretation stipulates that if the cause of the liability exemption originates from a prohibitive situation provided by law or regulation, the court will not side with the applicant, insured or beneficiary where they allege such exemption void and null on the ground of the insurer’s non-performance of the reminding and Explicit Explanation Responsibility. This will definitely ease the burden of the insurer in this respect, since a court would generally have held the insurer liable prior to this new interpretation.
In addition to the above changes, Interpretation II establishes that website, video, and audio, etc. can be used as valid methods for performance of the insurers’ duty to inform. This not only opens another door for the insurer to perform the said obligation, but also accelerates the efficiency of the insurance promotion.
4. As to the discrepancy between an application form and a policy, Article 14 of the Interpretation II diverges from previous practice.
It has been understood that the application form is a kind of offer for the conclusion of an insurance contract. When the insurer accepts the offer (application), and issues the policy, such behavior is treated as an acceptance, and thereby fulfills the creation of the insurance contract. In terms of the insurance contract, the application form, the actual plan policy (including schedule and standard terms) and endorsement itself will constitute a part of the insurance contract. If there is a conflict between the application form and the policy, courts usually hold that policy prevails because policy consists of more specific terms and conditions, and the policy is said to materialize after the application form.
However, Article 14 states that where there is inconformity between an application form and a policy or other insurance certificate, the application form prevails. This will undoubtedly favor the applicant and the insured, and alert the insurers to carefully handle the application process.
On the whole, Interpretation II is bound to bring us some changes in various aspects of the insurance business. While acknowledging the improvements and advantages brought about by the modifications, we have to keep an eye on the new problems which might soon emerge, for example, how to judge the validity of an insurance contract when the premium is received by the insurance agent, but the applicant and the insurer disagree on whether the insurance conditions have been satisfied, etc.
Overall, we believe that the effects of Interpretation II will eventually be examined thoroughly and brought to light by the ever-changing insurance practices in the Chinese market.