A clearer road for insurers

To ensure the qualified management of insurance companies, the new law introduces qualifications and requirements on directors, supervisors and senior managers: they should have a record of good behaviour and detailed knowledge of insurance-related laws, and should meet other relevant qualifications to be set by the CIRC. In operation, insurance companies should also have established an internal compliance system, shall submit filings and materials to the CIRC, and report on the retaining and dismissal of service companies including accounting firms, and organisations that evaluate or verify assets. Insurers no longer have to give priority to Chinese institutions for their re-insurance needs – a change which is in compliance with obligations under the World Trade Organisation.

Finally, the new law includes a number of new provisions regarding the bankruptcy or liquidation of insurance companies in China. Besides setting new standards for solvency based on the difference between admitted assets and admitted liabilities, the law emphasises the measures that the CIRC can take against an insurance company which does not meet certain solvency standards. Where an insurance company goes bankrupt, wages of directors, supervisors and senior managers should be calculated at the average rate of the company's employees.

Property Insurance Contracts

Insurable interest

When it comes to insurable interest, the new law now differentiates the two main categories, life and property insurance. As before, for a life insurance contract, the insurant shall have an insurable interest in the insured person at the time the insurance contract is concluded. This may include employers, who have an insurable interest in their employees, although only the insured or close relatives may act as beneficiary.

For property, however, the insured shall have an insurable interest in the insurance object at the time the insurance contingency occurs. This change is closely related to the transfer of insurance objects: when an insurance object is transferred, the rights and obligations of the insured may be transferred without prior consent from the insurer.¹ The insured has an obligation to notify the insurer of the transfer, but, even if not notified, the insurer must nonetheless undertake to compensation except for contingencies that result from a prominent increase in the risks of the objects insured.

In the case of a prominent increase of the insurance risk, whether or not it involves a transfer, the insurer is now obligated to claim for additional insurance premiums or terminate the contract within 30 days; in the latter case, it must return the premiums paid for insurance after the date of termination.

Untrue representations

As under the old regime, the insurer has the right to terminate the insurance contract if the insured has concealed facts deliberately or has failed its obligations of disclosure due to gross negligence, as long as such mis-representations would be sufficient to affect the insurer's decision on whether or not to accept the insurance or to raise the insurance premium. However, the new law introduces time limits for the insurer to respond:

(i) The insurer must exercise its right to terminate the contract within 30 days from the date that it learns about its right to terminate; and

(ii) the insurer loses its right to terminate if the contract has been valid for more than two years, regardless of whether it knew of the mis-representations.

Standard Clauses and Exception Clauses

If the insurance contract refers to a Standard Clause, the insurer is obligated to enclose the same and explain it in the insurance policy. Moreover, a Standard Clause is void if it exempts the insurer from statutory obligations or aggregates the responsibility of the insured; or if it excludes legitimate rights of the insurant, the insured or the beneficiary. Where there is a dispute over the interpretation of a Standard Clause, reference must be made to the usual understanding of such a clause, or otherwise be made in favour of the insured and/or the beneficiary.

Where the insurance contract includes an Exception Clause, the insurer must make a reminder of this, which should be sufficiently obvious to attract the insurant's attention. It must also clarify the content of the exception either orally or in writing.

Limitations to notification obligations

While the new law reconfirms the obligation of the insurant, the insured or the beneficiary to timely notify the insurer upon their learning of the occurrence of an insured contingency, it limits the level to which an insurer will be exempt in case of a failure to notify on time. The insurer is only exempt from paying compensation for that part where the failure to notify, either deliberately or due to gross negligence, makes it difficult to determine the nature, cause and extent of damage of the insurance contingency. An exception is also made where the insurer has known or should have known about the occurrence of the insured contingency through other channels.

On the other hand, the new law also introduces a new obligation of notification on the insurer. Upon receiving a claim, where the insurer deems the evidence or materials to prove the nature and causes of the contingency and resulting losses insufficient, the insurer must make a one-off notification to the applicant to demand additional evidence and materials. This demand must be made as soon as possible, and in any case within 30 days of receiving the claim.² Another new obligation is that after concluding the verification, any Notice of Refusal must be issued within three days, or the insurer will be deemed to have waived his right to reject the claim.

Third party damages

The new law includes new provisions relating to the insurer's right of subrogation to recover damages from third parties, and damages of the insured against third parties.

Where the insurer is unable to exercise its right of subrogation against a third party to an indemnity claim, due to the insurant's deliberate acts or gross negligence, then the insurer may deduct or require the insurant to refund the corresponding amount.

On the other hand, for liability insurance, where the liability to compensate a third party for damages caused by the insured is confirmed, the insurer may directly pay compensation to the damaged third party upon the request of the insured, or upon a direct request from the third party. If the insurer is to pay compensation to the insured instead, it shall do so only after the insured has compensated the third party.

Legal Liabilities

Part Seven reorganises the legal liabilities for breach of the new law. While most of the standards and penalties remain the same, the order of the articles has been altered, and a number of articles are added to deal in more detail with violations. Among the most notable additions are the fines for the retaining of staff with insufficient qualifications (Rmb20,000–100,000) and for the illegal transfer, lease or lending out of a business operation permit (Rmb10,000–100,000). Also, special mention is made of foreign insurance institutions:

(1) Where a foreign insurer establishes a representative office without relevant approvals, it may be fined between Rmb50,000 and Rmb300,000, and the office shall be banned; and

(2) Where a foreign insurer's CIRC-approved representative offices engages in insurance operating activities, the CIRC shall order a correction, confiscate illegal gains and impose a fine of between one- and five-times the illegal gains, or if there are no illegal gains, a fine of between Rmb200,000 and Rmb1 million.

Conclusion

The amended Insurance Law does not represent a radical change to the established regulatory system for insurance companies and insurance operations in China, but it does provide confirmation of judicial practice, and introduces numerous refinements. To insurance companies already operating in China, the biggest impact could be more flexibility in investing funds, combined with stricter oversight from the CIRC. Moreover, property insurers will have to review their procedures to ensure compliance with some of the new provisions, such as on standard clauses and exception clauses, and on notification. For foreign insurers not yet operating in China, the amendments to the Insurance Law are a clear warning: go through the legal steps to establish legal operations, or the penalties will be severe.

Endnotes

1 Article 49; except when the insurance contract expressly requires prior consent from the insurer.

2 Or longer if agreed in the insurance contract.