Insurance Coverage Alert
December 17, 2009
Authors:
Newly Amended Chinese Insurance Law
Yujing Shu
yujing.shu@klgates.com
+86.10.8518.8528
John M. Sylvester
john.sylvester@klgates.com
+1.412.355.8617
Iris He
iris.he@klgates.com
+86.10.8518.8528
The newly amended Insurance Law of the People’s Republic of China (“Insurance
Law”) became effective on October 1, 2009. Compared with the previous version of
the law, enacted in 2002, the amended Insurance Law provides more rights for
policyholders and additional obligations for insurance companies. These
amendments are worthy of note by foreign companies that purchase insurance
policies in China, as well as foreign-owned insurance companies doing business in
China. In addition, there are several key changes in the amended law regarding the
establishment and management of both domestic and foreign-owned insurance
companies. This Alert summarizes the significant changes effected by this new
Insurance Law.
I. Rights of Policyholders and Obligations of Insurers
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1. Insurable Interest
The 2002 version of the Insurance Law provided only a very general statement with
respect to insurable interest. It stated that “A policyholder shall have an insurable
interest in the insured”. The amended Insurance Law further addresses the issue of
insurable interest and classifies it in two categories: life insurance and property
insurance. It provides that, under a life insurance contract, the policyholder must
have an insurable interest in the life being insured, as of the effective date of the
insurance contract, or else the life insurance contract shall be invalid. Moreover, the
amended law requires that, under a property insurance contract, the insured must
have an insurable interest in the insured property at the time when an insured event
occurs.
The amended Insurance Law further clarifies that, with respect to a life insurance
contract, employers are deemed to have an insurable interest in their employees.
Under the prior law, employers were deemed to have an insurable interest in their
employees only if and when the employees had consented to their employers
purchasing life insurance policies on their lives. In practice, it was burdensome for
employers to obtain such consent from employees. Thus, under the amended law,
the employers no longer must obtain consent from their employees. However, under
the amended law, employers are no longer allowed to designate themselves as
beneficiaries of a life insurance policy on an employee. The amended law provides
that only the insured or the insured’s close relatives may be designated as
beneficiaries. Such employee-friendly requirements in the amended law are deemed
to be consistent with a policy of providing maximum protection to laborers.
2. Misrepresentations in Insurance Policy Application
Under the 2002 version of the Insurance Law, an insurer was entitled to terminate an
insurance contract at any time if the insured had concealed facts deliberately or had
failed to make a disclosure because of gross negligence, provided that the
misrepresentation would have been sufficient to affect the insurer’s decision on
whether to issue the insurance policy or would have affected the setting of the
insurance premium. The amended law prevents the insurer from abusing its
Insurance Coverage Alert
termination rights by introducing time limits for the
insurer to terminate an insurance contract. Such
time limits include: (i) the insurer must exercise its
right to terminate the contract within thirty days
from the date it learns of the basis for termination;
and (ii) the insurer loses its right to terminate if two
years have elapsed after the inception date of the
insurance contract, regardless of whether the insurer
is then aware of the basis for termination.
3. Untimely Notice
Under the 2002 version of the Insurance Law, the
policyholder had an obligation to timely notify the
insurer of the occurrence of an insured event.
Failure to satisfy such obligation would entitle the
insurer to be exempted from providing coverage. In
practice, this law had caused many insurers to be
excused from their coverage obligation by claiming
lack of timely notification.
The amended Insurance Law sets forth more
restrictions on the insurer’s right to avoid coverage
for alleged late notice. According to the amended
law, an insurer may avoid coverage only under the
circumstance that the policyholder (or other insured)
deliberately or with gross negligence failed to
provide notice of the occurrence of the insured event
such that it was impossible for the insurer to
determine the nature or cause of the insured event or
the extent of the resulting loss. In addition, in this
circumstance, the insurer would only be excused
from covering that portion of the loss which is
impossible to be determined. The amended law also
provides that, notwithstanding late notice by the
policyholder, if the insurer learned or should have
learned of the occurrence of the insured event in a
timely manner by other means -- for example,
through media coverage of a natural disaster -- the
insurer may not avoid its coverage obligation.
4. Time Limitation on Settling an Insurance
Claim
With respect to the settlement of an insurance claim,
the amended Insurance Law introduces new time
limits for an insurer to make a determination on
coverage for a claim. First of all, if the evidence to
prove the nature or cause of the insured event is not
sufficiently provided by the policyholder, the insurer
may make a one-time request to the policyholder for
additional evidence. However, the insurer is
prohibited from making multiple requests for
additional evidence with the purpose of delaying
resolution of the claim. Second, the insurer shall
render its determination of the insurance claim no
more than thirty (30) days upon receipt of the claim
application. If the insurer determines to reject the
claim, any notice of refusal must be issued to the
policyholder within three (3) days from the date the
insurer makes its determination; otherwise the
insurer will be deemed to have waived its right to
reject the claim.
5. Standard Clauses
The amended Insurance Law contains the following
new requirements with respect to standard clauses
used in an insurance contract:
•
If an insurance contract is intended to contain
standard clauses, the insurer is obligated to
enclose these clauses in the insurance policy
and also to explain to the policyholder the
meaning of such standard clauses.
•
A standard clause in an insurance policy is void
if it purports to exempt the insurer from
statutory obligations or to increase the
responsibilities of the policyholder or another
insured; or if it excludes legitimate rights of the
policyholder, other insured or a beneficiary.
•
Where there is a dispute over the interpretation
of a standard clause, such clause shall be
construed based on common understandings. If
the standard clause can reasonably be
interpreted in more than one manner, it shall be
interpreted in the manner favoring coverage.
•
If an insurance contract contains an exclusion,
the insurer shall provide sufficiently obvious
notice to the policyholder of such exclusion so
as to attract the policyholder’s attention.
II. Insurance Company Management
In addition to the above-described features of the
amended Insurance Law dealing with an insurance
company’s interactions with its policyholders, the
amended law includes key amendments applicable
to insurance companies in terms of their
establishment, investments, management, and legal
liabilities.
December 17, 2009
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Insurance Coverage Alert
•
•
The amended law sets forth additional
requirements for establishment of a new
insurance company in China. It requires the
principal shareholders of a new insurance
company to have: (1) sustainable ability to
make profits and good reputation; (2) no records
of serious violations of laws in last three years;
and (3) net assets shall be no less than RMB 200
million (USD 29 million).
The amended law expands the investment
options for insurance companies. In addition to
bonds, shares and securities investment funds,
the amended law now allows insurance
companies to invest in real property.
•
With respect to the management of insurance
companies, the amended law introduces ethical
requirements for directors and senior managers.
In addition, a compliance reporting system must
be established within an insurance company.
•
Insurance companies are no longer required to
give priority to Chinese reinsurers when they
cede out their reinsurance business. Such
change is a step designed to comply with
China’s commitments to the World Trade
Organization.
•
In the legal liability portion of the amended law,
new provisions are added to deal with violations
by foreign insurance institutions. For instance,
if a foreign insurance institution establishes a
representative office without relevant
governmental approvals, it may be shut down
and may be imposed a fine ranging from RMB
50,000 to RMB 300,000 (USD 7,350 to USD
44,200).
Each of the above-mentioned provisions of the new
amended Insurance Law may have significant
implications for policyholders and insurance
companies doing business in China. Yet, the details
of how this new amended law will be interpreted
and applied remain to be seen. Currently, the State
Council is developing regulations to provide further
guidance on how the new law will actually be
implemented. Until these regulations are published,
the true scope of the changes effected by this new
law may not be fully determined.
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December 17, 2009
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