Chinese Insurance Contracts: Law and Practice 2016028294, 9780415743280, 9781315813783

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C HIN E S E IN S U RA NCE CONTRACTS L AW A ND PRACTICE Z H E N J ING

LLOYD’S INSURANCE LAW LIBRARY Series Editors Robert Merkin Malcolm A. Clarke Systemic Risk and the Future of Insurance Regulation edited by Andromachi Georgosouli and Miriam Goldby (2015) Lloyd’s: Law and Practice Julian Burling (2013) The Law of Liability Insurance Malcolm A. Clarke (2013) Insurance Disputes Third Edition The Right Honourable the Lord Mance Iain Goldrein QC Robert Merkin (2011) Reinsuring Clauses Ozlem Gurses (2010) Insurance Law and the Financial Services Ombudsman Service Judith P. Summer (2010)

Good Faith and Insurance Contracts Third Edition Peter MacDonald Eggers Simon Picken QC Patrick Foss (2010) Directors’ and Officers’ Liability Insurance Adolfo Paolini Deepak Nambisan (2009) Reinsurance Law and Practice and the Law Barlow Lyde & Gilbert (2009) The Law of Insurance Contracts Malcolm A. Clarke (2009) Compendium of Insurance Law Robert Merkin Johanna Hjalmarsson (2007)

C HI NESE I NS U R A N C E C ONTRAC T S L AW A N D P R ACT ICE ZHEN JING (BA, MPHIL AND PHD) Senior Lecturer SCHOOL OF LAW Bangor University UK

First edition published 2017 by Informa Law from Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Informa Law from Routledge 711 Third Avenue, New York, NY 10017 Informa Law from Routledge is an imprint of the Taylor & Francis Group, an Informa business © 2017 Zhen Jing The right of Zhen Jing to be identified as author of this work has been asserted by her in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Whilst every effort has been made to ensure that the information contained in this book is correct, neither the author nor Informa Law can accept any responsibility for any errors or omissions or for any consequences arising therefrom. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Jing, Zhen (Lecturer in law) Title: Chinese insurance contracts : law and practice / by Zhen Jing. Description: Abingdon, Oxon [UK] ; New York : Routledge, 2017. | Series: Lloyd’s Insurance law library Identifiers: LCCN 2016028294 | ISBN 9780415743280 (hbk) | ISBN 9781315813783 (ebk) Subjects: LCSH: Insurance law—China. | Insurance policies—China. Classification: LCC KNQ998 .J56 2017 | DDC 346.51/086—dc23 LC record available at https://lccn.loc.gov/2016028294 ISBN: 978-0-415-74328-0 (hbk) ISBN: 978-1-315-81378-3 (ebk) Typeset in Plantin by Apex CoVantage, LLC

TA BL E OF C ON T EN T S

Preface Foreword Table of cases Table of legislation Table of judicial interpretations Table of regulations International conventions and principles

xiii xvii xix xxxix li liii lxi

CHAPTER 1 INTRODUCTION TO INSURANCE AND CHINA’S INSURANCE INDUSTRY 1.1 Introduction 1.2 The nature of insurance and insurance contracts 1.3 Classifications of insurance 1.4 The outline of this book 1.5 The history and development of China’s insurance industry 1.6 The top three insurance companies in China’s insurance market 1.7 The current insurance market in China 1.8 The further development of the insurance industry 1.9 Conclusion

1 1 2 3 7 9 17 19 23 26

CHAPTER 2 THE CHINESE LEGAL SYSTEM AND THE INSURANCE LAW 2.1 Introduction 2.2 Traditional underpinnings of Chinese law 2.3 A historical overview of the legal system 2.4 The legislative system 2.5 The judicial system 2.6 Insurance legislation in China 2.7 Conclusion

27 27 27 28 29 31 32 43

CHAPTER 3 THE REGULATION OF INSURANCE 3.1 Introduction 3.2 The statutory regulatory authority 3.3 The regulation on establishment of insurance companies 3.4 The regulation of corporate governance

45 45 46 49 54

v

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3.5 The regulation of insurance business 3.6 Regulation of insurance intermediaries 3.7 Regulation of Internet insurance 3.8 The protection of insurance consumers 3.9 The Insurance Association of China 3.10 Conclusion

59 85 97 101 105 106

CHAPTER 4 FORMATION OF AN INSURANCE CONTRACT 4.1 Introduction 4.2 General principles for making an insurance contract 4.3 The usual steps for making an insurance contract 4.4 The time when a contract is concluded 4.5 Offer made by the insurer 4.6 Online formation of an insurance contract 4.7 Agreement on essential terms of an insurance contract 4.8 Formality of conclusion of an insurance contract 4.9 The intermediary’s role in the formation of an insurance contract 4.10 Insurance documents 4.11 The effectiveness of the insurance contract 4.12 Legal elements for the validity of an insurance contract 4.13 Commencement of the insurer’s liability 4.14 Consideration 4.15 Some trouble spots in the process of formation of an insurance contract 4.16 Conclusion

107 107 108 109 117 118 118 125 129 129 130 132 133 135 137 137 145

CHAPTER 5 TERMS OF CONTRACTS AND CONSTRUCTION OF THE TERMS 5.1 Introduction 5.2 Terms of insurance contracts 5.3 Construction 5.4 Conclusion

147 147 147 154 158

CHAPTER 6 PREMIUMS 6.1 Introduction 6.2 Payment of premiums 6.3 Grace of payment 6.4 Payment of premiums and reinstatement of a life policy 6.5 Consequences of late or non-payment of premiums 6.6 Premiums cannot be demanded by legal action in life insurance 6.7 Modification of premiums during the insurance period 6.8 The return of premiums 6.9 Conclusion

159 159 159 163 164 165 165 166 166 169

CHAPTER 7 INSURABLE INTEREST 7.1 Introduction 7.2 The nature of the insurable interest in insurance law

171 171 172

vi

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7.3

Test of insurable interest – legally recognised interest and economic interest 7.4 Legal framework relating to insurable interests in China 7.5 Insurable interests in property insurance 7.6 Insurable interests in personal insurance 7.7 Insurer’s duty to check the existence of insurable interests at the time of the contract in life insurance 7.8 Conclusion

176 181 182 194 216 219

CHAPTER 8 THE INSURED’S DUTY OF DISCLOSURE AND REPRESENTATIONS221 8.1 Introduction 221 8.2 The concept of good faith in Chinese law 222 8.3 The statutory law relating to the doctrine of disclosure 223 8.4 The way of performing the duty 224 8.5 The scope of the duty of disclosure 236 8.6 The duty of disclosure is on the insured only 239 8.7 The time when the duty is to be performed 242 8.8 Materiality 246 8.9 Material facts 250 8.10 Remedies for breach of the duty 251 8.11 Restrictions on the insurer’s defence of non-disclosure 263 8.12 Conclusion 283 CHAPTER 9 THE INSURER’S PRE-CONTRACTUAL DUTY OF GOOD FAITH 9.1 Introduction 9.2 The insurers’ duty to explain the content of the contracts 9.3 The insurer’s duty to clearly explain the exemption clauses 9.4 The insurer’s duty not to mislead the insureds 9.5 Conclusion CHAPTER 10 INCREASE OF RISK DURING THE INSURANCE PERIOD 10.1 Introduction 10.2 The justification for the requirement of notification of an increase of risk 10.3 A material increase of risk 10.4 The way of performing the duty of notification 10.5 Is the duty of notification a statutory duty or a contractual duty? 10.6 Other factors activating the duty of notification 10.7 Remedies for the increase of risk 10.8 Consequences for breach of the duty of notification by the insured 10.9 Recommendations 10.10 Conclusion

vii

287 287 288 291 320 334 337 337 338 341 346 347 349 352 353 359 360

Table of CONTE NTS

CHAPTER 11 DOUBLE INSURANCE AND CONTRIBUTION 11.1 Introduction 11.2 Chinese laws relating to double insurance 11.3 Two types of double insurance – broad sense and narrow sense double insurance 11.4 Elements of double insurance 11.5 The scope of the application of double insurance 11.6 The insured’s duty to notify the insurers where there is double insurance 11.7 The doctrine of contribution in double insurance 11.8 The insured’s right to claim in double insurance 11.9 Rateable proportion clauses and other relevant clauses 11.10 Return of premiums 11.11 Conclusion

361 361 362

CHAPTER 12 CAUSATION 12.1 Introduction 12.2 The nature of the principle of proximate cause 12.3 The application of proximate cause in China 12.4 Further development of the traditional rules of the doctrine of proximate cause by Chinese courts – proportionate payment 12.5 The exception (or limitation) on the application of the doctrine of proximate cause 12.6 Burden of proof for proximate cause 12.7 Recommendations for incorporating the doctrine of proximate cause in Chinese law 12.8 Conclusion

387 387 388 389

CHAPTER 13 RISK PREVENTION AND LOSS MITIGATION 13.1 Introduction 13.2 Risk prevention 13.3 Loss mitigation 13.4 Conclusion

413 413 414 420 429

CHAPTER 14 THE MAKING OF A CLAIM 14.1 Introduction 14.2 The insured’s duty to notify the insurer of the happening of the insured event 14.3 The insured’s duty to provide evidence and information relating to the claim 14.4 Practical procedures for making a claim 14.5 The limitation period 14.6 Conclusion

431 431

CHAPTER 15 SETTLEMENT OF CLAIMS 15.1 Introduction

449 449

viii

363 365 369 375 377 378 382 383 385

406 407 409 412 412

431 437 444 444 447

Table of CON TE NTS

15.2 The insurer’s duty to pay valid claims in a timely manner 15.3 Compensatory damages for the insurer’s late payment of valid claims 15.4 Late payment of insurance proceeds under English law 15.5 Conclusion

449 456 467 475

CHAPTER 16 FRAUDULENT CLAIMS 16.1 Introduction 16.2 Statutory framework for insurance frauds 16.3 The types and effects of fraudulent claims 16.4 Fraudulent claims in life insurance 16.5 Criminal prosecutions 16.6 Criminal prosecution versus civil liability 16.7 Conclusion

477 477 477 479 486 487 489 491

CHAPTER 17 SUBROGATION 17.1 Introduction 17.2 The nature and origin of subrogation in insurance contract law 17.3 The legal framework relating to subrogation in China 17.4 The insurer’s subrogation rights against the third party 17.5 The insured cannot make a profit 17.6 Subrogation and assignment 17.7 Distribution of subrogation recoveries 17.8 Persons immune from subrogation action 17.9 The insured’s duties under subrogation 17.10 Contractual duties versus statutory duties under subrogation 17.11 The limitation period for subrogation 17.12 Conclusion

493 493 493 497 499 505 506 514 517 524 537 539 541

CHAPTER 18 MODIFICATION AND RESCISSION OF INSURANCE CONTRACTS 18.1 Introduction 18.2 Modification of an insurance contract 18.3 Rescission upon agreement between the parties 18.4 An insurance contract can be rescinded by the proposer 18.5 The return of the cash value of the policy where the proposer rescinds a contract 18.6 The proposer rescinds the contract during the cooling-off period 18.7 Can a proposer rescind a contract after the insured event has occurred? 18.8 Circumstances under which the insurer is entitled to rescind an insurance contract 18.9 Rescission of a marine insurance contract 18.10 Contracts which cannot be rescinded by any party 18.11 Consequences for rescission of an insurance contract 18.12 Conclusion

ix

543 543 543 545 546 553 553 553 554 559 559 561 562

Table of CONTE NTS

CHAPTER 19 PROPERTY INSURANCE 19.1 Introduction 19.2 Types of property insurance 19.3 Insurable interest in property insurance 19.4 Material facts in property insurance 19.5 The contents of a property policy must be explained by the insurer prior to entering into the contract 19.6 The assignment of the subject matter of insurance 19.7 The insured’s duties during the insurance period 19.8 Valued and unvalued policies 19.9 The insurer’s right of subrogation and the right to the damaged property 19.10 Risks covered and risks excluded in a property policy 19.11 Conclusion

563 563 563 565 565

CHAPTER 20 LIFE AND ACCIDENT INSURANCE 20.1 Introduction 20.2 Definition of personal insurance 20.3 Types of personal insurance 20.4 Parties in life insurance 20.5 Insurable interest in life insurance 20.6 Good faith in life insurance 20.7 Formation of a life insurance contract 20.8 The life insured’s consent as a condition precedent for the validity of a life policy 20.9 Suspension and reinstatement of a life insurance contract 20.10 Matters of beneficiaries in life insurance 20.11 The change of a beneficiary in life insurance 20.12 Whether the beneficiary’s name must be inserted into the policy 20.13 Circumstances under which insurance money is disposed as the life insured’s estate 20.14 The refund of the cash value of the policy 20.15 Whether the consent of the life insured or the beneficiary must be obtained where the proposer rescinds the contract 20.16 Whether a beneficiary should possess an insurable interest in the life insured 20.17 Consequences for the situation where the proposer or the beneficiary murders the life insured 20.18 The life insured commits suicide 20.19 Prohibition of insurance on a person without capacity for civil acts 20.20 Payment of premiums for personal insurance 20.21 Assignment of life policies 20.22 The transfer of the beneficial right in life insurance 20.23 Subrogation does not apply to life insurance 20.24 Conclusion

579 579 579 580 581 582 583 588

x

567 568 573 575 576 576 577

593 599 603 605 607 611 622 622 624 626 628 630 630 632 634 635 638

Table of CON TE NTS

CHAPTER 21 LIABILITY INSURANCE 21.1 Introduction 21.2 Types of liability insurance 21.3 Statutory law governing liability insurance 21.4 The insured’s legal liability to the third party 21.5 The insurer’s liability to the insured 21.6 Legal force of settlement agreements 21.7 The prior discharge of the insured’s liability to the third party 21.8 The insurer’s direct payment to the third party 21.9 The third party’s right to sue the insurer for indemnity payments 21.10 The insurer’s liability for other costs 21.11 The insurer’s right of participation and duty of defending the insured 21.12 Conclusion

639 639 639 642 643 645 648 653 655 656 660

CHAPTER 22 MOTOR VEHICLE INSURANCE 22.1 Introduction 22.2 Compulsory motor insurance 22.3 The Road Traffic Accident Social Relief Fund 22.4 Non-compulsory commercial insurance 22.5 Conclusion

665 665 666 692 695 704

CHAPTER 23 REINSURANCE 23.1 Introduction 23.2 China’s reinsurance market 23.3 Legal framework for reinsurance 23.4 Definition and the nature of reinsurance 23.5 Functions of reinsurance 23.6 Types of reinsurance 23.7 Parties to a reinsurance contract 23.8 Contents of a reinsurance contract 23.9 Standard clauses in a reinsurance contract 23.10 Incorporation of terms from the original insurance contract 23.11 Rights and liabilities of the parties in a reinsurance contract 23.12 Scope of reinsurance business 23.13 Reinsurance and co-insurance 23.14 Principles in making a reinsurance contract 23.15 Regulations on reinsurance business 23.16 Conclusion

707 707 708 709 710 712 713 717 720 721 723 723 724 725 728 732 736

CHAPTER 24 MARINE INSURANCE 24.1 Introduction 24.2 Nature of marine insurance 24.3 Formation of the marine insurance contract 24.4 Obligations and liabilities of the insurer in marine insurance 24.5 Exclusions of the insurer’s liability

737 737 738 740 741 744

xi

661 663

Table of CONTE NTS

24.6 Obligations of the insured 24.7 Utmost good faith in marine insurance 24.8 Warranty in marine insurance 24.9 Insurable interests in marine insurance 24.10 Subrogation in marine insurance 24.11 Limitation period for actions 24.12 Doctrine of abandonment 24.13 Assignment of a policy in marine insurance 24.14 Double insurance in marine insurance 24.15 Conclusion

744 745 752 759 766 771 775 780 785 785

Appendix 1  The Insurance Law of the People’s Republic of China Appendix 2  The Maritime Code of the People’s Republic of China Index

787 823 833

xii

P R E FACE

The modern insurance industry and insurance legislation have a relatively short history in China. The first comprehensive insurance legislation since the foundation of the People’s Republic of China in 1949 was enacted in 1995. The Insurance Law 1995, consisting of both insurance contract law and insurance regulations, was amended in 2002, 2009 and 2015. This book focuses on insurance contract law. Since 1978, when the economic reform and the open-door policy were initiated, China’s economy has been growing rapidly. This creates a favourable environment and conditions for the insurance industry to develop. As a result, China’s insurance industry has been growing very rapidly. An open and vigorous modern insurance market system has been formed. The Insurance Law has, since its enactment, played a very important role in governing the activities of the insurers and the insureds, and in regulating the behaviour of the participants in the insurance market. To keep pace with the fast growth of the insurance industry, to cope with new circumstances and to attempt to strike the balance between the rights and obligations of the insurers and the insureds, the Insurance Law has been amended three times, and another proposed amendment was released for comment on 14 October 2015. This book is intended to provide a systematic and comprehensive analysis of Chinese insurance contract law and practice, to present a critical examination of the principles, doctrines and concepts of insurance contract law in a fairly conventional doctrinal way, and to explore the ways in which these rules of law are applied in industrial and judicial practice. In addition, it also examines some special types of insurance contract, such as those for life insurance, property insurance, liability insurance, motor vehicle insurance, reinsurance and marine insurance. While undertaking the task of examining and analysing the provisions of the Insurance Law and their application, deficiencies and shortcomings of the law and practice in some areas or aspects are also identified and thus critically analysed; meanwhile, suggestions and recommendations on how to improve the Insurance Law are proposed. The Insurance Law was first drafted in 1995 by taking references from many other jurisdictions; it has incorporated major internationally accepted principles regarding insurance contracts. Comparative references will be made at the relevant points in this book to the rules of law in England and Australia, as many insurance principles such as utmost good faith, subrogation, etc. originated from English common law. The Australian Insurance Contracts Act 1984 codifies the common law and practice and mitigates the harshness of the common law to the insureds in some areas, and is regarded as a model for insurance law reform in England. Approaches xiii

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in some other jurisdictions, such as Germany and the US, are also referred to, where appropriate and necessary. By taking a comparative approach, the Chinese law will be better presented and the audience will be able to view the Chinese law from a broader perspective so as to facilitate a better understanding and evaluation of the complex principles of the Chinese Insurance Law. However, the nature and scope of this book limit the selection of comparative law materials, so it is not intended to make comparative references in every aspect of the insurance contract law. The principles and rules of insurance contract law in the current Chinese legislation are analysed with judicial interpretations and case decisions of Chinese courts. The examination of judicial materials is important in the study of Chinese law, as the legal doctrines and rules are construed and applied by courts. The Supreme People’s Court of China has so far enacted three sets of Interpretations on Certain Issues Concerning the Application of the Insurance Law. These Interpretations have legal force and are examined in this book. Some High People’s Courts (the HPC) at provincial level have also published guidelines for trying insurance cases which are guiding, but not binding, the lower courts. The HPC’s guidelines are discussed where necessary to help with the explanation of the provisions of the Insurance Law. This book is intended primarily for academics, researchers, legislators, students and practitioners both in China and in other countries, who are interested in Chinese law and practice. Some western academics and researchers are keen to gain knowledge and understanding of Chinese insurance law, while Chinese academics, researchers and law reformers are equally keen to gain knowledge and understanding of insurance law in other jurisdictions. Moreover, an increasing number of foreign insurance companies have opened their businesses in China; they are required to conduct business in accordance with Chinese insurance law, and thus they are keen to understand that law. There has so far been no such book on systematic analysis of Chinese insurance contract law in the English language which shows a comprehensive picture of the law in comparison with some western counterparts. I am indebted to many people who have offered me support and help in one way or another for this book; first, I would like to thank the reviewers for reviewing the proposal for this book and for their wholehearted support for this project. I am grateful to Professor Noel Thompson (Swansea University, UK) who supervised my MPhil study on the topic of China’s insurance history and development, and to the late Professor John Adams (Queen Mary, London University, UK) who supervised my PhD study on the topic of insurance contract law, for their effective supervision and guidance for my studies. I owe special gratitude to Professor Rob Merkin QC (Exeter University, UK) for his strong support and encouragement. Professor Merkin has been a tremendous source of inspiration to me during my work, and he kindly agreed to write the foreword for this book. My thanks go to Bangor Law School for providing me with a platform for writing this book. I am grateful to Professor Dermot Cahill (Dean of the Bangor Law School) for his support and encouragement for this book. I would like to express my gratitude to Mrs Mairwen Owen (Law Librarian) for her great help in getting me some books and papers in a timely manner. I am grateful to Professor Ming Zhong (Shanghai University of Finance and Economics) and Mr Li Gong (Manager of the People’s Insurance Company of xiv

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China Shenzhen Branch) for their kindness in providing me with some materials on reinsurance. I am grateful to the staff of the publisher, Informa Law from Routledge, especially to Caroline Church, Jackie Day and Marie Roberts, who have shown great patience and provided significant help in the editing and publishing of this book. My ultimate gratitude goes to my family: my parents, my husband Liangfeng Dong, my son Jian Dong and my brothers and sister, who have given me endless love, support and encouragement. The materials used in this book are up to date as of June 2016. Zhen Jing 6 July 2016

xv

F OR E WOR D

This is the first systematic text written in English on the law of insurance in China. China has a long history of maritime trade, but it was not until 1992 that a Maritime Code was adopted, including provisions on marine insurance contracts. In 1995 China adopted an Insurance Law governing non-marine policies, but with different principles at various points. The system thus resembles the position in Australia under the Insurance Contracts Act 1984 (Cth) and the Marine Insurance Act 1909 (Cth), with entirely separate marine and non-marine regimes. That division never really existed in England, as early marine principles were simply extended to other forms of insurance when they developed, and to the extent that there were practical differences they have mainly been eliminated after the passing of the Insurance Act 2015 (UK). Chinese law nevertheless draws heavily on common law jurisdictions for its substantive provisions, as well as adopting some civil law – particularly Germanic – principles, both of law and of judicial freedom from precedent. The outcome is labyrinthine. Dr Zhen Jing has in this volume adopted a chapter structure familiar to common law readers, analysing the regulatory structure, tracing the contract through from formation to claim and then considering specific forms of insurance. At every point, the analysis discusses the principles of the codes in detail, referring where appropriate to decided cases and also drawing attention to external influences. Readers are guided through the complexities of Chinese law in a clear and comprehensive fashion, and – significantly – in a manner that is accessible and meaningful for those used to a common law system. It is a superb and comprehensive work, of immense value to practitioners and students alike. Anyone advising on Chinese law will use this as a text of first reference, and those with a general interest either in insurance law or in the Chinese legal system will benefit from its pages. Dr Zhen Jing by this work has confirmed her credentials as a leading international scholar on insurance law, and we should be immensely grateful for her achievement. Professor Rob Merkin QC 25 June 2016

xvii

TA BL E OF   CA S ES

Australia Albion Insurance Co. v Government Insurance Office of New South Wales (1969) 121 CLR 342������������������������������������������������������������������������������������������������������� 361 Ayoub v Lombard Insurance Co. (Aust) Pty Ltd (1989) 166 CLR 606������������������������������� 249 Dalgety Co. Ltd v Australian Mutual Provident Society [1908] VLR 481 at 499������������������ 281 Dr Gregory Moore v The National Mutual Life Association of Australasia Ltd [2011] NSWSC 416 at [71]��������������������������������������������������������������������������������������������� 281 Hartford Fire Insurance Co. v Hurse [1962] WAR 1987 at 191������������������������������������������ 494 Hungerfords v Walker [1989] 171 CCLR 125����������������������������������������������������������������� 473 Mercantile Mutual Insurance (Australia) Ltd v Gibbs [2001] WASCA 271������������������������� 244 NTG Victory Australia Ltd v Hudson [2003] WASCA 291 at [5] (Steytler J), [32] (Parker J)������������������������������������������������������������������������������������������������������ 281 Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182������������������ 281 State Government insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228������������������������������������������������������������������������������������������������������� 536 Toikan International Insurance Broking v Plasteel Windows Australian Pty Ltd (1989) 94 ALR 435���������������������������������������������������������������������������������������������������������� 249 Trident General Insurance Co. Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107���������������� 720 Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office [1997] NTSC 467����������������������������������������������������������������������������������������������������������� 473

Canada Constitution Insurance v Kosmopoulos (1987) 34 DLR (4th) 208�������������������������������������� 178 Constitution Insurance v Kosmopoulos (1987) 34 DLR (4th) 208�������������������������������177, 180

China A Beneficiary v Guangzhou Insurance Company, W. F. Hu, The Guidance of Claim Settlement (Procuratorate Press of China 1993) p. 51������������������������������������� 584 A Trade Company v the Insurer; the China Life Insurance Company Ltd, Insurance Law and Analysis of Cases (China Financial Press 2010) p. 92������������������� 544 American Seller B v PICC Insurance Co, Tongjiang Su and Chunling Wang, Practice and Law of Marine Insurance (Dalian Maritime Law Press 2012) p. 59��������� 760 Anshun Property Development Co. v PICC Property Co. Dangyang Branch, Zhan Hao, The New Insurance Law – Interpretation on Practice Highlights and Case Analysis (Law Press China 2010) p. 41������������������������������������������������������������������������������� 144

xix

Table of Cases

Baishichang Co. Ltd v China Property Insurance Beijing Branch, Tianjin High People’s Court [2005] No. 160������������������������������������������������������������������������������������������� 774 Beijing Lu Gou Bridge Zhi Hong Concrete Company v People’s Insurance Company of China (Property), Nan Le Branch, Beijing City Feng Tai District People’s Court, Civil Judgment (2009) No. 891����������������������������������������������������������������������������� 461 Beijing Yuan Da Machinery Construction Company v China Property Insurance Company Ltd Beijing Branch, Jianxun Liu, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press China 2010) p. 230������������������������������� 483 Cai Shigen, etc. v Xiamen Life Insurance Co. [1993] Selected Cases of the People’s Court of China, vol. 2, p. 132�������������������������������������������������������������������������������� 612 Cai Shigen, etc. v Xiamen Life Insurance Co. [1993], Selected Cases of the People’s Court of China vol. 2, p. 132����������������������������������������������������������������������������������� 608 Chang Cheng Life Insurance Company Ltd. Henan Branch v Mrs Shan Wang, the Intermediate People’s Court, Zheng Zhou City, Henan Province, Civil Court Judgment (2009) No. 786������������������������������������������������������������������� 299 Changsha Arts Co. Ltd v XX Insurance Co. Ltd, Shanghai Branch the Maritime Court of Shanghai, Civil Verdict (2011) No. 1298�������������������������������������������������� 746 Cheng Yang Transport Company v Pingan Insurance Company, Qingdao Shinan People’s Court, Court Judgment (2010) No. 20243�����������������������������������������451, 454 China Industry and Commercial Bank Guangzhou City Dade Lu Branch v Hua An Property Insurance Company Guangdong Branch, the Intermediate People’s Court, Guangzhou City, Guangdong Province, Civil Court Judgment (2006) No. 89��������������������������������������������������������������������������������������� 446 China Life Insurance Company Ltd Jixi Branch v Mrs Xiuchun Shao, the Intermediate People’s Court, Xuancheng City, Anhui Province, Civil Court Judgment (2007) No. 23��������������������������������������������������������������������� 317 China Life Insurance Company Ltd v Chen Jinmei, the Intermediate People’s Court, Sanya City, Hainan Province, Civil Court Judgment (2007) No. 8�������������������������� 307 China Life Insurance Company Ltd. Chong Qing Branch v Mr Xiang Hong, the First Intermediate People’s Court, Chong Qing City, Civil Court Judgment (2009) No. 2588����������������������������������������������������������������������������������� 316 China Pacific Property Insurance Company, Dongying Branch v Zhong Xiohai, Dongying City, Shandong Province, Intermediate People’s Court, Civil Judgment (2005) No. 62������������������������������������������������������������������������������� 463 China Pingan Property Insurance Company Fanyu Branch v Mr Pan Jingxing, Guangzhou City, Guangdong Province, Intermediate People’s Court, Civil Judgment (2006) No. 1910��������������������������������������������������������������������������� 463 China Pingan Property Insurance Company, Foushan City Nanhai Branch v Mr Gue Behua, Foushan City, Guangdong Province, Intermediate People’s Court (2006), civil case final judgment report No. 53��������������������������������������������� 520 China Property Insurance Jiaozuo Branch v PICC Property Insurance Wuhai Branch (2008), Zibin Miao, Judicial recognition of double insurance,

accessed in April 2016������������������������������������������������������������������������������������������ 369 Chongqing Wanzhou Rural Credit Co-operatives v China Pacific Property Insurance Company Ltd, the Second Intermediate People’s Court, Chongqing City, Civil Court Judgment (2006) No. 547����������������������������������������� 418 Company A v PICC (2000), Law Department of Ping An Insurance Company of China, Insurance Contract Law – Case Studies, (Qing Hua University Press 2006) p. 65�������������������������������������������������������������������������������������������������� 145

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Cui Long v Ping An Life Insurance Company of China, Beijing Branch, Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 570����������������������������������������������������������������������������� 637 Dalian International Cooperate Group v XX Insurance Co. Ltd (1992) Peng N. Wang, Abstracts and Reviews of Certain Chinese Marine Insurance Cases (Dalian Maritime University Press 2003) p. 104����������������������������� 740 Dong Qin v China Life Insurance Beijing Branch (2007), J. X. Liu, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 479����������������� 608 Dong Qin v China Life Insurance Beijing Branch (2007); J. X. Liu, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 479����������������� 613 Energy Co. & Transport Co. v China Property Insurance Co, 2005, Hao Zhan et al., Insurance Law – Interpretations on Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 58����������������������������������������������������������� 404 Feng Yaoshun v Guangda Yongming Life Insurance, the Supreme People’s Court Announcement (2007) No. 11������������������������������������������������������������������������������� 637 Fuzhou Minsheng Sand & Stone Co. Ltd v PICC Fujian Branch, Yuhua Zhou, The Latest Insurance Law and Doctrines Cases, Materials and Problems (Law Press China 2008) p. 456����������������������������������������������������������������������������� 760 German X Insurance Co. v Lianhe Development Co, the Chinese Foreign-related Commercial and Maritime Trial website accessed on 16 December 2011����������������������������������������������������������� 762 Guangdong Fuhong Oil Products Ltd v China Ping An Property Insurance Company Ltd, Shenzhen Branch, Guangzhou Maritime Court, Civil Judgment (2005) No. 211����������������������������������������������������������������������������� 463 Guangdong Wenshi Food Company v People’s Property Insurance Company of China Guangzgou Branch, Guangzhou Maritime Court, Civil Judgment (2005) No. 103����������������������������������������������������������������������������������������������������� 454 Guilan Han v Ping An Life Insurance Co, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 24������������������������������������������������������������� 408 Hainan Hongye Wool Textile Company v Hong Kong Minan Insurance Company, Haikou Branch, Haikou City Intermediate People’s Court, Civil Judgment (2005) No. 2��������������������������������������������������������������������������������������������������������� 458 Helong Jiang Branch of Insurer B v Liaoning Branch of Insurer A, the Intermediate People’s Court of Shenyang, Liaoning Province, Civil Court Judgment (2010) No. 646����������������������������������������������������������������������������������������������724, 728 Hezhong Life insurance Company v Mr Zhongqi Li, the Intermediate People’s Court, Ping Ding Shan City, Henan Province, Civil Court Judgment (2009) No. 261��������� 298 Huai County Anshun Transport Company Ltd v China Pacific Insurance Company Bangbu Ventral Branch, the People’s Court, Xiacheng District, Hangzhou City, Zhejiang Province, Civil Court Judgment (2010) No. 626�������������� 655 Huatai Insurance Company v Ms Li Lan, Liu Jianxun, Insurance Cases and Analysis (Law Press China 2007) p. 184����������������������������������������������������������� 500 Insurance Company v Construction Team������������������������������������������������������������������������� 510 Insurer A v Insurer B Shenzhen Intermediate Court, Guangdong Province, Civil Court Judgment (2009) No. 5����������������������������������������������������������������������� 725 Japan West Valley Commercial Corporation v PICC Qingdao Branch Qingdao Maritime Court (2000) No. 207���������������������������������������������������������������������������� 749 Japan West Valley Commercial Corporation v PICC Qingdao Branch, Shandong High Court (2002) No. 45�������������������������������������������������������������������� 749

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Japan West Valley Commercial Corporation v PICC Qingdao Branch, Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 451���������������������������������������������������������� 749 Jiangsu Oversea Enterprise Group v Fengtai Insurance (Asia) Co. Ltd, Shanghai Branch, Ying Xinlong, Selected Maritime Cases of Shanghai Maritime Court China (Law Press China) p. 150������������������������������������������������������������������� 747 Jiqing v the PICC Life Insurance, Chen Xuqin, “Some thought arising from a life insurance claim for a huge sum” (1997) 2 Chinese Legal Sciences 114�������������� 197 Ke Zunxiang v China Life Insurance Co. Keshen Branch, Selected cases of the People’s Courts [2005] vol. 2����������������������������������������������������������������������������������� 371 Lei Jun Yan v Behai Property Insurance Company Ltd, Xuchang Branch, Xuchang City, Henan Province, Intermediate People’s Court, Judgment on 10 May 2010��������������������������������������������������������������������������������������������������� 455 Li Sijia v China Life Insurance Company, the Supreme People’s Court Announcement (2006) No. 7��������������������������������������������������������������������������������� 637 Lu v XY Insurance Life Company, Jing Wang, “Discussion on the Proposer’s Rescission Right in an altruistic insurance contract” (2013) 2 Law Application������������������������������������������������������������������������������������������������� 623 Lu v XY Insurance Life Company, Jing Wang, Discussion on the Proposer’s Rescission Right in an altruistic insurance contract [2013] 2 Law Adaption������������������� 548 Min Ye v Property Insurance Beijing Branch, Jianxun Liu, Typical Cases and Adjudgement Consideration of Insurance Law (Law Press China 2012) p. 121������� 405 Minfeng Special Paper Company Ltd v Gerling Allgememeine Versicherungs AG, Shanghai Maritime Court, Civil Judgment (2004) No. 91��������������������������������������� 463 Minghui Li v Ancheng Property Insurance Company Beijing branch, Jing Wang, Insurance Cases, Rules of Judgment and Application of Laws (People’s Court Press 2013) p. 70���������������������������������������������������������������������������������������� 190 Miss Li v the Life Insurance Company of Xichang City (2003), Li Zongjian, Insurance Case Book (China Modern Economic Publishing House 2007) p. 63��������� 203 Mr and Mrs Gao v China Life Insurance Co, Yuhao Zhou, The Latest Insurance Law and Doctrines: Cases, Materials, and Practice (Law Press China 2008) p. 21��������� 195 Mr Bao v the property Insurance Company, Xiaoming Xi, Interpretation and Application of the Provisions of The Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 186������������������������������� 485 Mr Cai v Ping An Insurance Co. of China, Zhan Hao, Insurance Law – Interpretations on Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 90����������������������������������������������������������� 187 Mr Chao Li v China Ping An Life Insurance Company Ltd Hainan Branch, the Intermediate People’s Court, Haikou City, Hainan Province, Civil Court Judgment (2009) No. 75��������������������������������������������������������������������� 258 Mr Chen v China Ping An Life Insurance Company Ltd Bangbu Branch, accessed on 24 January 2015��������������������������������������������� 229 Mr Chen v Pingan Life Insurance Company, Nanping Branch, the China Pingan Insurance Co. Ltd Legal and Compliance Dept, Insurance Contract Law – Cases Commentary, (Qinghua University Press 2006) p.480�������������� 636 Mr Cheng v the Insurance Company, Xiaoming Xi, Interpretation and Application of the Provisions of The Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 423��������������������������������������������������������� 653 Mr Dong v the Insurance Company, the People’s Court, Gulou District, Nanjing City, Jiangsu Province, Civil Court Judgment (2011) No. 0117������������������ 496

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Mr Dong v the Insurance Company; the People’s Court, Zhaoyang County, Liaoning Province, Civil Court Judgment (2011) No. 687�������������������������������������� 653 Mr Du v the Insurance Company, the People’s Court, Yaobei District, Baicheng City, Jilin Province, Civil Court Judgment (2010) No. 297����������������������� 374 Mr En Wu v the Property Insurance Company Beijing Branch, J. X. Liu, Typical Cases and Adjudgement Consideration of Insurance Law (Law Press China 2012) p. 150����������������������������������������������������������������������������������������������� 315 Mr Fan v Pacific Ocean Life Insurance Co, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 30������������������������������������������������������������� 396 Mr Fang v the Insurance Company, the People’s Court, Jia County, Henan Province, Civil Court Judgement (2011) No. 92������������������������������������������ 408 Mr Feng Liao v Ping An Insurance Company Ltd Shenzhen Branch, Baoshi Wang, The Property Insurance Law – Legal Interpretation and Cases Analysis (Intellectual Property Press 2009) p. 78�������������������������������������341, 342 Mr Gao v Pingan Life Insurance Co. Shanghai Branch, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 86��������������������������������� 137 Mr Ge v the Insurance Company, the Intermediate People’s Court, Hangzhou City, Zhejing, Civil Court Judgment (2010) No. 2358���������������������������� 301 Mr Guo v the Insurance Company, Jiu Quan City, Gansu Province, Fuzhou District People’s Court, Civil Judgment (2010) No. 166����������������������������� 453 Mr Guo v the Life Insurance Company, the Intermediate People’s Court, Yiyang City, Hunan Province, Civil Court Judgment (2009) No. 53������������������������ 291 Mr Guo v the Property Insurance Company Beijing Branch, Jianxun Liu, Typical Cases and Adjudgement Consideration of Insurance Law (Law Press China 2012) p. 317����������������������������������������������������������������������������� 433 Mr He v the Property Insurance Company, Haiyu Bai, Introduction of Insurance Law Cases and Analysis (Law Press China 2013) p. 91������������������������������ 416 Mr Hong v the Life Insurance Company Beijing Branch, Jianxun Liu, Typical Cases and Adjudgement Consideration of Insurance Law (Law Press China 2012) p. 351����������������������������������������������������������������������������� 480 Mr Hu v Life Insurance Company, Li Zongjian, Insurance Case Book, (China Modern Economic Publishing House 2007) p. 132������������������������������������� 199 Mr Huang Chen and Mr Tao Chen v Prudential Life Insurance Company Ltd Guangdong Branch, the Intermediate People’s Court, Guangzhou City, Guangdong Province, Civil Court Judgment (2009) No. 4198�������������������������������� 267 Mr Jiang v China Pacific Insurance Company Shanghai Branch, Xiaoming Xi, Interpretation and Application of the Provisions of The Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 149�������������� 434 Mr Jiang v the Life Insurance Company Dian Jiang Branch, the third Intermediate People’s Court, Chongqing City, Civil Court Judgment (2005) No. 408������������������ 290 Mr Jiangang Guo v China Life Insurance Company Ltd Hebi Branch, the Intermediate People’s Court, Hebi City, Henan Province, Civil Court Judgment (2010) No. 81��������������������������������������������������������������������� 267 Mr Jianjun Chen v China Life Insurance Co, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 33����������������������������������������������������� 396 Mr Jianxiang Li v China Life Insurance Company Shangli County Branch, the Intermediate People’s Court, Pingxiang City, Jiangxi Province, Civil Court Judgment (2007) No. 918������������������������������������������������������������������� 269 Mr Jianxiang Li v China Life Insurance Company Shangli County Branch, the Intermediate People’s Court, Pingxiang City, Jiangxi Province, Civil Court Judgment (2009) No. 75��������������������������������������������������������������������� 267

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Mr Jin v China Life Insurance Company Ltd Tongxiang Branch, the Intermediate People’s Court, Jia Xing City, Zhejiang Province, Civil Court Judgment (2009) No. 115������������������������������������������������������������������������������������� 299 Mr Jizhong Meng v China Property Insurance Company Beijing Branch, Jianxun Liu, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press China 2010) p. 447����������������������������������������������������������������������������� 661 Mr Ju v the Insurance Company, the People’s court, Xuanwu District, Nanjing City, Xian Xie, One Hundred Selected Insurance Cases, (Law Press China 2012) p. 79������������������������������������������������������������������������������� 308 Mr Li Huang v China Life Insurance Company, Court Selected Cases, vol. 4, published by People’s Court Press in 2001��������������������������������������������������� 231 Mr Li v China Life Insurance Company Beijing Branch, Jianxun Liu, Resolution to the Classical and Difficult Cases of Insurance Law (Law Press China 2010) p. 116����������������������������������������������������������������������������� 156 Mr Li v Life Insurance Co. Ltd, accessed 10 June 2014���������������������������������������������������������� 123 Mr Li v the Life Insurance Company, the People’s Court, City District, Chang Zhi City, Shanxi Province, Civil Court Judgment (2009) No. 445���������������� 328 Mr Li v the Life Insurance Company, Y. L Dai and G. Q. Chen, Lawyers Show You How to Make a Lawsuit: Insurance Disputes and Cases (China Economic Publishing House 2013) p. 9������������������������������������������������������ 276 Mr Li Xian v PICC property Insurance Company, Dong Guan Branch, Dong Guan People’s Court (trial court) civil cases report No. 1874 (2006)������������� 350 Mr Li Xian v PICC property Insurance Company, Dong Guan Middle People’s Court (appeal court) civil cases final judgment report No. 558 (2006)������� 350 Mr Liang v the Insurance Company Taizhou Central Branch, the People’s Court, Jiaojiang District, Taizhou City, Zhejiang Province, Civil Court Judgment (2012) No. 2246����������������������������������������������������������������������������������� 300 Mr Liang v the Insurance Company, the Intermediate People’s Court, Zhengzhou City, Henan Province, Civil Court Judgment (2009) No. 562���������������� 301 Mr Liao v the Insurance Company; the Intermediate People’s Court, Yancheng City, Jiangsu Province, Civil Court Judgment (2012) No. 741����������������� 497 Mr Liu v Life Insurance Co, the People’s Court of Xingqing District, Yinchuan City, Ningxia Autonomous Region, Civil Court Judgment (2009) No. 312����������������������������������������������������������������������������������������������������� 585 Mr Liu v Life Insurance Company, Jing Wang, “Discussion on the Proposer’s Rescission Right in an altruistic insurance contract” [2013] 2 Law Adaption 15–22������������������������������������������������������������������������������������������ 547 Mr Liu v Property Insurance Co, Haichun Yu and Chunyan Fu, New Insurance Law and Cases Review (Foreign Economic and Trade University Press 2009) p. 242���������������������������������������������������������������������� 377 Mr Liu v the Insurance Company; the Intermediate People’s Court, Shenyang City, Liaoning Province, Civil Court Judgment (2012) No. 38����������648, 678 Mr Liu v the Life Insurance Company (2004), Haichun Yu and Chunyan Fu, Analysis of Insurance Cases (University of International Business and Economics Press 2009) p. 189������������������������������������������������������������������������������� 635 Mr Liu v the Life Insurance Company, the People’s Court, Xingqing District, Yinchuan City, Ningxia Autonomous Region, Civil Court Judgment (2009) No. 312����������������������������������������������������������������������������������������������������� 237

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Mr Luo v the Property Insurance Company, Xiaoming Xi, Interpretation and Application of the Provisions of The Insurance Law of the People’s Republic of China (China Legal Publishing House 2010)p. 155���������������������������������������������������������� 439 Mr Ma v People’s Insurance Company of China Yizheng Branch, the People’s Court, Yizheng City, Jiangsu Province, Civil Court Judgment (2011) No. 228�������������������� 657 Mr Nie v the Insurance Company; the Intermediate People’s Court, Huizhou City, Guangdong Province, Civil Court Judgment (2009) No. 168������������ 300 Mr Qi v the Property Insurance Company Beijing Branch, Jianxun Liu, Typical Cases and Adjudgement Consideration of Insurance Law (Law Press China 2012) p. 383����������������������������������������������������������������������������� 653 Mr Shen v the Property Insurance Company, China Insurance Newspaper, 29 May 2014 ( accessed in January 2016)���������������������������������������������������������������� 482 Mr Tian v the Life Insurance Company, Xiaoming Xi, Understanding and Application of the Supreme People’s Court Second Interpretation on Certain Questions Concerning the Application of The Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 204����������������������������� 276 Mr Wang Lianshun v Yingshun Branch of China Life Insurance Company, Yearly Report of the Supreme People’s Court of China 2001 (Press of People’s Court 2003)������������������������������������������������������������������������������ 210 Mr Wang v Pingan Insurance Company, Li Zongjian, Insurance Case Book (China Modern Economic Publishing House 2007) pp. 37–39������������������������������� 594 Mr Wang v the Insurance Company, the People’s Court, Shuangliu County, Sichuan Province, Civil Court Judgment (2010) No. 2742������������������������������������� 374 Mr Wang v the Insurance Company, X. M. Xi, Understanding and Application of the Provisions in relation to Insurance Contracts of The Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 236�������������� 300 Mr Wang v the Insurance Company, Xiaoming Xi, Interpretation and Application of the Provisions of The Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 185��������������������������������������������������������� 485 Mr Wang v the Life Insurance Company, the People’s Court, Jiang Gan District, Hangzhou City, Zhejiang, Civil Court Judgment (2010) No. 1594�������������������������� 312 Mr Wang v the Life Insurance Company, Zhi Hua Song, The Insurance Law Review, vol. 5, 2013, Law Press China, p. 152�������������������������������������������������������������������� 282 Mr Wang v the Life Insurer, China Life Insurance Company Ltd, Insurance Law and Analysis of Cases, (China Financial Press 2010) p. 97���������������������������������������� 545 Mr Wang v the Property Insurance Company, Junyan Zhang, Insurance Law: Guidance on Difficult Points (China Legal Publishing House 2007) p.150����������������� 429 Mr Wang v the Property Insurance Company, Yulong Dai and Guoqiang Chen, Big Lawyers Show You How to Win Insurance Disputes Cases (China Economic Publishing House 2014) p. 140�������������������������������������������������� 428 Mr Wang v X Life Insurance Company, Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 548������������� 629 Mr Wei v A Life Insurance Company, Qian Huo, China Insurance Newspaper, 31 January 2013 accessed in June 2014���������������������������� 282 Mr Wei v Ping An Life Insurance Co. (2009) accessed 15����������������������������������������������������������������������������������������������������������� 613 Mr Wu v A Life Insurance Company in Shanghai, the People’s Court, Huangpu District, Shanghai City, Civil Court Judgment (2009) No. 1846�������������� 290

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Mr Wu v the Life Insurance Company, the People’s Court, Yuexiu District, Guangzhou City, Guangdong Province, Civil Court Judgment (2010) No. 1929������ 439 Mr Wu v X Insurance Company, Xiaoming Xi, The Insurance Law of the PRC – Understanding and Adaptation of the Provisions (China Legal Publication House 2010) p. 328���������������������������������������������������������������������������� 572 Mr Xiang v Life Insurance Co, Liyan Li, Guidance on Insurance Law and Analysis of Difficult Insurance Cases (National Defence Industry Press 2007) p. 37���� 398 Mr Xing v the Insurance Company, the Intermediate People’s Court, Juijiang City, Jiangxi Province, Civil Court Judgment (2012) No. 618��������������������� 652 Mr Xu v Life Insurance Company, Zongjian Li, Insurance Case Book (China Modern Economic Publishing House 2007) p. 208������������������������������������� 217 Mr Xu v the Insurance Company, the People’s Court, Bayu Quan District, Yingko City, Liaoning Province, Civil Court Judgment (2012) No. 00594��������������� 650 Mr Xu v the Life Insurance Company������������������������������������������������������������������������������ 214 Mr Xu v the Life Insurance Company, B. X. Jiang, Insurance Disputes (Law Press China 2014) p. 223����������������������������������������������������������������������������� 275 Mr Xu v the Life Insurance Company, Z. J. Li, Insurance Cases, China Modern Economic Publishing House 2007 p. 208��������������������������������������� 329 Mr Xu v Xinhua Life Insurance Company Ltd, the People’s Court, Fengtai District, Beijing City, Civil Court Judgment (2010) No. 0046��������������������� 305 Mr Xue v the Insurance Company, the Intermediate People’s Court, Taiyuan City, Shanxi Province, Civil Court Judgment (2010) No. 668�������������������� 446 Mr Yan v the Insurance Company, the Intermediate People’s Court, Jinan City, Shandong Province, Civil Court Judgment (2010) No. 109�������������������� 648 Mr Yang v the Insurance Company, Xie Xian, A Hundred Insurance Cases (Law Press China 2011) p. 399����������������������������������������������������������������������������� 460 Mr Yang v the Life Insurance Company, the People’s Court, Dongying District, Dongying City, Shandong Province, Civil Court Judgment (2011) No. 249������������� 264 Mr Yao v the Life Insurance Company, Xian Xie, A Hundred Insurance Cases (Law Press China 2012) p. 88������������������������������������������������������������������������������� 236 Mr Yinan Li v China Ping An Insurance Company Ltd Beijing Branch, the People’s Court, West District, Beijing City, Civil Court Judgement (2009) No. 16562������������������������������������������������������������������������������������������������� 229 Mr Ying Bai v China Life Insurance Company Shanghai Branch, the Intermediate People’s Court, Shanghai City, Civil Court Judgement (2000) No. 1722��������������������������������������������������������������������������������������������������� 231 Mr Yingzhong Li v China Life Insurance Company Ltd Xiayi Branch, the People’s Court, Xiayi County, Henan Province, Civil Court Judgement (2010) No. 39������������������������������������������������������������������������������������������������������� 160 Mr Zhang and others v Huaxia Life Insurance Company Jiangsu Branch, Jiadong Xing, Insurance Law Review, (Law Press China 2012) p. 143����������������������� 122 Mr Zhang v the Life Insurance Company, the Intermediate People’s Court, Nan Yang City, Henan Province, Civil Court Judgment (2011) No. 498������������������ 274 Mr Zhang v the Life Insurance Company, the People’s Court, Xin Hua District, Shi Jia Zhuang City, Hebei Province, Civil Court Judgment (2009) No. 28������������� 602 Mr Zhang v the Property insurance company, the People’s Court, Laizhou City, Shandong Province, Civil Court Judgment (2011) No. 421��������������� 428 Mr Zhang vs the Life Insurance Company, the Intermediate People’s Court, Qingdao City, Shandong Province, Civil Court Judgment (2012) No. 273��������������� 298 Mr Zhao v the Insurance Company, the Intermediate People’s Court, Foshan City, Guangdong Province, Civil Court Judgment (2011) No. 177�������������� 678

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Mr Zhongqi Li v Hezhong Life Insurance Company Pingdingshan Branch, the Pingdingshan Intermediate People’s Court, Henan Province, Civil Court Judgment (2009) No. 261������������������������������������������������������������������� 268 Mr Zhou v China Dadi Property Insurance Company Songyuan Branch, the Intermediate People’s Court, Songyuan City, Civil Court Judgment (2009) No. 367����������������������������������������������������������������������������������������������������� 435 Mr Zhu v the Ping An Property Insurance Company of China Haining Branch, the Intermediate People’s Court, Jiaxing City, Zhejiang Province, Civil Court Judgment (2012) No. 355������������������������������������������������������������������� 654 Mr Zong v the Insurance Company, People’s Court, Xin Pu District, Lianyungang City, Jiangsu Province, Civil Court Judgment (2012) No. 2434���������� 352 Mrs Bai v the Life Insurance Company Ltd, the People’s Court, Yancheng District, Henan Province, Civil Court Judgment (2009) No. 1552��������������������������������������������������������������������������������������������������� 235 Mrs Chen v Pingan Life Insurance Company Shanghai Branch, Report of Civil Department of the Second Middle Court of Shanghai (2009) No. 408����������������������������������������������������������������������������������������������������� 595 Mrs Guihong Li v China Pingan Insurance Company Shanghai Branch, the Second Intermediate People’s Court, Shanghai City, Civil Court Judgment (2003) No. 110������������������������������������������������������������������� 266 Mrs Guiying Zhu v Kangtai Life Insurance Company Ltd Zhoukou Branch, People’s Court, Chuanhui District, Zhoukou City, Henan Province, Civil Court Judgement (2009) No. 819������������������������������������������������������������������ 233 Mrs Huang v the Life Insurance Company Xiang Tan Branch the Intermediate People’s Court, Xiang Tan City, Hunan Province, Civil Court Judgment (2011) No. 71������������������������������������������������������������������������������������������������������� 274 Mrs Jie Qu v China Pacific Life Insurance Company Ltd Kaifeng Central Branch, the Intermediate People’s Court, Kaifeng City, Henan Province, Civil Court Judgment (2009) No. 185������������������������������������������������������������������� 319 Mrs Juan Gao v China Life Insurance Dongying Branch, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 28�������������������������������� 403 Mrs Li v Shencheng Life Insurance Company, newspaper Liao Shen Evening on 17 November 2007������������������������������������������������������������������������������������������ 212 Mrs Lihong He v China Life Insurance Company Ltd Feshan Shunde Branch, The Supreme People’s Court Bulletin, 2008 No. 8������������������������������������������������� 233 Mrs Lihong Zhao v China Life Insurance Company Puyang Branch, the People’s Court, Hualong District, Puyang City, Henan Province, Civil Court Judgment (2009) No. 2943����������������������������������������������������������������� 243 Mrs Shuying Liu v Changcheng Life Insurance Company Ltd Henan Province Branch, the Intermediate People’s Court, Zhengzhou City, Henan Province, Civil Court Judgment (2010) No. 331������������������������������������������������������������������� 319 Mrs Wang v the Life Insurance Company Yuxi Branch, the Intermediate People’s Court, Yuxi City, Yunnan Province, Civil Court Judgment (2012) No. 550����������������������������������������������������������������������������������������������������� 255 Mrs Weili Zhang v China Life Insurance Company Ltd Zhumadian Branch, People’s Court, Yicheng District, Zhumadian City, Henan Province, Civil Court Judgment (2010) No. 901������������������������������������������������������������������� 233 Mrs Xue Juan Wang v China Pacific Life Insurance Company Ltd Quzhou Central Branch, the Intermediate People’s Court, Quzhou City, Zhejiang Province, Civil Court Judgment (2007) No. 51���������������������������������������� 317

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Mrs Xuexian Ye v Kang Tai Life Insurance Company Heyuan Branch, the People’s Court, Ping County, Guangdong Province, Civil Court Judgment (2008) No. 341��������������������������������������������������������������������������� 243 Mrs Zhang v Life Insurance Company, Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 527������ 621 Mrs Zhang v the Life Insurance Company Beijing Branch, Jianxun Liu, Typical Cases and Adjudgement Consideration of Insurance Law (Law Press China 2012) p. 269����������������������������������������������������������������������������� 256 Mrs Zhanxian Xue v China Pacific Life Insurance Company Jiaozuo Branch, the People’s Court, Jiyuan City, Henan Province, Civil Court Judgment (2009) No. 126����������������������������������������������������������������������������������������������������� 243 Mrs Zheng v Beijing Life Insurance Company, Liu Jianxun, New Insurance Law and Cases (Law Press China 2010) p. 59��������������������������������������������������������� 205 Mrs Zhou Jinfeng v Pingan Life Insurance Company Beijing Branch, Liu Jianxun, Case Book of Insurance Law (Law Press China 2007) p. 238������������������������������������� 215 Mrs Zhou v the Insurance Company, X. M. Xi, Understanding and Application of the Supreme People’s Court Second Interpretation on Certain Questions Concerning the Application of The Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 157����������������������������������������������������������� 257 Ms Shuai Ying v China Life Insurance Company Ltd, Y. H. Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 508����������������������������������������������������������������������������� 279 Na Li v China Life Insurance Company, Nanyang Branch, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012)������������������������������������������ 138 Nanjing Electronic Products Company v Jiangsu Property Insurance Company, Zongjian Li, Insurance Cases (China Modern Economic Publishing House 2007) p. 356–59����������������������������������������������������������������������������������������� 533 Paint Manufacturer v the Insurance Company, Xiaoming Xi, The Insurance Law of the PRC – Understanding and adaptation of the provisions (China Legal Publication House 2010) p. 337���������������������������������������������������������������������������� 574 People’s Insurance Company of China, Guang Dong Branch v Beijing Jinhai Transport Ltd, Liu Jianxun, Insurance Cases and Analysis (Law Press China 2007) p. 192����������������������������������������������������������������������������������������������� 501 People’s Insurance Company of China, Nankang Branch v Nankang City Laoxiong Kelong Store, Ganzhou City Intermediate People’s Court, Civil Judgment (2005) No. 207����������������������������������������������������������������������������������������������������� 463 People’s Insurance Company of China,Yaoping Branch v Chaozhou City Huafeng Petroleum Product Storing Company, Guangdong Province, High People’s Court, Civil Judgment (2004) No. 22������������������������������������������������������������������������457, 459 PICC Quan Zhou Branch v Wuhan Fuan Zhong Marine Transport Ltd (Xiamen Maritime Court, 2003)��������������������������������������������������������������������������� 767 PICC Quan Zhou Branch v Wuhan Guan Zhong Ocean Transport Co. Ltd, Xiamen Maritime Court, 2003������������������������������������������������������������������������������ 769 PICC Zhoushan Putuo Ltd v Shanghai Hangjie Transport Agency Ltd, Zhe Jiang People’s Court, 2004 No. 121���������������������������������������������������������������� 770 Plastic Product Manufacturer Co. v Insurance Co, Xie Xian, A Hundreds Insurance Cases (Law Press 2012) p.143����������������������������������������������������������������� 355 Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd (2005)���������������������������������������������������������������������������������������������� 476

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Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd (2005), Hainan Province, Haikou Maritime Court, Civil Judgment, (2005) No. 35������������������������������������������������������������������������������ 476 Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd (2005), Hainan Province, High People’s Court, Civil Final Judgment (2005) No. 35���������������������������������������������������������������������� 476 Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd, Hainan Province, Haikou Maritime Court, Civil Judgment (2005) No. 35������������������������������������������������������������������������������� 464 Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd, Hainan Province, High People’s Court, Civil Final Judgment (2005) No. 35���������������������������������������������������������������������� 464 Putian City Taisheng Paper Company Ltd v China Ping An Insurance Company Ltd Putian Branch, the Intermediate People’s Court, Putian City, Fujiang Province, Civil Court Judgment (2000) No. 41����������������������� 426 Qilan Zhong v China Life Insurance Company Ltd Huichang Branch, the Intermediate People’s Court, Ganzhou City Jiangxi Province, Civil Court Judgement (2008) No.1 63����������������������������������������������������������������� 161 Qingxiu Wu v China Life Insurance Company, Chengyi Branch, Jiangxi Provincial High People’s Court������������������������������������������������������������������ 607 Shanghai Nursing Home v Dubang Property Insurance Co. Ltd, Meng Chen et al., “The application of the proximate cause in insurance liability” (2011) 10 People’s Judiciary, accessed 16 April 2016������������������������������������������������������������������������������������������ 406 Shanghai Zhenan Company v PICC Property Co.Wenzhou Branch, Ningbo Maritime Court, Civil Judgment (2007) No. 25����������������������������������������� 462 Sien Li v PICC Life Insurance Co. Ltd, Biao Dong, Analysis on Insurance Cases (Social Sciences Academic Press 2011) p. 268�������������������������������������������������������� 370 Sugar, Tobacco and Alcohol Company Ltd v People’s Insurance Company of China (Xuwen Branch), the Institute for Practical Legal Research of the National Supreme Court, The Selected Cases of the Supreme People’s Court, Vol. 17, (Publishing House of the People’s Court 1996) p.187����������� 782 the Internet Entertainment Shop v the Insurance Company, the Second Intermediate People’s Court, Tianjin City, Civil Court Judgment (2010) No. 426����������������������������������������������������������������������������������������������������� 647 the Logistics Company v the Insurance Company, the People’s Court, Jinan City Central District, Jinan City, Shandong Province, Civil Court Judgment (2010) No 109�������������������������������������������������������������������� 648 The Plastics Company v The Chinese Insurance Company, Zongjian Li, Insurance Case (China Modern Economic Publishing House 2007) pp. 237–40������� 526 The Rattan Industry Co. v PICC Fujian Zhangzhou Branch, Hao Zhan et al., Insurance Law – Interpretations on Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 508��������������������������������������������������������� 410 The Son of the Life Insured v the Uncles of the Life Insured (2010); Z. F. Yang, How to dispose the insurance money where the beneficiary dies prior to the death of the life insured? accessed in December 2014������������� 617 the Trade Company v the Insurance Company Changsha City Central Branch, Changsha Arbitration Commission, Hunan Province, Arbitration Award Letter (2011) No. 279�������������������������������������������������������������������������������� 651

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the Transport Company v the Insurance Company, the People’s Court, Futian District, Shenzhen City, Guangdong Province, Civil Court Judgment (2012) No. 6363����������������������������������������������������������������������������������� 651 the Travel Agent v the Insurance Company, the People’s Court, Furong District, Changsha City, Hunan Province, Civil Court Judgment (2011) No. 1132��������������� 646 Trade Co. Ltd v Transport Co. Ltd, Lin Baoqing, Insurance Law Principles and Cases (Qinghua University Press 2006) p. 166����������������������������������������������������������������� 504 Transport Company v the Insurance Company, Understanding and Application of the Interpretation of The Insurance Law by the Supreme People’s Court of China, edited by X. M. Xi (People’s Court Press 2014) p. 257������������������������������������������� 309 Wang v the Insurance Company, Xian Xie and Yougen Li, One Hundred Selected Insurance Cases (Law Press China 2012) p. 331������������������������������������������������������ 656 Wetting of Cigarettes, Chang Gong Zheng and Fei Qing Xu, The Analysis of the Insurance Cases (Wuhan University Press 1989)������������������������������������������������������ 395 Xiaocheng Lu v Yixing City Smelting Plant, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 423����������������������������������������������������������� 552 Xingwang Food Company v the Property Insurance Company, Yulong Dai and Guoqiang Chen, Big Lawyers Show You How to Win Insurance Disputes Cases (China Economic Publishing House 2014) p. 133�������������������������������������������426, 430 Xinjiang Dawang Co. Ltd v PICC Miquan Branch, Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 23�������� 189 Xiulin Yu v PICC Life Insurance Co., Jiujiang Branch (2004), Jiangxi Court, Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 84�������������� 138 Xu Qing v China Life Insurance Shandong Branch, J. X. Liu in his book, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 264����������������� 606 Xu Qing v China Life Insurance Shandong Branch, J. X. Liu, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 264���������������������� 625 Yang Cuixiong v China Life Insurance Company Shilin Branch, Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 564����������������������������������������������������������������������������� 636 Yuan Qingshan v Huang Renjie (2010), China Insurance News, 16 November 2010�������� 619 Zhang Shaojie v Pingan Insurance Co., the People’s Court of Pingdue City, Court’s Judgment (2010) No. 2831����������������������������������������������������������������������� 451 Zhang v Pacific Life Insurance Co. Cichuan Branch,Website, “A patient bought insurance but his doctor benefited from the insurance contract.”

accessed in May 2016������������������������������������������������������������������������������������������� 206 Zhang Yanyi v China Life Insurance Company, Changzhou Branch. Jing Wang, Insurance Cases, Rules of Judgement and Application of Laws (People’s Court Press 2003) p. 283������������������������������������������������������������������������������������������������ 637 Zheng Guangming v Insurance Company; Hu Wenfu, The Guidance of the Insurance Claim and Settlement (China Procuratorate Press 1993) p. 174�������������������������������� 529 Zhong Youlai v China Pingan Insurance Company Huizhou Sub-branch������������������������������� 132 Zhong Youlai v Ping An Life Insurance Co. Ltd, Huizhou Sub-branch, Y. H. Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 82������������������������������������������������������������������������������� 162 Zhou Guang v Shanghai Life Insurance Co. (1999), Y. F. Lu, Claim for Insurance Money should be Rejected Where the Beneficiary Murders the Life Insured (2002) 5 Journal of Insurance Studies 50��������������������������������������������������������������� 620

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Zhou v China Life Insurance Company Ltd Yizheng Branch, the Intermediate People’s Court, Yangzhou City, Jiangsu Province, Civil Court Judgment (2010) No. 0046�������������������������������������������������������������������������������������������������������������� 304

New Zealand Blackley v National Mutual Life Association Ltd (No 2) [1973] 1 NZLR 668�������������������� 470 New Zealand Insurance Co. Ltd v Harris [1990] 1 NZLR 10�������������������������������������������� 357 State Insurance v Peake [1991] 2 NZLR 287������������������������������������������������������������������ 232

United Kingdom Adelaide Steamship Co. v R. (1924) 93 LJKB 871����������������������������������������������������������� 399 Agnew v Lansforsakringbolagens AB [2003] Lloyd’s Rep IR 637�������������������������������������� 729 Albion Insurance Co. v Government Insurance Office of New South Wales, (1969) 121 CLR 342������������������������������������������������������������������������������������������������������� 372 Albion Insurance Co. v Government Insurance Office of New South Wales, (1969) 121 CLR 345������������������������������������������������������������������������������������������������������� 372 Allgemeine versicherungs-Gesellschaft Helvetia v Administrator of German Property [1931]1 KB 672, at 688���������������������������������������������������������������������������������������� 780 Anderson v Morice [1876] 1 App Cas 713���������������������������������������������������������������������� 191 Andree v Fletcher (1787) 2 TR 161, at 162��������������������������������������������������������������������� 711 Andrews v The Patriotic Assurance Co������������������������������������������������������������������������������ 366 Andrews v The Patriotic Assurance Co (1886) 18 LR Ir 335���������������������������������������������� 539 Ansari v India Assurance Ltd [2009] Lloyd’s Rep IR 718������������������������������������������������ 344 Anstey v British Natural Premium Life (1908) 99 LR 765������������������������������������������������ 270 Apostolos Konstantine Ventouris v Trevor Rex Mountain (The Italia Express (No 3)) [1992] 2 Lloyd’s Rep 281�������������������������������������������������������������������������������������� 470 Arbory Group v West Craven Insurance Services [2007] Lloyd’s Rep IR 491����������������������� 470 Arterial Caravans Ltd. v Yorkshire Insurance Co., [1973] 1 Lloyd’s Rep 169����������������������� 251 Asfar v Blundell [1896] 1 Q.B. 123 (CA)����������������������������������������������������������������������� 777 Atlasnavios-Navegação Lda v Navigators Insurance Co. Ltd and Others (The “B Atlantic”), QBD (Comm Ct) (Flaux J) [2014] EWHC 4133 (Comm) – 8 December 2014������ 394 Austin v Drewe (1815) 4 Camp 360�����������������������������������������������������������������������411, 412 Australian Agricultural Co. v Sunders (1875) LR 10 CP 668�������������������������������������������� 376 Aviva Insurance Ltd v Brown [2011] EWHC 362 (QB), [2012] Lloyd’s Rep IR 211 (QBD)������������������������������������������������������������������������������������������������������ 484 Ayrey v British Legal & united Provident Assurance Co. Ltd [1918] 1 KB 136�������������������� 269 Ballantyne v MacKinnon [1896] 2 QB 455, CA������������������������������������������������������������� 393 Bank of Nova v Hellenic Mutual War Risks Association (Bermuda) Ltd, The Good Luck [1991] 3 All ER 1������������������������������������������������������������������������������������������������� 151 Banque Financiere de la Cite SA v Westgate Insurance Co., [1990] 1 QB 665 at 772, Slade LJ��������������������������������������������������������������������������������������������������������������� 329 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Lt [2008] NSWCA 243����� 381 Baxendale v Harvey (1859) 4 H & N 445���������������������������������������������������������������������� 339 Beach v Pearly Assurance Co. Ltd [1938] IAC Rep. (1938–49) 3�������������������������������������� 127

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Bean v Stupart (1778) 1 Dong 11, p. 14������������������������������������������������������������������������ 753 Bee v Jenson [2008] Lloyd’s Rep IR 221 (CA)��������������������������������������������������������������� 499 Biddell Bros v E Clemens Horst Co. [1911] 1 KB 934������������������������������������������������������ 783 Blascheck v Bussell (1916) 33 TLR 74��������������������������������������������������������������������������� 497 Boag v Standard Marine Ins. Co. [1937] 2 KB 113��������������������������������������������������������� 527 Boag v Standard Marine Insurance Co. Ltd [1937] 2 KB 113������������������������������������495, 534 Bousfield v Barnes (1815) 4 Camp 228�������������������������������������������������������������������������� 381 BP Exploration Operating Co. Ltd v Kvaerner Oilfield Products Ltd (2004) EWHC 999������ 523 Bradburn v Great Western Railway Co. (1874) LR 10 Ex 1����������������������������������������������� 499 Bradley v Eagle Star Insurance Co. Ltd [1989] AC 957���������������������������������������������������� 658 Brewster v National Life Insurance Society (1892) 8 TLR 648������������������������������������������� 634 Bristol & West Building Society v May, May and Merrimans (No. 2) [1998] 1 WR 338������� 499 British Traders Insurance Co. Ltd v Monson (1964) ALR 845�������������������������������������������� 505 Bruce v Jones (1863) 1 H & C 769�������������������������������������������������������������������������������� 381 Burnand v Rodocanachi (1882) 7 App Cas 333�������������������������������������������������������494, 495 Burnand v Rodocanachi (1882) 7 App Cas 333, at 339��������������������������������������������������� 494 Caledonian North Sea v London Bridge Engineering [2002] 1 All ER (Comm) 321, para. 11���������������������������������������������������������������������������������������������������������������� 502 Callaghan v Dominion Insurance Co. Ltd [1997] 2 Lloyd’s Rep 541 (QBD)���������������������� 466 Cambridge v Anderson (1824) 2 B&C 691���������������������������������������������������������������������� 776 Carter v Boehm (1766) 3 Burr 1905, at 1909����������������������������������������������������������������� 221 Carter v White (1883) 25 Ch D 666������������������������������������������������������������������������������ 539 Cash & Carry [1989] 1 Lloyd’s Rep 299, at 302����������������������������������������������������������� 754 Castellain v Preston (1883) 11 QBD 380�������������������������������������������������493, 499, 505, 507 Castellain v Preston (1883) 11 QBD 380, at 387������������������������������������������������������������ 494 Charter Re Co. Ltd v Fagan [1996] 1 Lloyd’s Rep. 261��������������������������������������������������� 147 Cia Colombiana de Seguros v Pacific Steam Navigation Co. [1965] 1 QB 101��������������������� 507 Claims Direct Test Cases, Re [2003] Lloyd’s IR 677��������������������������������������������������������� 159 Collingridge v Royal Exchange Assurance Corp (1877) 3 QBD 173����������������������������������� 499 Commercial Union Assurance Co. v Hayden [1977] QB 804���������������������������������������������� 373 Commercial Union v Lister (1874) 9 Ch App 483������������������������������������������������������������ 527 Compania Colombiana de Seguros v Pacific Steam Navigation Co. [1965] 1 QB 101���507, 510, 766, 767 Container Transport International Inc (CTI) v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476���������������������������������������247, 345 Co-operative Retail Services Ltd v Taylor Yong Partnership Ltd (2002) 1 WLR 1419������������� 523 Coxe v Employer’s Liability assurance Corporation [1916] 114 LT 1190����������������������������� 407 Crabb v Crabb (1834) 1 My & K 511���������������������������������������������������������������������������� 213 CTI v Oceanus [1984] 1 Lloyd’s LR 476����������������������������������������������������������������������� 226 Dalby v India & London Life Assurance Co. (1854)15 CB 365����������������������������������������� 495 Dalby v India and London Life Assurance Co. (1854) 15 CB 365������������������� 3, 211, 610, 615 De Hahn v Hartley (1786) 1 TR 343����������������������������������������������������������������������756, 757 De Vaux Salvador (1836) 4 Ad & El 420������������������������������������������������������������������������ 399 De Vaux v Salvador (1836) 4 Ad & E 420���������������������������������������������������������������������� 399 Derry v Peek (1889) 14 App Cas 337 (HL) at 374��������������������������������������������������������� 278 Derry v Peek (1889) LR 14 App Cas 337 HL���������������������������������������������������������������� 255 Digby v General Accident Fire and Life Assurance Corp [1943] AC 212������������������������������ 647 DR Insurance v Seguros America Banamex [1993] 1 Lloyd’s Rep 120������������������������������� 729 Drake Insurance Co. v Provident Insurance Plc [2004] QB 601�����������������������������������379, 382 Drake Insurance Plc v Provident Insurance Plc [2004] Lloyd’s Rep IR 277���������� 368, 378, 381 Dudgeon v Pembroke (1876–77) LR 2 App Cas 284�������������������������������������������������������� 404

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Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd [1915] AC 847 (HL)������������������������ 720 Economides v Commercial Union Co. plc [1998] QB 587, at 601–2������������������������������������ 237 Empress Car Co. (Abertillery) v National Rivers Authority [1999] 2 AC 22, at 29��������������� 387 England v Guardian Insurance Ltd [2000] Lloyd’s Rep IR 404���������������������������������������� 516 Esso Petroleum Co. Ltd v Hall Russell & Co. Ltd [1988] 3 WLR730����������������������������������� 502 Etheringron and Lancashire and Yorkshire Accident Insurance Co., Re [1909] 1 KB 591������� 395 Evants v Bignold (1869) LR 4 QB 622�������������������������������������������������������������������������� 609 Everett v London Assurance Co. (1865) 19 CB (NS) 126������������������������������������������411, 412 Excess Insurance Co. Ltd v Mathews (1925) 31 Com Cas 43�������������������������������������������� 722 Feasey v Sun Life Assurance Co. of Canada [2003] 2 All ER��������������������������������������������� 177 Feasey v Sun Life Assurance Co. of Canada [2003] 2 All ER (Comm) 587������������������������� 175 Feasey v Sun Life Assurance Company of Canada [2003] Lloyd’s Rep IR 637�������������������� 208 Felthouse v Bindley (1862) 11 CBNS 869���������������������������������������������������������������������� 114 Field Steamship Co. v Burr [1899] 1 QB 579������������������������������������������������������������������ 399 Fisk v Masterman (1841) 8 M & W 165������������������������������������������������������������������������ 384 Fontana v Skandia Life Assurance Ltd, Unreported, 2003������������������������������������������������ 163 Fooks v Smith [1924] 2 KB 508������������������������������������������������������������������������������������ 399 Frans Maas (UK) Ltd v Sun Alliance & London Insurance Plc [2004] 1 Lloyd’s Rep 484 at [63]���������������������������������������������������������������������������������������������������� 269 Galloway v Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209�������������484, 486 Garnat Trading and Shipping v Baominh Insurance Corporation [2011] EWCA Civ 773���������������������������������������������������������������������������������������������������������������� 226 General Provincial Ex p. Daintree, Re (1870) 18 WR 396������������������������������������������������� 280 Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society [1996] 1 Lloyd’s Rep 614 CA������������������������������������������������������������������������������������175, 177 Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society [1996] 2 All ER 487��������������������������������������������������������������������������������������������������������� 175 Globe & Rutgers Fire Ins. Co. v Truedell [1927] 2 DLR 659���������������������������������������������� 528 Godsall v Boldero (1807) 9 East 72�������������������������������������������������������������������������������� 495 Green v Russell [1959] 2 QB 226���������������������������������������������������������������������������204, 605 Griffiths v Fleming [1909] 1 KB 805����������������������������������������������������������������������172, 207 H. Cousins & Co. Ltd v D. & C. Carriers Ltd [1971] 2 QB 230���������������������������������������� 499 Haas v Atlas Insurance [1913] 2 KB 209����������������������������������������������������������������������� 634 Hadely v Baxendale (1854) 156 ER 145������������������������������������������������������������������������ 470 Hadenfayre v British National Insurance Society Ltd [1984] 2 Lloyd’s Rep 393������������������ 344 Haigh v Lawford (1964) 114 NLJ 208��������������������������������������������������������������������������� 528 Halford v Kymer (1830) 10 B & C 724�������������������������������������������������������������������������� 208 Hamilton, Fraser & Co. v Pandorf & Co. (1887) LR 12 App Cas 518������������������������������� 389 Harrington Motor Co., Re [1928] Ch 105����������������������������������������������������������������������� 658 Harse v Pearl Life Assurance Co. [1904] 1 KB 558������������������������������������172, 195, 202, 208 Harse v Pearl Life Assurance Co. [1994] 2 AC 199���������������������������������������������������������� 215 Haydenfayer v British National Ins. Soc. Ltd [1984] 2 Lloyd’s Rep 393, at 398������������������ 243 Hayler v Chapman [1989] 1 Lloyd’s Rep 490���������������������������������������������������������������� 509 Hebdon v West (1863) 3 B & S 579�������������������������������������������������������������������������������� 205 Hedley v Baxendale (1854) 9 Exch 341�������������������������������������������������������������������������� 457 Hemmings v Sceptre Life [1905] 1 Ch 365���������������������������������������������������������������������� 269 HIH Casualty and General Insurance Ltd v Building Insurers’ Guarantee Corp [2003] NSWSC 1083������������������������������������������������������������������������������������������� 720 HIH Casualty and General Insurance v Chase Manhattan Bank [2003] Lloyd’s Rep IR 230����������������������������������������������������������������������������������������������� 281 Holdsworth v L. & Y. Insurance (1907) 23 TLR 521�������������������������������������������������������� 269

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Holiday v Western Australian Ins Co. Ltd (1936) 54 Li L Rep 373������������������������������������� 159 Holmes v Scottish Legal Life Assurance Society (1932) 48 TLR 306����������������������������������� 585 Hood’s Trustees v Southern Union General Insurance Co. of Australasia [1928] Ch 734��������� 658 Horwood v Land of Leather Ltd [2010] EWHC 546 (Comm)������������������������������������������ 527 Insurance Co. of Africa v Scor (UK) Reinsurance Ltd [1985] 1 Lloyd’s Rep 312����������721, 722 Insurance Company of Pennsylvania Ltd v IBM UK Ltd [1989] Chartered Surveyor Weekly����������������������������������������������������������������������������������������������������������������� 502 Insurance Corp of the Channel Island Ltd v McHugh [1997] LRLR at 136–137����������������� 471 Inversiones Manria SA v Sphere Drake Insurance Co. Plc (The Dora) [1989] 1 Lloyd’s Rep 69��������������������������������������������������������������������������������������������������� 239 Ionides v Pacific Ins. Co. (1871) LR 6 QB 674, at 684; (1872) LR 7 QB 517������������������� 243 Ionides v The Universal Marine Insurance Company (1863) 14 CB (NS) 259��������������������� 389 Iraqi Ministry of Deftn v Arcepey Shipping Co. SA (The Angel Bell) [1979] 2 Lloyd Rep 491��������������������������������������������������������������������������������������������������� 781 J Aron & Co. v Miall (1938) 34 Com Cas 18����������������������������������������������������������������� 784 James Nelson & Sons Ltd v Nelson Line Liverpool Ltd [1906] 2 KB 217���������������������������� 506 John Edwards & Co. v Motor Union Insurance Co. Ltd [1922] 2 KB 249��������������������494, 769 Joyce v Swann (1864) 13 CBNS 84������������������������������������������������������������������������������ 761 Kaltenbach v Mackenzie (1878) 3 CPD 467, at 471������������������������������������������������������� 776 Kaltenback v Mackenzie (1878) 3 CPD 467 at 470�������������������������������������������������������� 775 Kastor Navigation Co. Ltd v Axa Global Risks (UK) Ltd (The Kastor Too) [2004] 2 Lloyd’s Rep 119������������������������������������������������������������������������������������������������� 780 Kausar v Eagle Star Insurance Co. Ltd [1997] CLC 129�������������������������������������������������� 344 Kausar v Eagle Star Insurance Co. Ltd [2000] 1 Lloyd’s Rep IR 154 (CA)������������������������ 338 King v Victoria Ins. Co. [1896] AC 250�������������������������������������������������������������������506, 507 King v Victoria Ins. Co. [1896] AC 250, at 255–56���������������������������������������������������������� 507 Kingscroft Insurance Co. v Nissan Fire and Marine Insurance Co. Ltd (No. 2) [1999] Lloyd’s Rep IR 603������������������������������������������������������������������������������������ 239 Kitchen Design and Advice Ltd v Lea Valley Water Co. [1989] 2 Lloyd’s Rep 221���������������� 509 Lawrence v Accidental Insurance Co., Ltd [1881] 7 QBD 216������������������������������������������� 397 Legal and General Assurance Society Ltd v Drake Insurance Co. Ltd [1992] 1 All ER 283, CA��������������������������������������������������������������������������������������������������������378, 381 Legal and General Assurance Society Ltd v Drake Insurance Co. Ltd [1992] QB 887; [1992] 2 WLR 157������������������������������������������������������������������������������������������������ 368 Lewis v Norwich Union Fire Insurance Co. [1916] AC 509����������������������������������������������� 159 Lewis v Norwich Union Fire Insurance Co. [1916] AC 509, at 519������������������������������������ 744 Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350�������� 389, 393, 395 Lister v Romford Ice and Cold Storage Ltd [1957] AC 555������������������������������������������������ 520 Lloyd Instruments Ltd. v Northern Star Insurance Co., Ltd (“The Jay Jay”) [1987] 1 Lloyd’s Rep 32, CA�������������������������������������������������������������������������������������������� 403 London Assurance Co. v Johnson (1737) Hardw 269�������������������������������������������������������� 503 London Assurance Co. v Sainsbury (1783) 3 Doug 245���������������������������������������������������� 502 London Assurance v Clare (1937) Lloyd’s L Rep 254, per Goddard L at 270������������������� 485 London County Commercial Reinsurance Office Ltd, Re [1922] 2 Ch 67����������������������������� 216 Lonsale v Thompson Ltd v Black Arrow Group Plc [1993] Ch 36��������������������������������������� 365 Looker v law Union and Rock Insurance Co. Ltd [1928] 1 KB 554������������������������������������ 243 Looker v law Union and Rock Insurance Co. Ltd [1928] 1 KB 558������������������������������������ 243 Lord Napier v Hunter [1993] AC 713���������������������������������������������������������������������514, 515 Lord Napier v Hunter [1993] AC 713; [1993] 2 WLR 42������������������������������������������������ 509 Lucena v Craufurd (1806) 2 B & PNR 269����������������������������������������������������� 173, 176, 762

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Lucena v Craufurd (1806) 2 Bos & PNR 269; 127 ER 630��������������������������������������������� 177 M’Farlane v Royal London Friendly Society (1886) 2 TLR 755���������������������������������������� 634 M’Farlane v Royal London Friendly Society (1886) 2 TLR 755, at 756����������������������������� 634 Macaura v Northern Assurance Co. Ltd [1925] AC 619��������������175, 177, 186, 187, 195, 763 Macaura v Northern Assurance Co. Ltd [1925] AC 619 HL��������������������������������������������� 177 Manifest Shipping Co. Ltd v Uni Polaris Shipping Co. Ltd (The Star Sea) [2001] 2 WLR 170����������������������������������������������������������������������������������������������������������� 339 Marc Rich & Co. AG v Portman [1996] 1 Lloyd’s Rep 430; [1997] 1 Lloyd’s Rep 225����� 537 Marcel Beller Ltd v Hayden [1978] QB 694�������������������������������������������������������������204, 605 Mardorf v Accident Insurance Company [1903] 1 KB 584��������������������������������� 395, 396, 407 Mark Rowlands Ltd v Berni Inns [1985] 3 All ER 473���������������������������������������������������� 191 Marsden v City & County Insurance [1865] LRICP 232������������������������������������������������� 399 Marsden v City and County Assurance Co. (1865) LR 1 CP 232��������������������������������411, 412 Mason v Sainsbury (1782) 3 Doug KB 61��������������������������������������������������������������494, 499 Mason v Sainsbury (1782) 3 Doug KB 61, at 64������������������������������������������������������������ 500 Mercandian Continent [2001] EWCA Civ 1275; 2 Lloyd’s Rep 563�������������������������������� 244 Mercantile and General Reinsurance Plc v London Assurance, unreported, 1989������������������ 502 Midland Insurance Co. v Smith and Wife (1881) 6 QBD 561�������������������������������������������� 519 Miller, Gibb & Co. Ltd, Re [1957] 1 WLR 703 at 707����������������������������������������������������� 494 Mitsui & Co. Ltd v Flota Mercante Grancolumbia SA [1989] 1 All ER 951����������������������� 761 Moate v Moate [1948] 2 All ER 486������������������������������������������������������������������������������ 213 Monk v Warbey [1935] 1 KB 75������������������������������������������������������������������������������������ 669 Mordy v Jones (1825) 4 B & C 394������������������������������������������������������������������������������� 399 Morris v Ford Motor Co������������������������������������������������������������������������������������������������� 524 Morris v Ford Motor Co. [1973] 1 QB 792��������������������������������������������������������������������� 494 Morris v Ford Motor Co. [1973] 1 QB 792, at 801���������������������������������������������������������� 494 Morris v Ford Motor Co. [1973] QB 792������������������������������������������������������������������������ 506 Morris v Ford Motor Co. [1973] QB 793������������������������������������������������������������������������ 521 Morris v Ford Motor Co. [1973] QB 793, at 801–02������������������������������������������������������� 521 Murray v Scottish Automobile (1929 SLT 114)��������������������������������������������������������������� 355 Napier and Ettrick (Lord) v Kershaw [1993] 1 All ER 385���������������������������������������������� 527 Napier v Hunter [1993] 2 WLR 42�������������������������������������������������������������������������������� 501 Napier v Hunter [1993] AC 713������������������������������������������������������������������������������������ 510 Napier v Hunter [1993] AC 713; [1993] 1 All ER 385��������������������������������������������������� 495 National Farmers Union Mutual Insurance Society Ltd v HSBC Insurance (UK) Ltd [2010] EWHC 773 (Comm), [2011] Lloyd’s Rep 1r 86����������������������������������������� 382 National Oilwell (UK) v Davy Offshore [1993] 2 Lloyd’s Rep 582����������������������������175, 523 National Oilwell (UK) v Davy Offshore [1993] 2 Lloyd’s Rep 582, at 613–14������������������ 523 New Hampshire Insurance Co. v MGN Ltd [1997] LRLR 24������������������������������������������� 114 Newbury Int. Ltd v Reliance National Ins. Co. (UK) Ltd [1994] 1 Lloyd’s Rep 83, at 85���� 243 Newby v Reed (1762) 1 Wm B1 416������������������������������������������������������������������������������ 381 Noble v Kennaway (1780) 2 Doug KB 510�������������������������������������������������������������������� 239 North British and Mercantile Insurance Co. v London, Liverpool and Globe Insurance Co. (1877) 5 Ch D 569����������������������������������������������������������������������������������������366, 368 North of England Pure Oil-Cake Co. v Archangel Maritime Insurance C, (1875) LR 10 QB 249������������������������������������������������������������������������������������������������������ 783 O’Kane v Jones, The Martin [2004] 1 Lloyd’s Rep 389 at [166]–[176]���������������������������� 368 Oceanic Steam Navigation Co. v Evans (1934) 50 Li L Reo 1, at 3 (CA)�������������������������� 780 Orakpo v Manson Investments Ltd [1978] AC 95������������������������������������������������������������ 506 Overseas Marine Insurance Co. Ltd, Re (1930) 36 Li LR 183������������������������������������������� 730 P. Samuel v Dumas [1924] AC 431�������������������������������������������������������������������������������� 394

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Table of Cases

Page v Scottish Insurance Corporation (1929) 98 LJKB 308���������������������������������������501, 507 Page v Scottish Insurance Corporation [1929] 140 LT 571������������������������������������������������ 502 Pan Atlantic Co. v Pine Top Insurance Co. Ltd [1994] 2 Lloyd’s Rep 427��������������������������� 345 Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. Ltd [1995] 1 AC 501, [1994] 3 WLR 677, [1994] 3 All ER 581, HL�������������������������������������������������������� 248 Pesquerias y Secaderos de Bacalao de Espana SA v Beer (1946) 79 LlL Rep 417, at 433����� 780 Peters v General Accident Fire and Life Assurance Corp Ltd [1938] 2 All ER 267����������������� 569 Petrofina Ltd v Magnaload Ltd [1984] 1 QB 127������������������������������������������������������������ 523 Pettitt v Pettitt [1970] AC777���������������������������������������������������������������������������������������� 213 Philpott v Swann (1861) 11 CB (NS) 270��������������������������������������������������������������������� 399 Pim v Reid (1843) 6 Man & G 1����������������������������������������������������������������������������������� 343 Pink v Fleming (1890) 25 QBD 396������������������������������������������������������������������������������ 399 Piper v Royal Exchange Assurance (1932) 44 Li LR 103�������������������������������������������������� 761 Post Office v Norwich Union Fire Insurance Soc. Ltd [1967] 2 QB 363, at 374������������������� 658 Powles v Innes (1843) 11 M & W 10������������������������������������������������������������������������������ 761 President of India v La Printata Compania Navigacion S.A. [1985] AC 395���������������467, 469 President of India v Lips Marine Corp. [1988] AC 395 at 424������������������������������������������ 467 President of India v Lips Marine Corp. [1988] AC 395 at 424, per Lord Brandon������������� 469 Prudential Insurance Company v Inland Revenue Commissioners [1904] 2 KB 658������������������ 2 Raman Chitty and Anor. v Chuah Eu Kay and Ors ([1897] 4 SSLR 53),��������������������������� 389 Randal v Cockran (1748) 1 Ves Sen 98�������������������������������������������������������������������������� 499 Randal v Cockran (1748) 1 Ves Sen 98, 27 ER 916�������������������������������������������������������� 494 Rankin v Potter (1872) LR 6 HL 83 156����������������������������������������������������������������������� 776 Rayner v Preston (1881) 18 Ch DA������������������������������������������������������������������������������� 505 RB Policies v Butler (1949) 65 TLR 436������������������������������������������������������������������������ 503 Reed v Royal Exchange (1795) Peake Ad Cas 70������������������������������������������������������������ 207 Reischer v Borwick, ([1894] 2 QB 548)�������������������������������������������������������������������������� 389 River Wear Comrs v Adamson (1877) 2 App Cas 743������������������������������������������������������� 780 Roberts v Anglo-Saxon Insurance Co. [1927] KB 590 at 591�������������������������������������������� 754 Roberts v Avon Insurance Co. [1956] 2 Lloyd’s Rep 240�������������������������������������������������� 234 Roberts v Plaisted [1989] 2 Lloyd’s Rep 341������������������������������������������������������������������ 232 Rogerson v Scottish Automobile and General Insurance Co. Ltd (1931) 48 TLR 17��������������� 569 Roux v Salvador (1836) 3 Bing (NC) 266��������������������������������������������������������������������� 776 Roux v Salvador (1836) 3 Bing (NC) 266, per Lord Abinger����������������������������������������� 776 Royal Boskalis Westminster BV v Mountain [1997] LRLR 523, at 557������������������������������� 780 Safadi v Western Assurance Co. [1933] 46 Li L Rep 140, at 144 (Roche J)������������������������ 781 Scottish Marine v Turner (1853) 1 Macq 334����������������������������������������������������������������� 399 Sharp v Sphere Drake Insurance Plc (Moonacre) [1992] 2 Lloyd’s Rep 201 QBD�������������� 177 Sharp v Sphere Drake Insurance Plc (Moonacre) [1992] 2 Lloyd’s Rep 501 QBD�������������� 175 Shaw v Robberds (1837) 6 A & E 75�����������������������������������������������������������������������343, 350 Shilling v Accidental Death Insurance Co (1857) 2 H & N 42������������������������������������206, 208 Simcock v Scottish Imperial Ins. Co. (1902) 10 SLT 286�������������������������������������������204, 605 Simon Haynes & Barlas v Beer (1946) 78 Lloyd’s Rep 337��������������������������������������������� 275 Simon, Haynes, Barlas & Ireland v Beer (1944) 78 Ll LR 337����������������������������������������� 269 Simpson v Thomson (1877) 3 App Cas 279�������������������������������������������������������������503, 518 Simpson v Thomson (1877) 3 App Cas 279, at 286��������������������������������������������������������� 502 Sirius v Oriental [1999] Lloyd’s Rep IR 343������������������������������������������������������������������ 732 Siu Yin Kwan v Eastern Insurance Co. [1994] 1 All ER 213 (Liability insurance)�������������� 191 Solicitors & General Life Assurance Society v Lamb (1864) 2 De GJ & S 251��������������������� 495 Sousa v London Borough of Waltham Forest [2011] 1 WLR 2197��������������������������������������� 499 South British Fire and Marine Insurance Co. of New Zealand v Da Costa [2906] 1 KB 456�� 711

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Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep IR 111����������������������������������� 467 Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep IR 111; [1997] CLC, 70��������� 470 Standard Steamship Owners’ P & I Assn (Bermuda) Ltd v Gann [1992] Lloyd’s Rep 528�� 159 Stearns v Village Main Reef Gold Mining Co. Ltd (1905) 10 Com.Cas 89�������������������499, 505 Strachan v The Scottish Boatowners’ Mutual Insurance Association (2010) SC 367�������������� 466 Tariff Reinsurances Ltd v Commissioner of Taxes (Vic) (1938) 59 CLR 194������������������������ 720 Tate & Son v Hyslop (1885) 15 QBD 368��������������������������������������������������������������������� 537 Tate Gallery v Duffy [2007] 1 All ER (Comm) 1004, at 1025–26������������������������������������ 523 Taylor v Dunbar (1868–69) LR 4 CP 206���������������������������������������������������������������������� 389 The Fanti and The Padre Island [1991] 2 AC 1���������������������������������������������������������������� 474 The Fanti and The Padre Island [1991] 2 AC 1, at 35–36������������������������������������������������� 469 The Fanti and The Padre Island [1991] 2 AC at 35���������������������������������������������������������� 467 The Good Luck [1992] 1 AC 233, at 263, per Lord Goff (hull)��������������������������������������� 753 The Italia Express (No 2), [1992] 2 Lloyd’s Rep 281������������������������������������������������������ 470 The Mostyn [1928] AC 57�������������������������������������������������������������������������������������������� 780 The Yasin [1979] 2 Lloyd’s Rep 45 at 54–55������������������������������������������������������������������ 523 Thompson v Montreal Insurance Co. (1850) 6 UCR 319�������������������������������������������������� 424 Tilley & Noad v Dominion Ins Co. Ltd (1987) 284 EG 1056�������������������������������������������� 261 Transthene Packing Co. Ltd v Royal Insurance (UK) Ltd [1996] Lloyds’ Rep IR 32, at 40��� 469 Tweddle v Atkinson (1861) 1 B & S 395������������������������������������������������������������������������� 720 Union Marine Insurance Co. Ltd v Martin (1866) 35 LJCP 181��������������������������������������� 365 W v Veolia Environmental Services (UK) Plc [2011] EWHC 2020 (QB)��������������������������� 499 Wainwright v Bland (1835) 1 Moo & R 481; (1836) 1 M & W 32����������������������������������� 207 Wasa International Insurance Co. Ltd v Lexington Insurance Co. [2009] Lloyd’s Rep IR 675����������������������������������������������������������������������������������������������������������� 729 Wasa International Insurance Co. v Lexington Insurance Co. [2008] 1 All ER (Comm) 1085 at 1102, [48]–[49] per Sedley LJ; [2010] 1 AC 180���������������������������������������� 711 Wayne Tank and Pump Co. Ltd v Employer’s Liability Assurance Corp Ltd [1973] 2 Lloyd’s Rep 237, at 240�������������������������������������������������������������������������������������� 387 Wayne Tank v Employer’s Liability Assurance Corporation [1974] 1 QB 66������������������������� 401 West of England Fire Insurance Co. v Isaacs [1897] 1 QB 226���������������������������� 505, 507, 527 West v National Motor & Accident Union [1955] 1 Lloyd’s Rep 207��������������������������������� 261 West v National Motor Accident & Insurance Union [1955] 1 All ER 800�������������������������� 275 Wight v Brown (1849) 15 11 D 459������������������������������������������������������������������������������ 207 Williams & Co. v Canton Insurance Office Ltd [1901] AC 462������������������������������������������ 399 Williams v Thorp (1828) 2 Sim 257������������������������������������������������������������������������������� 634 Winicofsdy v Army & Navy Insurance [1919] 35 TLR 283���������������������������������������������� 399 Winspear v Accident Insurance Association [1880] 6 QBD 42�������������������������������������������� 397 Yorkshire Insurance Co. v Nisbet Shipping Co. Ltd [1962] 2 QB 330���� 499, 505, 512, 513, 767 Yorkshire Insurance Co. v Nisbet Shipping Co. Ltd [1962] 2 QB 330, at 339����������������������� 494

United States Allstate life Ins. Co. v Miller, 424 F 3d 1113 (11th Cir 2005)������������������������������������������� 281 Amex Life Assurance Co. v Superior Court, 14 Cal 4th 1231 [60 Cal Rptr 2d 898, 930 P 2d 1264] (1997)����������������������������������������������������������������������������������������� 281 Azar v Prudential Insurance Co. of America 68 P 3d 909 (NM App, 2003)������������������������ 331 Balentine v New Jersey Insurance Underwriting Ass’n 966 A2d 1098 (NJ Super Ct App Div 2009)������������������������������������������������������������������������������������������������� 178

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Bell v Liberty Mutual Insurance Co. 676 SE 2d 428 at 434 (Ga App 2009)���������������������� 332 Bolick v Prudential Ins. Co. of Am., 249 F Supp 735 (DSC 1969)������������������������������������ 283 Connecticut Fire Insurance Co. v Erie 73 NY App 399 (1878)������������������������������������������� 505 Connecticut Mutual Life Insurance Co. of Hartford v Moore (1881) LR 6 App Cas 644������� 232 Dodd v Commercial Union Insurance Co. (1977) 365 NE 2d 802 (Mass 1977)������������������ 332 Dodd v Commercial Union Insurance Co. 365 NE 2d 802 (Mass 1977)����������������������������� 332 Fidelity Phoenix and Globe Fire Insurance Co. v Raper 6 So 2d 513 (Ala 1942)������������������ 177 Grand Ventures Inc v Whaley 622 A 2d 655 (Del Sup 1992)��������������������������������������������� 332 Great Northern Oil Company v St. Paul Fire and Marine Insurance Company, 189 NW 2d 404 (Minn 1971)������������������������������������������������������������������������������� 533 Kocok v Metro. Life Ins. Co., 189 NE 677 (NY 1933)����������������������������������������������������� 283 Liberty Nat. Life Insurance Co. v Weldon, 267 Ala 171 (1957)���������������������������� 200, 218, 219 Liverpool and London Insuarnce Co. v Bolling 176 Va 182 (2940)������������������������������������� 177 Mead v Westchester Fire Insurance Co., 3 Hun. 608 (NY Sup. Ct. 1875)���������������������������� 127 Mickleberry’s Food Products v Hauesserman 247 SW 2d 731 (Mo 1952)��������������������205, 605 Moradi-Shalal v Fireman’s Fund Insurance Co. 759 P 2d 58 (Cal 1988)��������������������������� 332 Muslin v Columbian Nat’l Life Ins. Co., 3 F Supp 368 (SDNY 1932)������������������������������� 281 National Filtering Oil v Citizen’s Insurance Co 13 NE 337 (NY 1887)������������������������������ 178 Northeast Georgia Cancer Care LLC v Blue Cross & Blue Shield of Georgia Inc 766 A 2d 1260 (NH 2001)������������������������������������������������������������������������������������ 332 Obtartuch v Sect. Mut. Life Ins. Co., 114 F 2d 873 (7th Cir 1940)����������������������������������� 281 Ramey v Carolina Life Insurance Co, 135 SE 2d 362 (1964)�������������������������������������218, 219 Ramsey v Old ColonyLife Ins. Co., 131 NE 108 (Ill 1921)������������������������������������������������ 283 Showpiece Home Corp v Assurance Co. of America 38 P 3d 47 (Colo 2001)������������������������ 332 Sinclair Refining Co. v Long 32 P 2d 464 (Sup. Ct. Kan 1934)���������������������������������205, 605 Smith v Merchants’ Fire of New York [1925] 3 WWR 91��������������������������������������������������� 114 State Farm Mutual Auto Ins Co. v Partridge (1973) 10 Cal 3d 94������������������������������������� 402 Strawbridge v N.Y. Life Ins. Co., 504 F Supp 824 (DNJ 1980)����������������������������������������� 281 Wagner v Travelers Property Casualty Co. of America 209 P 3d 1119 at 1129 (Colo App 2008)�������������������������������������������������������������������������������������������������� 332 Warnock v Davies, 104 US 755, at 779–780, per Field J (1881-life)�������������������������������� 633 Wellhouse v United Paper Co. 29 F 2d 886 (CCA 1929)�������������������������������������������205, 605 Weston v National Manufacturers and Stores Corp., 253 Ala 50345 So 2d 459������������������� 219 White v Republic Fire Insurance Co (1869) 57 Maine Reports 91, at 95���������������������������� 427

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Australia Corporations Act 2001 (Cth) s 562A(1)���������������������������������� 720 Insurance Contracts Act 1984 (hereinafter, ICA)���������������������� 171 s 11(7)���������������������������������������4, 639 (9)���������������������������������������������� 244 s 16����������������������������������������������� 192 s 17����������172, 176, 177, 178, 192, 762 s 18����������������������������������������209, 626 (1) (a), (b)����������������������������������� 209 (2)���������������������������������������������� 209 s 20����������������������������������������������� 609 s 21�������������������������������� 221, 234, 244 (1)������������������������������� 226, 248, 249 (3)���������������������������������������234, 239 s 21A�������������������������������������226, 244 s 22����������������������������������������228, 229 s 25����������������������������������������������� 241 s 27����������������������������������������������� 234 s 28����������������������������������������249, 262 s 29(2)������������������������������������������ 281 (3)���������������������������������������������� 281 s 31����������������������������������������������� 241 s 31A�������������������������������������������� 241 s 54����������������������������������������������� 758 (2)���������������������������������������������� 358 (3)���������������������������������������������� 358 (4)���������������������������������������������� 358 (6)(b)������������������������������������������ 358 s 65�������������������������������� 519, 520, 524 (3)���������������������������������������������� 519 s 66����������������������������������������������� 521 s 67����������������������������������������������� 516 s 68(1)�����������������������������������527, 536 (2)���������������������������������������������� 536 Insurance Contract Amendment Act 2013 (No. 75, 2013)�����516, 519 s 21(1)(b)������������������������������������ 249

Life Insurance (Consequential Amendments and Repeals) Act 1995 ������������������������������������������������� 626 s 45��������������������������������������172, 209 Marine Insurance Act 1909��������������� 171 s 24(1)���������������������������������������� 225 s 61��������������������������������������������� 387 Belgium Belgium Law 1874 art 9�������������������� 349 Canada Insurance Act (Ontario) RSO 1990 c. 18 s 178(2)�������������������������������������� 206 s 178(3)�������������������������������������� 206 China Adoption Law of the People’s Republic of China 1991; 1998���������������������� 195 Adoption Law 1991 art 15���������������� 195 Adoption Law art 6���������������������������������������������� 196 art 15�������������������������������������������� 196 Civil Code 1986 (the General Principles of the Civil Law of the People’s Republic of China 1986) art 11�������������������������������������134, 202 art 12�������������������������������������������� 202 (2)������������������������������������������������ 629 art 13�������������������������������������������� 134 (1)���������������������������������������������� 629 art 26�������������������������������������������� 186 art 29�������������������������������������������� 186 art 30�������������������������������������������� 186 art 58����������������������������� 133, 531, 598 art 66�������������������������������������������� 230 art 71�������������������������������������185, 761 art 73�������������������������������������������� 185 art 74(1)–(5)��������������������������������� 185

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art 43�������������������������������������������� 326 art 45�������������������������������������������� 133 art 46�������������������������������������������� 133 art 52����������������������������� 134, 158, 531 (5)���������������������������������������������� 440 art 52–53�������������������������������158, 531 art 53�������������������������������������������� 531 art 54����������������������������� 285, 327, 328 art 58���������������������212, 213, 214, 215, 326, 329, 330 art 73�������������������������������������������� 718 art 79(2)��������������������������������������� 783 art 80����������������������510, 766, 770, 771 art 84�������������������������������������������� 632 art 88�������������������������������������������� 632 art 93�������������������������������������545, 546 art 112������������������������������������������ 456 art 113������������������������������������������ 456 (1)���������������������������������������������� 466 (2)���������������������������������������������� 466 art 119�����������������������������������420, 458 (1)���������������������������������������������� 420 art 123������������������������������������������ 719 art 125(1)������������������������������������� 155 art 129������������������������������������������ 539 art 207������������������������������������������ 462 art 402������������������������������������������ 307 Criminal Law of the People’s Republic of China 1979���������������������254, 477 art 14�������������������������������������254, 481 art 15�������������������������������������������� 255 art 197������������������������������������������ 491 art 198�����477, 485, 487, 490, 491, 626 (1)���������������������������������������������� 488 Economic Contract Law of the PRC 1981����������������������������������� 33 art 25���������������������������������������������� 33 (3)���������������������������������������������� 497 art 46���������������������������������������������� 33 Electronic Signature Law of the People’s Republish of China (2004)��������� 119 Enterprise Bankruptcy Law of the People’s Republic of China 2006�� 53 art 2������������������������������������������������ 53 Fire Protection Law of the People’s Republic of China 1998������������� 414 Food Safety Law of the People’s Republic of China 2009���������������������������� 414 Inheritance Law of the People’s Republic of China 1985 art 2���������������������������������������610, 612

art 78�������������������������������������186, 187 art 80�������������������������������������������� 187 art 81�������������������������������������187, 188 art 84�������������������������������������������� 188 art 89(2)��������������������������������188, 189 art 111������������������������������������������ 503 art 117������������������������������������������ 503 art 126������������������������������������������ 539 art 135�����������������������������������539, 540 art 137������������ 465, 466, 476, 539, 540 Civil Procedure Law of the People’s Republic of China 1991������������� 442 art 64�������������������������������������442, 457 art 85–91�������������������������������������� 536 CMC (See: Maritime Code of China) Coal Law of the People’s Republic of China 1996�������������������������������� 640 art 44�������������������������������������������� 641 Company Law of the People’s Republic of China 1993���������������������������������� 55 art 146���������������������������������������55, 56 Construction Law of the People’s Republic of China 1998������������� 641 art 48�������������������������������������������� 641 Consumer Rights and Interests Protection Law (the Law of the Peoples Repulic of China on Protection of the right and Interests of the Consumers 1994) art 49������������������������������ 466 Contract Law of the People’s Republic of China 1999������������33, 107, 321, 531 art 2���������������������������������������������� 134 art 6���������������������������������������222, 326 art 10�������������������������������������������� 129 art 13�������������������������������������������� 110 art 15�������������������������������������������� 109 art 16�������������������������������������������� 111 art 17�������������������������������������������� 111 art 18�������������������������������������������� 111 art 20�������������������������������������������� 111 (4)���������������������������������������������� 116 art 22�������������������������������������������� 113 art 25�������������� 112, 113, 116, 117, 591 art 26�������������������������������������������� 113 art 30����������������������������� 113, 116, 117 art 31�������������������������������������113, 117 art 40�������������������������������������157, 531 art 42����������������������326, 327, 333, 355 (1)���������������������������������������������� 326 (2)������������������������������� 326, 328, 330 (3)���������������������������������������115, 326

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art 31�������������������������������������������� 154 art 34�������������������������������������������� 568 art 37�������������������������������������������� 355 art 41�������������������������������������������� 364 (3)���������������������������������������������� 363 art 50�������������������������������������������� 643 art 51�������������������������������������������� 661 art 53�������������������������������������������� 210 art 56����������������������������� 215, 329, 594 art 64(1)(2)����������������������������������� 617 art 66�������������������������������������������� 629 art 67�������������������������������������������� 635 art 92�������������������������������������������� 371 art 105�������������������������������������������� 72 art 138������������������������������������������ 279 Insurance Law 2009���������������������������� 36 art 10–30�������������������������������������� 273 art 12����������������������171, 181, 194, 211 (1)���������������������������������������������� 210 (2)���������������������������������������������� 191 (6)���������������������������������������������� 176 art 16����������������������221, 337, 342, 356 (1)������������������������������� 223, 333, 346 (2)�������� 221, 223, 251, 252, 268, 271, 282, 356 (3)������������������������223, 274, 275, 276 (4)���������������������������������������224, 356 (5)���������������������������������������224, 356 (6)���������������������������������������������� 224 art 17�������������������������������������������� 355 art 23�������������������������������������������� 442 (2)���������������������������������������456, 458 art 27(1)��������������������������������������� 562 art 28(2)��������������������������������������� 724 art 30�������������������������������������������� 154 art 31����������������������171, 194, 213, 274 (1)(1)–(3)����������������������������������� 197 art 31–47�������������������������������������� 273 art 33�������������������������������������������� 194 art 34�������������������������������������194, 329 art 36�������������������������������������������� 245 art 39(2)��������������������������������������� 605 art 41�������������������������������������������� 607 art 42�������������������������������������������� 608 (1)���������������������������������������604, 612 (1)(2)������������������������������������������ 617 (1)(3)������������������������������������������ 620 art 44�������������������������������������������� 629 art 46�������������������������������������������� 495 art 47�������������������������������������������� 206 art 48�������������������������������������������� 192

art 10�������������������������������������612, 614 art 33�������������������������������������������� 614 ch. 2 “Legal inheritance”��������612, 613 ch. 4 “Estate disposal”������������612, 613 Insurance Law 1995������������������������ 1, 35 art 1������������������������������������������������ 36 art 11�������������������������������������������� 190 art 12����������������������������� 192, 204, 213 art 14�������������������������������������������� 623 art 16(1)��������������������������������������� 223 (2)���������������������������������������������� 275 art 17�������������������������������������������� 293 art 21(3)��������������������������������������� 603 art 26�������������������������������������������� 445 art 30�������������������������������������������� 154 art 33�������������������������������������369, 568 art 36�������������������������������������340, 341 art 40�������������������������������������������� 364 (3)���������������������������������������������� 363 art 44�������������������������������������������� 526 (3)���������������������������������������������� 528 art 44–47�������������������������������������� 498 art 49�������������������������������������������� 643 art 52�������������������������������������������� 210 art 55�������������������������������������������� 594 (1)���������������������������������������������� 612 art 60�������������������������������������603, 604 art 62�������������������������������������607, 612 art 63�������������������������������������������� 617 (1)���������������������������������������������� 604 (3)���������������������������������������������� 620 art 65�������������������������������������������� 629 art 68�������������������������������������������� 635 art 91�������������������������������������������� 371 art 104�������������������������������������������� 72 art 147�������������������������������������������� 33 Insurance Law 2002 art 1������������������������������������������������ 36 art 11����������������������������� 192, 204, 213 art 12�������������������������������������������� 190 art 15�������������������������������������������� 623 art 17(2)��������������������������������275, 342 art 18�������������������������������������������� 293 art 22(3)��������������������������������������� 603 art 23�������������������������������������������� 465 (1)���������������������������������������������� 440 art 24����������������������������� 450, 461, 464 (2)���������������������������������������������� 458 art 26����������������������������� 461, 462, 463 art 27�������������������������������������445, 446 art 28�������������������������������������������� 485

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art 48–66�������������������������������192, 273 art 49�������������������������������������353, 568 art 52�������������� 340, 341, 347, 352, 525 art 54�������������������������������������������� 273 (2)���������������������������������������������� 361 (4)���������������������������������������������� 363 art 59�������������������������������������������� 775 art 60�������������������������������������������� 528 art 60–63�������������������������������������� 498 art 61�������������������������������������528, 529 (1)���������������������������������������������� 529 (2)���������������������������������������������� 527 (3)���������������������������������������������� 529 art 62�������������������������������������519, 520 art 65(2)��������������������������������������� 643 (3)���������������������������������������643, 653 art 66�������������������������������������������� 661 art 95�������������������������������������371, 564 art 106�������������������������������������������� 72 art 164������������������������������������������ 199 Insurance Law art 2�������������3, 108, 127, 389, 390, 449 art 4���������������������������������������������� 240 art 5������������������������287, 326, 421, 443 art 9������������������������������������������������ 46 (3)���������������������������������������������� 616 art 10����������������������������� 108, 306, 449 (1)�������������������������������������������3, 117 (2)�������������������������������������������3, 582 (3)�������������������������������������������3, 127 art 11�������������������������������������108, 134 art 12108, 135, 171, 172, 186, 211, 219, 565, 582, 597, 610, 615, 616, 729 (1)����������������������������3, 194, 211, 597 (1)–(6)���������������������������������������� 182 (2)������������������������3, 5, 184, 729, 759 (3)������������������������������� 126, 194, 579 (4)����������������������������5, 126, 563, 565 (4)–(6)���������������������������������������� 182 (5)���������������������������������������580, 582 (6)� 177, 179, 186, 194, 565, 760, 763 art 13������ 112, 116, 117, 122, 131, 133, 140, 590, 591 (1)���������������� 110, 116, 117, 130, 132 (3)���������������� 123, 132, 133, 159, 160 art 13–14�������������������������������������� 141 art 14135, 137, 141, 142, 162, 590, 591 art 15166, 546, 550, 554, 562, 599, 702 art 15,47��������������������������������������� 551 art 16...6, 110, 112, 125, 221, 223, 229, 234, 284, 294, 296, 532, 535, 555, 565, 586, 746, 748, 750

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(1) 230, 236, 239, 242, 244, 245, 252, 256, 271, 284, 333, 583, 587 (2)�������� 224, 246, 251, 252, 259, 261, 268, 271, 282, 285, 333, 583, 587, 681, 731 (3) 224, 252, 260, 261, 263, 271, 272, 277, 278, 281, 282, 283, 481, 555, 561, 584, 587, 750 (4) 167, 169, 253, 258, 259, 261, 265, 333, 480, 536, 682, 731 (5)�������� 253, 258, 259, 261, 265, 333, 536, 731 (6)�������� 224, 252, 263, 264, 265, 272, 284, 586 art 17������ 125, 140, 148, 154, 157, 223, 227, 306, 309, 310, 312, 316, 318, 443, 568, 587, 589, 602, 655, 682 (1)������������������������287, 289, 313, 333 (2) 227, 291, 296, 297, 302, 309, 310, 313, 315, 333 art 18�������������������������������������������� 125 (3)���������������������������������������������� 603 (5)���������������������������������������������� 127 (7)���������������������������������������������� 128 art 19������ 145, 154, 157, 277, 316, 435, 440, 451, 454 art 20�������������������������������������476, 543 art 21�������������� 285, 431, 432, 433, 698 art 22�������������� 390, 410, 439, 448, 452 art 22(1)������������������������������437, 440 art 22(2)���������������410, 441, 442, 452 art 23������ 158, 390, 410, 450, 451, 453, 459, 460, 742 art 23(1)���������������������� 150, 450, 742 art 23(2)������������������������������150, 456 art 23–25����������������������� 444, 449, 455 art 24����������������������390, 410, 450, 453 art 25�������������������������������������450, 455 art 26432, 433, 465, 485, 539, 773, 774 art 27296, 477, 478, 479, 487, 491, 556 (1)������������������������������� 169, 480, 556 (1)–(2)���������������������������������������� 482 (1)–(3)���������������������������������������� 484 (2)���������169, 295, 481, 486, 556, 644 (3)������������������������������� 295, 482, 484 (4)���������������������������������������������� 484 art 28����������������������707, 710, 726, 733 (2)���������������������������������������������� 731 art 28–29������������������������������������������ 7 art 29����������������������������� 718, 726, 727 (2)���������������������������������������������� 719 art 30�������������������������������������156, 157

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art 31135, 167, 171, 182, 196, 207, 211, 217, 582, 597, 603, 610, 615, 616 (1)(1)������������������������������������������ 197 (1)(1)–(4)�������������������� 205, 207, 219 (1)(2)�����������������������������������198, 202 (1)(3)������������������������������������������ 204 (1)(4)������������������������������������������ 204 (2)���������������� 197, 201, 219, 597, 633 (3)������������������������135, 203, 597, 625 art 31–47������������������������������������������ 5 art 32����������������������������� 272, 296, 555 (1)������������������������������� 272, 561, 584 (2)������������������������������� 166, 555, 584 (3)������������������������������� 167, 555, 584 art 33����������������������135, 198, 201, 582 (1)������������������������������� 200, 201, 630 (2)������������������������������� 200, 201, 630 art 34������ 129, 201, 209, 240, 550, 582, 593, 594, 595, 596, 597, 598, 632 (1)������������������������������� 135, 167, 551 (2)���������������������������������������������� 201 (3)���������������������������������������������� 630 art 35�������������������������������������128, 630 art 36�������163, 165, 557, 599, 600, 632 (1)���������������������������������������������� 163 art 37������ 245, 296, 558, 599, 600, 601, 622, 632 (2)���������������������������������������562, 622 (3)���������������������������������������������� 557 art 38�������������������������������������165, 632 art 39����������������������603, 613, 624, 625 (2)���������������������������������������������� 204 art 39–40�������������������������������������� 608 art 39–43�������������������������������������� 603 art 41�������������� 212, 545, 605, 606, 612 art 42�������������� 611, 612, 614, 618, 619 (1)������������������������608, 616, 627, 628 (1)(2)������������������������������������������ 616 (1)(3)������������������������������������������ 619 (2)���������������������������������������������� 621 (3)���������������������������������������627, 628 art 43����������������������������� 477, 486, 622 (1)������������������������������� 295, 487, 626 (2)���������������������������������������487, 626 art 44�������������� 298, 477, 487, 622, 628 (1)���������������������������������������������� 295 art 45�������������������������������������������� 295 art 46������������������ 5, 370, 493, 495, 635 (1)���������������������������������������������� 376 art 47����������������������������� 553, 561, 599 art 48�������135, 171, 182, 193, 565, 760 art 48–65�������������������������������������� 563

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art 48–66�����������������������������������5, 370 art 49����������������������369, 544, 556, 577 (1)���������������������������������������������� 570 (2)������������������������������� 556, 570, 572 (3)� 166, 168, 296, 556, 571, 572, 785 (4)������������������������295, 571, 572, 573 art 50����������������������166, 546, 559, 560 art 51�������������� 413, 414, 429, 430, 574 (1)���������������������������������������415, 557 (2)������������������������������� 416, 419, 557 (3)���������������� 166, 296, 419, 430, 557 (4)���������������������������������������������� 417 art 52340, 347, 348, 354, 532, 533, 544, 545, 556, 577, 752, 756, 758, 759 (1)������������������������166, 168, 296, 533 (2)������������������������303, 532, 533, 573 art 53�������������������������������������168, 544 art 54����������������������������� 166, 193, 561 art 55(1)��������������������������������128, 575 (2)���������������������������������������������� 575 (3)������������������������������� 128, 167, 575 (4)���������������������������������������128, 575 art 56�������������������������������������370, 785 (1)���������������������������������������������� 385 (2)���������������������������������������377, 379 (3)���������������������������������������167, 383 (4)������������6, 361, 363, 364, 365, 366, 367, 368 art 57413, 426, 427, 429, 430, 458, 574 (1)������������������������������� 415, 421, 423 (2)������������������������������� 424, 430, 696 art 58(1)��������������������������������������� 296 art 59�������������������������������������������� 576 art 60�������������� 500, 501, 502, 508, 541 (1)���������501, 504, 507, 508, 512, 517 (2)���������������������������������������295, 505 (3)���������������� 501, 503, 504, 508, 509 art 60–63�������������������������������������� 493 art 61�������������������������������������������� 524 (1)���������������������������������������295, 526 (2)���������������������������������������527, 530 (3)���������528, 530, 531, 532, 533, 537 art 61–63�������������������������������������� 732 art 62����������������������517, 519, 520, 524 art 63�������������������������������������������� 524 art 64�������������������������������������������� 438 art 65�������������������������������������������� 663 (1)���������������������������������������������� 642 (2)������������4, 639, 642, 652, 655, 656, 657, 690 (3)�������������������� 4, 639, 643, 653, 655 (4)����������������������������4, 564, 639, 643

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art 66�������������� 642, 643, 660, 663, 686 art 67�����������������������������������������47, 49 (1)���������������������������������������������� 134 art 67–94���������������������������������������� 49 art 69���������������������������������������������� 50 art 71���������������������������������������������� 50 art 72���������������������������������������������� 50 art 73���������������������������������������������� 50 art 74���������������������������������������������� 47 art 77���������������������������������������������� 50 art 79���������������������������������������������� 48 art 80���������������������������������������������� 48 art 81���������������������������������������������� 55 art 81–83���������������������������������������� 48 art 82���������������������������������������������� 56 art 83���������������������������������������������� 56 art 89�����������������������������������������48, 54 art 89–93���������������������������������������� 54 art 90�����������������������������������������48, 54 art 91���������������������������������������������� 54 art 92��������������������������48, 54, 105, 128 art 95����� 5, 59, 370, 563, 579, 581, 729 (1)�������������������������������������������5, 580 (2)�������������������������������������������3, 581 art 96���������������������������������������������� 59 art 97�����������������������������������������49, 71 art 98�����������������������������������������48, 71 art 99���������������������������������������������� 71 art 100�������������������������������������71, 101 art 101�������������������������������������67, 712 art 102�����������������������������������712, 733 art 102–103�������������������������������������� 7 art 103�������������������������������������59, 733 art 105���������������������������������������7, 733 art 106�������������������������������������������� 48 art 107���������������������������������������48, 79 art 111�������������������������������������������� 82 art 113(1)������������������������������������� 322 art 114������������������������������� 48, 60, 128 art 116������������ 287, 320, 321, 322, 325 (1)���������������������������������������������� 322 (1)–(3)���������������������������������������� 333 (1)–(4)���������������������������������������� 321 (3)���������������������������������������������� 330 art 117�������������� 85, 109, 129, 134, 588 art 117–132������������������������������������ 85 art 118�������������������������������������86, 129 art 119������������������������������� 48, 86, 588 art 120�������������������������������������������� 86 art 121�������������������������������������������� 86 art 122�������������������������������������������� 86

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art 72���������������������������������������������� 30 art 80���������������������������������������������� 30 Legislation Law art 45���������������������������������������������� 31 art 78���������������������������������������������� 30 Maritime Code of the People’s Republic of China 1992 (The Maritime Code, CMC)���������������������� 6, 33, 225, 737 Maritime Code art 3���������������������������������������������� 741 art 42(5)��������������������������������������� 741 art 193������������������������������������������ 743 art 216�����������������������������������738, 759 (1)���������������������������������������������� 738 (2)���������������������������������������������� 739 art 217������������������������������������������ 740 art 218�����������������������������������739, 741 (2)���������������������������������������710, 741 (6)���������������������������������������������� 739 art 221�����������������������������������129, 740 art 222� 6, 225, 246, 247, 555, 747, 748 (2)���������������������������������������������� 747 art 222–24������������������������������������ 745 art 223�����������������������������������749, 750 (1)���������������������������������������������� 749 (2)���������������������������������������������� 750 art 224������������������������������������������ 765 art 225����������� 361, 362, 364, 370, 375, 380, 785 art 226������������������������������������������ 559 art 227������������������������������������������ 559 (1)���������������������������������������������� 559 (1)���������������������������������������������� 560 (2)���������������������������������������559, 561 art 228������������������������������������������ 559 art 229��������������������������� 781, 782, 784 art 230�����������������������������������781, 784 (1)���������������������������������������������� 784 art 234������������������������������������������ 745 art 235����������� 153, 340, 745, 753, 754, 755, 758 art 236������������������������������������������ 745 (2)���������������������������������������������� 745 art 237�����������������������������������390, 741 art 237–41������������������������������������ 741 art 238�����������������������������������390, 743 art 239�����������������������������������390, 743 art 240������������������������������������������ 745 (1)���������������������������������������������� 743 (2)���������������������������������������������� 743 art 241������������������������������������������ 743

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art 242�����������������������������������390, 744 art 242–44������������������������������������ 741 art 243�����������������������������������390, 744 art 244������������������������������������������ 744 art 245������������������������������������������ 776 art 245–50������������������������������������ 776 art 246������������������������������������������ 777 (1)���������������������������������������������� 778 (2)���������������������������������������������� 778 art 248������������������������������������������ 776 art 249�����������������������������������778, 779 (2)���������������������������������������������� 779 art 251�����������������������������������390, 410 art 252��������������������390, 540, 769, 770 art 252–54�����������������������������498, 766 art 257�����������������������������������539, 771 art 264��������������������������� 772, 773, 774 art 267������������������������������������������ 775 art 268������������������������������������������ 753 (2)���������������������������������������������� 738 Ch 13������������������������������������������� 772 Marriage Law of the People’s Republic of China 1980; 2001���� 195 Marriage Law of the People’s Republic of China 1981 art 24�������������������������������������610, 615 Marriage Law 2001 art 20����������������� 518 art 21�������������������������������������������� 518 Marriage Law art 6���������������������������������������������� 202 art 20�������������������������������������������� 197 art 21�������������������������������������198, 201 art 25�������������������������������������������� 198 art 28�������������������������������������������� 203 art 29�������������������������������������������� 203 Organic Law of the People’s Court 1954���������������������������������� 31 Production Safety Law of the People’s Republic of China 2002������������� 414 Property Law of the People’s Republic of China 2007���������������������������� 653 art 245������������������������������������������ 653 Provisions of the Supreme People’s Court Concerning Trying Civil Cases Relating to People’s Mediation Agreement 2002������������������������ 649 Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance (The Motor Regulation)�������������������������������� 642 art 10�������������������������������������������� 118

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art 16�������������������������������������������� 561 art 43�������������������������������������������� 667 Road Traffic Safety Law of the People’s Republic of China 2003��� 4, 46, 301, 415, 640, 665 art 8���������������������������������������������� 415 art 17�������������� 640, 665, 666, 669, 692 art 21�������������������������������������������� 415 art 52�������������������������������������������� 667 art 53�������������������������������������������� 667 art 75�������������������������������������������� 692 art 76�������������� 654, 666, 667, 668, 690 (2)���������������������������������������������� 645 art 119������������������������������������������ 670 (5)���������������������������������������������� 666 Security Law of China 1993���������������� 79 Several Provisions on Civil Evidence 2001 art 9������������������������������������������ 411 Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures art 2������������������������� 442 SPC: “The Official Reply of the SPC on the Starting Date of Limitation Period in which the Insurer of a Marine Insurance Contract Exercises the Right of Subrogation to Claim for Compensation” 2014������������ 772 Special Maritime Procedure Law of the People’s Republic of China 1999 ������������������������������������������498, 737 art 65�������������������������������������������� 768 art 93�������������������������������������769, 770 art 93–96�������������������������������������� 766 art 94����������������������������� 767, 769, 770 art 95�������������������������������������767, 770 (1)���������������������������������������������� 767 (2)���������������������������������������������� 508 (2)���������������������������������������������� 767 art 96�������������������������������������������� 769 Stipulation of the Supreme People’s Court on the Judicial Explanation (2007 No. 12)���������������������������� 222 art 5�����������������������������������������40, 498 art 6�����������������������������������������40, 498 Stipulations of the Supreme People’s Court on Certain Issues Concerning Suspicion of Economic Crimes Involved in the Trial of Economic Disputes 1998��������������������������� 490 art 10–12�������������������������������������� 490 art 10�������������������������������������������� 490

Stipulations on Certain Questions for Hearing Marine Insurance Cases of the PRC 2006 (hereinafter, the SPC Stipulations 2006)������� 499, 737, 755 art 1���������������������������������������������� 759 art 6���������������������������������������������� 755 art 7���������������������������������������������� 755 art 8���������������������������������������������� 755 art 10�������������������������������������������� 765 art 13�������������������������������������������� 769 art 13–16�������������������������������������� 766 art 14�������������������������������������768, 769 art 15�������������������������������������768, 772 The Constitution 1982������������������������ 30 art 3������������������������������������������������ 31 art 5������������������������������������������������ 30 art 9���������������������������������������������� 185 art 10�������������������������������������������� 185 art 67���������������������������������������������� 31 art 123�������������������������������������������� 31 The People’s Mediation Law of the People’s Republic of China 2010 art 1���������������������������������������������� 649 art 31�������������������������������������������� 649 art 32�������������������������������������������� 649 art 33�������������������������������������������� 649 Tort Law of the People’s Republic of China 2009���������������������643, 667 art 16�������������������������������������������� 668 art 22�������������������������������������������� 668 art 48�������������������������������������644, 667 art 49�������������������������������������������� 672 art 52�������������������������������������������� 672 art 53�������������������������������������������� 692 Chapter 5�������������������������������������� 667 Urban Real Estate Administration Law 1994 (PRC) art 46������������� 188 Work Safety Law of the People’s Republic of China 2002������������� 414 European Union Principles of European Insurance Contract Law (PEICL 2009) art 4:202�������������������� 350, 354, 380 art 2.101��������������������������������������� 233 art 6:103��������������������������������������� 453 art 6:104 (2)��������������������������������� 455 (3)���������������������������������������������� 454 art 8:104��������������������������������������� 380 art 10:101(3)�������������������������������� 519

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Germany German Insurance Contract Act 2008 s 19����������������������������������������������� 221 (1)������������������������������� 227, 237, 244 (5)������������������������������� 228, 264, 586 s 20����������������������������������������������� 237 s 23(1)������������������������������������������ 358 (2)���������������������������������������������� 358 s 25(1)������������������������������������������ 352 (2)���������������������������������������������� 352 s 26����������������������������������������354, 358 s 28(2)������������������������������������������ 418 s 47����������������������������������������������� 242 s 62(2)������������������������������������������ 423 s 78����������������������������������������������� 384 (1)���������������������������������������������� 380 (3)���������������������������������������������� 384 s 95����������������������������������������������� 570 s 105��������������������������������������������� 663 s 115��������������������������������������659, 660 s 150��������������������������������������������� 593 Italy Italian Civil Code art 1910���������������� 363 Japan Commercial Code of Japan s 630������ 179 Macao Macao Civil Code s 404�������������������� 123 Macao Commercial Code art 995������������������������������������������ 179 art 966(3)������������������������������������� 116 art 1002(1)����������������������������������� 363 (2)���������������������������������������������� 385 (4)���������������������������������������������� 380 art 1004 (Co-insurance)���������������� 726 New Zealand New Zealand Marine Insurance Act 1908 s 55����������������������������������� 387 Insurance Law Reform Act 1977 s 11������������������������������������357, 758 Norway The Norwegian Marine Insurance Plan 1996 s 3–9��������������������������������������������� 349 s 3–11������������������������������������������� 350

Spain Spain: the Insurance Contracts Act Law Number 50/1980 art 83������������� 206 Switzerland Switzerland Insurance Contract Act��� 379 art 53 70��������������������������������������� 379 Taiwan Compulsory Automobile Liability Insurance Act 2010 (Taiwan) art 11�������������������������������������659, 660 art 7���������������������������������������659, 660 Insurance Act 2010 art 37�������������������������������������������� 385 art 38�������������������������������������������� 385 art 60�������������������������������������������� 352 art 93�������������������������������������������� 663 art 94�������������������������������������������� 659 Insurance Act 2015 art 97...417, 422, 423 Insurance Act����������������������������������� 379 art 35�������������������������������������������� 363 art 36�������������������������������������376, 377 art 37�������������������������������������376, 385 art 38�������������������������������������������� 376 art 59�������������������������������������347, 349 United Kingdom Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) ������������������������������������������151, 346 s 2������������������������������������������������ 221 (2)���������������������������������������225, 252 (3)���������������������������������������������� 244 s 3������������������������������������������������ 233 s 4(1)�������������������������������������248, 346 (1)(b)������������������������������������������ 248 s 5(2)�������������������������������������252, 263 (3)���������������������������������������������� 252 s 6�����������������������������������������151, 754 s 8�����������������������������������������241, 242 schedule 1, para 2�������������������������� 252 schedule 1, para 3–8���������������������� 253 schedule 1, para 7�������������������������� 262 schedule 1, part 1, para. 7�������������� 284 Civil Partnership Act 2004 s 253������� 208 Contracts (Rights of Third Parties) Act 1999������������������������������������������ 720 s 1������������������������������������������������ 720 s 2������������������������������������������������ 549

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English Law Reform (Husband and Wife) Act 1962�������������������������� 519 Family Law (Scotland) Act 1985 s 1(1)�������������������������������������������� 203 (2)���������������������������������������������� 203 Financial Services and Markets Act 2000 (FSMA)���������������������������� 151 s 138D������������������������������������������ 472 Insurable Interest Bill 2016��������������� 626 s 2������������������������������������������������ 609 (1)���������������������������������������������� 211 s 3(1)(a) and (b)���������������������������� 191 (2)���������������������������������������191, 194 (3)���������������������������������������176, 764 (3)(c)������������������������������������������ 190 (3)(d)������������������������������������������ 179 s 5������������������������������������������������ 609 s 7������������������������������������������������ 609 Insurance Act 2015��������������������������� 750 s 3�����������������������������������������226, 750 (1)���������������������������������������������� 750 (2)���������������������������������������������� 750 (3)���������������������������������������������� 750 (4)���������������������������������������������� 750 (4)(a)�����������������������������������226, 751 (4)(b)�����������������������������������226, 751 (5)���������������������������������������������� 751 s 7(3)�������������������������������������������� 751 (4)���������������������������������������������� 751 s 8�����������������������������������������253, 751 (1)���������������������������������������������� 248 s 9�����������������������������������������151, 757 (2)���������������������������������������������� 754 s 10����������������������������������������152, 757 (1)���������������������������������������357, 757 (2)���������������������������������������������� 357 (7)���������������������������������������������� 757 Schedule 1, para. 6������������������������ 262 Schedule 1, para. 6(1).������������������� 284 Insurance Companies Amendment Act 1973 s 50����������������������������������� 596 Insurance Contract Law Draft Bill (17 June 2014) clause 14������������ 468 Insurable Interest Bill (Draft) 2016�����������������������������������172, 764 Insurance Interest Bill 2016 s 2��������� 208 Law of Property Act 1925 [15 Geo 5, C 20]����������������������������������������� 506 s 136��������������� 506, 507, 512, 513, 771 Life Assurance Act 1772�������������������� 609

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Life Assurance Act 1774 (LAA)�������� 171, 191, 608 s 1��������������������������������� 172, 626, 634 s 2��������������������������596, 608, 609, 611 M1 Trustee Act, 1925����������������������� 507 Marine Insurance (Gambling Policies) Act 1909����������������������������173, 609 Marine Insurance Act 1788��������������� 609 Marine Insurance Act 1906 (MIA)��� 171, 174, 175, 737 s 1�����������������������������������������469, 738 s 2(1)�������������������������������������������� 738 s 3������������������������������������������������ 739 (1)���������������������������������������������� 739 (2)���������������������������������������������� 739 s 4������������������������������������������������ 769 s 5�����������������������������������������172, 764 (2)������������������������������� 174, 176, 762 s 6������������������������������������������������ 191 (1)������������������������������� 760, 764, 765 (2)���������������������������������������������� 765 s 7������������������������������������������������ 762 s 9(1)�������������������������������������������� 729 s 9–11������������������������������������������� 756 s 17����������������������������������������������� 221 s 18(1)��������������������������� 225, 226, 746 (2)������������������������������� 246, 247, 345 s 20(2)������������������������������������������ 248 s 21(1)������������������������������������������ 739 s 32(1)������������ 363, 364, 365, 366, 368 (2)���������������������������������������380, 381 s 33�������������������������������� 753, 756, 757 (1)���������������������������������������������� 753 (2)���������������������������������������������� 151 (3)������������������������������� 151, 753, 754 s 33–41����������������������������������������� 756 s 34����������������������������������������������� 757 (2)���������������������������������������151, 756 s 50(1)�����������������������������������782, 783 (2)���������������������������������������������� 782 (3)���������������������������������������������� 781 s 51����������������������������������������������� 782 s 52����������������������������������������������� 745 s 55����������������������������������������������� 387 (1)���������������������������������������������� 388 s 57����������������������������������������������� 776 (1)���������������������������������������������� 777 s 60����������������������������������������������� 778 s 62(1)������������������������������������������ 779 (6)���������������������������������������������� 779 s 79�������������������������494, 501, 507, 769

Table of L egislation

s 80����������������������������������������������� 378 (1)���������������������������������������������� 361 (2)���������������������������������������������� 361 s 84(3)(f)�������������������������������383, 384 Married Women’s Property Act 1882 (45 & 46 Vict C75) s 11����������������������������������������207, 624 Road Traffic Act  1988 s 145(4A)�������������������������������������� 676 s 148(2)���������������������������������������� 705 Sale of Goods Act 1979 s 17(2)��������� 761 Suicide Act 1961������������������������������ 628 Third Parties (Rights Against Insurers) Act 1930����������������������������������� 658 Third Parties (Rights against Insurers) Act 2010����������������������������������� 658 s 1������������������������������������������������ 660 (1)���������������������������������������������� 658 (4)���������������������������������������������� 658 s 2������������������������������������������������ 658 s 8������������������������������������������������ 660 United States 15 USC s 1012��������������������������������� 331 15 USC s 1012(b)���������������������������� 331 California general Unfair Competition Law������������������������������������������� 332 California Insurance Code, (CA Ins Code s 330 (2014)������������������������������ 320 s 10110.1(a)���������������������������������� 172 California Unfair Insurance Practice Act (CUIPA)����������������������������������� 332 s 790.03���������������������������������������� 332

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New Mexico Insurance Code s 59A-16–30���������������������������������� 334 New Mex Stat s 59A-16–1, 59A-16–3 (2014)��������������������������������������� 331 s 59A-16–4 (2014)������������������������ 331 s 59A-16–5 (2014)������������������������ 331 s 59A-16–29 (2014)���������������������� 331 s 59A-16–30 (2014)���������������������� 331 New York Insurance Act s 3205 (3)(c)���������������������������������593, 596 New York Insurance Law (2013) s 3420(a)(2) and (b)(1)�������������� 659 s 3420(a)(2)���������������������������������� 660 s 3420(b)(1)���������������������������������� 660 New York Insurance Law s 146(3)���������������������������������������� 593 s 3401������������������������������������������� 178 New York State Insurance Law 1939 s 3401������������������������������������������ 177 Pennsylvania Unfair Insurance Practice Act (PUIPA)����������������� 331 s 5(1)�������������������������������������������� 331 (2)���������������������������������������������� 331 s 9������������������������������������������������ 332 s 11����������������������������������������������� 332 Unfair Insurance Practice Act, Act of 22 July 1974, PL 589, No. 205, (Pennsylvania, PA) ss. 4 and 5������������������������������������� 331 Uniform Simultaneous Death Act 1940, 1993�������������������������������� 621

TABL E OF I N T ER P R E TAT ION S OF T HE SU PRE ME P E OP LE’S COU RT OF  CHIN A

art 6(1)����������������������������������225, 252 (2)���������������������������������������������� 231 art 7���������252, 260, 263, 264, 265, 269 art 8���������������������������������������������� 261 art 9(1)����������������������������������������� 297 (2)���������������������������������������������� 296 art 10�������������������������������������302, 303 art 11(1)��������������������������������309, 311 (2)������������������������������� 310, 313, 334 art 12�������������������������������������������� 313 art 13(2)��������������������������������318, 319 art 14�������������������������������������142, 157 art 15�������������������������������������������� 742 (1)���������������������������������������������� 452 art 16����������������������447, 504, 540, 768 art 18�������������������������������������������� 436 art 25(2)��������������������������������������� 455 Interpretation III: the Third Interpretation by the SPC on Certain Issues Concerning the Application of The Insurance Law of the People’s Republic of China 2014 (Draft for comments) Interpretation III (Draft for Comments) 2014�����������������������������������391, 623 art 4���������������������������������������������� 637 art 8���������������������������������������������� 602 art10��������������������������������������������� 285 art 16�������������������������������������������� 602 art 17�������������������������������������������� 602 art 23�������������������������������������������� 634 art 26�������������������������������������������� 550 art 28�������������������������������������549, 623 art 29�������������������������������������������� 554 art 31(1)��������������������������������������� 633 (2)���������������������������������������������� 633 art 32�������������������������������������������� 637 art 32(1)��������������������������������������� 637

Interpretation 2003 (the Supreme People’s Court Interpretation on Certain Questions Concerning the Application of the Special Maritime Procedure Law)����������������������������498,737 art 65–68�������������������������������������� 766 Interpretation (Draft for Comments) 2003 (the Supreme People’s Court Interpretation on Certain Issues Concerning the Trial of Insurance Disputes) art 19������������������������� 390 Interpretation 2003 art 65����������767, 769 Interpretation (I) of the Supreme People’s Court on Certain Issues Concerning the Application of The Insurance Law of the PRC 2009 (Interpretation I 2009)���������������������������������41, 391 art 5(2)����������������������������������������� 275 Interpretation II of the Supreme People’s Court on Certain Issues Concerning the Application of The Insurance Law of the PRC 2012 (Draft for Comments) art 1���������������������������������������������� 179 art 22�������������������������������������391, 404 Interpretation (II) of the Supreme People’s Court on Certain Issues Concerning the Application of The Insurance Law of the PRC 2013 (Interpretation II 2013)41, 213, 222, 287, 391, 504 Interpretation II 2013����������������107, 391 art 1���������������������������������������184, 365 art 2���������������������������������������������� 167 art 3���������������������������������������138, 256 art 4������������������������163, 168, 169, 591 art 5������������������������236, 252, 254, 263 (2)���������������������������������������������� 452

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Table of Interpretations of the Supreme People’ s Court of C hina

art 8���������������������������������������488, 490 Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents 2012 (the Interpretation on Compensation for Damages)������������647, 667, 670, 671 Interpretation on Compensation for Damages art 2���������������������������������������������� 672 art 14�������������������������������������������� 668 art 15�������������������������������������������� 668 art 16�������������������������������������������� 702 art 17�������������������������������������647, 677 art 18�������������������������������������������� 686 art 19����������������������������� 668, 669, 673 art 19.������������������������������������������� 669 Art 20������������������������������������������� 670 art 21(3)��������������������������������������� 669 art 25(1)��������������������������������������� 691 (2)���������������������������������������������� 691 Interpretation on Certain Issues Regarding the Application of the Contract Law (1) 1999��������������� 719 Interpretation on the Questions Concerning Applicable Law for Hearing Cases for Sales Contract Disputes, SPC, 2012 No. 8��������� 124 Interpretations on Questions Concerning Civil Cases in Respect of Limitation Period 2010 art 19�������������������������������������541, 773 Resolution of the NPC Standing Committee on Strengthening the Work of Law Interpretation 1981 ����������������������������������������������32, 40 art 2������������������������������������������������ 40 Supreme People’s Court’s Response to the Queries of the PICC Jiangyin Branch about the Disputes on Insurance Contract and Insurance Amount (Supreme People’s Court, No. 280) (2000)������������������������� 143

(2)���������������������������������������������� 637 (3)���������������������������������������������� 637 art 45�������������������������������������������� 391 Interpretation (III) of the SPC on Certain Issues Concerning the Application of The Insurance Law of the PRC 2015 (Interpretation III 2015)������41, 210, 391, 222, 486, 549 Interpretation III 2015������������������������ 41 art 1������������������������129, 594, 595, 596 art 2������������������������550, 551, 598, 599 art 3���������������������������������������������� 595 art 4���������������������������������������211, 633 art 5���������������������������������������������� 586 (2)���������������������������������������������� 586 art 6������������������������������� 200, 201, 630 art 8���������������������������������������600, 601 (1)���������������������������������������������� 558 (2)���������������������������������������������� 558 art 9���������������������������������������613, 616 (1)���������������������������������������������� 604 (1)-(3)���������������������������������������� 613 (2)���������������������������������������611, 615 (3)���������������������������������������������� 611 art 10�������������������������������������������� 606 (1)���������������������������������������������� 606 (2)���������������������������������������������� 606 (3)���������������������������������������������� 606 art 12�������������������������������������������� 628 art 13�������������������������������������������� 634 art 14�������������������������������������������� 619 art 15�������������������������������������������� 621 art 16����������������������������� 486, 553, 622 (1)���������������������������������������������� 622 (2)���������������������������������������������� 622 art 17�������������������������������������549, 623 art 24�������������������������������������������� 439 art 25����������������������������� 391, 402, 404 art 68�������������������������������������������� 769 Interpretation of the Supreme People’s Court of China on Certain Issues Concerning Application of Relevant Laws in Trialling Fraud Cases 1996 ������������������������������������������������� 488

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TA BL E OF R E G U LAT ION S

art 6������������������������������������������������ 61 art 7������������������������������������������������ 61 art 8������������������������������������������������ 62 art 9������������������������������������������������ 62 art 11���������������������������������������������� 62 art 13���������������������������������������������� 62 art 22���������������������������������������������� 63 Agricultural Insurance Regulation 2012�������������������������������������������� 38 art 2������������������������������������������������ 39 art 3������������������������������������������������ 39 art 7������������������������������������������������ 39 art 8������������������������������������������������ 39 art 9������������������������������������������������ 40 China Insurance Regulatory Commission (CIRC), established on 18 November 1998������������������������� 320 CIRC Regulations 2012 (Regulations on Administration of Reinsurance of Property Insurance Companies 2012)�������������������������������������7, 710 ch 2 art 5(1)��������������������������������������� 734 art 5(2)��������������������������������������� 734 ch 3 s 1(6)������������������������������������������ 734 s 1(6)(1)������������������������������������� 724 s 1(6)(3)���������������������� 721, 722, 724 s 1(6)(4)������������������������������������� 732 s 1(10)���������������������������������������� 734 s 2(1)(2)������������������������������������� 714 s 2(1)(4)������������������������������������� 716 s 2(1)(5)������������������������������������� 717 s 2(12)���������������������������������723, 724 s 3(1)(2)������������������������������������� 714 CIRC Regulations 2015 (Regulations on Administration of Reinsurance Business 2005, amended in 2010 and 2015) ����������������������������������59, 710

Australia

Insurance Contracts Regulation

1985������������������������������������������ 228 s 2������������������������������������������������ 228 s 2B���������������������������������������������� 226 China Accounting Standard for Enterprises No 26 – Reinsurance Contract, published by the Ministry of Finance of China in 2006, Re: Accounting (2006) No. 3������������������������������ 710 art 2���������������������������������������������� 711 Administrative Measures for Pension Insurance Business of Insurance Companies, Order of the CIRC [2007] No. 4���������������������������� 63, 548, 551 art 30�������������������������������������������� 552 Administrative Measures for the Information Disclosure of New-type Personal Insurance Products, Order of the CIRC [2009] No. 3����������������� 66 art 2������������������������������������������������ 66 art 3������������������������������������������������ 66 art 4������������������������������������������������ 66 art 5������������������������������������������������ 66 art 6������������������������������������������������ 66 art 7������������������������������������������������ 67 art 8������������������������������������������������ 67 art 9������������������������������������������������ 67 art 10���������������������������������������������� 67 art 17�������������������������������������������� 592 Administrative Measures in Insurance License, CIRC, 2007������������������� 50 art 79���������������������������������������������� 50 Administrative Measures on Examination, Approval and Filing of Personal Insurance Products (2004), Order of the CIRC [2004] No. 6.���������������� 61

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the People’s Bank of China, and the State Administration of Foreign Exchange, 2007 (The Measures 2007)������������������������������������������ 76 The Measures 2007 art 4������������������������������������������������ 76 art 5������������������������������������������������ 76 art 6������������������������������������������������ 76 art 7������������������������������������������������ 77 art 8������������������������������������������������ 77 art 9������������������������������������������������ 77 art 10���������������������������������������������� 77 art 11���������������������������������������������� 78 art 12���������������������������������������������� 78 art 13���������������������������������������������� 79 art 14���������������������������������������������� 79 art 31���������������������������������������������� 79 Interim Measures for the Administration of Overseas Utilisation of Foreign Exchange Insurance Funds, CIRC and the People’s Bank of China, 2004�������������������������������������������� 72 Interim Measures for the Administration of Stock Investment by Insurance Institutional Investors, CIRC and the China Securities Regulatory Commission, 2004����������������������� 72 Interim Measures for the Administration of Utilisation of Insurance Funds, Order of the CIRC [2010] No. 9����� 72 Interim Measures for the Administration of Utilisation of Insurance Funds (2014), Order of the CIRC [2014] No. 3��������72 art 2������������������������������������������������ 73 art 3������������������������������������������������ 73 art 7������������������������������������������������ 73 art 8������������������������������������������������ 73 art 9������������������������������������������������ 73 art 10���������������������������������������������� 73 art 11���������������������������������������������� 73 art 12���������������������������������������������� 74 art 13���������������������������������������������� 74 art 14���������������������������������������������� 74 art 15���������������������������������������������� 74 art 16���������������������������������������������� 75 art 17���������������������������������������������� 75 art 70���������������������������������������������� 73 Interim Measures for the Supervision of the Internet Insurance Business (the Measures 2015), Bao Jian Fa [2015] No. 69����������������������������������97, 118

art 2���������������������������������������713, 726 (1)���������������������������������������������� 710 (4)���������������������������������������������� 713 (5)���������������������������������������������� 714 (6)���������������������������������������������� 715 (7)���������������������������������������������� 717 art 3���������������������������������������������� 717 art 5���������������������������������������������� 731 art 6���������������������������������������������� 734 art 7���������������������������������������������� 725 art 9���������������������������������������������� 725 art 10�������������������������������������������� 733 art 11�������������������������������������725, 733 art 12�������������������������������������������� 733 art 13�������������������������������������������� 734 art 15�������������������������������������724, 731 art 18�������������������������������������������� 735 art 19�������������������������������������������� 735 art 20(1)��������������������������������������� 735 (2)���������������������������������������������� 735 art 21�������������������������������������������� 736 art 22�������������������������������������������� 736 ch 3 “Reinsurance Brokerage Business.”���������������������������������� 735 Compulsory Motor Vehicle Transport Accident Liability Insurance Clauses (Amendment 2012), the State Council’s Regulation art 2���������� 108 Guidance on Consolidated Supervision of Insurance Groups, Bao Jian Fa [2014] No. 96������������������������������ 58 Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure, CIRC, 2006�������������������������������������������� 56 Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds, Detailed Rules, CIRC,2012���������� 76 Interim Measures for the Administration of Bond Investment by Insurance Institutional Investors, CIRC, 2005�������������������������������������������� 72 Interim Measures for the Administration of Investment in Securities Investment Funds by Insurance Companies (2003), CIRC, 2003��� 72 Interim Measures for the Administration of Overseas Investment with Insurance Funds (2007), the China Insurance Regulatory Commission,

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Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies (2015), Order of the CIRC [2015] No. 3�������������� 60 art 48���������������������������������������������� 61 Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies (2010), Order of the CIRC [2010] No. 3�������������� 60 Measures for the Administration of Pilot Programme for Indirect Investment in Infrastructure Projects with Insurance Funds (2006), CIRC, 2006�������������������������������������������� 72 Measures for the Administration of the Formation of Overseas Insurance Institutions 2015, CIRC��������������� 50 art 7������������������������������������������������ 50 art 12���������������������������������������������� 51 art 15���������������������������������������������� 51 Measures for the Administration of the Insurance Protection Fund, CIRC, the Ministry of Finance and the People’s Bank of China, Order of the CIRC [2008] No. 2���������������71, 101 art 3���������������������������������������������� 101 art 4���������������������������������������������� 101 art 6���������������������������������������������� 101 art 7���������������������������������������������� 102 art 8���������������������������������������������� 102 art 9���������������������������������������������� 102 art 10�������������������������������������������� 102 art 13�������������������������������������������� 102 art 15�������������������������������������������� 103 art 16�������������������������������������������� 101 (2)���������������������������������������������� 104 art 17�������������������������������������������� 103 art 18�������������������������������������������� 104 art 19�������������������������������������������� 104 art 20�������������������������������������������� 104 art 21�������������������������������������������� 104 Measures for the Punishment of Illegal Conducts in the Intermediary Business of Insurance Companies [2009]����������������������������������������� 85 Measures on Administration of Health Insurance, Order of the CIRC [2006] No. 8���������������������63, 495, 725, 580 art 2�����������������������������������������63, 496

The Measures 2015 art 1�������������������������������������������97, 98 art 2������������������������������������������������ 98 art 3������������������������������������������������ 98 art 4������������������������������������������������ 98 art 5������������������������������������������������ 98 art 6������������������������������������������������ 99 art 7������������������������������������������������ 99 art 8���������������������������������������������� 100 art 9���������������������������������������������� 100 Interim Provisions for the Administration of Insurance Asset Management Companies, Order of the CIRC [2004] No. 2������������������������������������������� 80 Interim Provisions for the Administration of Insurance Asset Management Companies, Bao Jian Fa [2011] No. 19����������������������������������������� 80 art 3������������������������������������������������ 80 art 7������������������������������������������������ 80 art 8������������������������������������������������ 80 art 9������������������������������������������������ 81 art 29���������������������������������������������� 81 art 30���������������������������������������������� 81 Interim Regulations of Insurance Business 1985 art 4���������������������� 34 Interim Measures of Premium Rate Floating for Compulsory Motor Vehicle Traffic Accident Liability Insurance, CIRC, 2007�������������� 680 Interim Measures on Regulation of Non-insurance Subsidiaries of Insurance Companies, Bao Jian Fa [2014] No. 78������������������������������ 58 Interim Regulations on the Administration of Insurance Enterprises 1985�������������������������� 33 Liability limits of the amount covered under motor vehicle traffic accident liability insurance����������������������� 704 Limitation of the sum insured for a death insurance taken out by a parent on his minor child payment of the insurance money, CIRC, (2010) No. 95��������������������������������������� 201 Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies, (No. 3 [2011]); (No. 3 [2015])�������580, 581

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on the life of their child under which the death of the life insured is a condition for payment of insurance money” Bao Jian Fa (2015) No. 90 art 1�����������������������������������199, 201 Notice on property insurance company to carry out co-insurance business of self-examination (expired) CIRC [2005] No. 83���������������������������� 728 Notice on Regulation Life Insurance Business Related Issues [2000] No. 133 art 3����������������������������� 592 Notice on Regulation Life Insurance Business Related Issues [2011] No. 36 art 2���������������������������������������������� 592 art 4���������������������������������������������� 553 Notice on Strengthening Management of the Property Co-insurance Business, CIRC Order (2006) No. 31��������� 726 Opinions on Strengthening the Protection of Insurance Consumers’ Interests, Bao Jian Fa [2014] No. 89���������� 105 Provisions of Basic Services of Life Insurance Business, CIRC Order [2010] No. 4������������������������������ 115 Provisions on the Administration of Insurance Agencies, CIRC Order [2004] No. 14������������������������������ 85 Provisions on the Administration of Insurance Brokerage Institutions, CIRC [2004]������������������������������� 85 Provisions on the Administration of Insurance Companies, CIRC 2004; 2009; 2015���������������������������������� 49 Provisions on the Administration of Insurance Companies 2015 art 5������������������������������������������������ 49 art 61���������������������������������������������� 57 art 62���������������������������������������������� 58 art 63���������������������������������������������� 58 chapter 2����������������������������������������� 49 chapter 3����������������������������������������� 49 chapter 4����������������������������������������� 49 chapter 5����������������������������������������� 49 chapter 6����������������������������������������� 49 chapter 7����������������������������������������� 49 Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices, CIRC 2003���������������������������������� 67

art 3������������������������������������������������ 63 art 4���������������������������������������������� 496 art 12–24���������������������������������������� 63 art 12���������������������������������������������� 64 art 13���������������������������������������������� 64 art 14���������������������������������������������� 64 art 15���������������������������������������������� 64 art 16���������������������������������������������� 64 art 17���������������������������������������������� 64 art 18���������������������������������������������� 64 art 19���������������������������������������������� 65 art 20���������������������������������������������� 65 art 21���������������������������������������������� 65 art 22���������������������������������������������� 65 art 23���������������������������������������������� 65 art 24���������������������������������������������� 65 Measures on Evaluation of Insurance Company Corporate Governance, Bao Jian Fa [2015] No. 112���������� 57 Notice of “the limitation of the sum insured for death insurance taken out by a parent on his minor child payment of the insurance money” Bao Jian Fa (1999) No. 43, (2010) No. 95��������������������������������������� 199 Notice on Certain Issues Concerning Large Commercial Insurance and Omnibus Insurance Business, Bao Jian Fa (2002) No. 16 art 3�������� 726 art 3���������������������������������������������� 726 Notice on Certain Issues Concerning Regulating Life Insurance Business Behaviour, Bao Jian Fa [2000] No. 133������������������������������������� 137 art 2(1)����������������������������������110, 137 Notice Concerning Investment in Equity Shares of Commercial Banks by Insurance Institutions (2006), CIRC������������������������������������������ 72 Notice on Management of Compulsory Motor Vehicle Insurance Underwriting (2009)������������������ 139 Notice on Further Regulating Affiliated Transaction of Insurance Companies, Bao Jian Fa [2015] No. 36���������…57 Notice on Management of Compulsory Motor Vehicle Insurance Underwriting, CIRC Letter (2009) No. 91��������������������������������������� 139 Notice on “matters related to life insurance where parents effect policy

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art 4������������������������������������������������ 68 art 5������������������������������������������������ 68 art 6������������������������������������������������ 68 art 11���������������������������������������������� 68 art 12���������������������������������������������� 68 Provisions on the Administration of Loss Adjusters, CIRC Order [2001] No. 3������������������������������������������� 85 Provisions on the Supervision and Administration of Full-Time Insurance Agencies (2009)����������� 85 Provisions on the Supervision and Administration of Full-Time Insurance Agencies (2015 Amendment), CIRC, (The Agency Provisions 2015)�������������������������� 88 art 5������������������������������������������������ 88 art 6������������������������������������������������ 89 art 7������������������������������������������������ 89 art 11���������������������������������������������� 89 art 12���������������������������������������������� 89 art 13���������������������������������������������� 89 art 14���������������������������������������������� 89 art 15���������������������������������������������� 90 art 16���������������������������������������������� 90 art 17���������������������������������������������� 90 art 18���������������������������������������������� 90 art 19���������������������������������������������� 90 art 20���������������������������������������������� 91 art 21���������������������������������������������� 91 art 22���������������������������������������������� 91 art 23���������������������������������������������� 91 art 24���������������������������������������������� 91 art 25���������������������������������������������� 92 art 26���������������������������������������92, 130 art 27���������������������������������������������� 92 art 28���������������������������������������������� 92 art 29���������������������������������������������� 92 art 30���������������������������������������������� 92 art 31���������������������������������������������� 92 art 32���������������������������������������������� 93 art 33���������������������������������������������� 93 art 34���������������������������������������������� 93 art 35���������������������������������������������� 93 art 36���������������������������������������������� 93 art 37���������������������������������������������� 93 art 38���������������������������������������������� 94 art 39���������������������������������������������� 94 art 40���������������������������������������������� 94 art 41���������������������������������������������� 94 art 42���������������������������������������������� 94

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art 43���������������������������������������������� 94 art 44���������������������������������������������� 94 art 45���������������������������������������������� 95 art 46���������������������������������������������� 95 art 47���������������������������������������������� 95 art 48���������������������������������������������� 95 art 49���������������������������������������������� 95 art 56���������������������������������������������� 95 art 57���������������������������������������������� 95 art 58���������������������������������������������� 95 art 59���������������������������������������������� 95 art 60���������������������������������������������� 96 art 61���������������������������������������������� 96 art 62���������������������������������������������� 96 art 63���������������������������������������������� 96 art 64���������������������������������������������� 96 art 65���������������������������������������������� 96 art 66���������������������������������������������� 97 Provisions on the Supervision and Administration of Insurance Brokerage Institutions [2009]������� 85 Provisions on the Supervision and Administration of Loss Adjusters [2009]����������������������������������������� 85 Provisions on the Supervision and Administration of Loss Adjusters (2015 Amendment) art 2�������������� 86 Regulation for Life Insurance Business Service (2010) No. 4 art 11(1)��������������������������������������� 589 (2)���������������������������������������������� 590 art 12�������������������������������������������� 590 art 21(2)��������������������������������������� 631 Regulation on Work-Related Injury Insurance (2003), the State Council of the People’s Republic of China, Order No. 375��������������������109, 640 Regulations on Supervision and Administration Responsibilities of Local Offices of the CIRC, Order of the CIRC [2004] No. 7������������������������������������������� 47 Regulations on the Property Insurance Contracts 1983 art 3������������������ 184 art 7���������������������������������������������� 232 Road Traffic Accident Social Relief Funds (the SRF)���������������������������������� 692 Supervisory Measures on Internet Insurance Business of Insurance Agencies and Brokers (Trial) (2012)����������������������������������������� 97

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The Pilot Scheme of Management for the Road Traffic Accidents Social Relief Fund (the Pilot Scheme) 2009���� 693 art 6���������������������������������������������� 693 art 12�������������������������������������������� 694 art 13�������������������������������������������� 694 art 14�������������������������������������������� 694 art 15�������������������������������������������� 694 art 17�������������������������������������������� 694 art 18�������������������������������������������� 694 Practical Procedures in Underwriting and Claim-handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa [2009] No. 216�������������������������� 688 Procedural Requirements in Dealing with Traffic Accidents 2008��������������� 687 Provision of Administration of Insurance Companies (2015) art 44���������������������������������������������� 81 art 45���������������������������������������������� 81 art 46���������������������������������������������� 81 art 47���������������������������������������������� 82 art 48���������������������������������������������� 82 art 49���������������������������������������������� 82 art 50���������������������������������������������� 82 art 51���������������������������������������������� 82 art 52���������������������������������������������� 82 art 53���������������������������������������������� 82 art 54���������������������������������������������� 82 Regulation for Implementing the Road Traffic Safety Law of the People’s Republic of China the State Council (2004)��������������������������������������� 689 art 90�������������������������������������������� 689 Regulation of Private Enterprises 1988, the State Council����������������������� 186 art 2���������������������������������������������� 186 Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies, Implementation of, Detailed Rules, CIRC, 2004��������� 51 art 3������������������������������������������������ 52 Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies 2001, Decree No. 336 of the State Council�������������� 40, 51, 52 art 5������������������������������������������������ 52

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art 6������������������������������������������������ 52 art 7������������������������������������������������ 52 art 8������������������������������������������������ 52 art 12���������������������������������������������� 53 art 13���������������������������������������������� 53 art 15���������������������������������������������� 53 art 16���������������������������������������������� 53 art 18���������������������������������������������� 53 The Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance 2006, 2012 �����38, 295, 373, 642, 665, 666, 690 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance 2006 art 5������������������������������������������������ 38 art 21�������������������������������������������� 295 art 22�������������������������������������������� 295 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance, First Amendment, (30 March 2012) art 5������������������������������������������ 667 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance 2012 art 5������������������������������������������������ 38 art 43���������������������������������������������� 38 The Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance art 2������������������������665, 668, 669, 670 art 3���������������� 647, 676, 677, 679, 702 art 3, 22���������������������������������������� 704 art 5���������������������������������������667, 670 art 6���������������������������������������679, 684 art 7���������������������������������������������� 679 art 8���������������������������������������������� 680 art 10����������������������������� 642, 670, 682 art 11�������������������������������������������� 680 art 12�������������������������������������������� 680 art 14����������������������680, 681, 682, 689 art 16�������������������������������������689, 702 (4)���������������������������������������������� 682 art 17�������������������������������������������� 682 art 21�������654, 676, 677, 686, 701, 702 art 22����������������������644, 668, 673, 686 art 23�������������������������������������������� 673 art 24����������������������������� 692, 693, 694 art 25�������������������������������������692, 693

Table of R egulations

Regulations on Administration of Insurance Salespersons, Order of the CIRC [2013] No. 2���������������������� 82 art 2������������������������������������������������ 82 art 19���������������������������������������������� 83 art 23���������������������������������������������� 83 Regulations on Administration of Travel Agencies 1996��������������������������� 640

art 26�������������������������������������692, 693 art 28�������������������������������������687, 690 art 29�������������������������������������������� 691 art 31�������������������������������������������� 691 art 38�������������������������������������������� 670 art 39�������������������������������������669, 693 art 42����������������������������� 647, 672, 673 (2)���������������������������������������������� 671

lix

I NT ER N AT I ON A L CON V EN T ION S A N D P R I N CIP LES

International Principles Insurance Core Principle 2015, the International Association of Insurance Supervisors����������������������������������������������������������������������������������������������� 55 UNIDROIT Principles of International Commercial Contracts 2010 art 2.1.3(2)���������� 111 UNIDROIT Principles of International Commercial Contracts 2010 art 3.2.16............. 327

International Conventions UN Convention on Contracts for the International Sale of Goods (CISG, Vienna Convention) 1980 Vienna Convention 1980.............................................................................................. 762 art 1............................................................................................................................762 art 15(1)......................................................................................................................111 art 16(1)......................................................................................................................111 art 85...........................................................................................................................762

lxi

CHAPTER 1

Introduction to insurance and China’s insurance industry

1.1 Introduction The law of insurance can be divided into two distinct topics. The first is the law of insurance contracts, which governs the legal relations between the insurer and the insured. The second is insurance regulations, which can be generally defined as a mechanism used to control the behaviour of participants in an insurance market. The Insurance Law of the People’s Republic of China (hereinafter, the Insurance Law),1 consisting of both the insurance contract law and insurance regulation, governs the activities of the insurers and the insureds and regulates the behaviour of insurance companies in China’s insurance market. This book focuses primarily on insurance contract law, with a brief introduction to insurance regulation in Chapter 3. This book is intended to present a systematic and comprehensive analysis of the principles, doctrines and concepts of Chinese insurance contract law in a fairly conventional doctrinal manner, and to explore the ways in which these rules of law are applied in industrial and judicial practice. Most elements of insurance contract law will be examined critically, particularly the fundamental principles, such as insurable interest, utmost good faith, subrogation, etc. In addition, this book will also present rules of law on special types of insurance contracts, i.e. property insurance, life insurance, liability insurance, motor vehicle insurance, reinsurance and marine insurance. While examining and analysing the provisions of the Insurance Law and their application, deficiencies and shortcomings of the law and practice in some areas or aspects may also be identified and thus analysed; suggestions and recommendations on how to improve the law will be proposed. The modern insurance industry and insurance legislation have a relatively short history in China. The first comprehensive insurance legislation since the foundation of the People’s Republic of China (hereinafter, the PRC) in 1949 was only enacted in 1995. When the Insurance Law 1995 was drafted, it took references from the laws in many other jurisdictions,2 and incorporated major internationally accepted principles regarding insurance contracts. Comparative references will be made at the relevant points in this book to the rules of law in England and Australia, as many

1  The Insurance Law of the People’s Republic of China was adopted at the 14th Session of the Standing Committee of the Eight National People’s Congress on 30 June 1995 and became effective as of 1 October 1995. The Law was amended three times in 2002, 2009 and 2015. The amendments of the Law will be discussed in Chapter 2. 2  See Chapter 2.

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INTRODUCTION

insurance principles such as utmost good faith, subrogation, etc. originated from English common law. The Australian Insurance Contracts Act 1984 (ICA) codifies the common law and practice and mitigates the harshness of the common law to the insureds in some areas, and is regarded as a model for insurance law reform in England.3 Approaches in some other jurisdictions may also be referred to, where appropriate and necessary. However, the nature and scope of this book limit the selection of comparative law materials, so it is not the purpose of this book to make comparative references in every aspect of insurance contract law. 1.2 The nature of insurance and insurance contracts When you drive a car on a road, no matter how carefully you do so, it is impossible to completely eliminate the happening of a road accident. In other words, there is always a chance for a road accident to occur, which may cause damages to vehicles, or physical injury or even death to the persons who are involved in the accident. On the other hand, the house insured against loss by fire may never be burn down. So the occurrence of a road accident or a fire is an uncertain event. In contrast, some events are certain to occur but the time when the events are to occur is uncertain. For example, every human in the world is certain to die sometime in the future, but the time when a person will die is uncertain. In insurance, this uncertainty is normally described in terms of risk. In the modern world, insurance is a primary mechanism for the management of risks, by which the insured transfers the risks of some uncertain events to the insurer by paying premiums to the insurer, while the insurer promises that it will pay the insured for losses caused by the happening of the uncertain events insured against under an insurance contract. In essence, the purpose of insurance arrangements is to organise the sharing among a large number of persons (the insureds) of the cost of losses which are likely to happen only to some of them (or to happen at an earlier time to some than to others). In a sense, an insurer can be called the manager or organiser of two pools: the pool of risks and the pool of premiums. The shifting of risk from an insured to the insurer and the distribution of the cost of losses among the population of the insureds for a certain type of insurance or among a community of insureds for all different types of insurance underwritten by the insurer are the primary functions of insurance. In short, the essential characteristics of insurance are risk transfer and loss spreading.4 Insurance arrangements can be carried out by insurance contracts. A contract of insurance is one whereby one party (the “insurer”) promises in return for money consideration (the “premium”) to pay to the other party (the “insured”) a sum of money or provide him with some corresponding benefit, upon the occurrence of one or more specified events.5 3  See R. Merkin, “Reforming insurance law: is there a case for reverse transportation?” A report for the English and Scottish Law Commissions on the Australian experience of insurance law reform (2007); M. Kirby, “Australian Insurance Contracts Law: Local Reform with a Global Relevance” [2011] JBL 309, and also “Insurance Contract Law Reform, Recommendations to the Law Commission,” a report of the sub-Committee of the British Insurance Law Association, September 2002. 4  Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) para. 1.3. 5 This is a working definition for the concept of contract of insurance derived from that given by Channell J in Prudential Insurance Company v Inland Revenue Commissioners [1904] 2 KB 658.

2

INTRODUCTION

The Insurance Law defines the term of “insurance” as a commercial insurance transaction whereby a proposer, in accordance with the terms and conditions of a contract, pays insurance premiums to an insurer, and the insurer assumes liability to make indemnity payments where property loss or damage is caused as a result of the occurrence of an insured event that is agreed upon in the contract, or to pay insurance benefits upon the occurrence of death, injury or illness of the insured or the attainment of a certain age or time limit agreed upon in the contract.6 An insurance contract is an agreement whereby the rights and obligations are agreed upon by the proposer and the insurer.7 A proposer (or the insured or the policyholder) is a party who enters into an insurance contract with the insurer and is obliged to pay the premium under the contract.8 An insurer refers to an insurance company which enters into an insurance contract with a proposer and is obliged to make indemnity payments or pay insurance benefits under the contract.9 1.3 Classifications of insurance Insurance contracts can cover a variety of risks. The risks can be classified in several different ways, such as first party and third party insurance, personal and property insurance, marine and non-marine insurance, etc. It is important to distinguish one type of insurance from others for two primary reasons. First, some principles of insurance law are evolved from a certain type (or line) of insurance, and are applicable only to that type of insurance contract. For example, for a life policy to be valid, the proposer is required to have an insurable interest in the life insured at the time the policy is effected.10 But this requirement is not applicable to property insurance for which an insurable interest is required only at the time when an insured event occurs.11 Second, for the sake of the statutory regulation of the insurance business, property insurance must be distinguished from personal insurance, as the Insurance Law does not permit an insurer to concurrently undertake property insurance and personal insurance, but with an exception that an insurer conducting property insurance business may undertake short-term health insurance and accident insurance business with the approval of the China Insurance Regulatory Commission (CIRC),12 which is the statutory regulatory authority for the insurance industry in China.13 1.3.1 First party and third party insurance First party insurance is to insure someone’s own life, house or car, etc. against the risk of their own loss. For example, under a building insurance policy, the insured

  6  The Insurance Law, art. 2.   7  Ibid, art. 10(1).   8  Ibid, art. 10(2).   9  Ibid, art. 10(3). 10 This rule was established in the landmark case of Dalby v India and London Life Assurance Co. (1854) 15 CB 365. The Insurance Law, art. 12(1). 11  The Insurance Law, art. 12(2). 12  Ibid, art. 95(2). 13  The regulation of insurance in China is presented in Chapter 3.

3

INTRODUCTION

transfers the risks of damage to the building by fire, subsidence or other events to the insurer who will pay the insured for the loss of or damage to the building caused by an insured event, such as a fire. On the other hand, third party insurance protects the insured against the risk of their potential liability in law to pay damages to a third party.14 The Insurance Law defines liability insurance as “the type of insurance of which the insured subject matter is the insured’s liability to indemnify a third party according to law.”15 Sometimes, the first and third party aspects may be combined in the same policy. A typical example is a comprehensive motor vehicle insurance policy under which the risk of damage to the insured’s own vehicle and the risk of damage to a third party’s vehicle or injury or death to a third party victim are all covered. Some liability insurance contracts are required to be effected compulsorily by legislation, while some others may be effected voluntarily. The major compulsory liability insurance is the third party liability insurance for motor vehicles. This is required by the Road Traffic Safety Law of China.16 This topic will be discussed in detail in Chapter 22. First party insurance can be indemnity or contingency insurance, while liability insurance is always indemnity insurance. With first party property insurance there are two parties: the insurer and the insured; with first party life insurance there may be three or four relevant parties: the insurer, the insured (the proposer), the life insured17 and the beneficiary.18 Due to the fact that a beneficiary is usually nominated in a life policy, there are many rules specifically applicable to the matter of beneficiaries in Chinese law and practice; an in-depth discussion on this topic is given in Chapter 20. On the other hand, with liability insurance there are three relevant parties: the insurer, the insured and the third party victim. Because of the involvement of a third party, liability insurance possesses special features as compared with first party insurance, such as the insured’s prior discharge of his liability to the third party as a precondition for recovering insurance payments from the insurer,19 direct payment of insurance money to the third party upon the request of the insured,20 the third party’s right to claim directly against the insurer for insurance money,21 the insurer’s participation in determination of the insured’s liability to the third party22 and so on. These features will be considered in Chapter 21.

14  For more on the topic of liability insurance, see Chapter 21. 15 The Insurance Law, art. 65(4). The Australian Insurance Contracts Act 1984 defines that “a contract of liability insurance is a contract of general insurance that provides insurance cover in respect of the insured’s liability for loss or damage caused to a person who is not the insured” (s. 11(7)). 16 The Road Traffic Safety Law of the People’s Republic of China was adopted at the 5th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on 28 October 2003, and came into force on 1 May 2004. 17 The person whose life is insured is called the life insured. The insured can also be the life insured in the case where he effects a life policy on his own life. 18  A beneficiary refers to a person who is designated by the insured or the proposer in a life insurance contract and, who is entitled to make claims for the insurance benefits. The proposer or the life insured may be the beneficiary. 19  The Insurance Law, art. 65(3). 20  Ibid, art. 65(2). 21 Ibid. 22 For example, see the Employer’s Liability Policy of the People’s Insurance Company of China, clause 20.

4

INTRODUCTION

1.3.2 Personal insurance and property insurance The Insurance Law divides insurance contracts into two categories: personal insurance and property insurance. Articles 31 to 47 of the Insurance Law provide rules in relation to personal insurance contracts. Articles 48 to 66 of the Insurance Law govern property insurance contracts. According to art. 12(3) of the Insurance law, personal insurance is an insurance under which the insured’s life or physical body is the subject matter insured. Personal insurance business includes life insurance, health insurance and accidental injury insurance.23 In the modern world, personal insurance takes numerous different forms, ranging from the traditional whole life policy, which simply pays an agreed sum of money on the death of the life insured, and the term policy, which pays on death within a stated time, through endowment policies, to annuities and policies linked to investment in securities or property.24 These types of insurance are also called contingency insurance. It protects the insured or the beneficiary against the adverse financial impact of a contingent event which cannot, or cannot easily, be calculated (for example, with the value, in terms of money, of the loss of a leg), or which the insurer does not want to indemnify against (for example, actual loss of income due to illness or accident). Under a contingency insurance policy, the insurer is liable to pay an agreed amount upon the happening of the contingent event insured against, such as the death of the life insured, irrespective of the actual financial loss that an insured or the beneficiary of the policy would suffer if such an event were to occur.25 Payment of a claim under a personal insurance policy, such as death, disability or illness, etc. gives the insurer no right of subrogation; the insured or the beneficiary remains entitled to claim compensation against the third party wrongdoer.26 These topics will be considered in Chapters 17 and 20. Property insurance refers to the type of insurance where properties and the interests therein are the subject matter insured.27 Property insurance business includes property loss or damage insurance, liability insurance and accident insurance, etc.28 Property insurance is an indemnity insurance under which the insurer promises to indemnify the insured against financial loss suffered by the insured as a result of the occurrence of an insured event. The insurer’s promise to indemnify is a promise to make good any financial loss by paying the insured the amount of loss under the policy. The principle of indemnity requires that at the time of happening of an insured event and the occurrence of damage to the insured property, the insured must have an insurable interest in the subject matter insured; otherwise he would suffer no financial loss and cannot get paid by the insurer.29 The requirement of an insurable interest will be examined in Chapter 7. In the event that the damage or loss to the property is caused by a negligent third party, once the insurer has paid the insured for the loss, he acquires the right of subrogation to take action against the third

23  The Insurance Law, art. 95(1). 24  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 19.0. 25  Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) para. 2.12. 26  The Insurance Law, art. 46. 27  Ibid, art. 12(4). 28  Ibid, art. 95(1). 29  Ibid, art. 12(2).

5

INTRODUCTION

party for compensation for the loss. The application of the principle of subrogation effectively prevents the insured from being over indemnified by the insurance payment and by the compensation from the third party. Detailed consideration of the principle of subrogation can be found in Chapter 17. The Insurance Law permits an insured to take out more than one indemnity insurance policy with two or more insurers in respect of the same insured subject matter, the same insurable interest, the same insured event and for the same period of time.30 The insured is, however, not allowed to make a profit from these multiple insurance policies, for the insurers are not liable to pay more than the loss suffered by the insured. The amount of payment for the loss will be shared by the insurers. In this situation, the principle of double insurance and contribution comes into play, which will be dealt with in Chapter 11. 1.3.3 Marine and non-marine insurance In China, marine insurance is governed by the Maritime Code of the People’s Republic of China (the Maritime Code).31 Non-marine insurance is governed by the Insurance Law. With respect to matters which the Maritime Code does not specify, the Insurance Law is applicable.32 The Maritime Code defines a contract of marine insurance as “a contract whereby the insurer undertakes, as agreed, to indemnify the loss to the subject matter insured and the liability of the insured caused by perils covered by the insurance against the payment of an insurance premium by the insured. The covered perils referred to in the preceding paragraph mean any maritime perils agreed upon between the insurer and the insured, including perils occurring in inland rivers or on land which is related to a maritime adventure.”33

It is important to distinguish a marine insurance policy from a non-marine one, because different laws are applicable to different contracts. For example,34 with regard to the insured’s pre-contractual duty of disclosure and presentation, the Maritime Code and the Insurance Law adopt different ways of performing the duty and different tests of materiality.35 In non-marine insurance, an insured is required to correctly answer questions raised in the proposal form or asked by the insurer, and the test of materiality is the prudent insurer decisive influence test.36 While in marine insurance, an insured is required to voluntarily disclose everything he knew or that ought to be known in his ordinary course of business which the insurer wishes to know, and the prudent insurer mere influence test is adopted for non-disclosure or misrepresentation.37 So the application of different laws can give rise to different

30  Ibid, art. 56(4). 31  It was adopted at the 28th Meeting of the Standing Committee of the Seventh National People’s Congress on 7 November 1992 and came into force as of 1 July 1993. 32  The Insurance Law, art. 182. 33  Ibid, art. 216. 34  The Maritime Code, art. 222. 35  See Zhen Jing, “Insured duty of disclosure and test of materiality in marine and non-marine insurance laws in China” [2006] JBL 681. 36  The Insurance Law, art. 16. 37  The Maritime Code, art. 222.

6

INTRODUCTION

consequences to the parties, as the decisive influence test is more favourable to the insured, so in some cases it becomes crucial to decide which law is to be applied. However, it is sometimes difficult to draw a line between marine and non-marine insurance in view of the intermodal transport of goods. In China, the boundary between marine and non-marine insurance is not unequivocal in law and in practice. This may cause dispute as to which of the two laws should be applied. Marine insurance will further be explored in Chapter 24. 1.3.4 Reinsurance Reinsurance is an independent arrangement between a reinsurer and a reinsured (the original insurer) in which the subject matter reinsured is the reinsured’s liability in the original insurance. In essence, a reinsurance contract is a contract by which the insurer takes out cover on its own risk.38 Specific rules are applied to reinsurance contracts. The current legislation governing reinsurance includes arts 28, 29, 102,103 and 105 of the Insurance Law, and the CIRC’s Regulations on the Administration of Reinsurance Business (2015),39 and the Regulations on Administration of Reinsurance of Property Insurance Companies (2012),40 which will be discussed in detail in Chapter 23. 1.4 The outline of this book This book is concerned with Chinese insurance contracts: law and practice. An insurance transaction is carried out through an insurance contract, which sets out the rights and obligations of the insurers and the insured at various stages in the lifetime of the contract. This book presents rules of law governing the rights and obligations of the parties in an insurance contract from the pre-contract stage to the completion of the contract. While emphasising the commonality of rules in all different types of insurance, attention is paid to those principles peculiar to certain types of insurance. To begin with, Chapter 1 serves as an introduction to insurance and China’s insurance industry. The nature and definition of insurance and insurance contracts are considered. The past, the present and the future of China’s insurance industry are discussed. Chapter 2 explains the Chinese legal system, legislative and judicial sources of insurance law, and discusses the birth, amendments and judicial interpretations of the Insurance Law. Having laid down the industrial and legal backgrounds of the Insurance Law in Chapters 1 and 2, the question of how China’s insurance business is regulated is considered in Chapter 3.

38  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 17-001. Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) para.1.3. 39 The Regulations on the Administration of Reinsurance Business were enacted by the CIRC on 21 May 2010 and became effective on 1 July 2010 (Order [2010] No. 8). They were amended on 19 October 2015 (Order [2015 No. 3]). See accessed in May 2016. 40  CIRC, “Regulations on Management of Reinsurance Business of Property Insurance Companies,” CIRC Order (2012) No. 7.

7

INTRODUCTION

From Chapter 4 to Chapter 18, the principles of insurance contracts are examined. Chapter 4 addresses the relevant issues in relation to formation of an insurance contract. Chapter 5 analyses terms of the contracts and how these terms are interpreted by courts. The insured’s primary duty under an insurance contract is to pay premiums to the insurer; Chapter 6 discusses this duty and related issues in respect of premium payment and circumstances under which premiums can be refunded. For a life insurance contract to be valid and for the insured’s entitlement to insurance payment when the insured event occurs and causes loss, the insured must possess an insurable interest in the subject matter insured. Chapter 7 is devoted to the principle of insurable interest which is peculiar to insurance contracts. At the pre-contract stage, the insured is required to disclose to the insurer facts or information material to the risks to be insured, so as to enable the insurer to decide whether or not to accept the risks and, if so, on what terms; the relevant rules with regard to the insured’s pre-contractual duty of disclosure and representation are examined thoroughly in Chapter 8. On the other hand, the insurer’s pre-contract duty is to explain the terms of the contract and clearly explain the exclusions to the insured; otherwise, the exclusions are ineffective. This duty is discussed in depth in Chapter 9, for the Chinese law in this aspect is unique as compared to other jurisdictions. Once the insurance contract is concluded, the insured is required to notify the insurer of any material increase in the risk to the subject matter insured during the lifetime of the insurance policy; this requirement is explored in Chapter 10. An insured may take multiple insurances for the same subject matter and for the same interest and same risk; however, the principle of indemnity prevents the insured from being paid more than his actual loss. Chapter 11 is devoted to the principle of double insurance and contribution. The insurer is only liable for losses caused by the insured events; the issue of causation is explored in Chapter 12. During the insurance period, the insured has a duty to maintain the safety of the subject matter and to mitigate loss upon occurrence of the insured event; these requirements are discussed in Chapter 13. When an insured event happens and causes loss to the insured subject matter, the insured can make a claim for the loss, but he must follow the procedure and requirements for making a claim; this topic is considered in Chapter 14. The insurer’s primary duty is to pay valid claims in a timely manner. If the insurer fails to perform the duty, it is obliged to pay consequential losses caused by the delay in paying valid claims, in addition to paying the claim under the policy; Chapter 15 examines the rules in this regard. In the case where the insured makes a false claim, the issue of how the insurer can respond to a fraudulent claim is addressed in Chapter 16. Once the insurer has indemnified the insured’s loss under the policy, it is entitled to step into the insured’s shoes and enforce the insured’s right to sue the third party wrongdoer. This so-called principle of subrogation is analysed in depth in Chapter 17. Like other contracts, insurance contracts can be amended, rescinded or terminated; circumstances under which an insurance contract can be amended or rescinded are considered in Chapter 18. Chapters 19 to 24 deal with some special types of insurance contracts, i.e. property insurance in Chapter 19, life insurance in Chapter 20, liability insurance in Chapter 21, motor vehicle insurance in Chapter 22, reinsurance in Chapter 23 and marine insurance in Chapter 24. 8

INTRODUCTION

Having considered the nature and the classification of insurance contracts and the structure of the book, it is now appropriate to give a brief presentation of the history and development of China’s insurance industry. This is useful for later endeavours in examining the principles of insurance contract law and practice in China. 1.5 The history and development of China’s insurance industry The origin of China’s insurance industry can be traced back to more than 100 years ago; however, the development of the industry was not significant until 1978 when China initiated economic reform and the open-door policy.41 The experience of the world insurance industry demonstrates that the emergence and the development of the modern insurance industry are based on the development of productive forces and a commodity economy. In ancient China, its economy was primarily agrarian; in many ways it was a “natural economy” or “self-sufficiency” economy with a relatively low degree of commercialisation. Under those economic conditions and environment it was impossible for its insurance industry to develop. Thus, the emergence and development of modern insurance in China lagged behind that of the developed countries. Modern insurance practice spread to China but not until the early 19th century. 1.5.1 The emergence of modern insurance in China In the early 19th century, as Europe forged ahead through the Industrial Revolution, it became more powerful, and, in particular, the British began to expand their trade to China. As a result some modern insurance businesses, mainly in marine insurance, were first set up by British businessmen in China. In 1805, some British businessmen established an insurance company named the Canton Insurance Society in Canton which was the first insurance company set up by foreign merchants in China.42 In the following years, several insurance companies were established by foreign businessmen in Shanghai.43 After the Opium War, foreign businessmen were allowed to do business freely in the treaty ports. Insurance was indispensable to a trade in rich cargoes – opium and treasure – and involving great risks – pirates, treacherous seas and periodic warfare. More British insurers established insurance companies and they made steady

41  For more on the history and development of the Chinese insurance industry, see Zhen Jing, The History and the Future of China’s Insurance Industry (1995) MPhil thesis, University of Wales Swansea. The thesis considered the emergence, history and development of China’s insurance industry and market from 1875 to 1994. It demonstrated the close relationship between the development of the insurance industry, the growth of a commodity economy and political decision-making in China. The study provided a valuable insight into the potential of the insurance industry and further development of the insurance market. 42 M. Greeberg, British Trade and the Opening of China 1800–1842 (Cambridge University Press 1951), p. 171. 43  In 1808, the Atlas Insurance Company was set up by the British in Shanghai. In 1809, the British also established the North British and Mercantile Insurance Company in Shanghai, which mainly ran marine and fire insurance businesses. See PICC, “The List of the Foreign Insurance Companies in Shanghai before 1949” (1980) Insurance Studies, No. 6, p. 87.

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INTRODUCTION

progress in China.44 Before the 20th century, therefore, British insurance companies monopolised the insurance market in China. From the early 20th century, the Americans, French, Germans, Swiss and Japanese established their insurance companies or insurance agencies in China one after the other.45 During that time, foreign insurance companies were monopolising China’s insurance market. All insurance clauses, policies or premium rates were enacted by foreign underwriters. 1.5.2 The formation of China’s national insurance industry The practice of transacting insurance business by Chinese people can be traced back to 1875. The emergence of China’s national insurance was not only a consequence of the needs of the development of the national economy but also the outcome of stimulation and crowding out by foreign insurance companies. From the early 19th century, China’s traditional agricultural economy had begun to break down. There had been few significant innovations with respect to agriculture. Small peasant farms were clustered in isolated villages, and communication among them occurred with relatively independent marketing areas. Towns and cities were commercial hubs, conduits for rural food and grain, and intellectual and political centres. Especially after western powers’ incursions into China, foreign merchants could do considerable business there. Further, some Chinese businessmen did business with them. Thus China’s commerce began to develop in such a way as to establish the conditions for the emergence of a national insurance industry. After foreign powers intruded into China, they at first occupied transportation by sea and inland waterways. This led to a drastic decline of China’s water transport industry and shipbuilding industry. Under these circumstances, the Steamship Commerce Bureau of China (Lun Chuan Zhao Shang Ju) was established in 1872. It bought three ships from foreign ship companies, and the ships had to be insured by foreign insurance companies because there were no Chinese insurance companies then. The foreign insurance companies and foreign ship companies attempted to strangle the Chinese shipping industry. They refused to provide insurance for the Steamship Commerce Bureau or charged high premiums. The difficulty of securing

44  For example, the Union of Canton Insurance Company, which was established in 1835 in Hong Kong, bought some other small British insurance companies after the Opium War to expand itself. Before long it cooperated closely with the Commercial Union Insurance Company which was opened up in Shanghai in 1861 and the Insurance Department of Jardine Matheson & Co. (all of them were managed by British businessmen) to form an insurance monopoly bloc in the Far East. In 1863, British businessmen opened up the British & Foreign Marine Insurance Company in Shanghai which transacted marine and fire insurance business. In 1865, the British Traders Insurance Company was established by the British in Hong Kong which transacted mainly marine and fire insurance business. In 1866, the Hong Kong Fire Insurance Company was set up by Jardine Matheson & Co. See Shi Zheming, “The Development of China’s Insurance before 1949” (1983) Insurance Studies, No. 1, p. 59. 45  American businessmen established the Alliance of Philadelphia Insurance Company in Shanghai in 1905 trading in marine, fire and automobile insurance business. In 1921, the Asia Life Assurance Company was formed in Shanghai by Americans to operate life assurance business. In 1918, French businessmen set up the Assurance Franco-Asiatique Insurance Company in Shanghai. Most foreign insurance companies based their head offices in Shanghai, and had branches in every big city along the coast, at railway stations and on the Yangtse River. See PICC, “The List of Foreign Insurance Companies in Shanghai before 1949” (1986) Insurance Studies, No. 6, p. 87.

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INTRODUCTION

insurance for ships made some Qing Dynasty leaders like Li Hongzhang46 recognise the significance of setting up Chinese insurance. On 28 December 1875, China’s first national insurance institution – the Insurance Bureau of Commerce (Bao Xian Zhao Shang Ju) – was formally established, which altered the situation whereby foreign insurance companies had been monopolising China’s insurance market. It was the beginning of China’s national modern insurance industry.47 To meet the needs of the expanding transport business, the Steamship Commerce Bureau set up another insurance institution in 1878 – the Ji He Insurance Company. In 1886, two insurance companies – the Ren He and the Ji He were merged into one – the Ren Ji He Insurance Company.48 1.5.3 The growth of China’s insurance industry before the foundation of the People’s Republic of China (pre-1949) Following the foundation of the Ren Ji He Insurance Company, a number of other Chinese national insurance companies were set up in the late 19th century49 and early 20th century;50 they all transacted property insurance business. In 1912, the first Chinese life insurance company – the Hua An He Qun Life Insurance Company – was established in Shanghai. China’s insurance industry made little progress until the 1920s. When Guo Ming Dang (GMD), the Nationalist government, came into power, China’s economy began to recover. China’s national industry, commerce and banking developed relatively quickly, which created favourable conditions for the growth of the national insurance industry. During the 1920s and 1930s, two significant changes appeared in China’s insurance market. First, after 1926, banks’ capital was invested in China’s insurance.51 Second, from 1935, GMD bureaucratic

46  He was the most powerful leader of the regional armies of the Qing Dynasty in the late 19th century. He was one of the successful supporters of Chinese industrialisation and commercialisation. He also advocated learning from the western countries and took a large part of the responsibility for conducting China’s foreign relations. 47 Wu Yue and Cao Xuguang, “The Textual Criticism of the Name and Time for the First Chinese National Insurance Company” (1983) Insurance Studies, No. 6, p. 40. 48  Wu Yue and Du Boru, “The Textual Criticism about Ren He, Ji He and Ren Ji He Insurance Companies” (1990) Shanghai Insurance, No. 1, p. 31. 49 They were An Tai Insurance Company (1877), Chang An Insurance Company (1880), Shanghai Fire Insurance Company (1882) and Wan An Insurance Company (1882). However, these companies were closed soon after opening up because they had no insurance experience and insufficient funds. 50  Such as Hong Kong Chinese Businessmen Yuan An Insurance Company (1904), Hua Wing Insurance Company (1905), Tong Yi and Wuan Feng Insurance Companies (1905), and, in 1908, China Win Yi, Yi An, Hong An, Pu Hua, Yi Tong Ren, Hong Shen and Hu Tong Insurance Companies were opened up. In 1909, Tong An Insurance Company was set up. All of them transacted property insurance. 51  In December 1926, Bank of Communication, Jin Cheng Bank, Zhong Nan Bank, Da Lu Bank, Guo Hua Bank and Dong Lai Bank jointly set up An Ping Insurance Company. In March 1927, Shanghai Commercial Savings Bank created Da Hua Insurance Company. In November 1929, Jin Cheng Bank established Tai Ping Marine and Fire Insurance Company in Shanghai. On 1 November 1931, Bank of China (it was founded in 1904 and was a powerful semi-official bank under the GMD) invested capital to set up China Insurance Company in Shanghai, which was one of the biggest among the national insurance companies at that time. It had agencies all over the country. Owing to the swift expansion of the business, China Insurance Company could do some reinsurance business with foreign insurance companies. See Tang Mingzhi, “The Recollection of the Reinsurance Business of Chinese Insurance Company before 1949” (1991) Shanghai Insurance, No. 5, p. 36.

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INTRODUCTION

capital (GMD government officials’ capital) penetrated the insurance market.52 Both brought about great development in China’s insurance industry. The investment of GMD bureaucratic capital promoted the growth of China’s national insurance industry. Some companies whose head offices were in Shanghai began to set up branches in interior cities. Some, which had been run with bank capital, appointed their insurance agencies in interior cities through bank branches in those cities. Some big private companies like the China Insurance Company and the Tai Ping Insurance Company were expanding their business abroad. By 1937, there were 40 Chinese national insurance companies, of which 2 were state-owned and 38 were Chinese private companies, and 166 foreign insurance companies (from 16 countries).53 It was clear that foreign insurance companies still largely dominated the insurance market in China. Facing sharp competition from foreign insurance companies, the Chinese national insurance industry struggled hard to expand its business. However, during the eight years of the Sino-Japanese War (1937–45), like other Chinese industries, China’s insurance industry was nearly ruined. After the Sino-Japanese War, Shanghai again became the centre of the insurance market. Foreign insurance companies which were closed down in wartime reopened business in Shanghai after the war. In addition, due to the GMD government’s inflation policies, the currency depreciated daily, creating chaos in the financial markets. Many speculative insurance companies were suddenly set up by businessmen. The number of companies increased to 238 in Shanghai, which included 63 foreign and 175 Chinese insurance companies.54 Due to the intense competition and violent inflation, lots of Chinese national insurance companies were forced to stop business. On the eve of the establishment of the People’s Republic of China, a third of Chinese insurance companies closed down; only 126 of 175 were able to survive.55

52  In order to seize control over national finance, the GMD government had attempted since 1927 to strengthen the national financial institutions. In 1928, the GMD government reorganised the Central Bank of China which was established in 1924, acting as proxy for the State Treasury, with the right to issue currency and mint coins and to handle domestic and foreign debts. Soon after this, the government took over two big private indigenous banks – the Bank of China and the Bank of Communications. After dominating the banking system, the GMD government began from 1935 to seize control of China’s national insurance industry, e.g. in 1925, the Central Bureau of Trust set up an insurance section in Shanghai. However, the control of these financial institutions was actually in the hands of the “Four Biggest Families” of China, namely the Chiang, Song, Kong and Chen families, who provided officials for the GMD government. The GMD government officials (i.e. ministers and civil servants) invested their private moneys in insurance companies for their own gain. This was allowed by the GMD government. See Shi Zheming, “The Development of China’s Insurance Industry before 1949” (1983) Insurance Studies, No. 1, p. 61. See also H. H. Frank, A Concise Economic History of Modern China (1840–1961) (Pall Mall Press, UK, 1969) pp. 116–22. 53  Shi Zheming, “The Development of China’s Insurance Industry before 1949” (1983) Insurance Studies, No. 1, p. 61. 54  Liao Shen, “The Insurance Industry in Shanghai after Sino-Japanese War”(1992) Shanghai Insurance, No. 12, p. 45. 55  Ibid, p. 48.

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INTRODUCTION

1.5.4 After the foundation of the PRC (post-1949) Before 1949, insurance companies in China fell into three main categories: foreign insurance companies, GMD bureaucratic capitalists’ insurance companies and Chinese private companies. After 1949, the Chinese Communist Party government (CCP) employed three major means to transform the old insurance market: (1) taking over or confiscating companies owned by the GMD bureaucratic capitalists;56 (2) abolition of foreign insurance companies’ privileges and concessions;57 and (3) socialist transformation of Chinese private insurance companies.58 At the same time as China’s old insurance market was being transformed, a new type of socialist insurance system was formed. In October 1949, the People’s Insurance Company of China (hereinafter, the PICC), a united, centrally controlled and state-owned insurance company, was founded by the People’s Bank of China (PBC) with its head office in Beijing. The PICC expanded rapidly; by the middle of 1950, it founded branches and sub-branches in every province.59 During the period of the rehabilitation of China’s economy (1950–52), the PICC grew greatly in terms of its scope, number of employees and volume of business. During that period, the PICC mainly transacted compulsory insurance for state-owned units and enterprises according to the orders of the government. In urban areas, the PICC transacted fire insurance, life insurance, transportation insurance and motor vehicle insurance. In rural areas, the PICC also offered crop insurance, animal insurance and cotton harvest insurance. It also transacted export and import of goods, ocean marine cargo transportation insurance and war risks. By the end of 1952, it had about 1,300 branches and sub-branches all over the country, with over 40,000 employees and 3,000 agencies.60

56  By the end of 1949, among the 126 Chinese insurance companies, 23 were owned by the GMD bureaucrats, of which 21 were taken over by the new government in 1949, and only 2 were allowed to carry on business under government supervision. See Shi Zheming, “The Development of Chinese Insurance after 1949” (1983) Insurance Studies, No. 2, p. 56. 57 In 1949, there were 41 foreign insurance companies in Shanghai. In order to protect China’s national insurance industry, the government imposed various restrictions on foreign insurance companies and competed with them to gradually cut down the sources of their insurance and reinsurance business. By the end of 1952, all foreign insurance companies had been forced to stop their insurance business in China. 58  Towards Chinese private companies, the CCP pursued a policy of utilisation, restriction and transformation to protect them and to encourage them to amalgamate under the supervision of the government. These companies also underwent a socialist transformation. The government organised 47 private companies in Shanghai and Tianjin to set up the Mass Union of Reinsurance Exchange. Later the Mass Union was reorganised into two state–private-owned companies (with both the state’s and individuals’ shares). One was the Tai Ping Insurance Company set up in 1951, the other was the Xin Feng Insurance Company established in 1952. These two companies were merged into one in 1956 named the Tai Ping Insurance Company, which soon moved from Shanghai to Beijing, closing its domestic branches and retaining its overseas branches in Manila, Jakarta, Saigon and Singapore. The combination of Tai Ping and Xin Feng insurance companies marked the end of the socialist transformation of China’s old insurance market and the beginning of a new type of socialist insurance system. See the report of the President Lin Zhen Feng about the amalgamation of Shanghai private insurance companies, December 1951, Beijing; and the PICC’s report on the establishment of the two companies – The Tai Ping and Xin Feng Insurance Companies, PICC 1952, Beijing, China. 59  The statistical report of the PICC of 1950, PICC, Beijing, China 60 The Insurance Institute of China, “The Record of the Important Events of China’s Insurance during 1949–66” (1982) Selected Insurance Articles, p. 108.

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INTRODUCTION

The PICC’s expansion, however, was too rapid, and in some ways it did not conform to the actual needs of the people in urban and rural areas during a period in which the country’s economy was recovering from war. Paying the insurance premiums was a heavy burden on enterprises, especially for individuals. Under these circumstances, the PICC adopted some steps to readjust, to reduce its business and to rationalise its institutions and the number of its employees. During the period of the Great Leap Forward (GLF, 1958–60) and the People’s Commune,61 the People’s Commune led directly to a cessation of domestic insurance business. It was thought that China had achieved communism, and all property belonged to the state and commune, therefore everybody had a right to share the commune’s property. Thus, even if some catastrophe or accident happened, the state and commune would give emergency assistance to, or allocate a sum of money to, the unit or the people who suffered loss or damage. So it was believed that the role of insurance had already disappeared and domestic insurance business should be stopped immediately.62 It was decided at the Seventh National Insurance Meeting in January 1959 to stop the domestic insurance business. Soon after, apart from limited foreign-related insurance business, most branches of the PICC, except Shanghai, Guangzhou and Harbin, stopped domestic insurance.63 During the 10 years of the Cultural Revolution (1966–76), the domestic business ceased completely, and the small amount of foreign-related insurance business almost ceased.64 The existence of a highly centrally planned economy eliminated the objective basis for the existence and development of the national insurance industry. The history of the world insurance industry shows that the emergence and the development of the modern insurance industry are based on the economic fortunes of a commodity market economy. However, China’s insurance industry had since its beginning lacked such an economic environment. It was, after all, born and developed in the circumstances of a centrally planned economy. This hampered the development of China’s national insurance industry. 1.5.5 Economic reform and the open-door policy in China since 1978 The deterioration in economic performance during the Cultural Revolution pointed to a need for some types of reform. The new leadership, under the direction of Deng Xiaoping, led the whole country into economic reform. Deng elevated the need for

61 The Great Leap Forward meant that in a short time an explosive “great leap” in production in all sectors of the economy should be made. For more, see Zhen Jing, The History and the Future of China’s Insurance Industry (1995) MPhil thesis, University of Wales Swansea, pp. 118–27. 62  In 1958, at the National Financial Meeting, it was decided that “with the appearance of the People’s Commune, the role of insurance does not exist anymore, domestic insurance business should stop immediately and only small foreign insurance business would be retained.” 63  Shanghai, Guangzhou and Harbin maintained some domestic business until 1966. For the reasons why these three cities could maintain their insurance business for a longer time, see Zhen Jing, The History and the Future of China’s Insurance Industry (1995) MPhil thesis, University of Wales Swansea, pp. 118–27. 64  See Jiang Yunting, “The Recollection of a Foreign Related Insurance Business Group during the Cultural Revolution” (1989) Insurance Studies, No. 3, pp. 16–18.

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INTRODUCTION

socialist construction based on Four Modernisations.65 He thought that China was lamentably backward, and major reforms of the economy and administration were needed to raise production, and to get goods and products to the people. A policy of economic reform and opening the door to the outside world was announced in December 1978 at the Third Plenum of the Eleventh Congress of the Chinese Communist Party, which marked a watershed in the economic development of China. Since then, China has undertaken very drastic economic reforms, many of which are unprecedented in the history of socialist economic development. As a result of the economic reform and the opening of the door to the outside world, China’s economic growth has been dramatic. The rapid growth of the economy and the establishment of the market economy have created the necessary conditions and environment for the rapid development of China’s insurance industry. 1.5.6 The reopening and the rapid development of the PICC’s insurance business (1980–90) Economic reforms and the open-door policy promoted the development of China’s insurance industry and revived its domestic insurance. In 1980, the PICC reinstated domestic insurance under the instructions of the State Council’s Document of 1979 No. 99.66 Since then, China’s insurance industry has been growing rapidly. At first, when domestic insurance business was reinstated, the PICC mainly transacted property insurance business.67 Enterprise property insurance occupied a dominant position before 1986. After 1986, vehicle insurance became the most important class of domestic insurance. At the same time, household property insurance business and goods transport insurance were also expanding rapidly between 1980 and 1985.68 From 1982, when life assurance and agricultural insurance began to be opened up, the percentage of property insurance in the total domestic business began to decline. Following the great development of the economy, people’s living standards had been greatly improved, so people were increasingly thinking about

65 Modern industry, modern agriculture, modern national defence and modern science and technology. 66  In April 1979, the State Council issued the document 1979 No. 99, in which it was stated that the PICC was to run an insurance business to accumulate funds for the state and to provide economic compensation for state and collective properties. From then on, all imported equipment would be covered by insurance. The profit secured by the insurance companies would not be handed over to the Ministry of Finance, but would remain with the companies themselves as an insurance reserve in order to enable the enterprises and the peasants to get indemnity immediately when they suffered losses or damage from accidents or natural calamities, and the PICC was to reinstate domestic insurance business step by step after experiments and set up branches in every province, municipality and autonomous region and some cities. All branches should be under the control of the PICC and the PBC. The PICC should play a dominant role in running the business. 67  Between 1980 and 1981, almost 100% of domestic insurance business was property insurance (it included enterprise property insurance 97%, household property insurance 0.0024%, vehicle insurance 2.71%, cargo transportation insurance 0.017% and others 0.18% of the total premium from domestic property insurance). See Li Jiahua and the PICC group, The Development of China’s Insurance Industry, p. 150, 1990. 68  During 1980 to 1985, the growth rates of different types of property insurance were: enterprise property insurance, 30%; vehicle insurance, 196.46%; household property insurance, 983%; and transportation insurance, 202.64%. See the PICC’s Statistical Yearbooks, various issues, PICC, Beijing, China.

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INTRODUCTION

life insurance. The pace of growth of life insurance was very fast at an average rate of 554.2% per year between 1982 and 1985. However, the growth of life insurance declined with the influence of the high inflation which happened between 1987 and 1989. From 1988 to 1991, the growth rate of life insurance was 35.67%.69 Economic reform and the open-door policy expanded the PICC’s existing foreign-related insurance business.70 Meanwhile, its international inward reinsurance business continued to expand. In order to meet the needs of the rapid expansion of economic relations and technical cooperation with other countries and diversified forms of foreign trade, the PICC made big progress in exploiting the new types of coverage of foreign-related insurance business.71 Along with the increase of new types of coverage, the structure of foreign insurance business was changing. The percentage of the traditional type of cargo transportation insurance in foreign business was decreasing year by year, 90% in the 1960s, 68% in 1981 and only 52% in 1988.72 Other types of cover, such as non-marine insurance, oil exploration insurance, marine hull insurance, aviation insurance and projects contracted for abroad, as well as satellite-launch insurance, became increasingly important.73 With regard to the reinsurance business, the PICC continued to build up links with counterparts in foreign countries and regions throughout the world. By the end of 1990, the PICC maintained business relationships with all the leading insurance and reinsurance companies and broker firms all over the world.74 The PICC also established insurance offices in Western Europe, America, Canada and Japan in addition to ones in Hong Kong, Singapore and Macao. By the end of 1990, the PICC’s overseas offices increased to 60 from 11 in 1979. The number of employees working in overseas offices rose from 388 in 1979 to more than 800 in 1990. Between 1980 and 1985, the domestic insurance business grew at an average rate of 55.06% per annum. The average rate was still 31.29% per annum from 1986 to 1991.75 This growth rate was unprecedented in China’s insurance history and world insurance history. By the end of 1991, the PICC had over 3,000 branches and sub-branches with nearly 90,000 personnel. The types of coverage available reached

69 Ibid. 70  In 1979, the PICC made satisfactory progress in its foreign related insurance business. Overall premium income from its direct underwriting amounted to ¥171.16 million, a 24.84% increase over the previous year. See the PICC’s Annual Report for 1979, reported by the General President Song Guohua in September 1980, Beijing, China. 71  For instance, in 1984, the PICC signed insurance contracts with 23 oil companies owned by 12 oil exploration groups in seven countries to cover property, comprehensive third party liability, blowing out, oil pollution, cargo transportation and all risks, in respect of drilling and supply ships, labour and employer’s liability. There was also coverage of property, data processing, cash, cargo transportation, motor vehicle and employee’s fidelity. Also machinery breakdown, loss of profit, travellers’ liability and employer’s liability have been extended to Sino-foreign joint ventures and cooperative enterprises. See PICC’s Annual Report for 1984, reported by the PICC’s President Qin Daofu in 1985, Beijing, China. 72  Foreign-related insurance, published by the PICC in 1990, Beijing, China. 73  The classes of foreign-related insurance undertaken by the PICC increased from 20 in 1980 to 90 in 1990. By the end of 1990, the PICC was able to provide virtually all types of foreign insurance obtainable in the international insurance market. The premium income for foreign insurance business reached US$438 million in 1990, an increase of US$338 million over 1980 when it was US$100 million. See the PICC’s Annual Report of 1990, Beijing, China. 74  Foreign-related insurance, published by the PICC in 1990, Beijing, China. 75  The PICC’s Year Report and Accounting, 1985 and 1992, Beijing, China.

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INTRODUCTION

nearly 400, of which more than 300 types were domestic insurance coverage and more than 80 types were foreign insurance coverage.76 For the period from 1980 to 1990, the premium income increased 36 times, from ¥0.49 billion in 1980 to ¥17.85 billion in 1990, at the average annual rate of 47.2%. 1.5.7 Competition in China’s insurance market (1986 to present) Before 1986, the PICC was the only insurance company and had monopolised China’s insurance market. Since 1986, more and more companies have been set up, the monopolistic system broken down, and competition has been introduced in China’s insurance market. In 1986, the Agriculture and Animal Husbandry Insurance Company was established by the Productive Construction Army Corps in Xinjiang autonomous region. In May 1988, the Ping An Insurance Company was established in Shenzhen special economic zone. Its branches soon spread to every city in the country.77 In 1988, the Communication Bank of China set up an insurance department in Shanghai which was reorganised into the Pacific Insurance Company in 1991 with its head office in Shanghai and branches in provinces countrywide. Under the open-door policy, foreign insurance companies were also allowed to enter China’s insurance market. Since 1988, many foreign insurance companies have opened up liaison offices in China. In November 1992, the American International Assurance Co., Ltd (AIA) set up a branch in Shanghai which was the first foreign insurance company to open insurance business in China since 1980.78 Later, Sedgwick Insurance and Risk Management and Consultation (China) Company, the first foreign-invested insurance broker company, was founded in Beijing in 1993. The Manulife-Sinochem Life Insurance Company, the first Sino-foreign joint venture insurance company, was established in 1996. Then China’s insurance industry entered into a period of a competitive market with more and more market players. According to the Annual Report of the Chinese Insurance Market 2015 by the China Insurance Regulatory Commission (CIRC), as of the end of 2014, there were 56 foreign-funded insurance companies and 140 representative offices from 15 foreign jurisdictions in China. In total, there were 187 insurance institutions, with 78,000 branches or subsidiaries nationwide. An open, balanced and vigorous modern insurance market system has basically been formed.79 1.6 The top three insurance companies in China’s insurance market The People’s Insurance Company (Group) of China Limited (PICC), Ping An Insurance (Group) Company of China (PAICC), and China Pacific Insurance (Group) Company (CPIC) are the top three largest insurance companies in China.

76  The PICC’s Statistical Book of 1991, PICC, Beijing, China. 77  This company is a joint-stock insurance company invested in by the Bureau of Commerce Shekou Industrial District Authority and the Shenzhen Credit and Investment Corporation of the Industrial and Commercial Bank of China. 78  Lin Zengyu, “The Potential of China’s Insurance Market” (1996) Insurance Studies, No. 1, p. 7. 79  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 50.

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In the non-life insurance market in 2014, the PICC Property and Casualty Company Ltd took a 33.4% market share, Ping An Property and Casualty Insurance Company of China Ltd, 18.9%, and China Pacific Property Insurance Company Ltd, 12.3%.80 In the life insurance market in 2014, the China Life Insurance Company Ltd (a PICC Group member) and the PICC Life Insurance Company Ltd (a PICC Group member) together accounted for a 32.2% market share, Ping An Life Insurance Company, 13.7% and China Pacific Life Insurance Company Ltd, 7.8%.81 The PICC,82 founded in October 1949, is the first nationwide insurance company in the People’s Republic of China and monopolised China’s insurance market from 1949 to 1986. It has now developed into a leading large-scale integrated insurance financial group in China, ranking 174th in the List of Fortune Global 500 (2015) published by Fortune magazine. The PICC operates its property and casualty (P&C) insurance business in China through PICC Property and Casualty Company Limited and in Hong Kong through the People’s Insurance Company of China (Hong Kong) Limited. The PICC operates its life and health insurance businesses through PICC Life Insurance Company Limited and PICC Health Insurance Company Limited. The PICC centrally and professionally manages most of its insurance assets through PICC Asset Management Company Limited, and PICC Investment Holding Co. Ltd which is a professional investment company specialising in real estate investments. The PICC also carries out non-transactional businesses such as equity and debt investments in insurance and non-insurance capital within and outside the group through PICC Capital Investment Management Company Limited. The PICC has also made strategic investments in non-insurance financial businesses such as banking and trusts. The PAICC83 is the second largest insurance company (group) in China. It was established in 1988 in Shekou, Shenzhen. The group is the first insurance company in China to adopt a shareholding structure. The subsidiaries of Ping An include Ping An Life, Ping An Property & Casualty, Ping An Annuity, Ping An Health, Ping An Bank, Ping An Trust, Ping An Securities, and Ping An-UOB Fund, covering the entire financial services spectrum. The CPIC is the third largest insurance company (group) in China. It is an insurance group basically constituted by China Pacific Insurance Company, a company established on 13 May 1991. The head office of CPIC is located in Shanghai. As a leading integrated insurance group, CPIC is listed in the Shanghai and Hong Kong Stock Exchange. The group has several companies: China Pacific Property Insurance Company Ltd, China Pacific Life Insurance Company Ltd, CPIC Allianz Health Insurance Company Ltd, Changjing Pension Insurance Company Ltd, and Anxin Agricultural Insurance Company Ltd.

80  Ibid, p. 39 81  Ibid, p. 42. 82  See the PICC website, accessed in May 2016. 83  See the PAICC website, accessed in May 2016.

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1.7 The current insurance market in China China’s insurance market is one of the largest and fastest growing in the world. It is fuelled by the world’s second largest economy, with an average 10% GDP growth over the last 30 years. Although China’s GDP growth has been slowing down, it is widely expected to be well above other largest economies at around 6.9–7.5% in the next few years84 – and is fully sufficient to further stimulate the development of the insurance industry. China’s insurance industry has been growing even faster than the GDP, at a compound annual growth rate (CAGR) of 16.5% over the last decade.85 These rates indicate very favourable growth conditions for China’s insurance industry. At the end of 2014, China stood as the fourth largest insurance market in the world. Gross premium income reached US$328 billion (¥2.02 trillion yuan) at the end of 2014,86 while during the same period, total premiums in the US, Japan and the UK stood at US$1280 billion, US$478 billion and US$351,87 respectively. According to the CIRC Annual Report 2015,88 in 2014 the insurance penetration and density in China were 3.18% and ¥1,479.3, respectively. Insurance companies paid out ¥719.44 billion. Life insurance has been the main growth driver dominating China’s insurance industry. During the last few years, non-life insurance has been growing faster and at more stable rates, while slowly increasing its market share. At the end of 2015, life insurance accounted for 65% and non-life for 35% of China’s insurance market.89 Over the last decade, the life sector has grown at a CAGR of 14.6% and the non-life sector at a CAGR of 21.3%.90 1.7.1 Non-life insurance market (a) Non-life insurance companies and premium income As of the end of 2014, there were 67 non-life insurance companies in the market, of which 45 were domestic companies and 22 foreign-invested companies. The market share of the top five companies91 accounted for 74.7% (by premium income). Non-life insurance companies achieved premium income of ¥754.61 billion, of

84  International Monetary Fund, accessed in May 2016. 85  Dagong Europe, accessed in May 2016. 86  Swiss Re Sigma No. 4, 2015, accessed in May 2016. 87 Ibid. 88  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 38. See accessed in April 2016. 89  The CIRC Annual Report of Statistics 2015, accessed in May 2016. In the UK, non-life insurance accounted for about 33% of the total premium income (life plus non-life business) in 2014, according the Swiss Re Sigma No. 4, 2015. 90  Dagong Europe, accessed in May 2016. 91 The top five insurance companies for non-life insurance: PICC Property and Casualty Company Limited, Ping An Property and Casualty Insurance of China Ltd, China Pacific Property Insurance Co. Ltd, China Life Property and Casualty Insurance Company Limited, and China United Property Insurance Company Limited

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which motor vehicle insurance reached ¥551.59 billion, and premium income of non-motor insurance reached ¥203.02 billion.92 The top five lines of 2014 non-life premium income were motor vehicle insurance (¥551.59 billion, 72.1% of the total non-life premium), commercial property insurance (¥38.74 billion), agricultural insurance (¥32.58 billion),93 liability insurance (¥25.34 billion) and credit insurance (¥20.07 billion), which altogether accounted for 88.6% of the market total. Most of the non-life insurance lines maintained stable growth, including motor vehicles (16.8%), liability (16.9%), credit (29.3%), guarantee (66.1%), accident (14.1%) and health (44.5%).94 (b) Assets and profit In 2014, total assets of non-life insurance companies amounted to ¥1.4 trillion, up by 26.9% from 2013, and 10.5 percentage points higher than the growth rate of premium income. The net assets amounted to ¥384.06 billion.95 Non-life insurance companies achieved underwriting profits of ¥4.26 billion, up by 93.5% from 2013. The whole industry achieved net profits of ¥52.05 billion, up by 94% from a year earlier, benefiting from the significant increase in investment return.96 (c) Risks control and insurance protection At the end of 2014, the solvency and core capital ratios of all non-life insurance companies were sufficient. All of them maintained a solvency adequacy ratio of more than 150%, and no signs of systemic or regional risks were detected.97 The non-life insurance industry’s total sum insured was ¥761.7 trillion, which was 12 times nominal GDP, 13% up from 2013. The claim payment totalled ¥396.9 billion, 11.7% up from a year earlier. Insurance companies took an active part in disaster relief activities, giving full play to the insurance functions of improving and protecting people’s livelihood and disaster relief, helping the affected districts quickly restore normal production and life.98 1.7.2 Life insurance market (a) Premium income and life products structure At the end of 2014, there were 73 life insurance companies in the market, of which 45 were domestic and 28 foreign invested. The life insurance companies’ premium

92  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 38. 93  In 2014, the coverage of agriculture insurance continued to expand and the quality of service continued to improve. China is now the second largest agriculture market just after the US, and the largest livestock insurance and forest insurance market. See The CIRC Annual Report of the Chinese Insurance Market 2015, p. 51. 94 Ibid. 95  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 39. 96  Ibid, p. 40. 97 Ibid. 98 Ibid.

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income reached ¥1,268.73 billion. The top five life insurance companies99 by premium income accounted for a combined market share of 62.4%.100 In 2014, because of the market-oriented pricing reform of life insurance, the product structure was remarkably improved. The premium income from ordinary life insurance stood at ¥429.65 billion (258% up), accounting for 33.9% of the total premium income of life insurance companies. Participating products premium income totalled ¥650.88 billion (−20%), representing 51.3% of the total premium income from life insurance companies. The premium income from unit-linked insurance reached ¥440 million (0.1% up), and the premium income from universal insurance reached ¥9.19 billion (5% up), representing 0.03% and 0.7% of the total premium from life insurance companies, respectively.101 The premium income of health insurance totalled ¥141.58 billion, and accident insurance totalled ¥37.07 billion. Together they accounted for 14.1% of the total life insurance premium.102 (b) Distribution channels for life insurance products The major distribution channel for life insurance products is the individual agents who account for 48.6% of the total life insurance premiums. The bancassurance is the second most important channel, accounting for 39% of the total. Direct sales by the life insurers account for 10% of the total life premium income. Full-time institution agents, part-time institution agents and insurance brokers contribute 14% of the total life insurance premium.103 (c) Assets As of the end of 2014, the total assets of life insurance companies amounted to ¥8,254.54 billion. The industry achieved net profits of ¥109.27 billion, up by 119.6% from a year earlier. The solvency surplus increased significantly, further building up the capital buffer.104 (d) Market risks prevention First, the maturity payment risk and the surrender risk were steadily resolved. In 2014, the surrendered premium value reached ¥323.09 billion, with the surrender ratio at 5.71%. The insurance industry constantly strengthened risk prevention, weathered the maturity payment and surrender peak, and held the risk bottom line. Second, individual risks were successfully handled. The risk of individual companies was properly handled to maintain the stability of the whole industry. Third, the life insurance industry maintained sufficient solvency. As of the end of 2014, only one life insurer was below the solvency standard, and the solvency ratio of other companies was above 150%. Fourth, the over-heat development of the high cash value  99 China Life Insurance Company Ltd, Ping An Life Insurance Company of China, Ltd, New China Life Insurance Co., Ltd, China Pacific Life Insurance Co., Ltd, and PICC Life Insurance Company Limited. 100  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 40. 101 Ibid. 102  Ibid, p. 41. 103 Ibid. 104  Ibid, p. 42.

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business was effectively controlled. In the beginning of 2014, faced with the spurt of growth of the high cash value business, the CIRC promptly adjusted its regulatory policies and released the Notice on Regulation of High Cash Value Insurance Products. After the release of the notice, the growth rate of the high value business declined by 80%, 85% and 84% in the second, third and fourth quarter, respectively, and its precariously fast growth was effectively contained.105 1.7.3 Insurance intermediaries market Insurance intermediaries play a very important role in China’s insurance market. As of the end of 2014, there were 2,546 full-time institution intermediaries in China, of which there were 1,764 full-time insurance agencies, 445 insurance brokers and 337 loss adjusters. There were 210,108 part-time agencies nationwide, including 179,061 from the financial sector, and 31,047 from other sectors.106 In 2014, insurance intermediaries contributed premium income totalling ¥1,614.42 billion, accounting for 79.8% of the total national insurance premium (including ¥472.17 billion for non-life insurance and ¥1,142.25 billion for life insurance), of which all full-time institution intermediaries accounted for 7.3%, all the part-time agencies 34.6% and individual agents 37.9%.107 1.7.4 Reinsurance market Reinsurance business has continued to grow in recent years. As of the end of 2014, there was one reinsurance group company,108 and there were nine professional reinsurance companies. Many large insurance companies intend to set up professional reinsurance companies, many offshore reinsurers have actively sought to set up branches in the Chinese market, and social capital has expressed great interest in the reinsurance market.109 In 2014, reinsurers collected premium income of ¥151.85 billion (55.7% up from 2013) and made claim payments of ¥39.3 billion (11.2% up). Premiums amounting to ¥173.78 billion were ceded to reinsurers, 52% higher than in 2013, among which ¥92.94 billion were from non-life insurers, and ¥80.84 billion were from life insurers. Foreign-funded reinsurance companies accounted for 64.8% of the total reinsurance premium income across the country. The rapid increase of the ceded life business was due to a large scale of facultative reinsurance arrangements of some life insurers to ease their solvency pressure.110

105  Ibid, p. 43. 106 Ibid. 107  Ibid, p. 44. 108  China Reinsurance Group, accessed in May 2016. 109  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 45. 110 Ibid.

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1.7.5 Opening up of the Chinese insurance market According to the CIRC annual report 2015, as of the end of 2014, there were 56 foreign-funded insurance companies and 140 representative offices from 15 foreign jurisdictions in China. The premium income of foreign-funded insurance companies reached ¥90.19 billion (32.6% up on 2013), accounting for 4.5% of the national total. The claim payments totalled ¥47.2 billion. The total assets of foreign-funded insurance companies amounted to ¥664.67 billion, accounting for 6.5% of the national total. Foreign-funded non-life insurance companies in China took 2.2% of the market share, with a premium income of ¥16.8 billion (102.4% up) in 2014. In terms of business structure, motor vehicles, commercial property, liability, cargo, agriculture and accident insurance made up the major source of premium income of foreign-funded non-life insurers, accounting for 56.6%, 11.5%, 9.1%, 7.3%, 5.9% and 4.7% of the total, respectively. The above-mentioned six insurance lines altogether accounted for 95.1% of the total premium income of foreign-funded non-life insurance companies. Foreign-funded life insurance companies in China accounted for 5.8% of the total premium income of life insurance companies nationwide, with a premium income of ¥73.39 billion in 2014. Foreign-funded reinsurance companies collected premium income of ¥98.35 billion (104.1% up on 2013), accounting for 64.8% of the total reinsurance premium income across the country, and made claim payments of ¥22.75 billion. Total profit was ¥1.82 billion. As of the end of 2014, 12 Chinese-funded domestic insurers had set up 32 overseas operations, including 10 asset management companies. Four domestic insurers had set up seven overseas representative offices. 1.8 The further development of the insurance industry The State Council released the Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry (the Opinions) in August 2014.111 As a great milestone for the development of the modern insurance industry, the Opinions, consisting of 10 aspects, 32 items, proposed a series of strategic measures for the reform and development of the insurance industry. The Opinions elevated the position of the insurance industry as an important industry of the modern economy for the first time, and gave a top-down design of how the growth of the modern insurance service industry can be further boosted to play its part in the state governance system and governance modernisation. The Opinions defined the strategic objectives: by 2020, insurance will be an essential means of risk management and financial management for government, enterprises and residents, with insurance penetration of 5% and insurance density of ¥3,500. To achieve this goal, the Opinions developed a comprehensive plan for the reform, development and regulation of the insurance industry,

111  Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry, State Council Decree (2014) No. 29, the State Council. See accessed in April 2016.

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and set clear requirements on improving the insurance legal system to ensure orderly development. The Opinions also upgraded supportive policies for the insurance industry including taxation incentives, fiscal policies and land use policies. According to the Opinions, by 2020, a modern insurance service industry is to be in place to provide comprehensive protection and exert functions needed in economic development and social progress. China, at that time, will have not only a big insurance industry but also a strong one. China’s insurance will be an effective stabiliser of society and a booster of the economy. The insurance industry in China is now standing at a new historic point, and will continue to serve economic and social development. There is great potential for further development of the insurance industry in the long run. This can be seen by three indications, as compared to developed markets: low insurance penetration, low insurance density and large population. First, the insurance penetration (the ratio of premium to GDP) is low. For the period from 2004 to 2014, the average insurance penetration was 3.11% (being 3.39% in 2004 and 3.18% in 2014),112 as compared with 6% to 12% in developed markets around the world.113 This indicates the relatively small size and spread of the insurance industry in the Chinese economy. The life insurance penetration rate was 1.7% and non-life only 1.3%.114 The fact that China is the world’s largest and still growing manufacturer while having such low insurance penetration also implies a highly undeveloped non-life insurance sector and growth potential, particularly in property and fire, liability, trade credit, business interruption and other lines.115 Second, the insurance density (RMB yuan per person) is low. It was ¥332 in 2004 and ¥1,479 (US$227) in 2014,116 indicating a relatively low awareness compared with mature markets around the world, where it ranges from US$2,000 to US$7,000 per capita. Considering the density per sector, life insurance in China, similar to the global industry, has a relatively higher density compared to non-life. The low density suggests that market expansion could be immense as insurance awareness and disposable income per capita grow closer to those of the developed markets (in 2013, disposable income grew by 12.4% in rural areas and 9.7% in urban areas).117 Assuming that China is to reach the lower level of developed markets density (say, US$2,000), the insurance industry premiums would increase by about 10 times. Third, China has the largest and most steadily growing population in the world, with 1.4 billion inhabitants as of 2014.118 In comparison, Europe’s population was 815 million, North America’s 348 million and Latin America’s 598 million at the end of 2012.119 In addition, the population in China is aging faster than in Europe or

112  The CIRC Annual Report of the Chinese Insurance Market 2015. 113  China’s Insurance Market Overview, June 2014 by Dagong Europe Credit Rating, accessed in May 2016. 114  Swiss Re Sigma No. 3, 2013. 115  China’s Insurance Market Overview, June 2014 by Dagong Europe Credit Rating accessed in May 2016. 116  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 73. 117  China National Bureau of Statistics accessed in May 2016. 118 Ibid. 119  Swiss Re Sigma No. 3, 2013.

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North America. This will boost the demand for new products and services to meet the aging population’s needs. Fourth, China has been leading the world’s economic growth by the size and the speed of its development. The sustainability of growth is a matter of concern not only for the Chinese authorities but also globally. Though economic growth is slowing down, it is still sufficient to stimulate the insurance sector expansion. Fifth, the government’s policy is focused on maintaining economic growth and moving towards a more “market driven” economy to maintain wealth creation in the country. The opening, development and regulation of China’s insurance market are highly dependent on the government’s policy direction and its predictability. It is expected that economic policy will have positive impacts and will aid further insurance market development.120 Finally, social development in China is picking up pace, driven by a rapidly growing middle class and their evolving needs, including a strong need for more financial security and predictability of the future. The society is highly technology-savvy, and the penetration is high and still growing. As an example, the mobile phone industry has been growing at record levels, with mobile subscriptions reaching 1.2 billion in 2013, compared to 0.6 billion in 2008.121 It is expected that this development will fuel insurance product innovation and push insurers to approach target audiences in more innovative, cost-efficient and faster ways.122 As Chinese people become more and more aware of risks and insurance, the insurance industry enjoys a favourable environment for further development. The issuance of the Opinions by the State Council demonstrates that it is the government’s will to further develop insurance. The role of insurance has been uplifted to the national governance level, which implies that insurance will become one of people’s living necessities. For this under-insured country with a large population and high GDP, the next 5 to 10 years will be a golden period for the development of the insurance industry. It is reasonable to believe that the insurance industry will maintain the momentum of steady, rapid and profitable growth and deliver more benefits to society in the future. Insurance regulation and insurance contracts law must keep pace with the rapid development of the insurance business, so as to regulate and govern the activities of the players in the market and the contractual relations between insurers and insureds for healthy and sustainable development of the market. Recently, a new round of insurance law reform has been initiated. On 14 October 2015, the Legal Affairs Office of the State Council published the draft of the proposed amendment of the Insurance Law for consultation at its website.123 Under the proposed amendment, 24 new articles are included, 1 article deleted and 54 articles revised. The proposed reform focuses on the regulation of the insurance business and market. A few changes are proposed for the provisions in relation to insurance contracts for

120  China’s Insurance Market Overview, June 2014 by Dagong Europe Credit Rating. 121  Dagong Europe – Industry Compass: Telecom, May 2014. 122  China’s Insurance Market Overview, June 2014 by Dagong Europe Credit Rating. 123  accessed in May 2016.

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the purpose of strengthening the protection of insurance consumers.124 This will be considered in the next chapter. 1.9 Conclusion This chapter considers the nature of insurance and classification of insurance contracts. It also gives an outline of this book and presents a brief account of China’s insurance history, the insurance market and potential for further development of China’s insurance industry. The modern insurance industry has a relatively short history in China. The insurance industry developed very slowly for the period from 1949 to 1978 because of political movements and the backward economy of the country. Since 1978 when economic reform and the open-door policy were initiated, China’s insurance industry has been developing very rapidly at an unprecedented speed. China now stands as the fourth-largest insurance market in the world. An open, balanced and vigorous modern insurance market system has basically been formed. With the relatively high growth rate of the GDP, there is still great potential for further development of the insurance industry in the long run in China. The Insurance Law was enacted under this background in 1995 and amended three times to keep pace with the rapid development of the insurance industry. Having considered the industrial background under which the Insurance Law was enacted and is applied, the legal background will be considered in the next chapter.

124  Ibid, see the explanation concerning the amendment of the Insurance Law (the draft for comments), 14 October 2015, the Legal Affairs Office of the State Council.

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CHAPTER 2

The Chinese legal system and the Insurance Law

2.1 Introduction The previous chapter presents the industrial background under which the Insurance Law was formulated and has been operating. This chapter describes the legal background under which the Insurance Law was enacted and has been amended and interpreted. It presents an overview of the legal framework and sources of law relating to insurance contracts and regulations. It is hoped that this chapter can serve as a bridge from the introductory part of the book to the examination of the substantive law of insurance contracts in the following chapters. 2.2 Traditional underpinnings of Chinese law In China, two major philosophical traditions oppose and interact with each other in Chinese jurisprudence: Confucianism and Legalist thought.1 These philosophical views have strongly influenced the Chinese way of life and its legal development. The influence has permeated the whole of Chinese history. The essence of Confucianism is the belief that desirable behaviour and societal harmony can be obtained by the rule of good men, whose virtuous examples are the most effective form of persuasion, but not by strict regulation or severe punishment. Confucianism stresses the virtue of yielding and compromise so as to avoid friction. It also emphasises an ideal universe of harmony in which nature and human society assume their proper places and in which virtue and propriety in ruler and ruled follow traditional, hierarchical pathways. Each person fulfils a preordained and class-based function in society and is collectively responsible with others for reforming bad behaviour through willed social conformity. Confucianism is basically a philosophy of harmony, peace and conciliation. In contrast, the Legalist tradition insists that society can achieve harmony only by using strict and firm punishment for transgressions. The Legalists argued that human beings are fundamentally amoral, and that they cannot be moved by moral example. The only way to make them behave correctly is by a strong legal system, which enforces correct behaviour through rewards and punishments. If even minor infractions are ruthlessly punished, then nobody will dare to commit

1  For more, see Zhen Jing, Fundamental Principles of Insurance Law and Practice in the People’s Republic of China: A Comparative Study with English and Australian Counterparts (2001) PhD thesis, Department of Law, Queen Mary, University of London, pp. 44–46.

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serious crimes. The Legalists stress state power and control rather than morality. They think only the enforcement of the powerful and forceful written law could curb crime and keep society in order. By reflection of these philosophical senses in law, the purpose of law in China is basically, and has always been, twofold. On the one hand, the authorities have tried to make the enforcement of law flexible and adaptable to circumstances. Education, mediation and the reform of offenders have always played a great role and do so still today. This can be seen as a continuation of Confucian ideas. On the other, law is and has always been also regarded as a deterrent and is used to suppress offenders. This is in conformity with Legalist thinking. The model behaviour (Li) central to Confucian legality and the written law (Fa) of the Legalists have existed side by side, although Confucianism has more influence throughout Chinese history.2 So the Chinese legal system and laws have been characterised by having two sides, namely to reform the offenders by education and mediation on the one hand and to punish them on the other. 2.3 A historical overview of the legal system The establishment of the People’s Republic of China (PRC) in 1949 marked the beginning of a new era in China in which it began to develop its polity and economy independently, and it was the beginning of a new stage in Chinese legal history. The Chinese Communist Party’s aim, since its origin, has been to establish a fully socialist society in China. Having decided to abolish totally the legal system of its predecessors, the PRC government set itself the difficult task of establishing a whole new legal system, which had to be both socialistic and Chinese. During the period of 1949 to 1966, the Chinese legal system experienced difficulties at various stages of its development, but made considerable overall progress towards these goals. The government made active use of legal instruments to achieve this political goal of socialist construction. However, during the Great Proletarian Cultural Revolution (1966–76), Chinese legal systems accompanied by other “bourgeois traditional institutions” were nearly uprooted. One of the most popular slogans was “smash the security bureau, procuratorial system and judicial system (Zalan Gong Jian Fa).” The implementation of this slogan resulted in the collapse of judicial and legislative systems. With law schools closing down, the lawyers and law teachers as well as legal scholars and judges were removed from their positions and sent to farms for “re-education.” While there was no additional statute law, other existing codified laws were either suspended or declared void – even the Constitution suffered the same fate.

2  Confucians philosophised that if the people are guided by Fa, and order among them is enforced by means of punishment, they will try to evade punishment and have no sense of shame, but if they are guided by virtue, and order among them is enforced by Li, they will have a sense of shame and also be reformed. The dominance of Li over Fa has continued from Imperial China through the Nationalist government era and to the PRC. For example, in the 1982 Chinese Constitution, the concept of Li was reflected. (The Constitution of the PRC adopted by the 5th session of the Fifth National People’s Congress on 4 December 1982, and was amended in 1988, 1993 and 1999.) Article 111 of the Constitution stipulates that neighbourhood and municipal people’s mediation committees are to be established.

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The situation did not change until the end of the Cultural Revolution, and pragmatic policies were adopted by the Chinese government in 1978 when the government announced that the country would, from then on, concentrate its efforts on economic construction. The new economic policy, with its more decentralised governmental control and growing independence for individual economic entities, has greatly complicated economic relations. There is thus a pressing need for new laws and regulations governing economic activities. The Chinese legal system and law have been re-established since 1979. Many of the current laws and regulations are directly rooted in the economic reform. The government paid great attention to legislation on economic matters. Of the laws enacted since 1979, most deal with economic matters. The government has extensively resorted to such legal instruments to ensure the success of its reform policies. Indeed, most of the new economic policies are reflected in one way or another in existing laws and regulations. The economic reforms have also increased the need to develop the legal system to match changing economic relationships, and to provide basic guidelines for the economic activities of Chinese businesses which are now no longer as tightly controlled by the state. Chinese laws and regulations have developed rapidly in recent years, primarily because of the rapid changes in the economy and society brought about by economic reform policies. These policies have created a corresponding need to strengthen and improve the existing legal structure. The recent rapid pace of legal development presents the Chinese government with the difficult task of striking a balance between the need to develop the legal system further to match changing economic realities and the need to maintain a degree of certainty and predictability for entities and individuals affected by the new developments. 2.4 The legislative system According to the Legislation Law of the PRC 2000,3 the Chinese legislative system is characterised by three levels, namely the central legislative body (the National People’s Congress and its Standing Committee), the Central Government (the State Council)4 and the regional legislative bodies (local people’s congresses and standing committees). The principal law-making institution of the Chinese state is the National People’s Congress (NPC) and its Standing Committee.5 The NPC has the power to enact and amend laws, such as criminal law, civil law, laws of state organs and other organic laws.6 The Standing Committee of the NPC has substantial law-making powers and may enact or amend all laws other than those which are reserved for the NPC.7 As there is usually a substantial interval between the meetings of the NPC, the NPC Standing Committee plays an important law-making role when the NPC is not sitting. The Standing Committee is also 3  It was adopted at the 3rd Session of the 9th PNC on 15 March 2000 and became effective on 1 July 2000. It was amended on 15 March 2015. 4 The State Council, that is, the Central People’s Government of the PRC, is the executive body of the highest organ of state power; it is the highest organ of state administration. 5  See the Legislation Law 2015, art. 7, which states: “The NPC and its Standing Committee exercise the legislative power of the state.” 6 Ibid. 7 Ibid.

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vested with the power to make supplements and amendments to the laws which are enacted by the NPC during an interval of the meetings of the NPC, but such supplements and amendments must not conflict with the fundamental principles of the corresponding laws.8 The State Council has the rule-making powers and may make administrative regulations in accordance with the Constitution and statutes.9 These regulations shall include matters (1) in respect to the necessities of enacting administrative regulations in order to implement the provisions of a statute, and (2) within the functions and powers of the State Council’s administration.10 The people’s congresses and their standing committees of provinces, autonomous regions and municipalities may enact local regulations in accordance with the local special situations, and these regulations must not conflict with the Constitution, statutes or administrative regulations.11 Also, by virtue of the Legislation Law, ministries and commissions of the State Council, the People’s Bank of China, the China Insurance Regulatory Commission (CIRC), the Auditorial Office and institutions with administrative functions which are under direct leadership of the State Council may, according to the State Council’s administrative regulations, decisions and orders, enact regulations within their respective authorisation.12 These regulations shall deal with the matters on the implementation of the laws of the NPC, or the State Council’s administrative regulations and decisions or orders.13 In accordance with the hierarchy of the law-making power, Chinese law can be divided into four levels: (1) the Constitution;14 (2) laws adopted by the NPC and its Standing Committee; (3) administrative regulations adopted by the State Council; and (4) local regulations by the people’s congresses of provinces, autonomous regions and cities, and rules or regulations issued by the ministries and commissions of the State Council. As provided by the Constitution and the Legislation Law, the legal superiority descends according to the level of law-making authority. The Constitution is the highest and fundamental law of the PRC,15 which is supreme over all other laws, so any law which contravenes the Constitution is void.16 The second level is the laws enacted by the NPC and its Standing Committee. These laws are usually supplemented by more detailed rules and regulations promulgated by the State Council or its affiliated ministries. Local people’s congresses and their standing committees at various levels are permitted to enact regulations suitable to local conditions, provided that such regulations do not contravene the Constitution, the laws or regulations adopted by the NPC, its Standing Committee or the State Council.

 8 Ibid.   9  See the Legislation Law 2015, art. 65. 10 Ibid. 11  Ibid, art. 72. 12  Ibid, art. 80. 13 Ibid. 14  The Constitution was enacted in 1982, and was amended in 1988, 1993 and 1999. 15  See the Constitution, art. 5; and the Legislation Law, art. 78. 16  Ibid, see also the Preamble of the Constitution.

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2.5 The judicial system Under the Chinese Constitution, the People’s Courts of the PRC are the judicial organs of the state.17 The People’s Courts of the state are created by the people’s congresses to which they are responsible and by which they are supervised.18 Before the economic reform, Chinese courts essentially existed in form but not in substance, and they all but disappeared during the Cultural Revolution. The judicial system has been extensively rebuilt since 1979. Under the Organic Law of the People’s Court,19 the hierarchy of the People’s Courts is divided into four levels: (1) the Supreme People’s Court (SPC); (2) the High People’s Courts (HPC); (3) intermediate People’s Courts; and (4) the basic People’s Courts. At the top is the SPC in Beijing; the other three levels are generally referred to as “local People’s Courts.” The HPC include centrally administered cities like Beijing and Shanghai and autonomous regions like Tibet and Xingjiang, in addition to each of China’s provinces. Intermediate People’s Courts are courts at prefectures of a province or autonomous region, municipalities directly under the Central Government or directly under jurisdiction of a province or autonomous region or autonomous prefecture. At the lowest level, there are the basic courts of rural counties and urban districts. There are also some special courts: military courts, maritime courts and railway courts. In China, courts, except the SPC, have no power to interpret laws; neither the Constitution nor the Legislation Law authorises the courts to interpret the laws. In China, the power of legal interpretation is mainly exercised by the legislature. The Constitution and the Legislation Law entrust the NPC Standing Committee with the power to interpret the Constitution and laws.20 Such interpretation is called “legislative interpretation” in jurisprudence. It is said the basis of legislative interpretation is that those who make the law know the meaning of the law and are in the best position to interpret it. According to this theory, in addition to the NPC and its standing Committee, other law-making bodies, including the State Council and the standing committees of local people’s congresses, should also have the power to interpret the administrative regulations and local laws and regulations. The theory of legislative interpretation requires restraints of the judicial power in relation to interpreting laws and regulations. So in China, the courts, except the SPC, have no power to interpret the law but only to implement it. Without ascertaining the meaning of law, however, the power of implementation can hardly be exercised. In this regard, the more detailed an interpretation (ascertaining meaning) is given by the legislature, the easier it becomes for the court to implement. However, in practice, the NPC Standing Committee has not yet given any formal interpretation of any law; even when it was asked to do so, it refused to exercise the power.21 Instead, it authorised the judiciary and administrative organs to have certain powers

17  The Constitution, art. 123. 18  Ibid, art. 3. 19  The Organic Law of the People’s Court was adopted in 1954, and was amended in 1979 and 1983. 20  See art. 67 of the Constitution and art. 45 of the Legislation Law. 21  See Wang Guiguo and John Mo, Chinese Law (Butterworths 1999) p. 20.

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to interpret laws and regulations. The Resolution of the NPC Standing Committee on Strengthening the Work of Law Interpretation22 prescribes: (1) all articles in laws requiring further definition or supplementary stipulations shall be interpreted or stipulated by law by the NPC Standing Committee; (2) all questions arising from court trials concerning the specific application of laws and decrees shall be interpreted by the Supreme People’s Court. All questions relating to the specific application of laws and decrees in the procuratorial work of the procuratorate shall be interpreted by the Supreme People’s Procuratorate. In case there is a difference in principle between the interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate, the NPC Standing Committee shall be asked to give an interpretation or decision; (3) all questions on the specific application of laws or decrees that do not come under judicial or procuratorate work shall be interpreted by the State Council and the responsible department; (4) all articles of law of local character requiring further definition or supplement stipulations shall be interpreted or stipulated by the respective standing committees of provinces, autonomous regions and municipalities that formulated those regulations. All questions concerning the specific application of laws and regulations of a local character shall be interpreted by responsible departments under the people’s governments of provinces, autonomous regions and municipalities. Having the power vested by the Resolution of the NPC Standing Committee, the SPC, since the beginning of the 1980s, has often given its opinions regarding how a given statute or provision should be enforced. Such opinions of the SPC have been widely regarded as interpretations of the law. In practice, judicial interpretation by the SPC has emerged as the most frequent and important form of legal interpretation in China. The SPC is empowered to issue interpretations of questions of law arising out of concrete applications. The SPC has often issued an interpretation of a specific law soon after it is enacted for the purpose of further elaborating on the law. For instance, since the Insurance Law was amended in 2009, the SPC has so far enacted three judicial interpretations concerning issues as to the application of the Insurance Law (which are considered below). 2.6 Insurance legislation in China In China, the Insurance Law (statutory law), the Interpretations of the SPC on Certain Issues Concerning the Application of the Insurance Law, the relevant regulations of the State Council and the CIRC’s regulations constitute the legal framework governing insurance activities, the insurance market and the insurance industry.

22  It was adopted at the 19th Meeting of the Standing Committee of the 5th NPC on 10 June 1981.

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2.6.1 Before the enactment of the Insurance Law 1995 Prior to the Insurance Law 1995, there were mainly four laws and regulations relating to insurance contracts and insurance companies. These were the Economic Contract Law of the PRC 1981,23 the Regulation of the PRC on Contracts of Property Insurance 1983,24 the Interim Regulations on the Administration of Insurance Enterprises 198525 and the Maritime Code of the PRC 1992.26 In the Economic Contract Law 1981, arts 25 and 46 dealt with matters of insurance. This was the first time since 1949 that the insurance industry was guided by law other than administrative orders and regulations. On this basis, in 1983, the State Council issued the Regulations on Property Insurance which provided more detailed rules about property insurance contracts. To furnish a basic regulatory framework for the insurance industry, the State Council issued the Interim Regulations of the Administration of Insurance Enterprises in March 1985. The Interim Regulations were the first comprehensive set of insurance enterprise regulations in China which played an important role in insurance operations before the enactment of the Insurance Law. In November of 1992 the Maritime Code was promulgated, in which chapter 12 (arts 216 to 256) deals with matters of marine insurance contracts.27 2.6.2 The birth of the Insurance Law 1995 These three sets of laws and regulations relating to insurance made in the 1980s and the Maritime Code 1992 played an active role in the transformation of the Chinese economic system from a centrally planned economy to a market economy and in the formation of China’s insurance market. Since 1990, China’s economic reform has continued to be strengthened and deepened; the market economy has primarily been established. China’s insurance industry has been developing steadily, and the insurance market has been further opening and expanding dramatically. Thus the fragmentary pieces of the laws and regulations in respect of insurance promulgated in the early 1980s were unable to meet the considerable changes in the insurance industry and insurance market. For example, the number of people insured under personal insurance increased from 0.1 million in 1982 to 217.35 million in 1991 (the year when the drafting of the Insurance Law was started) and the premium

23  It was adopted by the 4th Session of the Fifth National People’s Congress (NPC) on 13 December 1981. Articles 25 and 46 deal with matters of insurance contracts. The Economic Contract Law was repealed by the Contract Law 1999 (PRC). 24  It was promulgated by the State Council on 1 September 1983. 25  It was enacted by the State Council on 3 March 1985. 26  It was adopted at the 28th Meeting of the Standing Committee of the Seventh NPC on 7 November 1992 and became effective on 1 July 1993. Chapter 12 (arts. 216–56) deals with matters of marine insurance. According to art. 147 of the Insurance Law 1995: “Marine insurance shall be governed by the relevant provisions of the Maritime Code. Matters not provided for by the Maritime Code shall be governed by the relevant provisions of this law.” 27  Chapter 12 of the Maritime Code contains six sections: section 1, basic principles; section 2, conclusion, termination and assignment of contract; section 3, obligations of the insured; section 4, liability of the insurer; section 5, loss of or damage to the subject matter insured and abandonment; and section 6, payment of indemnity. The Marine Insurance Contract Law included in the Maritime Code of the PRC is still in force.

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income for personal insurance rose from ¥1.59 million in 1982 to ¥8,340.14 million in 1991, and the types of personal insurance coverage increased to 50 in 1991 compared to 20 in 1982.28 However, there had been no law or regulation guiding personal insurance which was transacted only according to personal insurance policies.29 As to the regulations on property insurance, there were still lots of gaps to be filled. There was a lack of insurance contract law to balance the parties’ rights and obligations and to deal with matters of insurance contracts. In addition, the Interim Regulations of Insurance Enterprises were unable to cope with the real situation of the rapid developing insurance industry. The main problems were as follows: first, the People’s Bank of China (PBC) was then nominated by the government as the Financial Supervision and Control Department for insurance business,30 but the range of its functions was not clearly defined and it did not provide competent administration and supervision for the insurance business. This caused, to a certain extent, some disorder in the insurance market. Second, there was a lack of an environment for fair competition among the insurance companies. For example, the income tax rates for different companies were quite different. The state then collected 55% of income tax from the state-owned insurance company – the PICC – 35% from Pacific Insurance Company and Ping An Insurance Company (company limited by shares) and 15% from the branches of foreign insurance companies.31 Third, some insurance companies tried very hard to keep their customers and attract more new customers by inappropriately reducing the premium rate and other undue means. Consequently the compensation ability of the insurance companies was weakened. Fourth, some enterprises began to run, directly or indirectly, insurance businesses without approval of the Financial Supervision and Control Department. Such enterprises, in fact, had neither strong capital nor insurance managing experience, thus the interest of insurance consumers could not really be protected. Under these circumstances, it was imperative to draw up a comprehensive insurance law.32 In October 1991, authorised by the State Council, the People’s Bank of China (it then played the role as the supervision and regulation authority of the insurance industry in China) set up an insurance law drafting group to prepare the new insurance legislation.33 After two years of hard work, the draft of the Insurance Law was

28  The PICC’s Year Report of 1991. 29  These policies were drafted by the PICC. 30  Interim Regulations of Insurance Enterprises 1985, art. 4. 31 See The Explanation on the Draft of the Insurance Law of the PRC, by Zhou Zhengqing, the vice-president of the People’s Bank of China, February 1995. 32  For more, see Zhen Jing, Fundamental Principles of Insurance Law and Practice in the People’s Republic of China: A Comparative Study with English and Australian Counterparts (2001) PhD thesis, Department of Law, Queen Mary, University of London, pp. 44–58. 33 The law drafting group consisted of 10 persons (4 from PBC, 4 from PICC, 1 from the Pacific Insurance Company, and 1 from Ping An Insurance Company). The drafters collected, translated and studied insurance laws of 16 countries and regions, including the UK, the US, Japan, Hong Kong, Taiwan, etc. During the process of drafting, they investigated the attitudes and opinions of the PICC and its branches on the Interim Regulations of Insurance Enterprises and other existing insurance regulations and asked them for suggestions on the drafting of the new insurance law. The drafting group also invited experts, legal scholars and leaders from universities, relevant ministries of the State Council, the Bureau of Legislative Affairs, the Bureau of Judicial Affairs and the PBC as well as the PICC to discuss the possible contents of the Insurance Law of the PRC. The group also contacted some foreign insurance law experts for their opinions and suggestions.

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completed and submitted to the State Council for consideration in September 1993. After several corrections, the draft was eventually passed at the 29th Meeting of the Standing Committee of the State Council and then introduced as the Insurance Bill to the NPC for consideration. The Bill consisted of five chapters and 145 articles. The Legal Committee of the NPC examined the Bill carefully. The revised Bill was adopted on 30 June 1995 by the 14th Session of the Standing Committee of the 8th NPC and was put into effect on 1 October 1995. The Insurance Law 1995 consists of eight parts (152 articles), which are general provisions, insurance contracts, insurance companies, insurance business rules, supervision and administration of the insurance industry, insurance agents and insurance liability, and supplementary provisions. The Insurance Law 1995 is the first comprehensive set of insurance laws since the establishment of the PRC in 1949. In combination with other pertinent statutory provisions, it represented a basic legal framework for insurance operations, and has played a significant role in the development of China’s insurance industry and the growth of China’s insurance market. The Insurance Law 1995 has several features. (1) Most insurance laws of the other countries and regions of the world have not contained the objectives of the legislation on insurance law. The Insurance Law, however, expressly stipulated the objective of the legislation. The first article of the Insurance Law states: “This law is formulated in order to regulate insurance activities, protect the lawful rights and interests of the parties in insurance activities, strengthen the supervision and control of the insurance industry and promote the healthy development of the insurance business.” This article makes it very clear that the Insurance Law aims to provide legal protection for the healthy development of the insurance industry and the insurance market and to promote the growth of a socialist market economy. (2) The Insurance Law 1995 combines insurance contract law and insurance company law into one. Thus the Insurance Law not only adjusts the relations between the parties of an insurance contract, but also adjusts the relations between the state and insurance companies, and the behaviours of the insurance companies in the insurance market; it also governs the activities of insurance intermediaries (insurance agents and brokers). (3) The Insurance Law 1995 reflects the legislative principle of tailoring this law to China’s own circumstances. This principle means that the legislation on insurance not only is in accordance with the aims of the state regarding reforms of the insurance structures, but also gives consideration to the actual situation34 that insurance companies were being transformed from an old system to a new one. (4) The Insurance Law 1995 also reflects the efforts of the law drafters to keep the law in line with international practice. During the process of preparing

34  In other words, China’s insurance companies were then on the way to establish a modern enterprise system characterised by operating independently, assuming their own responsibility for their profits and losses and developing business of their own accord.

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and drafting the Insurance Law, the drafters collected, translated, consulted and referred to 16 countries’ and regions’ insurance laws and regulations. The Law adopted many internationally accepted principles and concepts regarding insurance contracts and insurance business. This is for the purpose of the incorporation of China’s insurance market into the international insurance market in the near future. 2.6.3 The amendments of the Insurance Law The Insurance Law 1995 has so far been amended three times, in 2002, 2009 and 2015. The current position of the statutory law relating to insurance contract law is represented by the Insurance Law 2009. Although the 2009 version of the Insurance Law was amended in 2015, the amendments were only made to the part on insurance regulation; there is no change at all in the part on insurance contract law (from art. 1 to art. 66) So in this book, all the provisions relating to the insurance contract are those in the 2009 version of the Insurance Law. Where an article (say, art. 1) in the 1995 or 2002 version of the Insurance Law is referred to, it will be presented in the following format: art. 1 of the Insurance Law 1995, or art. 1 of the Insurance Law 2002. Where an article in the 2009 (or 2015) version of the Insurance Law is referred to, it will be presented in the following format: art. 1 of the Insurance Law. (a) 2002 amendment of the Insurance Law The Insurance Law 1995 was amended for the first time at the 30th meeting of the Standing Committee of the 9th NPC of China on 28 October 2002. This amendment was made in response to China’s commitments in relation to the accession to the WTO at the end of 2001. Thus it focused mainly on the amendment of openness and regulation of the insurance market. The part relating to insurance contracts was almost untouched, although it had been recognised that certain articles were unclear or ambiguous and in need of clarification and amendment. The first amendment was thus regarded as an interim measure for the purpose of meeting the requirements for China’s accession to the WTO. Thus the second amendment was necessary in order to reform the law relating to insurance contracts. (b) 2009 amendment of the Insurance Law In October 2004, the CIRC and other relevant government departments started the task of amending the 2002 version of the Insurance Law. At the end of 2005, the draft of the amended Insurance Law was submitted to the Legislative Affairs Office of the State Council. The State Council made further changes after consultation with the general public and relevant bodies, and submitted the Insurance Bill 2009 to the NPC of China on 1 August 2008. On 28 February 2009, the Standing Committee of the NPC of China passed the amended version of the Insurance Law, which came into force on 1 October 2009. The 2009 version of the Insurance Law embraces many significant changes relating to both insurance contract law and insurance regulation, reflecting the fast-paced development of China’s insurance industry along with its regulatory regime. 36

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In respect of the law on insurance contracts, the 2009 amendment mainly focused on nine areas, namely formation of insurance contracts, the insured’s duty of precontractual duty of disclosure and representation, the insurer’s pre-contractual duty of explaining the contents of the insurance contract, construction of insurance clauses, claims handling and settlement, assignment of the subject matter insured, notification of occurrence of the insured event, double insurance and liability insurance, etc. These amendments will be considered in detail in the relevant chapters in this book. (c) 2015 amendment of the Insurance Law The Insurance Law was amended for the third time in accordance with the Decision on Amending Five Laws Including the Metrology Law of the People’s Republic of China adopted at the 14th Session of the Standing Committee of the 12th NPC of China on 24 April 2015. The third amendment was made only to the part on regulation of insurance business, and no change at all to the part on insurance contract law. (d) The proposed amendment of the Insurance Law in the new draft of the Insurance Law On 14 October 2015, the Legal Affairs Office of the State Council published the draft of the proposed amendment of the Insurance Law and a notice inviting comments on the proposed amendment of the Insurance Law on its website.35 Under the proposed amendment, 24 new articles are included, 1 article deleted and 54 articles revised. After the proposed amendment, the Insurance Law would consist of 208 articles in nine chapters. Again, the proposed reform focuses on the regulation of the insurance business and market. A few changes are proposed for the provisions in relation to insurance contracts for the purpose of strengthening the protection of insurance consumers, a brief account of which is as follows.36 (1) In industrial practice, for a life policy with a term of more than one year, there is usually a cooling-off period of 10–15 days within which the insured is covered but can rescind the contract if he wishes to. In the proposed amendment, a new article (art. 48) is introduced which reads, “A life insurance contract with an insurance period of more than one year shall provide a cooling-off period. The proposer has the right to rescind the contract within the period, and the insurer shall refund the whole premium paid. The cooling-off period shall be no less than 20 days from the date when the proposer has received the insurance policy.” (2) Article 18 of the Insurance Law is amended to include in the insurance contract the way of communication of the proposer, insurer, the insured and the beneficiary. (3) To strengthen the protection of the customer’s personal information, a new provision (art. 124(15)) is added which prohibits the insurer and its

35  accessed in May 2016. 36  Ibid, see the explanation concerning the amendment of the Insurance Law (the draft for comments), 14 October 2015, the Legal Affairs Office of the State Council.

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employees, insurance agents, insurance brokers and their employees from disclosing or illegally trading the personal information of the proposer or the insured with any other persons. (4) To introduce new provisions (art. 124(1), art. 140(1)) for the purpose of controlling misleading conduct, such as untrue or misleading representation, of the insurers, insurance agents, insurance brokers and their employees in the course of selling insurance products. For the breach of provisions, the amount of penalty will increase from the range of ¥50,000 to ¥300,000 to the range of ¥200,000 to ¥1,000,000 (art. 179 and art. 186). (5) To further tackle the problem of claims difficulty, a new provision (art. 124(6)) is added which prohibits the insurer and its employees from delaying insurance payments. For the breach of this provision, the amount of penalty will increase from the range of ¥50,000 to ¥300,000 to the range of ¥200,000 to ¥1,000,000 (art. 179 and art. 186). 2.6.4 Administrative regulations by the State Council Three administrative regulations have so far been enacted by the State Council which govern three important areas of insurance: compulsory motor vehicle insurance, agricultural insurance and administration of foreign-funded insurance companies in the insurance market in China. (a) Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance was adopted at the 127th executive meeting of the State Council on 1 March 2006, came into force on 1 July 2006 and was amended for the first time on 30 March 201237 and for the second time on 17 December 2012.38 It is the major legislation governing the scheme of compulsory motor vehicle traffic accident liability insurance in China. The Regulation consists of five chapters with 47 articles: chapter one concerns general provisions; chapter two deals with purchase of compulsory insurance; chapter three is related to claims; chapter four is concerned with penalties in the case of contravention of the provisions of the Regulation; and chapter five provides definitions of the terms of the Regulation. This Regulation will be discussed in detail in Chapter 22 of this book. (b) The Agricultural Insurance Regulation The Agricultural Insurance Regulation was adopted at the 222nd executive meeting of the State Council on 24 October 2012, and came into force on 1 March 2013. It 37  Article 5 of the 2006 version of the Regulation only permitted the Chinese-funded insurance company to engage in compulsory motor vehicle liability insurance. Article 5 of the first amendment of the Regulation (30 March 2012) allows any insurance companies to undertake such business upon approval by the CIRC. 38 A new article (art. 43) was added into the second amendment of the Regulation (17 December 2012). It concerns the insurance liability between a trailer and the tractor. The trailer is not required to be covered under a compulsory motor policy. Where a road accident causes losses to the third party, the insurance on the tractor shall be liable for the loss.

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was amended on 6 February 2016 by the order of the State Council No. 666. It is the primary legislation to regulate agricultural insurance activities, protect the legitimate rights and interests of the parties engaged in agricultural insurance activities, improve farmers’ capacity to withstand risks and promote the healthy development of the agricultural insurance business.39 Agricultural insurance means the insurance activities by which an insurance institution40 is obligated, under the agricultural insurance contract, to pay the insurance money to the insured for the property loss suffered due to specified insurance accidents such as natural disasters, fortuitous accidents, epidemics or diseases incurred to the subject matter in the production of planting, forestry, animal husbandry and fisheries.41 The state supports the development of various forms of agricultural insurance and the improvement of a policy-based agricultural insurance system. Agricultural insurance practice sticks to the principles of government guidance, market operation, free will and concerted efforts. The people’s government of a province, autonomous region or municipality directly under the Central Government may establish an agricultural insurance business model that is adapted to the local situations. Any entity or individual shall not force or restrict a farmer or an agricultural production and operation organisation to participate in agricultural insurance.42 Where the subject matter of agricultural insurance purchased by farmers or agricultural production and operation organisations falls within the scope of premium subsidies offered by public finance, the public finance department shall offer premium subsidies. The state encourages local governments to support the development of agricultural insurance by taking such measures as offering premium subsidies from the public finances of the local government.43 The state shall establish an agricultural insurance catastrophe risk dispersion mechanism supported by local public finance. The state encourages the local governments to establish an agricultural insurance catastrophe risk dispersion mechanism supported by local public finance.44 Insurance institutions engaged in agricultural insurance business enjoy tax preference in accordance with law. The state favours the establishment of a grassroots service system by insurance institutions featuring adaptation to the development needs

39  It was reported by the CIRC in the Annual Report of the Chinese Insurance Market 2015 that in 2014 the premium income for agricultural insurance was ¥32.58 billion, up by 6.3% on the previous year. The number of rural households insured totalled 250 million, up by 15.7%. The amount insured exceeded ¥1.6 trillion, up by 17.7%. The claims payment totalled ¥21.46 billion, up by 2.9%. There were 32.45 million farmers that benefited from agriculture insurance, up by 2.1%, and 47.7% of the staple crops area, or 78 million hectares, were insured. The participation ratios of the three major grain crops, i.e. corn, rice and wheat, were 68.7%, 69.5% and 49.3%, respectively. There were 144.67 million hectares of forests, or 67.2% of forests in China that were insured, and 130 million hogs and 3.981 million cows were insured, up by 54.3% and 21.2%, respectively. 40 An insurance institution means a legally established insurance company or agricultural mutual insurance organisation. 41  The Agricultural Insurance Regulation, art. 2. 42  Ibid, art. 3. 43  Ibid, art. 7. 44  Ibid, art. 8.

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of the agricultural insurance business. The state encourages financial institutions to enhance the credit support for farmers and agricultural production and operation organisations that purchase agricultural insurance.45 (c) The Regulation on Administration of Foreign-Funded Insurance Companies In order to meet the need of opening up to the outside world and developing the economy, and to strengthen and improve the supervision and administration of foreign-funded insurance companies, the Regulation on the Administration of Foreign-Funded Insurance Companies was enacted by the State Council in December 2001 and amended on 30 May 2013 and on 6 February 2016.46 This Regulation consists of 40 articles in seven chapters. It provides rules with regard to the setting up of foreign-funded insurance companies in China, the scope of the business, the supervision and administration of the companies, the dissolution of the companies and legal liabilities. Foreign-funded insurance companies shall abide by the laws and regulations of China and shall not infringe upon the social and public interests of China. The legitimate business activities and lawful rights and interests of foreign-funded insurance companies are protected by the laws of China. This Regulation will be discussed further in Chapter 3. 2.6.5 The interpretations of the Insurance Law by the Supreme People’s Court of China China has a civil law system, thus the written law is the major source of law. However, pursuant to the Resolution of the NPC Standing Committee on Strengthening the Work of Law Interpretation,47 the SPC is authorised by the NPC to enact judicial interpretations in respect of all questions arising from court trials concerning the specific application of laws and decrees.48 The SPC’s judicial interpretations on written laws have legal force.49 Especially where a written law is a skeleton or with ambiguities, the SPC’s judicial interpretations on the written law play a very important role in interpreting provisions of the law, clarifying ambiguities in the law, filling gaps in the law, and introducing new approaches for further development of the

45  Ibid, art. 9. 46  The Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies was adopted at the 49th Executive Meeting of the State Council on 5 December 2001, promulgated by Decree No. 336 of the State Council of the People’s Republic of China on 12 December 2001, and became effective on 1 February 2002. It was amended on 30 May 2013 by the order of the State Council No. 636 and further amended on 6 February 2016 by the order of the State Council No. 666. 47  It was adopted at the 19th Meeting of the Standing Committee of the 5th NPC on 10 June 1981. 48 Ibid, art. 2. See accessed in June 2016. 49  According to arts 5 and 6 of the Stipulation of the Supreme People’s Court on the Judicial Explanation (2007 No. 12), the Supreme People’s Court stipulation, judicial explanation or decision has legal force. This means that the Supreme People’s Court stipulations, judicial interpretations, decisions or replies are legal sources in China. However, there are doubts as to whether the SPC’s interpretations will have the same legal effect as those issued by the NPC (see C. Wang, “Studies on the effectiveness of the judicial interpretation by the Supreme People’s Court of China” (2016) 28(1) Peking University LJ 263–79). Nevertheless, the SPC’s interpretations play a significant role in judicial practice.

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law.50 Since 2009 when the Insurance Law was amended for the second time, the SPC has published three sets of Interpretations on some provisions of the Insurance Law,51 for the purpose of providing rules for correctly trying cases about disputes over insurance contracts and protecting the legitimate rights and interests of the parties concerned. (a) The SPC Interpretation I 2009 Interpretation I of the SPC on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 14 September 2009 and came into force on 1 October 2009. Interpretation I 2009 mainly concerns the circumstances where the 2002 version of the Insurance Law should be applied and where the 2009 version of the Insurance Law should be applied. (b) The SPC Interpretation II 2013 Interpretation II of the SPC on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 6 May 2013 and came into force on 8 June 2013. Interpretation II includes 21 articles which give judicial interpretations and clarify some ambiguities, and fill the gaps in Insurance Law 2009 mainly on matters of insurable interest, duty of disclosure, exclusion clauses, subrogation and exclusion clauses.52 All these articles will be discussed in the relevant chapters in this book. (c) SPC Interpretation III 2015 The third Interpretation of the SPC on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 25 November 2015 and came into force on 1 December 2015 (Interpretation III). Interpretation III is concerned with issues on provisions of the Insurance Law in life insurance with particular focuses on aspects of insurable interest and beneficiaries.53

50  Following the rapid growth of the insurance market in China, in recent years the number of insurance disputes and litigation has been increasing at a phenomenal speed. There were 41,752 insurance cases in 2009 tried by different levels of courts country-wide, and the number increased to 91,555 in the first 10 months of 2015. See the answers to the journalists by Zhumei Liu (Judge of the SPC and the Vice-President of the Civil Division Two of the SPC) on the Insurance Law Interpretation Press Conference held on 26 November 2015. See accessed in December 2015. The Interpretation III on the Insurance Law has clarified the ambiguities of some provisions of the Law and provided rules for the courts to follow when hearing insurance cases. 51 The Interpretation (I) of the Supreme People’s Court on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 14 September 2009 and came into force on 1 October 2009. Interpretation (I) mainly concerns the circumstances where the 2002 version of the Law should be applied and where the 2009 version of the Law should be applied. Interpretation II of the Supreme People’s Court on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 6 May 2013 and came into force on 8 June 2013. Interpretation (II) includes 21 articles which give judicial interpretations and clarify some ambiguities and fill the gaps in Insurance Law 2009 mainly on matters of insurable interest, duty of disclosure, subrogation and exclusion clauses. For more, see Wenhao Han, “Judicial Interpretations on Chinese Insurance Act 2009 from its Highest Court” [2013] 126 BILAJ 189. 52 For more, see Wenhao Han, “Judicial Interpretations on Chinese Insurance Act 2009 from its Highest Court” [2013] 126 BILAJ 189. 53  For more on insurable interest and beneficiaries in life insurance in China, see Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] JBL 337–60; Zhen Jing, “Beneficiaries in Life Insurance in Chinese Law and Practice” [2013] JBL 463–86.

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Interpretation III consists of 26 articles which are concerned with matters of life insurance. It has clarified some long-disputed issues in the following areas: the life insured’s consent as a condition for the validity of a death policy, the time when an insurable interest must exist, the life insured’s medical examination and the proposer’s pre-contractual duty of disclosure, limitation of a life policy on a minor child, reinstatement of a suspended life policy, beneficiaries, and medical insurance. Interpretation III is helpful for the understanding of relevant provisions of the Insurance Law. These articles of Interpretation III have been discussed in a recent paper published in the Journal of the British Insurance Law Association,54 and will be further examined in the relevant chapters in this book. 2.6.6 The guiding rules published by High People’s Courts in some provinces Some High People’s Courts (HPC) at the provincial level have published guiding rules in handling insurance disputes; these rules are not binding on the lower courts in the relevant province but guide them in hearing insurance cases. Examples include the following: the Guidance of Beijing City High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2005 (the Guidance of Beijing City HPC 2005); the Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Guangdong Province HPC 2011); the Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Shandong Province HPC 2011); and the Guidance of Zhejiang Province High People’s Court Concerning Questions of How to Deal with Property Insurance Disputes 2009 (the Guidance of Zhejiang Province HPC 2009). The relevant rules will be referred to when discussing relevant issues in the chapters of this book. 2.6.7 Departmental rules of the CIRC In China, the insurance industry is regulated by the CIRC. The CIRC, as the statutory regulatory authority in China, is responsible for the supervision and administration of the insurance industry, and has the power to formulate departmental rules in the form of stipulations and regulations which play a very important role in regulating the insurance business and market in China. The function and responsibilities of the CIRC and the relevant rules enacted by the CIRC for the regulation of the insurance industry will be further discussed in the next chapter.

54  Zhen Jing, “The Latest Development of the Insurance Law in Life Insurance in China: The Third Judicial Interpretation on the Insurance Law by the Supreme People’s Court of China” [2016] 129 BILAJ, accessed in August 2016.

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2.7 Conclusion We have seen an overall picture of the Chinese legal system and the legislative and judicial sources of insurance law in this chapter; together with the background knowledge about China’s insurance industry in Chapter 1, we are now better prepared to embark on the task of examination of the substantive insurance law. The next chapter is concerned with insurance regulation in China, and after that, from Chapter 4 to Chapter 24, the principles of insurance law and the law and practice relating to specific types of insurance will be examined in detail.

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CHAPTER 3

The regulation of insurance

3.1 Introduction A sound regulatory and supervisory system is necessary for maintaining a fair, safe and stable insurance industry for protecting the rights and interests of insurance consumers, preventing and mitigating market risks, and promoting the sustainable and healthy development of the insurance industry, ultimately contributing to the stability of the financial system of the country. As mentioned in Chapter 2, the Insurance Law consists of both insurance contract law and insurance regulation. The Law has been amended three times since its enactment in 1995.1 The latest amendment was made in 2015. The articles in relation to insurance contract law in the 2015 version are exactly the same as those in the 2009 version. A few changes were made to articles in relation to insurance regulation in the 2015 version of the Law. So in this chapter, all the articles referred to are those in the 2015 version of the Law. The rules in relation to insurance regulation are provided in arts. 67 to 185 of the Insurance Law 2015, including rules governing Insurance Companies,2 Insurance Business Operation,3 Insurance Agents and Insurance Brokers,4 Supervision and Regulation of the Insurance Industry,5 Legal Liability,6 and Miscellaneous.7 Based on the provisions of the Insurance Law, the China Insurance Regulatory Commission (the CIRC) has published many regulations, measures and guiding rules in recent years governing China’s insurance industry.8 In addition, the State Council has published some rules relating to insurance regulation. There are also some other relevant laws including, inter alia, rules governing insurance business, such as the Road Traffic Safety Law of the People’s Republic of China

1  The amendments were made in 2002, 2009 and 2015. 2  See the Insurance Law 2015, chapter 3, arts 67–94. 3  See the Insurance Law 2015, chapter 4, arts 95–116. 4  See the Insurance Law 2015, chapter 5, arts 117–32. 5  See the Insurance Law 2015, chapter 6, arts 133–57. 6  See the Insurance Law 2015, chapter 7, arts 158–79. 7  See the Insurance Law 2015, chapter 8, arts 180–85. 8  This will be discussed shortly. In the UK, insurance business is regulated by the Financial Conduct Authority; for more on the regulation of insurers in the UK, see J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) chapter 2; and R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) paras 13-001 to 13-076.

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2003.9 All this legislation constitutes the legal framework for the regulation of the Chinese insurance industry. This chapter gives an overall picture of how the Chinese insurance industry is regulated. 3.2 The statutory regulatory authority Article 9 of the Insurance Law provides that “The insurance supervision and regulation authority of the State Council is responsible for the supervision and regulation of the insurance industry according to law. The insurance supervision and regulation authority of the State Council sets up local branches according to the needs for performing its responsibilities. The local branches offices shall perform the responsibilities for supervision and regulation according to the authorisation of the insurance supervision and regulation authority of the State Council.” According to the Insurance Law, the CIRC was established to act as the insurance supervision and regulation authority of the State Council on 18 November 1998. It is authorised by the State Council to conduct administration, supervision and regulation of the Chinese insurance market, and to ensure that the insurance industry operates stably in compliance with the law. In 2003, the State Council upgraded the CIRC from a semi-ministerial institution to a ministerial institution directly under the State Council, and expanded the size of the CIRC in terms of staff, internal set-up and local offices.10 3.2.1 Organisational structure of the CIRC The head office of the CIRC is located in Beijing. It is led by a chair, four vice chairs, a secretary of discipline and an assistant chair. It currently has 16 internal departments, including:11 (1) General Office (2) Development and Reform Department (3) Policy Research Department (4) Finance and Accounting Department (5) Insurance Consumer Interests Protection Bureau (6) Property Insurance Regulatory Department (7) Life Insurance Regulatory Department (8) Insurance Intermediaries Regulatory Department (9) Insurance Fund Management Regulatory Department (10) International Department (11) Legal Affairs Department (12) Statistics and IT Department (13) Inspection Bureau

  9 The Road Traffic Safety Law of the People’s Republic of China 2003 requires that a scheme of compulsory motor vehicle third party liability insurance is applied nationwide. 10  See the CIRC website, accessed in June 2016. 11 See the website of the CIRC, accessed in April 2016.

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(14) Human Resources and Education Department (15) Disciplinary Inspection Department (16) Party Committee of the CIRC Head Office. In addition, the CIRC has 36 branches, with one branch in each province, autonomous region or municipal city, and five sub-branches in Tangshan of Hebei Province, Suzhou of Jiangsu Province, Wenzhou of Zhejiang Province, Yantai of Shandong Province and Shantou of Guangdong Province. Based on the authorised administrative functions, these branches and sub-branches under the direct leadership of the CIRC head office regulate the insurance markets within their respective jurisdictions, maintain the steady operation of local insurance markets and promote the sustainable and healthy development of the insurance industry in line with laws, regulations, guidelines and policies.12 As of the end of 2014, the CIRC had 2,835 employees, of which 383 were at head office and 2,452 at local branches; 99% of the employees hold bachelor degrees or above.13 The functions and responsibilities of the local offices are stipulated in the Regulations on Supervision and Administration Responsibilities of Local Offices of the CIRC which became effective on 1 August 2004.14 3.2.2 Functions and responsibilities of the CIRC The Insurance Law vests in the CIRC the power and responsibilities to supervise and regulate the insurance industry, safeguard the order of the insurance market, and protect the lawful rights and interests of the proposers, the insureds and the beneficiaries in accordance with the Insurance Law and the competences provided by the State Council and in line with the principles of conformity with law, openness and fairness.15 Accordingly, the CIRC is charged with the following main responsibilities:16 (1) The CIRC formulates policies, strategies and plans regarding the development of the insurance industry; drafts relevant laws and regulations regarding insurance supervision and regulation; and makes relevant rules for the insurance industry.17 (2) It examines and approves the establishment of insurance companies and their branches, insurance groups and insurance holding companies;18 approves the establishment of insurance asset management companies in

12  See accessed in April 2016. 13 The Annual Report of the Chinese Insurance Market 2015, accessed in April 2016. 14  Order of the CIRC [2004] No. 7, see accessed in April 2016. 15  The Insurance Law, art. 133. 16 See the website of the CIRC, see accessed in April 2016. 17 This is in accordance with art. 134 of the Insurance Law, which provides: “The insurance supervision and regulation authority of the State Council formulates and promulgates administrative rules concerning the supervision and regulation of the insurance industry in accordance with laws and administrative regulations.” 18  The Insurance Law, arts 67 and 74.

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conjunction with relevant authorities;19 examines and approves the establishment of representative offices by overseas insurance organisations within the territory of China;20 examines and approves the establishment of insurance intermediaries such as agencies, brokerages, loss-adjusting companies and their branches;21 examines and approves the establishment of overseas insurance organisations by domestic insurance and non-insurance organisations;22 examines and approves the merger, split, alteration and dissolution of insurance organisations;23 decides whether or not to take over an insurance company or designates an organisation to take it over;24 organises or participates in the bankruptcy and liquidation process of insurance companies.25 (3) It examines and confirms the qualifications of the senior managerial personnel in all insurance-related organisations; establishes the basic qualification standards for insurance practitioners.26 (4) It examines and approves the clauses and premium rates of insurance lines related to the public interest, statutory insurance lines and newly developed life insurance lines; files the insurance clauses and premium rates of the other insurance lines.27 (5) It supervises the solvency28 and market conduct of insurance companies according to law;29 manages the insurance security fund, and monitors insurance guarantee deposits;30 formulates rules and regulations on insurance fund management on the basis of laws and relevant policies of the state, and supervises insurance fund management according to law.31 (6) It supervises the business operation of public-policy-oriented insurance and statutory insurance;32 supervises organisational forms and operations such as captive insurance and mutual insurance; conducts administration of societies and organisations such as the China Insurance Association and China Insurance Society.33 (7) It conducts investigations into the following irregularities and imposes penalties accordingly: unfair competition and other irregularities by insurance organisations and practitioners, direct engagement or disguised engagement in insurance business by non-insurance organisations.34

19  Ibid, art. 107. 20  Ibid, art. 80. 21  Ibid, art. 119. 22  Ibid, art. 79. 23  Ibid, art. 89. 24  Ibid, art. 92. 25  Ibid, art. 90. 26  Ibid, arts 81–83. 27  Ibid, art. 114. 28  Ibid, art. 137. 29  Ibid, art. 98. 30  Ibid, art. 98 31  Ibid, art. 106. 32  Ibid, art. 135. 33  Ibid, art. 180. 34  Ibid, chapter 7, Legal liabilities.

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(8) It supervises overseas insurance organisations established by domestic insurance and non-insurance organisations according to law.35 (9) It lays down standards for the information system of the insurance industry; establishes insurance risk-assessment, risk-warning and risk-monitoring systems; follows, analyses and predicts the operation of the insurance market; compiles the statistics and report forms of the insurance industry and discloses them in accordance with relevant regulations of the state. (10) It takes on other duties commissioned by the State Council. 3.3 The regulation on establishment of insurance companies Insurance companies must be authorised by the CIRC to carry on the classes of insurance business.36 The requirements for establishment and dissolution of an insurance company are set out in arts 67 to 94 of the Insurance Law. In accordance with the Insurance Law, the Company Law of China and other laws and administrative regulations, the CIRC promulgated the Provisions on the Administration of Insurance Companies.37 The Provisions set out detailed rules governing matters on insurance companies, including formation of insurance companies,38 formation of branch offices,39 modification or dissolution or abolition of insurance institutions,40 management of branch offices,41 insurance operations,42 supervision and administration.43 3.3.1 The requirements for the establishment of an insurance company According to art. 5 of the Provisions on the Administration of Insurance Companies 2015, insurance business may only be conducted by insurance companies formed in accordance with the Insurance Law and other insurance organisations specified by laws and administrative regulations, and no other entity or individual may conduct insurance business or conduct insurance business in a disguised form.44 For the establishment of an insurance company, a written application must be submitted to the CIRC, together with relevant documents and material as required 35  Ibid, art. 97. 36  Ibid, art. 67. 37  In order to strengthen the supervision and administration of insurance companies, maintain the normal order of the insurance market, protect the lawful rights and interests of the insured, and promote the sound development of the insurance sector, the CIRC has developed rules governing insurance companies in accordance with the Insurance Law, the Company Law of China, and other laws and administrative regulations. These rules were included in the Provisions on the Administration of Insurance Companies, which were first promulgated by the CIRC in 2004. The 2004 version was appealed by the new version in October 2009 which came into force on 1 October 2009. The 2009 version was further amended on 19 October 2015, accessed in April 2016. 38  The Provisions on the Administration of Insurance Companies 2015, chapter 2. 39  Ibid, chapter 3. 40  Ibid, chapter 4. 41  Ibid, chapter 5. 42  Ibid, chapter 6. 43  Ibid, chapter 7. 44  Ibid, art. 5.

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in art. 70 of the Insurance Law. Certain conditions must be met for the establishment of an insurance company, as required in art. 68 of the Insurance Law. The major shareholder must have sustainable profitability and a good reputation, no record of serious violation of laws and regulations in the last three years and net assets of no less than ¥200 million. The minimum amount of registered capital is ¥200 million.45 The CIRC shall examine the application and, within six months from the date of receiving the application, make a decision whether or not to approve the application and notify the applicant of the outcome of the application.46 Once the CIRC approves the application, the applicant is given a period of one year to prepare its establishment of the company.47 After completion of its preparation, the applicant may apply to the CIRC to conduct business. The CIRC must make a decision on whether or not the applicant is permitted to conduct business within 60 days of receiving the application.48 Once an insurance company has been established with the permission of the CIRC, it will register with and obtain a business licence from the Administration for Industry and Commerce.49 The CIRC is responsible for the issuance and regulation of insurance licences and sets out rules with respect to regulation of insurance licensing in the Administrative Measures in Insurance Licences which came into force on 1 September 2007.50 3.3.2 The requirements for the establishment of an overseas branch Where an insurance company intends to establish subsidiaries, branches or representative offices outside the territory of China, it must obtain approval from the CIRC. Representative offices are not permitted to carry out insurance business activities.51 The CIRC, in accordance with the Insurance Law and other laws and administrative regulations, enacted the Measures for the Administration of the Formation of Overseas Insurance Institutions by Insurance Companies in 2006 and amended the Measures in 2015.52 These Measures are followed for the regulation of the formation of overseas branches of insurance companies. The CIRC is charged with supervision and administration of the formation of overseas insurance institutions by insurance companies.53 According to art. 9 of the Measures for the Administration of the Formation of Overseas Insurance Institutions by Insurance Companies, to form an overseas insurance institution, an insurance company must meet the following conditions:

45  The Insurance Law, art. 69. 46  Ibid, art. 71. 47  Ibid, art. 72. 48  Ibid, art. 73. 49  Ibid, art. 77. 50 The Administrative Measures in Insurance Licences, see accessed in April 2016. 51  Ibid, art. 79. 52 The Measures for the Administration of the Formation of Overseas Insurance Institutions, see accessed in April 2016. 53  Ibid, art. 7.

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(1) It has operated for two years or more. (2) Its total assets at the end of the prior year are not less than ¥5 billion. (3) Its foreign exchange funds at the end of the prior year are not less than US$15 million or an equivalent in freely convertible currency. (4) Its solvency level is in compliance with the relevant provisions issued by the CIRC. (5) Its internal control and risk management rules are in compliance with the relevant provisions issued by the CIRC. (6) It has no record of receiving any major punishment in the last two years. (7) The country or region where the overseas insurance institution is to be formed has a sound financial regulatory system and maintains an effective regulatory cooperation relationship with the insurance regulatory authority of China. (8) Other conditions as set out by the CIRC. The CIRC shall, according to the law, examine an application for formation of an overseas insurance institution, and make a decision to approve or disapprove the application within 20 days of receiving of the application. In the case of disapproval, the CIRC shall notify the applicant in writing of the decision, with an explanation of the reasons for the disapproval.54 An insurance company is required to conduct effective risk management of an overseas insurance institution formed by it, and supervise the institution in establishing and improving risk management rules according to the laws and the relevant provisions issued by the regulatory authority of the country where the institution is located.55 3.3.3 Regulation on the establishment of foreign-funded insurance companies The State Council has made separate legislation in relation to the administration of foreign-funded insurance companies − the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies, which was first enacted by the State Council in 2001 and amended 30 May 2013 and on 6 February 2016.56 In accordance with this Regulation, the CIRC formulated the Detailed Rules for the Implementation of the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies.57 The CIRC is responsible for the supervision and administration of foreign-funded insurance companies. The local offices of the CIRC conduct the routine supervision

54  Ibid, art. 12. 55  Ibid, art. 15. 56  The Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies was adopted at the 49th Executive Meeting of the State Council on 5 December 2001, promulgated by Decree No. 336 of the State Council of the People’s Republic of China on 12 December 2001, and effective as of 1 February 2002. It was amended on 30 May 2013 and on 6 February 2016. See accessed in April 2016. 57  The Detailed Rules for the Implementation of the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies was enacted by the CIRC on 13 May 2004 and came into force on 15 June 2004. See accessed in April 2016.

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and administration of foreign-funded insurance companies within their respective jurisdictions.58 The formation of a foreign-funded insurance company shall be subject to the approval of the CIRC.59 For the formation of foreign-funded insurance companies engaging in personal insurance and foreign-funded insurance companies engaging in property insurance, the form of business and the proportion of foreign investment are determined by the CIRC according to the relevant provisions.60 The CIRC defines maximum ownership differently for life and non-life. It allows only up to 50% foreign ownership in life insurance companies. For this reason, the majority of foreign life companies are joint ventures with 50/50 ownership split between the foreign insurer and the local company.61 For non-life, there is no limit on foreign ownership, so foreign players could invest up to 100%, with CIRC’s approval.62 The minimum registered capital of an equity joint venture insurance company or a wholly foreign-owned insurance company shall be ¥200 million or an equivalent in freely convertible currencies, and must be paid-up monetary capital. The head office of a foreign insurance company shall grant not less than ¥200 million or an equivalent in freely convertible currencies to a branch of the foreign insurance company as working capital. The CIRC may, according to the scope and scale of business of a foreign-funded insurance company, raise the minimum amount of the registered capital or working capital of the foreign-funded insurance companies.63 A foreign insurance company applying to establish a foreign-funded insurance company is required to meet the following conditions:64 (1) It has engaged in insurance business for not less than 30 years. (2) It has maintained a representative office within the territory of China for not less than two years. (3) It possessed total assets of not less than US$5 billion at the end of the year prior to the submission of its establishment application. (4) The country or region where it is domiciled has a sound system of insurance supervision and administration, and it is under effective supervision and administration by the relevant competent authorities of the country or region.

58  The Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies, art. 4. 59  Ibid, art. 5. 60  Ibid, art. 6. 61  The Detailed Rules for the Implementation of the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies, art. 3 provides: “Where foreign insurance companies and Chinese companies or enterprises form insurance companies engaging in the personal insurance business within China in the form of equity joint ventures (EJV life insurance companies), the foreign stake in such a joint venture shall not exceed 50% of the total shares of the joint venture. The shares held directly or indirectly by foreign insurance companies in an EJV life insurance company shall not exceed the percentage limit in the preceding paragraph.” ( accessed in April 2016) 62 Ibid. 63  The Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies, art. 7. 64  Ibid, art. 8.

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(5) It satisfies the solvency standards of the country or region where it is domiciled. And (6) It meets other prudent requirements prescribed by the CIRC. The CIRC shall, within 60 days of receipt of the complete formal application materials for forming a foreign-funded insurance company, decide whether to approve or disapprove the application. In the case of approval, it shall issue a permit for engaging in the insurance business to the applicant; or in the case of disapproval, inform the applicant in writing of the decision with an explanation of the reasons for the disapproval.65 A foreign-funded insurance company shall, after its formation, set aside a deposit at the rate of 20% of the total amount of registered capital or working capital, and place the deposit in a bank designated by the CIRC. The deposit may not be used for any purpose other than repayment of debts of the foreign-funded insurance company during its liquidation.66 A foreign-funded insurance company may, according to the scope of business affirmed by the CIRC, engage in all or part of the following types of insurance business: (1) property insurance, including but not limited to property loss insurance, liability insurance and credit insurance; (2) personal insurance, including but not limited to life insurance, health insurance and accidental injury insurance. A foreign-funded insurance company may engage in large commercial risk insurance and master policy business within the scope affirmed by the CIRC according to the relevant provisions.67 A foreign-funded insurance company may not concurrently engage in property insurance and personal insurance.68 The specific scope of business, territories of business and range of clients of a foreign-funded insurance company shall be subject to the affirmation of the CIRC according to the relevant provisions, and the foreign-funded insurance company may only engage in the insurance business within the affirmed scope, territories and range.69 3.3.4 The regulation on dissolution of an insurance company According to art. 2 of the Enterprise Bankruptcy Law of China,70 where an enterprise legal person cannot pay off his due debts and his assets are not enough for paying off all the debts, or he apparently lacks the ability to pay off his debts, the debts shall be liquidated according to the provisions of this Enterprise Bankruptcy Law. Where an enterprise legal person is in the circumstances as specified above or he has apparently forfeited the ability to pay off his debts, he may undergo reorganisation according to the provisions of the Enterprise Bankruptcy Law. In respect of

65  Ibid, art. 12. 66  Ibid, art. 13. 67  Ibid, art. 15. 68  Ibid, art. 16. 69  Ibid, art. 18. 70  The Enterprise Bankruptcy Law of the People’s Republic of China was adopted at the 23rd Meeting of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on 27 August 2006 and came into effect as of 1 June 2007.

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dissolution or liquidation of insurance companies, rules of law are provided in arts 89 to 93 of the Insurance Law. Where an insurance company is to be dissolved due to division, merger, a resolution of a shareholders’ meeting or a shareholders’ general meeting or any cause for dissolution specified in the Articles of Association, such dissolution may be carried out only upon the approval of the CIRC. Life insurance companies are not permitted to be dissolved except by reason of division, merger or revocation according to law. A liquidation team is formed to carry out liquidation where an insurance company is dissolved.71 In the event that the circumstances as provided for in art. 2 of the Enterprise Bankruptcy Law occur, an insurance company or its creditors may apply to the People’s Court for reorganisation, a scheme of arrangement or bankruptcy liquidation. The CIRC may apply to the People’s Court as well for reorganisation or liquidation of the insurance company according to law.72 The property of the bankrupt estate, after the expenses of bankruptcy proceedings and obligations of common interest are satisfied in priority, is distributed in the following order: (1) any salaries, medical and disability allowances, and conforming expenses owed to the employees, any basic pension, basic medical insurance expenses owed that are payable to the employee’s personal accounts, or any compensation payable to the employees as provided by laws and administrative regulations; (2) making of indemnity or payment of insurance benefits; (3) social insurance expenses owed and payable by the insurance company other than those provided in item (1) and taxes owed; and (4) claims of ordinary bankruptcy creditors. Where the property of the bankrupt estate is insufficient to satisfy all the claims within the same order, payment shall be made on a pro rata basis. The salaries of the directors and senior management of a bankrupt insurance company shall be calculated on the basis of the average salary of the employees in the company.73 There are special rules for the dissolution of life insurance companies. In the event that a life insurance company is revoked or declared bankrupt, all of the life insurance contracts and reserves held by it must be transferred to other life insurance companies; where no agreement in respect of such transfer can be reached with other insurance companies, the CIRC shall designate life insurance companies to accept such transfer.74 3.4 The regulation of corporate governance Corporate governance broadly refers to the mechanisms,75 processes76 and relations by which corporations are controlled and directed.77 Governance structures and

71  The Insurance Law, art. 89. 72  Ibid, art. 90. 73  Ibid, art. 91. 74  Ibid, art. 92. 75  Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. 76  Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. 77  See accessed in April 2016.

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principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators and other stakeholders) and include the rules and procedures for making decisions in corporate affairs. According to the International Association of Insurance Supervisors, the modern system of insurance supervision and regulation is made up of three pillars: the regulation of market behaviour, the regulation of solvency and the regulation of corporate governance.78 A sound system of corporate governance of an insurance company is necessary for the success of the company. The Insurance Law sets forth a number of requirements for appointment of directors or senior managers. 3.4.1 Requirements for directors, supervisors and senior officers The directors, supervisors and senior officers of insurance companies must have good morals, be well versed in insurance-related laws and administrative regulations, have the operation and management ability needed for fulfilling their responsibilities, and have obtained the qualifications for holding a position verified by the CIRC before taking the position.79 The scope of senior officers of an insurance company is defined by the CIRC.80 According to art. 146 of the Company Law,81 a person may not serve as a company’s director, supervisor or senior officer if he is: (1) a person with no or limited capacity for civil acts; (2) a person who was sentenced to criminal punishment for the crime of corruption, bribery, encroachment of property, misappropriation of property or disruption of the order of the socialist market economy, and not more than five years has elapsed since the expiration of the enforcement period; or a person who was deprived of his political rights for committing a crime, and not more than five years has elapsed since the expiration of the enforcement period; (3) a director, factory director or manager of a company or enterprise liquidated upon bankruptcy who was personally responsible for the bankruptcy

78  See the Insurance Core Principle 2015, by the International Association of Insurance Supervisors, accessed in April 2016. 79  The Insurance Law, art. 81. 80 Ibid. 81 The Company Law of the People’s Republic of China was adopted at the 5th Meeting of the Standing Committee of the Eighth National People’s Congress on 29 December 1993; amended for the first time in accordance with the Decision on Revision of the Company Law of the People’s Republic of China made at the 13th Meeting of the Standing Committee of the Ninth National People’s Congress on 25 December 1999; amended for the second time in accordance with the Decision on Revision of the Company Law of the People’s Republic of China made at the 11th Meeting of the Standing Committee of the Tenth National People’s Congress on 28 August 2004; and revised at the 18th Meeting of the Standing Committee of the Tenth National People’s Congress on 27 October 2005, and amended for the third time on 28 December 2013 in accordance with the Decision on Amending Seven Laws Including the Marine Environment Protection Law of the People’s Republic of China at the 6th Session of the Standing Committee of the Twelfth National People’s Congress. It came into effect as of 1 March 2014 (see accessed in April 2016).

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of the company or enterprise, and not more than three years has elapsed since the date of completion of the bankruptcy liquidation; (4) the legal representative of a company or enterprise that had its business licence revoked and had been closed down by order for violation of law, for which such representative bears individual liability, and not more than three years has elapsed since the date on which the business licence of the company or enterprise was revoked; and (5) a person with a comparatively large amount of personal debts due and unsettled. If a company elects or appoints a director or supervisor or employs senior officers in violation of the preceding paragraph, such election, appointment or employment shall be invalid. If a director, supervisor or senior officer falls under the circumstances specified above during his term of office, the company shall dismiss him from his office. In addition to the circumstances as provided for in art. 146 of the Company Law, the Insurance Law specifies two circumstances under which a person may not serve as an insurance company’s director, supervisor or senior officer: (1) any director, supervisor or senior officer of a financial institution who was disqualified by the financial supervision and regulation authority for violation of laws or regulations or disciplines, and five years have not elapsed since the date of disqualification; and (2) any lawyer, chartered public accountant or any professional of an assets evaluation agency or certification agency whose practising licence was revoked for violation of laws or regulations or discipline, and five years have not elapsed since the date of revocation.82 Where the director, supervisor or senior officer of an insurance company has caused loss to the company due to violation of laws, administrative regulations or provisions in the Articles of Association when performing their duties for the company, the director, supervisor or senior officer of the company shall be liable for compensation.83 3.4.2 The regulation of corporate governance structure In order to strengthen and improve regulation of corporate governance, the CIRC promulgated the Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure in 2006.84 It is applicable to all insurance companies and insurance asset management companies. The Guiding Opinion sets out guidelines in six aspects in respect of insurance company corporate governance: (1) strengthen the obligations of the major shareholders; (2) strengthen the construction of the board of directors; (3) ensure the functioning of the supervisory board; (4) regulate the operations of the management; (5) strengthen the management of

82  The Insurance Law, art. 82. 83  Ibid, art. 83. 84 The Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure was published on 5 January 2006 by the CIRC, Bao Jian Fa [2006] No. 2 (see accessed in April 2016).

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affiliated transactions and information disclosure; and (6) supervise and administer the corporate governance structure.85 3.4.3 Evaluation of insurance company corporate governance The CIRC promulgated Measures on Evaluation of Insurance Company Corporate Governance,86 so as to rate insurers according to their corporate governance, and link the rating result to the remuneration supervision, branch application and business inspection of the company to make the evaluation more binding. A yellow or red card is given to those with poor corporate governance and no effective improvement. The CIRC promulgated Notice on Further Regulating Affiliated Transaction of Insurance Companies,87 to further prevent the actual controller of an insurance company from embezzling the interests of medium and small shareholders and the policyholders through affiliated transactions by strengthening the regulation on the proportion of affiliated transactions, internal review and information disclosure. A database of insurance company corporate governance problems has been set up by the CIRC as an important reference for corporate governance evaluation and on-site inspection. The CIRC carries out on-site and off-site inspection and supervision of corporate governance. In recent years, the CIRC has expanded the scale of inspection target, scope and frequency. According to the inspection result, regulation letters are sent to relevant companies to urge them to make necessary changes and improvements. For off-site supervision, the CIRC analyses the insurers’ annual reports of corporate governance and sends risk-warning letters to urge faulty companies to make changes. The CIRC also conducts a theme inspection on the Articles of Incorporation of relevant insurers, and urges them to rectify problems within a time limit. The on-site inspection of an insurance institution conducted by the CIRC shall include, without limitation, the following:88 (1) whether the formation or change of the institution has been approved by or reported to the CIRC according to the law; (2) whether a director, supervisor, or senior executive’s satisfaction of office qualifications has been confirmed according to the law; (3) whether its application materials for administrative licensing are true; (4) whether its capital and various reserves are true and adequate; (5) whether its corporate governance and internal control rules are developed in compliance with the provisions issued by the CIRC; (6) whether it satisfies the solvency requirements; (7) whether its use of capital is legal;

85  For more, see Guojian Xu et al., Insurance Law in China (CCH 2009) pp. 62–72. 86  Bao Jian Fa [2015] No. 112, see accessed in April 2016. 87  Bao Jian Fa [2015] No. 36, see accessed in April 2016. 88  Provisions on the Administration of Insurance Companies (2015 Amendment), art. 61, accessed in April 2016.

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(8) whether the legal requirements for its operations and financial condition are satisfied and whether its reports, statements, documents, and materials are provided in a timely, complete, and true manner; (9) whether it has reported its insurance clauses and premium rates in use for approval or registration as required; (10) whether its business transactions with insurance intermediaries are legal; (11) whether its information technology systems are developed in compliance with the relevant provisions; (12) whether it has reported as required any other matters subject to ex post reporting; (13) other matters under inspection as specified by the CIRC. An insurance institution (a company or a branch) shall cooperate in an on-site inspection conducted by the CIRC and provide the relevant documents and materials as required by the CIRC.89 The staff members of the CIRC shall implement an on-site inspection according to the law; and there shall be two inspectors at a minimum, who shall produce their credentials and a notice of inspection. In on-site inspections, the CIRC may engage an accounting firm and other intermediary institutions to provide relevant professional services, and if so, shall enter into written engagement agreements with them.90 3.4.4 Comprehensively monitoring and preventing group operation risks The CIRC released Interim Measures on Regulation of Non-Insurance Subsidiaries of Insurance Companies in 2014,91 to implement overall risk monitoring on the non-insurance subsidiaries of insurance companies to prevent cross-company and cross-sector risk transfer. The Measures mainly regulate five actions that insurance companies make in investing in and managing their non-insurance subsidiaries: the first action is investing in and setting up the non-insurance subsidiaries; the second is management of the non-insurance subsidiary; the third is internal transaction with the non-insurance subsidiary; the fourth is outsourcing to the non-insurance subsidiary; and the fifth is the risk firewall between the insurance company and the non-insurance subsidiary. The Measures set specific rules on the criteria of insurance companies entering non-insurance business, the exit of insurance companies from non-insurance business, and the reporting mechanism. The CIRC promulgated Guidance on Consolidated Supervision of Insurance Groups in 2014,92 to clarify the responsibility of consolidated supervision, further enhance insurance group supervision and effectively prevent operational risks of insurance groups. Based on the objective of effective prevention of insurance group risks, while supporting the group operation, group synergy and scale effect, the Guidance implements overall risk monitoring over the insurance group through 89  Ibid, art. 62. 90  Ibid, art. 63. 91  Bao Jian Fa [2014] No. 78, see accessed in April 2016. 92  Bao Jian Fa [2014] No. 96, see accessed in April 2016.

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clarifying group structure, monitoring internal transactions, improving the overall risk management system and risk firewall mechanism, and improving corporate governance and information disclosure mechanisms. The CIRC promotes the regulation of domestic systemically important insurers (D-SII), to gradually establish a D-SII supervision system that is internationally comparable and reflects Chinese features. In 2014, Ping An Insurance Company was reselected as one of the global systemically important insurers (G-SII). The CIRC has established a crisis management team to guide Ping An in working out its risk resolution plans and systemic risk management plans. 3.5 The regulation of insurance business The operation of insurance business is regulated by the Insurance Law and the rules and measures of the CIRC. In this section, we will consider the regulation of insurance business in four aspects: the scope of the insurance business, the solvency of the insurance companies, the conduct of the insurance companies and the use of the insurance funds. 3.5.1 The regulation of the scope of insurance business According to art. 95 of the Insurance Law, the scope of business of an insurance company is confined to (1) personal insurance business, including life insurance, health insurance and accident insurance, etc.; (2) property insurance, including property loss or damage insurance, liability insurance, credit insurance and surety bonds, etc.; and (3) other insurance-related business approved by the CIRC. An insurer is not permitted to concurrently engage in property insurance and personal insurance. However, a property insurance company may conduct short-term health insurance and accident insurance business with the approval of the CIRC. An insurance company shall engage in insurance business activities within the scope of the business approved by the CIRC.93 As to reinsurance business,94 the Insurance Law provides that an insurance company, with the approval of the CIRC, may conduct ceding reinsurance and/or assuming reinsurance business.95 Where the liability assumed by an insurer for a single insured event exceeds 10% of the total sum of its paid-up capital and its surplus reserve, reinsurance shall be arranged for the portion in excess of this limit.96 The reinsurance business shall be divided into life reinsurance and non-life reinsurance. An insurer shall maintain separate accounts and conduct separate accounting for life reinsurance and non-life reinsurance.97 An insurance company may establish branches, and the geographical scope of the business operation is limited according to art. 41 of the Provisions on the

93  The Insurance Law, art. 95. 94  Reinsurance will be discussed in Chapter 23 of this book. 95  The Insurance Law, art. 96. 96  Ibid, art. 103. 97 The Regulations on the Administration of Reinsurance Business (2015 amendment), art. 9. See  accessed in April 2016.

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Administration of Insurance Companies,98 which provides that a branch office of an insurance company may not conduct insurance business across provinces, autonomous regions or municipalities directly under the Central Government, except under the circumstances as set out in art. 42 of the Provisions or except as otherwise specified by the CIRC. Article 42 of the Provisions sets out the circumstances by providing that an insurance institution which participates in co-insurance, conducts large commercial insurance or master policy business, or underwrites insurance across provinces, autonomous regions or municipalities directly under the Central Government on the Internet, by telephone or in any other manner shall comply with the relevant provisions issued by the CIRC. (a) Regulation of insurance clauses and premium rates The Insurance Law requires an insurance company to fairly and reasonably formulate insurance clauses and determine premium rates in accordance with the relevant provisions of the CIRC, and not to prejudice the lawful rights and interests of the policyholders and the beneficiaries.99 The insurance clauses and premium rates of the insurance products that concern social and public interest, the compulsory insurance products and the newly developed life insurance products shall be submitted to the CIRC for approval. The CIRC follows the principles of protecting social and public interest and preventing unfair competition in examination and approval. The insurance clauses and premium rates of other insurance products shall be filed with the CIRC. The specific rules for examination and approval and filing of insurance clauses and premium rates shall be formulated by the CIRC in accordance with art. 135 of the Insurance Law.100 Accordingly, the CIRC formulated two major regulations for regulating the insurance clauses and premium rates for property and personal insurance business, respectively: the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies (2010),101 and the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies (2015).102 According to art. 26 of the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies (2010), insurance clauses and premium rates shall meet the following requirements: (1) being clearly structured, accurate wording, precise statements and easy to understand; (2) being with complete features, fair, without infringement of the legitimate rights and interests of the policyholders and the beneficiaries, and without prejudice to the public interest; (3) the premium rates are determined reasonably in accordance with the risk principles, without compromising the solvency of   98  See the 2015 version, accessed in April 2016.   99  The Insurance Law, art. 114. 100  Ibid, art. 135. 101  Order of the CIRC [2010] No. 3, see accessed in April 2016. 102  Order of the CIRC [2015] No.3, see accessed in April 2016.

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insurance companies or hindering fair competition in the market; (4) the premium rates can be altered up or down, and conditions for adjusting the premium rates shall be clearly set out; and (5) other requirements by the Insurance Law and other laws, administrative regulations or the stipulations by the CIRC. Article 135 of the Insurance Law sets forth the consequences for not complying with the requirements relating to the insurance clauses and premium rates. Where the insurance clauses and premium rates used by an insurance company violate laws, administrative regulations or the relevant provisions of the CIRC, the CIRC shall order the insurance company to stop using them and to make corrections within a prescribed period; where the circumstances are severe, submission of new insurance clauses and premium rates may be forbidden within a certain period. In implementing the requirement as provided for in art. 135 of the Insurance Law, the CIRC stipulates, in art. 48 of the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies (2015), that where the insurance clauses and premium rates used by an insurance company have any of the following circumstances, the CIRC shall order the insurer to stop using them and to make ratifications within a prescribed period; where the circumstances are severe, submission of new insurance clauses and premium rates may be forbidden within a certain period: (1) the insurance clauses and premium rates are harmful to the public interest; (2) the content of the insurance clauses or premium rates are manifestly unfair or form a price monopoly, or violate the lawful rights and interests of the policyholders or the beneficiaries; (3) improper design of the clauses and determination of the premium rates may compromise the insurer’s solvency; or (4) other circumstances where there is violation of relevant laws, administrative regulations or the stipulations of the CIRC. (b) Regulation of insurance products (I) EXAMINATION, APPROVAL AND FILING OF THE PRODUCTS In order to standardise the administration of examination, approval and filing of the products developed and designed by personal insurance companies, the CIRC formulated the Administrative Measures on Examination, Approval and Filing of Personal Insurance Products (2004).103 The Measures regulate the personal insurance products developed and designed by a personal insurance company engaged in the business of life insurance, health insurance and accident insurance, etc. The insurance products which are subject to the CIRC’s examination and approval include: (1) products considered by the CIRC as products related to the public interest; (2) compulsory insurance products prescribed in law; and (3) products considered by the CIRC as newly developed life insurance products.104 Products other than those specified here are subject to filing with the CIRC.105

103  Order of the CIRC [2004] No. 6, see accessed in April 2016. 104 The Administrative Measures on Examination, Approval and Filing of Personal Insurance Products (2004), art. 6. 105  Ibid, art. 7.

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The CIRC specifies the scope of products subject to examination and approval according to law and may adjust the scope according to the actual situation.106 Where an insurance company intends to make changes to a product that has been examined and approved by or filed with the CIRC, the company shall reapply for examination, approval or filing.107 When applying for examination and approval of a product, the head office of an insurance company shall submit the following materials to the CIRC in duplicate:108 (1) “Application Form for Examination and Approval of Personal Insurance Products”; (2) “List of Application Materials to Be Submitted for Examination and Approval of Personal Insurance Products”; (3) explanatory materials for application of product examination and approval, which shall specify the main features of the product and the reasons for application for examination and approval; (4) insurance clauses; (5) product premium rate table; (6) for a product with cash value, paper files containing cash value table (examples) and electronic files containing the complete table of cash values for all ages must be submitted; (7) actuarial report of the product issued by the responsible actuary of the company; (8) statement of the responsible actuary of the company; (9) statement of the legally responsible person of the company; (10) feasibility report of the product; (11) sales management measures, which shall include product sales channels, territorial sales management measures, etc.; (12) financial management measures; (13) business management measures; (14) management system for information disclosure; (15) text of product description; (16) CD or floppy disk(s) containing electronic files of all materials to be submitted; (17) other materials required by the CIRC. When applying for filing of a product, an insurance company shall submit the following materials to the CIRC in duplicate:109 (1) “List of Application Materials to Be Submitted for Filing of Personal Insurance Products”; (2) insurance clauses; (3) table of premium rates of the product;

106  Ibid, art. 8. 107  Ibid, art. 9. 108  Ibid, art. 11. 109  Ibid, art. 13.

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(4) for a product with cash value, paper files containing cash value table (examples) and electronic files containing the complete table of cash values for all ages must be submitted; (5) actuarial report of the product issued by the responsible actuary of the company; (6) statement of the responsible actuary of the company; (7) statement of the legally responsible person of the company; (8) for a product with description, text of the product description shall be submitted; (9) CD or floppy disk(s) containing electronic files of all materials to be submitted; (10) other materials required by the CIRC. Within 20 days after accepting an application for product examination and approval, the CIRC shall make the decision to approve or not to approve the application. In case the decision cannot be made within 20 days, the examination and approval time limit, subject to approval by the person-in-charge of the CIRC, may be extended by 10 days. The CIRC shall inform the insurance company of the reason for extension. In the case where an approval is granted, the CIRC shall publicise the decision in the CIRC proclamations or on its official website. In case of disapproval, the CIRC shall notify the insurance company in writing to explain the reasons for the disapproval, and inform it of the right to apply for administrative reconsideration or start administrative proceedings according to law.110 (II) REGULATION OF SPECIFIC INSURANCE PRODUCTS The CIRC has promulgated rules to regulate some specific insurance products. For example, to regulate pension products, the Administrative Measures for Pension Insurance Business of Insurance Companies were published.111 To promote development of health insurance and to regulate operational activities of health insurance, the Measures on Administration of Health Insurance were enacted.112 Under the Measures on health insurance, the term “health insurance” refers to the type of insurance under which an insurance company pays benefits for losses caused by health reasons in the form of disease insurance, medical insurance, disability income insurance and care insurance, etc. Health insurance is classified into long-term health insurance and short-term health insurance according to insurance term.113 Rules on administration of health insurance products are specified in arts 12 to 24 of the Measures. Insurance companies shall submit draft insurance clauses and

110  Ibid, art. 22. 111  The Administrative Measures for Pension Insurance Business of Insurance Companies were published on 2 November 2007 and became effective on 1 January 2008. Order of the CIRC [2007] No. 4, see accessed in April 2016. 112  The Measures on Administration of Health Insurance were enacted on 7 August 2006 and came into force on 1 September 2006. Order of the CIRC [2006] No. 8, see accessed in April 2016. 113  Ibid, arts 2 and 3.

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premium rates for health insurance to CIRC for examination and approval or filing according to relevant stipulations of CIRC.114 When a health insurance product designed by an insurance company contains more than two types of health protection liabilities, the responsible actuary of the company shall determine the main liability according to general actuarial principles, and the product type shall be determined based on the main liability of the product.115 Disease insurance products of long-term health insurance can contain death liabilities, but the amount of death benefits shall not exceed the maximum amount of disease benefits. Health insurance products other than those specified in the preceding paragraph shall not contain death liabilities, except death liabilities arising from disease. Medical insurance products and disease insurance products shall not contain living benefits liabilities.116 Long-term health insurance products shall have a cooling-off period, and the rights of the applicant in such period shall be specified in insurance clauses. The cooling-off period for long-term health insurance products shall be no less than 10 days.117 Premium rates of short-term individual health insurance products can be adjusted.118 Materials submitted by insurance companies for application for examination and approval or filing of short-term individual health insurance products with adjusted premium rates shall contain benchmark premium rates, the method and scope of premium adjustment; and the materials shall be confirmed and signed by the responsible actuary of the company following the principle of prudence.119 Parameters of short-term group health insurance products can be subject to adjustment. “Parameters” herein refer to the insured amount, minimum indemnities, payment percentage, exclusions and elimination period, etc. specified in insurance clauses, which can be reasonably adjusted based on specific situations of the group applicant.120 Materials submitted by insurance companies for application for examination and approval or filing of short-term group health insurance products with adjustable product parameters shall contain an adjustment method of the product parameters and shall be confirmed and signed by the responsible actuary of the company following the principle of prudence. When selling short-term group health insurance products with adjustable product parameters, insurance companies shall calculate corresponding premium rates based on the adjustment method of product parameters. The premium rating method and basic data required for calculation of the premium rate shall not be changed in the adjustment of product parameters.

114  Ibid, art. 12. 115  Ibid, art. 13. 116  Ibid, art. 14. 117  Ibid, art. 15. 118  Ibid, art. 16. 119  Ibid, art. 17. 120  Ibid, art. 18.

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Where the premium rating method or basic data required need to be changed in the selling of short-term group health insurance products with adjustable product parameters, insurance companies shall go through the examination and approval or filing procedures for such products again.121 For health insurance products containing a guaranteed renewable clause, time for such clause to take effect shall be specified. No specification providing that insurance companies have the right to adjust insurance liabilities and scope of exclusions at the time of renewal shall be made for health insurance products containing a guaranteed renewable clause. When applying for examination and approval or filing of health insurance products with a guaranteed renewable clause, insurance companies shall provide an explanation of the pricing method and calculation method of liability reserves for guaranteed renewal in a product actuarial report.122 When drafting clauses of medical insurance products, insurance companies shall respect the rights of the insured to accept reasonable medical services, and shall not set unreasonable requirements or requirements against general medical standards in clauses as conditions for payment of benefits. Diagnosis standards for diseases specified in the clauses of health insurance products shall conform to generally accepted medical diagnosis standards and shall take into consideration the development trend of medical technology and conditions. After a health insurance contract takes effect, if the insured has been diagnosed to have disease based on generally accepted medical diagnosis standards, the insurance company shall not decline payment of benefits with inconsistency between such diagnosis standards and the stipulation in the insurance contract as the excuse.123 When designing medical insurance products on a reimbursement basis, insurance companies must differentiate between different situations of the insured such as whether they enjoy public health services or social medical insurance, and shall treat them differently regarding insurance clauses, premium rates and indemnity amounts.124 In the contract of medical insurance products, insurance companies can specify that medical treatment of the insured in designated medical service institution networks is the condition for payment of benefits. Medical service institution networks designated by the insurance companies shall follow the principle of “convenient for the insured and reasonable management of medical expenses,” guide the insured to reasonably use medical resources and save medical expenses and properly publicise and explain to the applicant and the insured.125 Insurance companies shall make timely amendment to the premium rates of new health insurance products based on actual indemnity experience and apply for examination and approval or filing of the new premium rates according to the relevant requirements of the CIRC.126

121  Ibid, art. 19. 122  Ibid, art. 20. 123  Ibid, art. 21. 124  Ibid, art. 22. 125  Ibid, art. 23. 126  Ibid, art. 24.

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(III) INFORMATION DISCLOSURE OF NEW PRODUCTS The Administrative Measures for the Information Disclosure of New-Type Personal Insurance Products were published by the CIRC in 2009, in order to regulate information disclosure of new life insurance products.127 The term “new-type personal insurance products” (new products) as mentioned in these Measures refers to investment-based insurance, universal insurance, participating insurance and other products approved by the CIRC.128 The term “information disclosure” refers to describing the characteristics of new products, demonstrating the estimation of insurance policy benefits and introducing business performance and other relevant information to the proposer, the life insured and beneficiaries and the general public by life insurance companies and their agents.129 Information can be disclosed in forms including, but not limited to: (1) explanations and introductions on media or company websites; (2) explanations and introductions in product presentations; (3) explanations and introductions made by salespersons; (4) return visits made by customer service staff; and (5) reports sent on a regular basis.130 To launch a new product, an insurance company shall make a product description and an insurance information notice, and disclose information according to these Measures.131 Insurance companies shall use plain language in information disclosure to accurately describe the product. Insurance companies shall be responsible for the objectiveness and authenticity of the information disclosed by them, and may not omit any important information. Insurance companies may not provide false information to proposers, the life insured, beneficiaries and the general public, and may not mislead them or conceal information from them.132 When selling a new product, an insurance company shall present the insurance clauses and the product description to insurance proposers. When selling a new product to an individual, it shall also present the insurance information letter. To conclude an insurance contract which adopts the standard clauses provided by the insurance company, the company shall provide a proposal form together with the standard clauses to the proposer and explain the contents of the contract to the proposer. For a new product sold to individuals, the insurance proposal form provided by the insurance company shall have a declaration column for the proposer to sign on after he has written the sentence: “I have read the insurance clauses, the product description and the insurance information letter and I’m aware of the characteristics of this product and the uncertainty of the insurance policy benefits.”133 Where an insurance company demonstrates the insurance policy benefits in the product description or any other publicity materials, it shall demonstrate the benefits

127 The Administrative Measures for the Information Disclosure of New-Type Personal Insurance Products were published on 25 September 2009 and came into force on 1 October 2009. Order of the CIRC [2009] No. 3, see accessed in April 2016. 128  Ibid, art. 2. 129  Ibid, art. 3. 130  Ibid, art. 3. 131  Ibid, art. 4. 132  Ibid, art. 5. 133  Ibid, art. 6.

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that can be distributed in the future at three levels: high, middle and low. Benefit demonstration shall follow the prudential principle. The return-on-investment assumptions used in the benefit demonstration of participating insurance products and investment-based insurance products and the settlement interest rate assumptions of universal insurance may not exceed the maximum limit prescribed by the CIRC.134 In the information disclosure of new products, insurance companies and their agents may not use ratios to make simple comparison with other insurance products or the savings, funds or treasury bonds of banks or give misleading or false publicity to proposers, the life insured, beneficiaries or the general public.135 Except for group insurance products, an insurance company shall set up a return visit (to the proposers) system for new products with a period of one year or more. The return visit system shall contain the time limits, ways, contents, success rate and problem-handling situations of return visits.136 The return visit to a proposer of a new product shall be done within the grace period (cooling-off period). The return visit shall be first made via telephone where recordings shall be made; if that fails, the return visit can be made by letter or meeting where an acknowledgement signed by the proposer shall be obtained; if none of the above-mentioned ways works out, the insurance company shall make detailed records about the specific situation and the reasons why the return visit failed. An insurance company shall properly keep the recordings and other proof of a return visit from the day when the insurance contract is terminated for at least five years if the insurance duration is less than one year or for at least 10 years if the insurance duration is one year or more.137 3.5.2 The regulation of solvency The Insurance Law requires an insurance company to maintain a minimum solvency margin commensurate with the size of its business and risk profile. The balance between its available assets and its actual liabilities shall not be less than the amount set by the CIRC. Where the balance is less than the amount set by the CIRC, measures shall be taken to reach the amount according to the requirements of the CIRC.138 (a) The first generation of the solvency regulation system In accordance with the requirement of the Insurance Law, the CIRC formulated the Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices in 2003, which governed regulation of insurance company solvency until 2015.139 The Provisions consisted of six chapters: the general provisions, 134  Ibid, art. 7. 135  Ibid, art. 8. 136  Ibid, art. 9. 137  Ibid, art. 10. 138  The Insurance Law, art. 101. 139 The Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices came into force on 24 March 2003. See accessed in April 2016.

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minimum solvency margins, the regulatory indices for property insurance companies, the regulatory indices for personal insurance companies, the administration of solvency margins and regulatory indices, and supplementary provisions. According to the Provisions, minimum capital requirements were set based on the three-year average of net written premiums and three-year average of net reported losses. The minimum solvency margin of a property insurance company is the greater of the following two figures: (1) in the most recent accounting year, 18% of the portion under ¥100 million plus 16% of the portion in excess of ¥100 million of the self-retained premiums less business tax and its surtax; or (2) 26% of the portion under ¥70 million plus 23% of the portion over ¥70 million of the average comprehensive compensation for the most recent three-year period. The standard in the first figure was applied to the insurers who had been in business for less than three years.140 The minimum solvency margin for a life insurance company is the sum of the minimum solvency margin for long-term personal insurance (with the insurance period of more than one year) and the minimum solvency margin for a short-term personal insurance (with the insurance period of one year or less).141 The minimum solvency margin for a long-term personal insurance company is the sum of the following two items: (1) 1% of the closing liability reserve fund (the statutory minimum reserve fund stipulated by the CIRC) for investment-linked life insurance products plus 4% of the closing liability reserve fund for other life insurance products; and (2) 0.1% of the amount of insured risk for fixed-term death insurance having an insurance term of less than three years, plus 0.15% of the amount of insured risk for fixed-term death insurance having an insurance term of between three and five years, plus 0.3% of the amount of insured risk for fixed-term death insurance having an insurance term of more than five years and other life insurance.142 The minimum solvency margin for short-term personal insurance is calculated as that for a property insurance company.143 The Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices also set out detailed regulatory indices for property or life insurance companies.144 The minimum solvency margin for a reinsurance company is the sum of the minimum solvency margin for property insurance and personal insurance calculated according to the aforementioned stipulations, respectively.145 It was reported by the CIRC that by the end of 2014, the overall solvency status of the insurance industry in China was sufficient, with only one insurance company below the solvency standard, and the other companies above 150%. The median of the solvency margin of non-life insurance companies was 360%, up by 7 percentage points as compared with the previous year; the median of life insurance companies

140  Ibid, art. 4. 141  Ibid, art. 5. 142 Ibid. 143 Ibid. 144  Ibid, arts 11 and 12. 145  Ibid, art. 6.

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was 285%, up by 21 percentage points as compared with the previous year.146 The solvency surplus of the insurance industry was ¥720.7 billion, 30% higher than the beginning of the year.147 (b) The second generation of solvency regulation system: C-ROSS Starting in 2012, the CIRC researched various solvency standards with a target of delivering a new risk-based solvency system, i.e. the China Risk Oriented Solvency System (C-ROSS), by the end of 2014. Industry testing started in 2014 with the aim of evaluating the reasonableness and practicability of the C-ROSS system. The C-ROSS system is risk oriented and based on various risk exposures, comprehensive risk factors, and multi-level correlation; while the first generation of solvency system is scale oriented and based on premium and losses only, simple flat risk factors and no correlation consideration. (I) THE TECHNICAL FRAMEWORK OF THE C-ROSS The C-ROSS is a three-pillar prudential supervision system based on China’s insurance risk stratification model. The first pillar of quantitative regulatory requirements is aimed at addressing three kinds of quantifiable risks, namely insurance risk, market risk and credit risk. It requires insurers to hold capital reflecting those risk exposures. The second pillar of qualitative regulatory requirements is aimed at addressing operational risk, strategic risk, reputation risk and liquidity risk, which are difficult to quantify. This pillar evaluates the risk management competence of insurance companies. The third pillar of the market discipline mechanism, through public information disclosure and transparency enhancement, leverages market disciplinary power to address risks which are difficult to address by the conventional regulatory tools of Pillars 1 and 2. The C-ROSS is also a new framework for insurance group solvency regulation, taking insurance conglomerates controlled by non-insurance institutions under regulation for the first time, thus able to supervise a series of complex risks.148 (II) THE DOCUMENTARY FRAMEWORK OF C-ROSS In February 2015, the CIRC promulgated 17 regulations regarding the new C-ROSS, i.e. the Provisions on Supervision and Regulation of Insurance Companies’ Solvency.149 The Provisions came into force on 1 January 2016.150 All the insurance companies in China are now following the 17 regulations as follows: No. 1, available capital (the difference between the actual assets and the actual liabilities); No. 2, minimum capital;

146  The Annual Report of the Chinese Insurance Market 2015, accessed in April 2016. 147  Ibid, p. 31. 148  Ibid, p. 54. 149  Bao Jian Fa [2015] No. 22, see accessed in April 2016. 150  See the Notice of the CIRC Concerning the Implementation of C-ROSS, January 2016, accessed in April 2016.

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No. 3, assessment of liabilities for life insurance contracts; No. 4, minimum capital for non-life insurance risks; No. 5, minimum capital for life insurance risks; No. 6, minimum capital for reinsurance; No. 7, minimum capital for market risk; No. 8, minimum capital for credit risk; No. 9, assessment of solvency pressure (dynamic solvency test); No. 10, integrated risk rating; No. 11, solvency aligned risk management requirement and assessment; No. 12, liquidity risks (the risks that an insurance company is unable to obtain sufficient funds in a timely manner or is not able to obtain sufficient funds at a reasonable cost to cover maturing debt payment obligations or to perform other payment obligations); No. 13, solvency public information disclosure; No. 14, solvency information communication; No. 15, insurance company credit rating; No. 16, solvency report; and No. 17, insurance group regulation. (III) THE IMPACT OF THE C-ROSS The design and implementation of the C-ROSS is an important milestone in the history of China’s insurance industry development and regulatory reform, which will accelerate the modernisation of China’s insurance regulatory system, support the sustainable, fast and healthy development of the insurance industry and have far-reaching impacts on the global insurance paradigm.151 First, it can facilitate the transformation of the development mode. The C-ROSS comprehensively measures all risks of insurers’ business activities, strengthens solvency regulation on insurers, and guides insurers to balance risks and cost of capital in the pursuit of growth, so they will abandon the extensive growth pattern for more efficient growth. Second, it can promote risk management competence in the industry. The C-ROSS established an incentive mechanism for risk management, regularly assessing risk management competence of insurers, taking risk management competence into the capital requirements and urging insurers to constantly improve their risk management to enhance the core competitiveness of their business. Third, it could make the industry more attractive to capital. The C-ROSS releases capital, making capital use more efficient and thus increasing the insurance industry’s attractiveness to social capital. Fourth, it can promote greater participation in international insurance cooperation and exchanges. The C-ROSS is comparable to international mainstream regulatory regimes both in terms of the “three pillars” regulatory framework, and with regard to the specific aspects of regulatory standards and requirements, facilitating international exchanges and cooperation.

151  The Annual Report of the Chinese Insurance Market 2015, p. 54.

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(c) Other requirements in relation to solvency In addition to the requirement for an insurance company to maintain a minimum solvency margin, the Insurance Law sets out four further requirements which are closely related to the solvency of an insurance company. (1) An insurance company is required to set aside 20% of its registered capital as the guarantee fund and deposit it with the banks designated by the CIRC. This fund cannot be used for any purposes other than to pay off debts at the time of liquidation of the company.152 (2) An insurance company is required to set aside various kinds of reserves in accordance with the principles of safeguarding the interest of the insureds and maintaining solvency. The CIRC is authorised to formulate specific rules for setting aside and carrying over reserves by an insurance company.153 (3) An insurance company is required to set aside statutory surplus reserves.154 And (4) an insurance company is obliged to make contributions to an insurance protection fund, which is managed as a pool, and applied through overall planning in the following circumstances: (i) providing relief to the proposers, the insureds or the beneficiaries where an insurance company is revoked or declared bankrupt; (ii) providing relief to the insurance companies that take over the life insurance contracts from the insurance company which has been revoked or declared bankrupt; or (iii) other circumstances as provided for by the State Council.155 The specific management rules for raising, managing and using the insurance protection fund (i.e. the Measures for the Administration of Insurance Protection Fund) were formulated by the CIRC, the Ministry of Finance and the People’s Bank of China jointly in 2008.156 This will be discussed shortly. With respect to insurance companies with inadequate solvency, the CIRC lists them as key targets for regulation, and may take the following steps according to the specific circumstances:157 (1) order them to increase capital and arrange reinsurance; (2) restrict their scope of business; (3) restrict their dividends distribution to shareholders; (4) restrict their purchase of fixed assets or scale of operating expenses; (5) restrict their category and proportion of fund investments; (6) restrict their establishment of additional branches; (7) order them to auction off bad assets or to transfer their insurance business; (8) restrict the remuneration level of their directors, supervisors and senior officers; (9) restrict business advertising; or (10) order them to stop accepting new business. 3.5.3 The regulation of the use of insurance funds The use of insurance funds is an important business of insurance companies. The Insurance Law and the CIRC have so far provided many rules in respect of insurance funds utilisation.

152  The Insurance Law, art. 97. 153  Ibid, art. 98. 154  Ibid, art. 99. 155  Ibid, art. 100. 156 The Measures for the Administration of Insurance Protection Fund were formulated by the CIRC, the Ministry of Finance and the People’s Bank of China jointly in 2008 and came into force on 11 September 2008. Order of the CIRC [2008] No. 2, see accessed in April 2016. 157  The Insurance Law 2015, art. 138.

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(a) Channels for the use of insurance funds The 1995 version of the Insurance Law limits the channels for the use of insurance funds to bank deposits, trading in government bonds and financial bonds, and other ways specified by the State Council. The funds of insurance companies may not be used for the establishment of securities houses or investment in enterprises.158 The 2002 version of the Insurance Law is the same as that in the 1995 version in respect of the channels for the use of insurance funds, but differs in that the insurance funds can be used for the establishment of insurance companies.159 With the rapid accumulation in the total assets of the insurance companies, it became increasingly important for diversifying the channels for the use of insurance funds. The 2009 version of the Insurance Law has thus expanded the channels by providing that the fund utilisation portfolios of an insurance company shall be limited to the following forms: (1) bank deposit; (2) trading negotiable securities including bonds, stocks, shares of securities investment funds, etc.; (3) investing in real estate; and (4) other fund utilisation forms as prescribed by the State Council.160 The CIRC has formulated a number of rules and measures by which the Insurance Law is implemented and new investment vehicles for insurance funds have been effected. Examples include the following: the Interim Measures for the Administration of Investment in Securities Investment Funds by Insurance Companies (2003);161 the Interim Measures for the Administration of Overseas Utilisation of Foreign Exchange Insurance Funds (2004);162 the Interim Measures for the Administration of Stock Investment by Insurance Institutional Investors (2004);163 the Interim Measures for the Administration of Bond Investment by Insurance Institutional Investors (2005);164 the Measures for the Administration of Pilot Programmes for Indirect Investment in Infrastructure Projects with Insurance Funds (2006);165 the Notice Concerning Investment in Equity Shares of Commercial Banks by Insurance Institutions (2006).166 Recently, for purposes of regulating the utilisation of insurance funds, preventing risks in the utilisation of insurance funds, protecting the legitimate rights and interests of insurance parties and promoting the sustainable and sound development of the insurance industry, the Interim Measures for the Administration of Utilisation of Insurance Funds were promulgated by the CIRC on 30 July 2010, came into force on 31 August 2010167 and were amended in 2014 (hereinafter, the Measures 2014).168 Where the CIRC’s other existing rules and regulations in relation to the

158  The Insurance Law 1995, art. 104. 159  The Insurance Law 2002, art. 105. 160  The Insurance Law 2009, art. 106. 161  It was promulgated by the CIRC on 17 January 2003. 162  It was promulgated jointly by the CIRC and the People’s Bank of China on 9 August 2004. 163  It was promulgated jointly by the CIRC and the China Securities Regulatory Commission on 24 October 2004. 164  It was promulgated jointly by the CIRC on 17 August 2005. 165  It was promulgated jointly by the CIRC on 14 March 2006. 166  It was promulgated jointly by the CIRC on 21 September 2006. 167  Order of the CIRC [2010] No. 9. See accessed in August 2016. 168  Order of the CIRC [2014] No. 3, see  accessed in April 2016.

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administration of the use of insurance funds are inconsistent with the Measures 2014, the Measures 2014 prevail.169 The Measures 2014 apply to the insurance group (holding) companies and insurance companies legally formed within the territory of China which are engaged in the utilisation of insurance funds.170 The term “insurance funds” as mentioned in the Measures refers to the renminbi-denominated and foreign currency-denominated capital funds, accumulation funds, undistributed profits, all kinds of reserves and other funds of insurance group (holding) companies and insurance companies.171 The utilisation of insurance funds is limited to those forms as provided for in art. 106 of the Insurance Law, as mentioned above. Where insurance funds are utilised to make bank deposits, a commercial bank which meets the following conditions can be selected as the bank of deposit:172 (1) its capital adequacy ratio, net assets and provision coverage, etc. conform to the regulatory requirements; (2) it has a standard governance structure, sound internal control system and good business performance; (3) it has committed no serious violations of the laws and regulations in the last three years; and (4) its credit rating is above the investment level in any three consecutive years. The bonds invested with insurance funds shall reach the credit levels which are appraised by the credit rating institutions recognised by the CIRC and meet the prescribed requirements, mainly including government bonds, financial bonds, enterprise (corporate) bonds, non-financial corporate debt financing instruments and other bonds meeting the relevant provisions.173 The shares invested with insurance funds shall mainly include the shares which are publicly issued and traded and the shares which are non-publicly issued by listed companies for specific objects.174 Where the insurance funds are invested in securities investment funds, the fund manager shall meet the following conditions: (1) it has good corporate governance, and its net assets remain at ¥100 million or more for three consecutive years; (2) it performs contracts according to law, protects the legitimate rights and interests of investors and has no bad records in the latest three years; (3) it has established an effective firewall mechanism between the securities investment funds and the asset management business for specific clients; and (4) it has a stable investment team, good historical investment performance and relatively stable scale of assets or fund units under its management.175 The real estate invested with insurance funds shall refer to the land, buildings and other fixtures on the land. The specific measures shall be formulated by the CIRC.176

169  Ibid, art. 70. 170  Ibid, art. 2. 171  Ibid, art. 3. 172  Ibid, art. 7. 173  Ibid, art. 8. 174  Ibid, art. 9. 175  Ibid, art. 10. 176  Ibid, art. 11.

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The equities invested with insurance funds shall be the equities of joint-stock companies and limited liability companies which are legally formed and registered within the territory of China and are not publicly listed in stock exchanges.177 An insurance group (holding) company or an insurance company shall not use various reserves to purchase real estate for self-use or to engage in equity investment to control other enterprises.178 The equity investment made by insurance group (holding) companies and insurance companies to control other enterprises shall meet the relevant regulatory provisions on solvency. If the insurance subsidiary of an insurance group (holding) company does not meet the regulatory requirements for solvency of the CIRC, the insurance group (holding) company shall not invest in non-insurance financial enterprises. The enterprises that can make the equity investment to control other enterprises shall be limited to the following enterprises: (1) insurance enterprises, including insurance companies, insurance asset management institutions, professional insurance agencies and insurance brokerages; (2) non-insurance financial enterprises; and (3) insurance-related enterprises.179 An insurance group (holding) company or an insurance company engaged in the utilisation of insurance funds shall not commit any of the following acts: (1) depositing insurance funds in non-banking financial institutions; (2) purchasing the shares under “special treatment” or “special treatment of delisting risk warning” imposed by stock exchanges; (3) investing in enterprises’ equities or real estate that have no prospects for a stable cash return or asset value gain, or that are in high-polluting projects not in conformity with the national industrial policies; (4) being directly engaged in the development and construction of real estate; (5) being engaged in venture capital investment; (6) using the investment assets formed from the utilisation of insurance funds to provide guarantees or grant loans, with the exception of granting personal policy-pledged loans; or (7) other investments prohibited by the CIRC. The CIRC may, according to the relevant circumstances, properly adjust the prohibitive provisions on utilisation of insurance funds.180 An insurance group (holding) company or an insurance company engaged in the utilisation of insurance funds shall meet the following ratio requirements: (1) the book balance of the total value of the investments in bank demand deposits, government bonds, central bank bills, bonds of policy banks, funds of money markets, etc. shall not be less than 5% of the total assets of the company at the end of the preceding quarter; (2) the book balance of the total value of the investments in unsecured enterprise (corporate) bonds and non-financial corporate debt financing instruments shall not be more than 20% of the total assets of the company at the end of the preceding quarter; (3) the book balance of the total value of the investments in shares and funds of an equity nature shall not be more than 20% of the total assets of the company at the end of the preceding quarter; (4) the book balance of the value of the investments in equities in unlisted enterprises shall not be more than 5% of the total assets of the company at the end of the preceding quarter; 177  Ibid, art. 12. 178  Ibid, art. 13. 179  Ibid, art. 14. 180  Ibid, art. 15.

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(5) the book balance of the value of the investments in the financial products related to equities in unlisted enterprises shall not be more than 4% of the total assets of the company at the end of the preceding quarter, and the book balance of the total value of the aforesaid two investments shall not be more than 5% of the total assets of the company at the end of the preceding quarter; (6) the book balance of the value of the investments in real estate shall not be more than 10% of the total assets of the company at the end of the preceding quarter; (7) the book balance of the value of the investments in the real estate-related financial products shall not be more than 3% of the total assets of the company at the end of the preceding quarter, and the book balance of the total value of the aforesaid two investments shall not be more than 10% of the total assets of the company at the end of the preceding quarter; (8) the book balance of the value of the investments in debt investment plans including infrastructure shall not be more than 10% of the total assets of the company at the end of the preceding quarter; and (9) as to the equity investment made by an insurance group (holding) company or an insurance company to control any other enterprise, the total investment cost shall not exceed its net assets.181 The utilisation of funds of investment-linked insurance products and non-life insurance type of investment insurance products with variable return shall be independent of the utilisation of funds of other insurance products in asset separation, asset allocation, investment management, staffing, investment transactions, risk control and other links, and the specific measures shall be formulated by the CIRC.182 The use of insurance funds for overseas investments is regulated separately by the CIRC, and is considered below.

181  Ibid, art. 16. The term “total assets” as mentioned in items (1) to (6) of the preceding paragraph shall exclude the balance of the capital borrowed from bond repurchase, assets of investment-linked insurance products, and assets of non-life insurance type of investment insurance products with variable return; the total assets of an insurance group (holding) company shall refer to the total assets of the group parent company. The term “non-financial corporate debt financing instruments” shall refer to the negotiable securities which are issued by non-financial enterprises with legal person status in the inter-bank bond market with the stipulation of repaying principal and interests within a certain time limit. The term “financial products related to the equities in unlisted enterprises” shall refer to the investment plans launched and established or investment funds issued within the territory of China on the basis of equities in unlisted enterprises by equity investment management institutions according to law. The term “real estate-related financial products” shall refer to the investment plans launched and established or investment funds issued within the territory of China on the basis of real estate assets by real estate investment management institutions according to law. The term “debt investment plans including infrastructure” shall refer to the financial instruments under which the insurance asset management institutions and other professional management institutions issue beneficiary certificates for investment plans according to the relevant provisions to raise funds from insurance companies and other clients for investing in infrastructure projects, etc., and pay the principal and expected return as agreed upon. An insurance group (holding) company or an insurance company shall control investment instruments, single variety, single counterparty, and the ratio of investment in the same subject by the affiliated enterprises and all companies within the group, so as to prevent a concentration risk in fund utilisation. The specific measures for the administration of utilisation of insurance funds shall be formulated by the CIRC. The CIRC may, according to the relevant circumstances, properly adjust the investment ratio of utilisation of insurance funds. 182  Ibid, art. 17.

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(b) Administration of overseas investment with insurance funds The overseas investment of insurance funds is governed by the Interim Measures for the Administration of Overseas Investment with Insurance Funds (2007) (hereinafter, the Measures 2007)183 and the Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds (2012).184 Except as otherwise specified by the CIRC and the State Administration of Foreign Exchange (SAFE) to engage in overseas investment with insurance funds,185 a client186 shall enter into agreements with the trustees187 and custodian188 in accordance with the provisions of these Measures, and the trustees and custodian shall be responsible for the investment operations and custodial supervision of the insurance funds, respectively, under the agreements.189 The insurance funds trusted for investment or under custody shall be separate from the assets owned by the trustee or custodian, and may not be included in the trustee’s or custodian’s own assets or any other assets under the management of the trustee or custodian. Except under the statutory circumstances such as debts incurred from overseas investment with insurance funds, no enforcement may be conducted against the insurance funds trusted for investment or under custody.190 A client shall, under the principles of security, fluidity, profitability and matching of assets and liabilities, prudently make investment decisions, and assume investment risks. The trustees, custodian and other natural persons, legal persons, or organisations providing services for overseas investment with insurance funds shall, as agreed upon, provide the relevant services, and strictly perform their duties of honesty and trustworthiness, prudence and diligence.191 The parties to overseas investment with insurance funds shall abide by the relevant laws and administrative regulations of China, these Measures and the relevant

183 The Interim Measures for the Administration of Overseas Investment with Insurance Funds jointly developed by the China Insurance Regulatory Commission, the People’s Bank of China, and the State Administration of Foreign Exchange were issued on 28 June 2007, and came into force on the date of issuance. See  accessed in April 2016. 184 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds were issued on 12 October 2012, and came into force on the date of issuance. See accessed in April 2016. 185 “Insurance funds” means a client’s own foreign exchange funds, foreign exchange funds purchased with renminbi, and assets formed from overseas investment with the aforesaid funds. 186  For the purposes of the Measures, “parties to overseas investment with insurance funds” means the client, trustees and custodian. “Client” means an insurance company, an insurance group company, an insurance holding company, or any other insurance institution legally formed in the territory of China. 187  “Trustees” includes the domestic trustee and the overseas trustee. A domestic trustee shall be an insurance asset management company legally formed in the territory of China or any other professional investment management institution in the territory of China which meets the conditions prescribed by the CIRC. An overseas trustee shall be a professional investment management institution legally formed outside the territory of China and meeting the conditions prescribed by the CIRC. 188  “Custodian” means a commercial bank or any another financial institution legally formed in the territory of China and meeting the conditions prescribed by the CIRC. Commercial banks serving as custodians include Chinese-funded banks, Chinese–foreign equity joint venture banks, wholly foreignfunded banks, and branches of foreign banks. 189  The Measures 2007, art. 4. 190  Ibid, art. 5. 191  Ibid, art. 6.

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foreign laws and provisions.192 The CIRC is responsible for developing the policies for the administration of overseas investment with insurance funds, and according to the law, supervise and administer activities of overseas investment with insurance funds. The SAFE, according to the law, administers quotas for foreign exchange payments, remittance of foreign exchange for settlement, and other foreign exchange matters related to overseas investment with insurance funds.193 To engage in overseas investment with insurance funds, a client shall meet the following conditions: (1) it has established a sound corporate governance structure and a complete asset management system, and its internal management rules and risk control rules comply with the provisions of the Guidelines for Risk Control in the Use of Insurance Funds (Trial Implementation);194 (2) it has a relatively strong investment management capability, risk evaluation capability, and investment performance assessment capability; (3) it has specific policies and strategies for allocation of assets, and conducts rigorous management of the matching of assets and liabilities; (4) the operations of its investment management team are well regulated, and its senior executive in charge of investment has 10 years or more of experience in the financial or other economic fields; (5) it has a stable finance and good credit standing, its solvency adequacy ratio and risk-monitoring indicators satisfy the relevant requirements of the CIRC, and it has no record of any gross violation of laws and regulations in the last three years; (6) it has a permit for engaging in the foreign exchange business; and (7) other conditions as set out by the CIRC.195 To provide trust services for overseas investment with insurance funds, a domestic trustee shall meet the following conditions: (1) it is qualified to engage in the insurance asset management business; (2) it has established a sound corporate governance structure and effective internal management rules; (3) it has established a rigorous risk control mechanism, has a capability of effective risk management of overseas investment, and has secure and efficient transaction management and financial management systems; (4) it has an experienced management team which specialises in the management of overseas investment and insurance assets, has a certain number of investment professionals, and the company’s senior executive in charge of investment has 10 years or more of experience in the financial or other economic fields; (5) both the paid up capital and the net assets of the company are not less than ¥100 million or an equivalent in a convertible currency, and its capital scale and the scale of trusted assets under its management satisfy the requirements of the CIRC; (6) it has a stable finance and good credit standing, its risk-monitoring indicators satisfy the relevant requirements of the CIRC, and it has no record of any gross violation of laws and regulations in the last three years; and (7) other conditions as set out by the CIRC.196 To provide trust services for overseas investment with insurance funds, an overseas trustee shall meet the following conditions: (1) it has an independent legal person

192  Ibid, art. 7. 193  Ibid, art. 8. 194  Bao Jian Fa [2004] No. 43, see accessed in April 2016. 195  The Measures 2007, art. 9. 196  Ibid, art. 10.

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status and is qualified to engage in the asset management business under the laws of the country or region where it is located; (2) it has established a sound corporate governance structure, and implements effective internal management rules; (3) it has established a rigorous risk control mechanism and secure and efficient transaction management and financial management systems, and has a capacity of comprehensive risk management; (4) it has an experienced management team which specialises in the insurance asset management business, and has a certain number of investment professionals with professional investment experience of 10 years or more on average; (5) it has a stable finance and good credit standing, its risk-monitoring indicators comply with the laws of the country or region where it is located and the relevant rules of the regulatory authorities, and it has no record of any gross violation of laws and regulations in the last three years; (6) its capital scale and the scale of assets under its management satisfy the requirements of the CIRC; (7) it has purchased the relevant liability insurance consistent with the scale of assets under its management; (8) the country or region where it is located has a sound financial regulatory system, and the financial regulatory authorities in such a country or region have signed regulatory cooperation documents with the financial regulatory authorities of China and maintain an effective regulatory cooperation relationship with the financial regulatory authorities of China; and (9) other conditions as set out by the CIRC.197 To provide custodial services for overseas investment with insurance funds, a custodian shall meet the following conditions: (1) it has established a sound corporate governance structure, and implements effective internal management rules; (2) it has established a rigorous risk control mechanism, strict segregation rules for assets under custody, and secure and efficient custodial and disaster disposal systems; (3) it has an experienced management team, has established a specialised custodial department and has a certain number of custodial business personnel; (4) its capital adequacy ratio and core capital adequacy ratio reached 10% and 8% at the end of the prior year, respectively, it has a stable finance and good credit standing, its risk-monitoring indicators satisfy the relevant requirements and it has no record of any gross violation of laws and regulations in the last three years; (5) its capital scale and the scale of assets under its custody satisfy the requirements of the CIRC; (6) it is qualified to engage in the settlement and sale of foreign exchange; and (7) other conditions as set out by the CIRC and the SAFE.198 A custodian may, with the consent of a client, select a commercial bank or a professional custodial institution which meets the following conditions as its custodial agent: (1) it is permitted to engage in the custodial business under the laws of the country or region where it is located, and maintains a good cooperative relationship with the custodian; (2) it has established a sound corporate governance structure, and implements effective internal management rules; (3) it has established a rigorous risk control mechanism, effective segregation rules for assets under custody, and secure and efficient custodial and disaster disposal systems; (4) it has an experienced management team and a certain number of professional custodial personnel who are familiar with the custodial business in the country or region where it is located; (5) it

197  Ibid, art. 11. 198  Ibid, art. 12.

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has a stable finance and good credit standing, its risk-monitoring indicators comply with the laws of the country or region where it is located and the relevant rules of the regulatory authorities, and it has no record of any gross violation of laws and regulations in the last three years; (6) its capital scale and the scale of assets under its custody satisfy the requirements of the CIRC; (7) the country or region where it is located has a sound financial regulatory system, and the financial regulatory authorities in such a country or region have signed regulatory cooperation documents with the financial regulatory authorities of China and maintain an effective regulatory cooperation relationship with the financial regulatory authorities of China; (8) conditions in the custodial agreement; and (9) other conditions as set out by the CIRC and the SAFE.199 None of the following circumstances may exist between a client and a custodian or between a client and a custodial agent: (1) the shares held by either of them in the other exceeds the proportion prescribed by the CIRC; and (2) any other circumstances which affect a custodian’s or a custodial agent’s performance of custodial obligations, as determined by the CIRC. A client shall undertake that none of the circumstances as described in the preceding paragraph exits among the trustee, custodian or custodial agent.200 Overseas investment of insurance funds is limited to the following varieties: (1) bank bills, large amount negotiable certificates of deposit, repurchase and reverse repurchase agreements, money market funds and other money market instruments; (2) bank deposits, structured deposits, bonds, convertible bonds, bond funds, securitised products, trust products and other fixed income products; (3) equity products, such as stocks, equity funds, equities, equity-type products, etc.; and (4) other forms of investment or investment products as stipulated by the Insurance Law and by the State Council.201 (c) Administration of insurance asset management companies In order to facilitate the use of the insurance funds, the Insurance Law entitles an insurance company to set up an insurance asset management company with the approval of the CIRC in consultation with the securities supervision and regulation authority of the State Council.202 An insurance assets management company shall comply with the provisions of laws and administrative regulations such as the Security Law of China203 while engaging in securities investment activities. The administrative rules for insurance asset management companies shall be formulated by the CIRC and other related authorities of the State Council.204

199  Ibid, art. 13. 200  Ibid, art. 14. 201  Ibid, art. 31. 202  The Insurance Law, art. 107. 203  It was adopted at the 30th Meeting of the Standing Committee of the Seventh National People’s Congress on 22 February 1993, promulgated by Order No. 68 of the President of the People’s Republic of China, and became effective as of 22 February 1993 accessed in April 2016. 204  The Insurance Law, art. 107.

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In accordance with the Insurance Law and the Company Law for the purpose of strengthening supervision over insurance asset management companies, preventing the risk of the use of insurance capital, and protecting the legal rights and interests of the insurance companies and the insurance asset management companies, the Interim Provisions for the Administration of Insurance Asset Management Companies were formulated by the CIRC on 21 April 2004, came into force on 1 June 2004,205 and were amended on 7 April 2011.206 An insurance asset management company is a financial institution, which is registered according to law upon the approval of the CIRC together with the relevant departments, and manages insurance capital by entrustment. The “insurance capital” refers to the various insurance reserves, capital funds, working capital, accumulation funds, undistributed profits and other liabilities of an insurance company, and the various assets formed by the preceding capital.207 An insurance asset management company takes the following forms of organisation: a limited liability company or a joint-stock limited company.208 There shall be at least one shareholder or promoter to represent the insurance company or insurance shareholding (group) company when establishing an insurance asset management company, and the said insurance company or insurance shareholding (group) company shall meet the following conditions:209 (1) undertaking insurance business for over eight years; (2) having no record of administrative punishment for violation of the provisions on capital arrangement in the past three years; (3) the net assets are no less than ¥1 billion; the total assets are no less than ¥5 billion, while the total assets of the insurance shareholding (group) company and the insurance company that have life insurance business shall be no less than ¥10 billion; (4) meeting the requirements for solvency as prescribed by the CIRC; (5) having perfect corporate governance structure and internal control systems; (6) having established the corresponding departments for assets and liability management and a risk control department, and having perfect investment information management systems; (7) the proportion of assets used and managed in a centralised way by the departments of capital arrangement shall be no less than 50% of the total assets of the company, of which such proportion of an insurance company that has life insurance business shall be no less than 80% of the total assets of the company; and (8) other conditions as prescribed by the CIRC.

205  Order of the CIRC [2004] No. 2, see accessed in April 2016. 206  Bao Jian Fa [2011] No. 19, see accessed in April 2016. 207  Ibid, art. 3. 208  Ibid, art. 7. 209  Ibid, art. 8.

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The total share of insurance asset management companies held by a domestic insurance company shall be no less than 75%. The “domestic insurance company” as mentioned in the preceding paragraph shall refer to the insurance company or insurance shareholding (group) company with legal person status, which is approved by the CIRC and registered according to law.210 The minimum registered capital of an insurance assets management company shall be ¥30 million or the equivalent convertible currency; and the registered capital shall be the paid up monetary capital. The registered capital of an insurance asset management company shall be no less than one-thousandth of the insurance capital managed by it by entrustment; if it is less than one-thousandth, a sum of capital funds shall be added accordingly. But no more capital funds may be added if its registered capital has reached ¥500 million. The scope of business of an insurance asset management company includes all or part of the following:(1) to manage and utilise the insurance funds entrusted by its shareholders in RMB or foreign currency; (2) to manage and utilise the fund entrusted by an insurance company controlled by its shareholders; (3) to manage and utilise held funds in RMB or foreign currency; (4) other types of business approved by the CIRC; or (5) types of business approved by other authorities of the State Council.211 The management and utilisation of the insurance funds is limited to bank deposits, buying and selling of governmental bonds, financial bonds and other fund utilisation forms prescribed by the State Council.212 3.5.4 The regulation of conduct of insurance companies (a) Regulation of the conduct of insurance operations Chapter 6 of the Provision of Administration of Insurance Companies (2015) contains rules as regards insurance operations, which set out what an insurer can do and what it cannot. As to the advertising and promotion of insurance products, the promotional materials of an insurer shall be objective, complete and true and state the name and address of the insurance institution.213 An insurer shall disclose the relevant information according to the provisions issued by the CIRC, and must not disseminate misleading information on its insurance clauses and service quality, among others, by advertising or in any other manner of publicity.214 The insurers are required to alert the proposers to the exemptions of an insurers’ liability, surrender, deduction of expenses, cash value, cooling-off period and other matters in the insurance contracts in accordance with the Insurance Law and the provisions issued by the CIRC.215 With regard to fair dealing and competition, insurers shall follow the principle of fair competition in conducting business, and may not engage in any unfair

210  Ibid, art. 9. 211  Ibid, art. 29. 212  Ibid, art. 30. 213  The Provision of Administration of Insurance Companies (2015), art. 44. 214  Ibid, art. 45. 215  Ibid, art. 46.

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competition.216An insurer may not one-sidedly compare its insurance clauses and premium rates with similar insurance clauses and premium rates of any other insurance company or with the deposit interest rates of any financial institution.217An insurance institution may not damage the reputation of any other insurance institution by fabrication or spreading false facts. An insurer may not elbow out any other insurers in conducting insurance business or obstruct the insurance business of any other insurers by taking advantage of the government, any government department or any monopolistic enterprise or organisation.218 An insurance institution may not persuade or induce any insurance proposers to rescind an insurance contract with any other insurance company.219 An insurance institution may not provide or promise to provide the proposer, insured or beneficiary with any premium kickback or other benefit not agreed upon in the insurance contract.220 Except for in the case of a reinsurance company, an insurance institution shall establish a customer service department or a consultation and complaint department according to the relevant provisions, and make the telephone number for contacting the said department publicly available. Insurers shall carefully handle insurance complaints and notify the complainants of the handling results in a timely manner.221 Insurers shall establish a registration system for the management of insurance agents and enhance the training and management of the agents, and may not instigate or induce insurance agents to engage in any activity violating the principle of good faith.222 An insurer may not authorise any institution or individual which has not been legally qualified to sell insurance products, nor pay any commission or other benefit to such an institution or individual.223 (b) Regulation of the salespersons The Insurance Law provides that “the personnel engaged in insurance sales of an insurance company shall meet the qualifications provided by the CIRC, and have obtained the qualification certificates issued by the CIRC. The scope of insurance sales personnel and management rules shall be provided by the CIRC.”224 In accordance with this requirement, the CIRC formulated the Regulations on Administration of Insurance Salespersons on 6 January 2013 which became effective on 1 July 2013.225 “Insurance salespersons” used in these Regulations refer to individuals who are employed by insurance companies or by insurance intermediaries to sell insurance products for the insurance companies.226 216  Ibid, art. 47. 217  Ibid, art. 48. 218  Ibid, art. 49. 219  Ibid, art. 50. 220  Ibid, art. 51. 221  Ibid, art. 52. 222  Ibid, art. 53. 223  Ibid, art. 54. 224  The Insurance Law, art. 111. 225  Order of the CIRC [2013] No. 2, see accessed in April 2016. 226  Ibid, art. 2.

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The Regulations provide rules relating to the administration of qualification of the salespersons, administration of practice registration of the salespersons, administrative responsibility for managing the activities of the salespersons by the insurance company, and the legal liabilities for non-compliance with the provisions of the Regulations. Insurance salespersons shall conduct insurance sales activities within the scope of their insurance company’s authorisation. Insurance salespersons shall show the clients practice certificates in insurance sales activities.227 Insurance salespersons are prohibited to carry out misconduct as specified in the Insurance Law. Insurers should take steps to rectify their salespersons’ misconduct.228 (c) Prohibition of misconduct of insurers and their employees Article 116 of the Insurance Law provides: “An insurance company and its employees shall not commit any of the following acts in the course of conducting business: (1) cheating the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts; (3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) giving or promising premium rebates or other benefits other than those provided for in the contracts to the proposers, the insureds or the beneficiaries; (5) refusing to fulfil the obligation of paying indemnity or insurance benefits agreed upon in an insurance contract according to law; (6) deliberately fabricating insured events that have never occurred, making up insurance contracts or deliberately exaggerating insured events that have occurred to make false indemnities and defrauding the company of insurance benefits or seeking other illegitimate gains; (7) diverting, retaining or encroaching on premiums; (8) entrusting agencies or individuals that have not obtained lawful qualifications to engage in activities of insurance sales; (9) seeking illegitimate gains for other organisations or individuals by taking advantage of the insurance business; (10) using insurance agencies, insurance brokers or insurance adjusting firms to engage in illegal activities such as siphoning off commission by making up insurance agency business or fabricating surrender of policies; (11) damaging the commercial reputation of its rivals by fabricating and disseminating false facts or other acts of unfair competition, disturbing the order of the insurance market by other acts of unfair competition; (12) divulging the business secrets of the proposers or the insured so that they become known in their business activities; (13) other acts violating laws, administrative regulations and provisions of the insurance supervision and regulation authority of the State Council.”

227  Ibid, art. 19. 228  Ibid, art. 23.

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(d) Regulation of the conduct of insurance claims For the purpose of improving insurance claim settlement services, promoting simple, convenient, rapid and transparent insurance claim settlement services, and effectively protecting the lawful rights and interests of insurance consumers, the CIRC developed the Guidelines for Small-Sum Insurance Claim Settlement Services (for Trial Implementation), which became effective on 24 October 2015.229 The Guidelines contain 22 articles in relation to small claims handling and settlement. Insurance companies are required to establish service rules for receiving claim reports on a 24/7 (24 hours per day, 7 days per week) basis, ensure smooth channels for reporting claims on a “365 days × 24 hours” basis, announce to the public the uniform hotline for reporting claims at business outlets and on the Internet, and remind and direct consumers to report claims in a timely manner after the loss.230 For vehicle insurance claim settlement, an insurance company shall, when receiving a claim report, accurately record the information on the reported claim, remind the claim informant of the matters for attention, inform the informant of the claim acceptance result, dispatch personnel to conduct a claim survey in a timely manner, and inform the informant of the claim number and contact information of the person responsible for claim settlement by such means as telephone, short message and instant messaging tools. In the regions where the rapid traffic accident handling and compensation mechanism has been established, claim informants shall be directed to handle accidents according to the local rapid handling and compensation mode. The person in an insurance company responsible for claim surveys shall, after receiving a dispatch order, contact the claim informant in a timely manner, inform the informant of his or her name and contact information, verify the information on the reported claim, confirm the survey site and inform the informant of claim matters.231 For personal medical insurance claims, the insurance company, upon receiving a report of a case, should inform the insured of claim matters within one working day, by telephone, text messaging, or other instant communication means.232 For the person who is disabled or sick in bed with special difficulties or for whom it would be inconvenient to come to the claims service window to submit application materials, the insurance company should provide a service of coming to his door to deal with the claim, or other convenient services.233

229  Bao Jian Xiao Bao [2015] No. 201, see accessed in April 2016. For the purpose of these Guidelines, “small-sum insurance claim settlement” means the claim settlement of motor vehicle insurance and individual medical insurance provided that consumers claim a relatively small amount of compensation, the facts are clear, and the responsibilities are definite. “Small-sum claim settlement of vehicle insurance” means the claim settlement of vehicle insurance provided that accidents only involve vehicle losses (not involving human and material losses), the facts are clear, the responsibilities are definite, and the claimed amount of compensation is less than ¥5,000 yuan. “Small-sum claim settlement of individual medical insurance” means the claim settlement of individual medical insurance of expense remedy type and quota payment type provided that the claimed amount of compensation is less than ¥3,000 yuan, the facts are clear, the responsibilities are definite and no investigation is required. 230  Ibid, art. 3. 231  Ibid, art. 4. 232  Ibid, art. 5. 233  Ibid, art. 6.

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On the condition of satisfaction of risk control and regulatory requirements, insurance companies should, to the maximum extent possible, simplify the claim materials needed for small claims. Generally, no additional claim materials should be required, except the types of materials such as claim applications, identification determinations, proof of loss, and payment information.234 3.6 Regulation of insurance intermediaries 3.6.1  Overview of legislation on insurance intermediaries In China, insurance intermediaries consist mainly of three types: insurance agencies, insurance brokers and loss adjusters. The Insurance Law sets out rules in relation to insurance agents and brokers in arts 117 to 132. The CIRC has formulated three major regulations to govern the establishment and business activities of the insurance intermediaries: (1) the Provisions on the Supervision and Administration of Full-Time Insurance Agencies (2015 Amendment);235 (2) the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (2015 Amendment);236 and (3) the Provisions on the Supervision and Administration of Loss Adjusters (2015 Amendment).237 In addition, the CIRC has enacted the Measures for the Punishment of Illegal Conduct in the Intermediary Business of Insurance Companies (2009) for purposes of maintaining the order of the insurance market – preventing and punishing illegal conduct in the intermediary business of insurance companies.238 According to the Insurance Law, an insurance agent means an entity or an individual who is entrusted by and charges commissions from an insurer to transact insurance business on behalf of the insurer within the scope of the delegated authority. Insurance agencies include professional insurance agencies specialising in insurance agency business and side-line insurance agencies that engage in insurance agency as a side-line business.239 An insurance broker means an entity which, based on the interests of the proposers, provides intermediary services to facilitate insurance

234  Ibid, art. 7. 235 The Provisions on the Supervision and Administration of Full-Time Insurance Agencies came into force on 1 October 2009, upon which the Provisions on the Administration of Insurance Agencies (Order No. 14 [2004], CIRC) issued by the CIRC on 1 December 2004, were repealed. The Provisions were amended twice on 27 April 2013 and on 19 October 2015; see accessed in April 2016. 236  Provisions on the Supervision and Administration of Insurance Brokerage Institutions came into force on 1 October 2009, upon which the Provisions on the Administration of Insurance Brokerage Institutions (Order No. 15 [2004], CIRC) issued by the CIRC on 15 December 2004, were repealed. The Provisions were amended twice on 27 April 2013 and on 19 October 2015; see accessed in April 2016. 237  Provisions on the Supervision and Administration of Loss Adjusters came into force on 1 October 2009, upon which the Provisions on the Administration of Loss Adjusters (Order No. 3 [2001], CIRC) issued by the CIRC on 16 November 2001, were repealed. The Provisions were amended twice on 29 September 2013 and on 19 October 2015; see accessed in April 2016. 238 The Measures for the Punishment of Illegal Conduct in the Intermediary Business of Insurance Companies, which became effective on 1 October 2009; see accessed in April 2016. 239  The Insurance Law, art. 117.

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contracting between proposers and insurers and receives commissions according to law.240 According to the Provisions on Loss Adjusters,241 loss adjusters means institutions which specially engage in the assessment, survey, identification and loss adjustment, among others, of the subject matters of insurance or the insured events as authorised by clients, and receive remuneration as agreed on. 3.6.2 Establishment of an intermediary firm Insurance agencies and insurance brokers shall meet the conditions provided by the CIRC, and obtain an insurance agency business licence and an insurance brokerage business licence issued by the CIRC. Professional insurance agencies and insurance brokers shall register with the Administration of Industry and Commerce with the insurance business licence (i.e. permission) issued by the CIRC and obtain a business licence. Side-line insurance agencies shall register the change with the Administration of Industry and Commerce with a business licence issued by the CIRC.242 Where a professional insurance agency or insurance broker is established in the form of a company, the provisions in the Company Law of China shall be applicable to the minimum amount of its registered capital. The CIRC may, according to the scope of business and operational size of a professional insurance agency or insurance broker, adjust the minimum amount of its registered capital, but the registered capital may not be lower than the minimum amount provided in the Company law of China. The registered capital or the capital contributions of a professional insurance agency or broker must be fully paid-up monetary capital.243 The senior management officers of a professional insurance agency or insurance broker shall have good morals, be well versed in insurance laws and administrative regulations, have the operation and management ability needed for performing their responsibilities, and have obtained the qualifications for holding a position verified by the CIRC before taking up their position.244 Individual insurance agents, practitioners of insurance agencies and practitioners of insurance brokers shall meet the qualifications provided by the CIRC and obtain qualifications issued by the CIRC.245 An insurance agency or an insurance broker shall have its own business premises, and maintain separate accounting records solely for recording revenues and expenses in connection with the agency or the brokerage business.246 An insurance agency or an insurance broker shall pay deposits or take out professional liability insurance according to the provisions of the CIRC. Insurance agencies or insurance brokers may not use the deposit without the approval of the CIRC.247

240  Ibid, art. 118. 241  CIRC Provisions on the Supervision and Administration of Loss Adjusters (2015 Amendment), art. 2. 242  The Insurance Law, art. 119. 243  Ibid, art. 120. 244  Ibid, art. 121. 245  Ibid, art. 122. 246  Ibid, art. 123. 247  Ibid, art. 124.

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3.6.3 Business operation An individual insurance agent, in conducting a life insurance agency business, shall not accept entrustment of more than two insurers concurrently.248 In entrusting an insurance agent to conduct insurance business, an insurer shall sign an agency agreement with the insurance agent to provide for the rights and obligations of the parties according to law.249 An insurer shall be liable for the acts of its insurance agents when they transact insurance business on behalf of the insurer in accordance with the delegated authority. Where an insurance agent enters into a contract in the name of an insurer, while the agent has no authority of agency or acts beyond the scope of the authority, or his authority of agency ceases, in such a way that the proposer has reason to believe that the agent has authority, the act of agency is effective. The insurer may pursue the insurance agent for liabilities of ultra vires acts according to law.250 An insurance broker shall be liable for loss and damage caused to the proposer or the insured due to its fault.251 Parties to insurance activities may entrust independent assessment agencies duly established such as an insurance adjusting firm or persons with related professional expertise to carry out adjustments and assessments of loss and damage resulting from the occurrence of the insured events. Institutions and persons entrusted to adjust and assess loss and damage resulting from the occurrence of the insured events shall carry out adjustment and assessment legally, independently, objectively and fairly; no unit or individual shall intervene therewith. An institution or the person shall be liable for any damage or loss caused to the insurer or the insured intentionally or negligently.252 Insurance commissions may only be paid to the insurance agents and insurance brokers with lawful qualifications and may not be paid to others.253 3.6.4 Acts prohibited by the Insurance Law In handling insurance business, insurance agents and insurance brokers and their practitioners are not allowed to conduct any of the following acts in the course of conducting business:254 (1) cheating the insurers, the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts; (3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under the Insurance Law or inducing them not to fulfil such an obligation;

248  Ibid, art. 125. 249  Ibid, art. 126. 250  Ibid, art. 127. 251  Ibid, art. 128. 252  Ibid, art. 129 253  Ibid, art. 130. 254  Ibid, art. 131.

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(4) giving or promising any interests other than those provided for in the contracts to the proposers, the insureds or the beneficiaries; (5) using their administrative power, position or the advantage of their profession or any other illicit means to force, induce or restrict the insured to sign insurance contracts; (6) forging or altering an insurance contract arbitrarily, or providing false certification materials to the parties to an insurance contract; (7) diverting, retaining or encroaching on premiums or insurance benefits; (8) seeking illegitimate gains for other organisations or individuals by taking advantage of the business; (9) defrauding the insurer of insurance benefits by colluding with the proposers, the insureds or the beneficiaries; or (10) divulging the business secrets of the proposers or the insured so that they become known in their business activities. 3.6.5 Regulation of insurance agencies The regulation of insurance intermediaries described above shows how the intermediaries are regulated under the Insurance Law. The detailed rules for regulating the activities of the intermediaries are formulated by the CIRC. It is appropriate to take a look at how an insurance agency is regulated by the CIRC under the Provisions on the Supervision and Administration of Full-Time Insurance Agencies (2015 Amendment) (hereinafter, the Agency Provisions 2015). The Agency Provisions 2015 consist of 92 articles in seven chapters: general provisions, market access, operational rules, market exit, supervisory inspection, legal liabilities and supplemental provisions. Under the Agency Provisions 2015, full-time insurance agencies means institutions which engage in the insurance business on behalf of insurance companies as authorised by insurance companies and collect commissions from insurance companies, including full-time corporate insurance agencies and their branches. For a full-time corporate insurance agency to be formed within the territory of China, it must satisfy the qualification requirements prescribed by the CIRC and obtain an insurance agency business permit. (a) Market access (I) FORMATION OF AN INSURANCE AGENCY Except as otherwise specified by the CIRC, a full-time insurance agency shall adopt either of the following forms of organisation: (1) limited liability company or (2) joint-stock limited company.255 For the formation of a full-time corporate insurance agency, the following conditions shall be met: (1) its shareholders or promoters are of good credit standing and have no record of any major violation of laws in the last three years; (2) its registered capital reaches the minimum amount specified in the Company Law

255 The Supervision and Administration of Full-Time Insurance Agencies (2015 Amendment), art. 5.

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and the Agency Provisions 2015; (3) its bylaws are in compliance with the relevant provisions; (4) its chair of the board of directors or executive director and senior executives satisfy the office qualifications as set out in the Agency Provisions 2015; (5) it has a sound organisational structure and adequate and effective management rules; (6) it has a fixed domicile suitable for its scale of business; (7) it has business, financial and other computer software and hardware facilities suitable for its business development; (8) other conditions as set out in laws, administrative regulations and the provisions issued by the CIRC.256 The minimum registered capital of a full-time corporate insurance agency to be formed shall be ¥50 million, except as otherwise specified by the CIRC. The registered capital of a full-time corporate insurance agency must be paid-up monetary capital.257 The branch offices of a full-time corporate insurance agency shall include branches and business departments. To form a branch office, a full-time corporate insurance agency shall meet the following conditions:258 (1) its internal control rules are adequate and effective; (2) its registered capital satisfies the requirements of the Agency Provisions 2015; (3) its existing organisational structure is in normal operation, and it has committed no major violation of laws in the last year; (4) the proposed primary person in charge satisfies the office qualifications as set out in the Agency Provisions 2015; (5) the branch office to be formed has business premises satisfying the prescribed requirements and other facilities related to its operations. After receiving an application for formation of a full-time corporate insurance agency, the CIRC may alert the applicant to risks and conduct interviews on issues related to the formation, to learn the market development strategy, business development plan, development of internal control rules, personnel structure and other relevant matters of the company to be formed.259 The CIRC may, as needed, organise an on-site check. After approving the formation of a full-time corporate insurance agency according to the law, the CIRC shall issue a permit to the applicant. Only after receiving the permit may the applicant engage in the insurance agency business.260 Under any of the following circumstances, a full-time insurance agency shall report to the CIRC in writing within five days of the occurrence thereof:261(1) modification of the name of the agency or any branch office thereof; (2) change of the domicile of the agency or the business premises of any branch office thereof; (3) change of the name of any promoter or principal shareholder of the agency; (4) change of any principal shareholder of the agency; (5) modification of the registered capital of the agency; (6) material modification of the equity structure of the agency; (7) modification of the form of organisation of the agency; (8) division or combination of the agency; (9) amendment of the company bylaws; or (10) formation or abolition of any branch office of the agency.

256  Ibid, art. 6. 257  Ibid, art. 7. 258  Ibid, art. 11. 259  Ibid, art. 12. 260  Ibid, art. 13. 261  Ibid, art. 14.

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Where any modification of a full-time corporate insurance agency involves any matter recorded in the permit, it shall surrender the original permit, obtain a new one and issue an announcement in accordance with the relevant provisions of the Measures for the Administration of Insurance Permits.262 The permit of a full-time corporate insurance agency shall be valid for three years, and a full-time corporate insurance agency shall apply to the CIRC for renewal 30 days before its permit expires. Where a full-time corporate insurance agency applies for renewal of its permit, the CIRC shall, before the expiration of the permit, comprehensively review and assess the full-time corporate insurance agency’s operations in the last three years and make a decision to approve or disapprove the renewal. In the case of disapproval, it shall provide a written explanation of the reasons for the disapproval. The full-time corporate insurance agency shall surrender the original permit to the CIRC within 10 days of receiving the decision, or in the case of approval, obtain a new permit.263 (II) OFFICE QUALIFICATION For the purposes of the Agency Provisions 2015, “senior executive” of a full-time insurance agency means the following person:264 (1) the general manager, a deputy general manager or an executive with the same power of a full-time corporate insurance agency; or (2) the primary person in charge of a branch office of a full-time corporate insurance agency. The proposed chair of the board of directors or executive director and senior executives of a full-time insurance agency shall meet the following conditions and be subject to the confirmation of the CIRC:265 (1) having an educational background of junior college or above; (2) having two years or more of work experience in economics; (3) having the management capability required for performing his or her duties and being familiar with insurance laws and administrative regulations and the relevant provisions issued by the CIRC; (4) being honest and trustworthy and having good conduct; and (5) other conditions as set out by the CIRC. One with 10 years or more of financial work experience may be exempt from the condition in item (1) above. A person who falls under any of the circumstances as set out in art. 146 of the Company Law or falls under any of the following circumstances shall not serve as the chair of the board of directors or executive director or a senior executive of a full-time insurance agency:266 (1) a person who, as a former director, supervisor or senior executive of an insurance company or insurance intermediary institution and whose permit has been revoked for any violation of laws, was personally liable or was directly liable as a leader for the revocation of permit, and it has not been more than three years since the date of revocation; (2) a person who, as a former director, supervisor or senior executive of a financial institution, has been disqualified from the office by the financial regulatory authority for his or her violation of

262  Ibid, art. 15. 263  Ibid, art. 16. 264  Ibid, art. 17. 265  Ibid, art. 18. 266  Ibid, art. 19.

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laws or discipline, and it has not been more than five years since the disqualification; (3) a person who has been prohibited from access to the financial sector during a certain period as decided by the financial regulatory authority, and the period has not expired; (4) it has not been more than two years since the person was issued a warning or fined by the financial regulatory authority; (5) a person who is under investigation by the judicial authority, the disciplinary inspection and supervision department, or the financial regulatory authority; and (6) other circumstances as set out by the CIRC. Without the consent of the shareholders’ meeting, a director or senior executive of a full-time insurance agency may not concurrently hold any position in an institution with any conflict of interest.267 To apply to the CIRC for the confirmation of satisfaction of office qualifications for the chair of the board of directors or executive director and senior executives, a full-time insurance agency shall honestly complete an application form and submit the relevant materials. The CIRC may investigate or interview the proposed chair of the board of directors or executive director and senior executives of a full-time insurance agency.268 Where the chair of the board of directors or executive director or a senior executive of a full-time insurance agency is transferred to or holds concurrently any post at the same or a lower level within the agency, reconfirmation of his or her satisfaction of office qualifications is not required. Where a full-time insurance agency removes the chair of the board of directors or executive director or a senior executive from the office or consents to his or her resignation, he or she shall be automatically disqualified from the office. The appointment or removal of the chair of the board of directors or executive director or a senior executive by a full-time insurance agency shall be reported to the CIRC in writing within five days after the decision is made.269 Where the chair of the board of directors or executive director or a senior executive of a full-time insurance agency is prosecuted for any suspected economic crime, the full-time insurance agency shall submit a written report to the CIRC within five days after the prosecution is instituted and within five days after the case is closed.270 Where a full-time insurance agency appoints anyone as the temporary person in charge under special circumstances, it shall submit a written report to the CIRC within five days after the appointment decision is made. The term of office of the temporary person in charge shall not exceed three months.271 (b) Operation rules (I) GENERAL RULES A full-time corporate insurance agency shall put its permit in a conspicuous position in its domicile or business premises. A branch office of a full-time corporate insurance agency shall put a photocopy (bearing the official seal of the corporate body

267  Ibid, art. 20. 268  Ibid, art. 21. 269  Ibid, art. 22. 270  Ibid, art. 23. 271  Ibid, art. 24.

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owning the branch office) of the permit of the company and its business licence in a conspicuous position in its business premises.272 A full-time insurance agency may engage in the following insurance agency business:273(1) selling insurance products as an agent; (2) collecting insurance premiums as an agent; (3) conducting damage survey and claim settlement for the relevant insurance business as an agent; or (4) other business approved by the CIRC. To engage in the insurance agency business in a province, autonomous region or municipality directly under the Central Government other than its place of registration, a full-time corporate insurance agency shall form branch offices. The business territory of a branch office of a full-time corporate insurance agency shall not be beyond the province, autonomous region or municipality directly under the Central Government where it is located.274 The practitioners of a full-time insurance agency shall meet the conditions as set out by the CIRC. For the purposes of the Agency Provisions 2015, “insurance agency practitioner” means an employee of a full-time insurance agency who engages in the sale of insurance products, damage surveys, claim settlement or other relevant business.275 A full-time insurance agency shall provide its practitioners with training on insurance law and insurance business and education on professional ethics. The pre-job training received by an insurance agency practitioner shall not be less than 80 hours, and an insurance agency practitioner shall receive on-the-job training and education every year for not less than 36 hours accumulatively, including not less than 12 hours of training on legal knowledge and education on professional ethics.276 A full-time insurance agency shall establish special account books to record the revenues and expenditures in the insurance agency business. A full-time insurance agency which collects insurance premiums as an agent shall open an independent premium agent account to conduct settlement.277 A full-time insurance agency shall establish complete and standardised business archives, including the following at a minimum:278 (1) basic information on the insurance policies sold as an agent, including but not limited to the names of insurers, insurance applicants and the insured, the names of products, insured amounts, premiums and methods of payment; (2) information on the collection of insurance premiums as an agent and delivery of collected premiums to insurance companies represented; (3) information on the amounts of insurance agency commissions and the collection thereof; and (4) other important business information. The records of a full-time insurance agency shall be true and complete. A full-time insurance agency shall properly manage and use the various documents and materials provided by the insurance companies represented, and submit

272  Ibid, art. 25. 273  Ibid, art. 26. 274  Ibid, art. 27. 275  Ibid, art. 28. 276  Ibid, art. 29. 277  Ibid, art. 30. 278  Ibid, art. 31.

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the remaining documents and materials to the insurance companies represented within 30 days after the end of the agency relationship.279 To engage in the insurance agency business, a full-time insurance agency shall enter into a written agency contract with an insurance company represented, agreeing on the rights and obligations of both parties and other relevant matters. An agency contract may not violate laws, administrative regulations or the provisions issued by the CIRC.280 A full-time insurance agency shall prepare a standard client notification letter and present it to clients in conducting business. The client notification letter shall, at a minimum, include the basic information on the full-time insurance agency and the insurance company represented, such as the names, business premises, scope of business and contact methods thereof. If there is any affiliation between the fulltime insurance agency or its director or senior executive and the insurance company represented or the relevant insurance intermediary institution, it shall be explained in the client notification letter.281 A full-time insurance agency shall clearly alert an insurance applicant to the clauses in the insurance contract regarding the liability exemptions or exceptions, surrender, deduction of other expenses, cash value and cooling-off period, among others.282 A full-time corporate insurance agency shall take out professional liability insurance or deposit a bond within 20 days of obtaining a permit. A full-time corporate insurance agency shall, within 10 days of taking out professional liability insurance or depositing a bond, submit to the CIRC a photocopy of the professional liability insurance policy or a photocopy of the bond deposit agreement and a photocopy of the original voucher of deposit of the bond.283 A full-time corporate insurance agency which takes out professional liability insurance shall ensure the continuing validity of the insurance. The limit of liability for each accident under the professional liability insurance policy owned by a fulltime corporate insurance agency shall not be less than ¥1 million, and the cumulative liability limits under a one-year policy shall not be less than ¥5 million and not be less than two times the full-time insurance agency’s operating revenue in the prior year. If the cumulative liability limits under professional liability insurance reach ¥50 million, further increase in the liability limits under professional liability insurance is not required.284 A full-time corporate insurance agency which deposits a bond shall deposit the bond at 5% of its registered capital; if it increases its registered capital, it shall increase the amount of the bond accordingly; but if the amount of the bond deposited reaches ¥1 million, further increase in the bond is not required. The bond of a full-time corporate insurance agency shall be deposited in the form of a bank deposit

279  Ibid, art. 32. 280  Ibid, art. 33. 281  Ibid, art. 34. 282  Ibid, art. 35. 283  Ibid, art. 36. 284  Ibid, art. 37.

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or any other form recognised by the CIRC. If the bond is deposited in the form of a bank deposit, it shall be deposited in a special account in a commercial bank.285 Under any of the following circumstances, a full-time corporate insurance agency may use the bond: (1) its registered capital is reduced; (2) its permit is cancelled; (3) it takes out professional liability insurance meeting the prescribed conditions; (4) other circumstances as set out by the CIRC. Within five days of using the bond, a full-time corporate insurance agency shall report it to the CIRC in writing.286 (II) PROHIBITED CONDUCT No full-time corporate insurance agency may forge, alter, lease out, lend or transfer its permit.287 The scope of business of a full-time insurance agency may not exceed the scope as specified in art. 26 of the Agency Provisions 2015.288 The insurance agency business conducted by a full-time insurance agency shall not exceed the scope of business and the business territory of the insurance company represented, except insurance agency business involving co-insurance outside its business territory, insurance underwritten outside its business territory, or master policies as otherwise specified by the CIRC.289 In conducting the insurance agency business, a full-time insurance agency and its practitioners may not deceive insurance applicants, the insured, beneficiaries or insurance companies by the following means:290 (1) concealing or fabricating any important information related to the insurance contract; (2) conducting any misleading sale; (3) forging or modifying without permission the insurance contract, selling false insurance documents or providing false certifications to the parties to the insurance contract; (4) obstructing an insurance applicant from performing or inducing any insurance applicant not to perform the obligation of telling the truth; (5) fraudulently obtaining commissions by fabricating any insurance agency business or surrender; (6) conducting any false claim settlement; (7) fraudulently obtaining a claim payment by colluding with any insurance applicant, insured or beneficiary; or (8) otherwise deceiving an insurance applicant, insured, beneficiary or insurance company. In conducting the insurance agency business, a full-time insurance agency and its practitioners may not:291 (1) force or induce an insurance applicant to enter into or restrict an insurance applicant from entering into an insurance contract or restrict the normal operations of any other insurance intermediary institution, by taking advantage of administrative power, shareholder privileges, or professional advantage or by any other improper means; (2) misappropriate, intercept or encroach on insurance premiums, surrender values or claim payments; (3) provide or promise to provide any insurance company or employee thereof, insurance applicant, insured or beneficiary with any benefit not under the contract; (4) seek improper benefits for

285  Ibid, art. 38. 286  Ibid, art. 39. 287  Ibid, art. 40. 288  Ibid, art. 41. 289  Ibid, art. 42. 290  Ibid, art. 43. 291  Ibid, art. 44.

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any other institution or individual by taking advantage of its business; or (5) divulge any trade secret or individual privacy of an insurance applicant, insured, beneficiary or insurance company known in its operations. A full-time insurance agency may not (1) damage the goodwill of competitors by fabrication or spreading false facts, nor disrupt the insurance market order by false advertisements, false publicity or any other act of unfair competition;292 (2) conduct insurance agency transactions with any institution or individual which illegally engages in the insurance business or insurance intermediary business;293 (3) withhold commissions from the insurance premiums collected;294 (4) enter into insurance contracts on behalf of insurance applicants;295 or (5) recruit practitioners on condition of their payment of fees or purchase of insurance products, may not promise unreasonably high returns and may not use the number of directly or indirectly recruited persons or sale performance as the main basis for computing the remuneration of practitioners.296 (c) Supervisory inspection A full-time insurance agency shall, according to the relevant provisions issued by the CIRC, submit the relevant reports, statements, documents and materials in a timely, accurate and complete manner, and submit the relevant electronic texts as required by the CIRC. The statements, reports and materials submitted by a full-time insurance agency shall bear the signature of the legal representative or the primary person in charge or a person authorised by him or her and the seal of the agency.297 A full-time insurance agency shall properly preserve its business archives, account books, business ledgers, original vouchers of the commission revenue and other relevant materials for not less than five years if the duration of insurance is not more than one year and for not less than 10 years if the duration of insurance is longer than one year, starting from the day when the insurance contract is terminated.298 A full-time insurance agency shall, according to the relevant provisions, pay the regulatory fees into an account designated by the CIRC.299 A full-time corporate insurance agency shall, within three months after the end of each accounting year, engage an accounting firm to audit its financial situation including but not limited to its assets, liabilities and profits, and submit the relevant audit report to the CIRC. The CIRC may, as needed, require a full-time corporate insurance agency to submit a specific external audit report.300 The CIRC may, as needed for supervision, hold regulatory interviews with the chair of the board of directors or executive director and the senior executives of a

292  Ibid, art. 45. 293  Ibid, art. 46. 294  Ibid, art. 47. 295  Ibid, art. 48. 296  Ibid, art. 49. 297  Ibid, art. 56. 298  Ibid, art. 57. 299  Ibid, art. 58. 300  Ibid, art. 59.

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full-time insurance agency, requiring them to provide explanations on the major issues in operations.301 The CIRC shall conduct an on-site inspection of a full-time insurance agency according to the law, including but not limited to the following:302 (1) whether the formation or modification of the agency has been approved or whether the obligation to report the same has been performed according to the law; (2) whether its capital is true and adequate; (3) whether the set-aside and use of the bond is in compliance with the relevant provisions; (4) whether it complies with the provisions on professional liability insurance; (5) whether its operations are lawful; (6) whether it is in good financial condition; (7) whether the reports, statements and materials submitted to the CIRC are timely, complete and true; (8) whether its internal control rules are adequate and effectively implemented; (9) whether the appointment of its chair of the board of directors or executive director and senior executives complies with the relevant provisions; (10) whether it has effectively performed the duty of managing its practitioners; (11) whether its announcements are published in a timely and true manner; and (12) whether its computer equipment and information systems are in good operating condition. Where a full-time insurance agency is under investigation by the CIRC for any of the following reasons, the CIRC shall have the authority to order it to stop part or all of its business during the period of investigation:303 (1) it is suspected of any serious violation of insurance law or administrative regulation; (2) there is any major risk in its operations; or (3) it is unable to conduct normal operations. A full-time insurance agency shall, according to the following requirements, cooperate with the CIRC in an on-site inspection, and may not refuse or obstruct the supervisory inspection legally conducted by the CIRC:304 (1) it shall provide the relevant documents and materials as required, and may not delay the provision of or displace or conceal them; and (2) its relevant managers, financial staff members and practitioners shall appear on site to provide explanations and answer questions as required. A full-time insurance agency which falls under any of the following circumstances may be placed by the CIRC under priority inspection:305 (1) there are any abnormal changes in its operations or financial condition; (2) it fails to submit reports and statements on time or provides any false reports, statements, documents or materials; (3) it is suspected of any major violation of laws or has received any administrative punishment by the CIRC; or (4) other circumstances under which the CIRC deems priority inspection necessary. In the process of an on-site inspection, the CIRC may engage an accounting firm and other private intermediary institutions to provide the relevant services, and if so, shall enter into written engagement agreements with them. The CIRC shall inform the inspected full-time insurance agency of the engagement.306

301  Ibid, art. 60. 302  Ibid, art. 61. 303  Ibid, art. 62. 304  Ibid, art. 63. 305  Ibid, art. 64. 306  Ibid, art. 65.

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A full-time insurance agency which believes that an inspector has violated any law or administrative regulation or the relevant provisions issued by the CIRC may report it or submit a complaint to the CIRC. A full-time insurance agency shall have the right to apply for administrative reconsideration or institute administrative litigation against the administrative disposition measure taken by the CIRC.307 3.7 Regulation of Internet insurance In recent years, the Internet insurance business has been developing very rapidly in China. In order to regulate Internet insurance business operations and protect the lawful rights and interests of insurance consumers, and to promote the sound development of the Internet insurance business, the CIRC has recently enacted the Interim Measures for the Supervision of the Internet Insurance Business (the Measures 2015).308 The Measures 2015 specify the basic requirements of participating in Internet insurance business, including the qualifications of entities to participate in Internet insurance business, operation criteria, geographic scope of Internet insurance business, self-operated Internet platforms and third party Internet platforms, information disclosure and CIRC supervisory rules. For the purpose of the Measures 2015, “Internet insurance business” means the business under which insurance institutions309 conclude insurance contracts and provide insurance services via self-operated network platforms,310 and third party network platforms,311 among others, by relying on the Internet, mobile communications and other technologies.312 When conducting Internet insurance business, insurance institutions shall abide by laws, administrative regulations and the relevant provisions of the Measures 2015, and shall not damage the lawful rights and interests of insurance consumers and the public interest. Insurance institutions shall scientifically evaluate their risk management and control capability and customer service capability, and rationally determine insurance products appropriate for Internet operations and the sales 307  Ibid, art. 66. 308 The Interim Measures for the Supervision of the Internet Insurance Business (the Measures 2015) came into force on 1 October 2015 and will remain effective for a period of three years. With the implementation of the Measures 2015, the former Supervisory Measures on Internet Insurance Business of Insurance Agencies and Brokers (Trial), which had been effective since 1 January 2012, were superseded on 1 October 2015. Bao Jian Fa [2015] No. 69, see accessed in April 2016. 309 “Insurance institutions” means insurance companies and specialised insurance intermediary institutions formed with the approval of insurance regulatory authorities and registered in accordance with the law. “Specialised insurance intermediary institutions” means specialised insurance agency companies, insurance brokerage companies and insurance assessment institutions which conduct business operations in the areas not limited to provinces, autonomous regions, and municipalities directly under the Central Government where they are registered. 310 “Self-operated network platforms” means network platforms established by insurance institutions in accordance with the law. 311 “Third-party network platforms” means the network platforms providing auxiliary services of network technical support for insurance consumers and insurance institutions in Internet insurance business activities, excluding self-operated network platforms. 312  The Measures 2015, art. 1.

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areas thereof. If they cannot guarantee customer service quality or risk management and control, they shall make adjustments in a timely manner. Insurance institutions shall ensure that Internet insurance consumers enjoy insurance services such as insurance purchase and claim settlement that are not less than those from any other business channel, and guarantee the safety of insurance transaction information and consumer information.313 Insurance institutions shall manage and take charge of insurance operations of the Internet insurance business, including sales, underwriting, claim settlement, surrender, handling of complaints, and customer services. Whoever engages in the aforesaid insurance business through a third party network platform shall have obtained the qualification to engage in the insurance business.314 The head office of an insurance institution shall establish a uniform and centralised business platform and processing flow to conduct centralised operation and uniform management of the Internet insurance business. Except for insurance companies and specialised insurance intermediary institutions as set out in art. 1 of the Measures 2015, no other institution or individual may engage in the Internet insurance business. The employees of insurance institutions shall not conduct the Internet insurance business in their own name.315 A self-operated network platform through which an insurance institution conducts the Internet insurance business shall meet the following conditions: (1) it has an information management system supporting Internet insurance business operations, realises the real-time seamless connection with the core business systems of the insurance institution, and ensures effective separation from any other internal application system of the insurance institution, so as to avoid the transmission and spread of information safety risks inside and outside the insurance institution; (2) it has a complete Internet information safety management system covering firewall, invasion detection, data encryption and disaster recovery, among others; (3) it has a licence issued by the competent Internet industry department or has completed registration of the website at the competent Internet industry department, and its place of website access is within the territory of the People’s Republic of China; (4) it has a special department that manages the Internet insurance business, and has the corresponding professionals; (5) it has complete management rules and operating procedures for the Internet insurance business; (6) Internet insurance business salespersons shall comply with the relevant provisions of the CIRC; and (7) other conditions as required by the CIRC.316 Where an insurance institution conducts the Internet insurance business through a third party network platform, the third party network platform shall meet the following conditions: (1) it has a licence issued by the competent Internet industry department or has completed registration of the website at the competent Internet industry department, and its place of website access is within the territory of the People’s Republic of China; (2) it has a safe and reliable Internet operation system and information safety management system, and realises effective separation from 313  Ibid, art. 2. 314  Ibid, art. 3. 315  Ibid, art. 4. 316  Ibid, art. 5.

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any application system of the insurance institution, so as to avoid the transmission and spread of information safety risks inside and outside the insurance institution; (3) it is able to provide the personal identity information, contact information, account information, operation track of insurance purchase, and other information on the insurance applicant, the insured and the beneficiary required for conducting the insurance business of the insurance institution in a complete, accurate and timely manner; (4) it has not been given any serious administrative punishment by the competent Internet industry department, the administrative department for industry and commerce or any other government department in the past two years, and has not been included by the CIRC in the list of entities subject to cooperation prohibition in the insurance sector; and (5) other conditions as required by the CIRC. Where the third party network platform fails to meet the aforesaid conditions, the insurance institution shall not cooperate with it in conducting Internet insurance business.317 Where an insurance company has the corresponding internal control management capability and is able to satisfy the demand for customer services, it may expand the areas where it conducts Internet insurance business operations of the following insurance products to provinces, autonomous regions and municipalities directly under the Central Government where it has not formed branch offices: (1) personal accidental injury insurance, term life insurance and ordinary whole life insurance; (2) household property insurance, liability insurance, credit insurance and guarantee insurance in which the insurance applicant or the insured is an individual; (3) property insurance business in which whole-process services for sales, underwriting and claim settlement can be realised through the Internet in an independent and complete manner; and (4) other insurance products as prescribed by the CIRC.318 The CIRC may, in light of the actual circumstances, adjust the scope of the aforesaid insurance products that may be operated in the provinces, autonomous regions and municipalities directly under the Central Government where no branch office has been formed and publish them. Where an insurance company has not formed a branch office in a province, autonomous region or municipality directly under the Central Government where the insurance applicant, the insured, the beneficiary or the subject matter of insurance is located, the relevant insurance institution shall, at the time of sale, give a specific reminder on possible problems such as inefficient services without timeliness, require the insurance applicant to make a confirmation, and retain the confirmation records. The business scope within which and the operation area where a specialised insurance intermediary institution conducts an Internet insurance business shall be consistent with those of the insurance company that provides the corresponding underwriting services.319 An insurance institution that conducts Internet insurance business shall not make false statements, unilaterally publicise or exaggerate previous performance, promise

317  Ibid, art. 6. 318  Ibid, art. 7. 319 Ibid.

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benefits or assumption of losses in violation of any regulation, or make any other misleading statement.320 In addition to meeting the information disclosure requirements for offline business, an insurance company involved in an Internet insurance business shall also disclose information as follows: (1) in the information disclosure section on its official website – disclosing the name and address of the website on which the Internet insurance business is operating, information about Internet insurance products, a list of branch companies, access to customer services and the complaints procedure; (2) on the online platforms – listing and disclosing the information of the relevant insurance products and services in a prominent position; (3) on the webpage concerning a specific product – setting out the product name, the product approval or filing number, policy wording and premium rates (or links to such information), the policyholder’s duty of disclosure and consequences of non-disclosure, the sales area of the product etc.321 An insurance intermediary who engages in an Internet insurance business shall disclose its operational licence issued by the CIRC, information on its business licence, and the scope and contents of the authorisation from the principal insurance companies. A third party online platform shall also disclose the information of the insurance institutions that it cooperates with in a prominent place and make it clear that the insurance services are provided by insurance institutions.322 According to the CIRC, in 2014, Internet insurance grew with fast momentum in China. There were 94 insurers conducting Internet insurance business, which contributed premium income of ¥87.08 billion, which was 1.7 times that of 2013. Internet insurance was sold by insurers directly on their e-commerce websites, through the websites of Internet insurance brokers and agencies, on third party platforms or by professional Internet insurers. Internet insurance achieved very eye-catching growth throughout the year as there were so many forms of conducting this business. For instance, on an Online Shopping Day in 2014, over 187 million product-return insurance policies were sold, a world record for the transactions of a single insurance product in a single day. The premium income of product-return insurance was over ¥100 million on that day. Zhongan Online (a professional Internet insurer) developed nearly 50 insurance products, achieved premium income of nearly ¥800 million with total insured amount of ¥1.94 billion, and realised profits in its first year of business in 2014.323 It is anticipated that the CIRC may modify the Measures 2015 or release further detailed rules after the implementation period of the Measures (i.e. up to 30 September 2018) to keep pace with the fast-changing Internet world.

320  Ibid, art. 8. 321  Ibid, art. 9. 322 Ibid. 323  Annual Report of the Chinese Insurance Market 2015 by the CIRC, p.58.

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3.8 The protection of insurance consumers 3.8.1 Insurance protection fund The major statutory scheme for the protection of the policyholders of an insurer which has become insolvent is the insurance protection fund. The Insurance Law requires insurers to make contributions to an insurance protection fund, which is managed as a pool, and applied through overall planning in the following circumstances: (1) providing relief to the proposers, the insureds or the beneficiaries where an insurance company is revoked or declared bankrupt; (2) providing relief to the insurance companies that take over the life insurance contracts from the insurance company which has been revoked or declared bankrupt; or (3) other circumstances as provided for by the State Council. The specific management rules for raising, managing and using the insurance protection fund shall be formulated by the State Council.324 In accordance with this requirement of the Insurance Law, for the purposes of regulating the raising, management and use of the insurance protection fund, and protecting the legitimate rights and interests of the policyholders, the Measures for the Administration of the Insurance Protection Fund were jointly formulated by the CIRC, the Ministry of Finance and the People’s Bank of China and came into force on 11 September 2008.325 The Measures contain 36 articles in seven chapters: general provisions, Insurance Protection Fund Company, the raising of the insurance protection fund, the use of the insurance protection fund, administration and supervision, legal liabilities and supplementary provisions. The “insurance protection fund” refers to the non-governmental industry risks relief fund, which is founded on payments in accordance with the Insurance Law and the provisions of the Measures, and used for assisting policyholders and companies with ceded policies, or for handling the risks of the insurance industry under the circumstances specified by art. 16 of the Measures.326 The insurance protection fund is divided into the property insurance protection fund and the life insurance protection fund. The property insurance protection fund is founded on payments from the property insurance companies. The life insurance protection fund is founded on payments from the life insurance companies.327 The wholly state-owned China’s Insurance Protection Fund Co. Ltd (hereinafter, the Insurance Protection Fund Company) has been set up to be responsible for the raising, management and use of the insurance protection fund according to the laws. The Insurance Protection Fund Company operates independently in accordance with the laws, and its board of directors are responsible for the legitimate use and security of the insurance protection fund.328

324  The Insurance Law, art. 100. 325  Order of the CIRC [2008] No. 2, see accessed in April 2016. The 2004 version of the Measures for the Administration of Insurance Protection Fund was repealed. 326  Ibid, art. 3. 327  Ibid, art. 4. 328  Ibid, art. 6.

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(a) The Insurance Protection Fund Company The Insurance Protection Fund Company shall establish and improve the company’s governing structure, internal control system and risk management system according to the laws, operate under the laws and conduct independent accounting.329 The Insurance Protection Fund Company conducts the following: (1) raising, managing and operating the insurance protection fund; (2) monitoring the risks of the insurance industry, namely, putting forward proposals on supervisory disposal to the CIRC when it finds that there is a major risk in the operation and management of an insurance company, which could possibly endanger the policyholders and the insurance industry; (3) offering relief to the policyholders and the companies with ceded policies or other individuals and institutions, or participating in the risk disposal of the insurance industry; (4) participating in the liquidation of an insurance company when the company is revoked or goes bankrupt according to the laws; (5) managing and handling the compensation assets; and (6) other business authorised by the State Council. In the event the Insurance Protection Fund Company puts forward proposals on supervisory disposal to the CIRC according to the provisions of item (2), it shall timely submit a copy of the relevant situations to the Ministry of Finance and the People’s Bank of China.330 The Insurance Protection Fund Company sets up a board of directors, and the members of the board are recommended by the CIRC, the Ministry of Finance, the People’s Bank of China, the State Administration of Taxation, and the Legislative Affairs Office of the State Council. The chair of the board is the legal representative of the company, who is recommended by the CIRC and approved by the State Council. The Insurance Protection Fund Company establishes the relevant organisational structure and improves the governing of the company according to the Company Law.331 For purposes of assisting the policyholders and the companies with ceded policies in accordance with the laws, and handling the insurance risks, the Insurance Protection Fund Company may, after the financing plans are formulated by the CIRC upon deliberation with the relevant departments and approved by the State Council, take various forms of financing.332 (b) The raising of the insurance protection fund The insurance protection fund is raised from the following sources: (1) the payments of the insurance companies in China in accordance with the requirement of laws; (2) the repayment income acquired by the Insurance Protection Fund Company from the liquidation assets of an insurance company that is revoked or declared bankrupt; (3) donations; (4) the income from the investment of the capital from the above income; and (5) other legitimate income.333 An insurance company shall pay the insurance protection fund for its property or life insurance business according to the following proportions.The insurance business

329  Ibid, art. 7. 330  Ibid, art. 8. 331  Ibid, art. 9. 332  Ibid, art. 10. 333  Ibid, art. 13.

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for which the insurance protection fund has been paid falls within the scope of relief by the fund. (1) An insurer pays 0.8% of its premium income for non-investment types of property insurance, 0.08% of its business income334 for investment types of property insurance with guaranteed income, or 0.05% of its business income for investment types of property insurance without guaranteed income. (2) An insurer pays 0.15% of its business income for life insurance with guaranteed income, or 0.05% of its business income for life insurance without guaranteed income. (3) An insurer pays 0.8% of its premium income for short-term health insurance or 0.15% of its premium income for long-term health insurance. And (4) An insurer pays 0.8% of its premium income for non-investment types of accident insurance, 0.08% of its business income for investment types of accident insurance with guaranteed income, or 0.05% of its business income for investment types of accident insurance without guaranteed income. An insurance company is required to pay, in a timely manner and sufficiently, the insurance protection fund into the special account for the insurance protection fund; however, if the insurer is under any of the following circumstances, its payment of the insurance protection fund can be suspended: (1) in the event the insurance protection fund surplus of a property insurance company, comprehensive reinsurance company or property reinsurance company amounts to 6% of its total assets; or (2) in the event the insurance protection fund surplus of a life insurance company amounts to 1% of its total assets. Where the insurance protection fund surplus of an insurer reduces or its total assets increase and thus the proportion of the insurance protection fund to the total assets cannot satisfy the requirements as provided for by the preceding two cases, its payment of the insurance protection fund shall be automatically resumed. The insurance protection fund surplus of an insurance company equals the accumulatively paid insurance protection fund plus the apportioned investment income minus the various expenses.335 (c) The use of the insurance protection fund Article16 of the Measures for the Administration of the Insurance Protection Fund sets out the circumstances under which the insurance protection fund can be used: (1) the liquidation assets of an insurance company that is revoked or declared bankrupt are insufficient to pay for the policy-related benefits; and (2) the CIRC together with other government departments has determined that an insurance company has serious risks which may seriously endanger social and public interests and financial stability. Where the insurance protection fund is to be used, it is the CIRC’s duty to work out a plan of how to deal with risks and how to use the fund, consult with relevant parties and report to the State Council for approval. The Insurance Protection Fund Company is responsible, in accordance with the approved plan and relevant provisions of the Measures for the Administration of the Insurance Protection Fund, for dispensing the fund.336 334  Business income means the total amount paid by proposers for purchasing the relevant insurance products. 335  Order of the CIRC [2008] No. 2, art. 15. 336  Ibid, art. 17.

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The Insurance Protection Fund Company shall manage and use the fund for property insurance and for life insurance separately. The property insurance protection fund is only used for providing relief to the property insurance policyholders, as well as for the use for risk disposal of property insurers in the case of serious risk under art. 16(2) of the Measures. The life insurance protection fund is used for providing relief to the life insurance policyholders and to the life insurers who accept life insurance contracts from the insolvent life insurer, as well as for the use for risk disposal of life insurers in the case of serious risk under art. 16(2) of the Measures.337 In case an insurance company is revoked or declared bankrupt, and its liquidation properties are insufficient for paying the policy-related benefits, the insurance protection fund shall offer relief to the policyholders of non-life insurance contracts in accordance with the following principles: (1) policyholders’ losses that are no more than ¥50,000 will be fully covered by the insurance protection fund; and (2) for individual policyholders, in the case of losses in excess of ¥50,000, the insurance protection fund will cover 90% of the extra part; for corporate policyholders, in the case of losses in excess of ¥50,000, the insurance protection fund will cover 80% of the extra part. The policyholders’ losses as mentioned in the preceding sentence refer to the balance between the policyholders’ policy-related benefits and the compensation recovered from the liquidation properties.338 In case a life insurance company is revoked or declared bankrupt, its life insurance contracts shall be transferred to another life insurance company. If it cannot reach an assignment agreement with another life insurance company, the CIRC will designate a life insurance company to take over the said life insurance contracts.339 In case the liquidation assets of an insurance company that is revoked or declared bankrupt are insufficient to reimburse the policy-related benefits under life insurance contracts, the insurance protection fund shall offer relief to the companies with ceded policies in accordance with the following principles: (1) for individual policyholders, relief from the policy-related benefits after the transfer shall not exceed 90% of policy-related benefits prior to the transfer; and (2) for corporate policyholders, relief from the policy-related benefits after the transfer shall be no more than 80% of policy-related benefits prior to the transfer.340 3.8.2 Take-over of certain insurance companies by the CIRC Where there are any of the following circumstances with respect to an insurance company the CIRC may take over the company: (1) the solvency of the company is seriously inadequate; or (2) the company is violating the provisions of the Insurance Law and hindering the social and public interest so that its solvency may be seriously threatened or has already been threatened. The debtor–creditor relationships of the insurance company taken over do not change as a result of the take-over.341 The composition of the take-over task force and the take-over procedures shall be

337  Ibid, art. 18. 338  Ibid, art. 19. 339  Ibid, art. 20. 340  Ibid, art. 21. 341  The Insurance Law 2015, art. 144.

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determined and publicised by the CIRC.342 When the term of take-over is to expire, the CIRC may decide to extend it. However, the maximum term of take-over may not exceed two years.343 In the event that a life insurance company is revoked or declared bankrupt, all of the life insurance contracts and reserves held by it must be transferred to other life insurance companies; where no agreement in respect of such transfer can be reached with other insurance companies, the CIRC shall designate life insurance companies to accept such transfer.344 3.8.3 Other measures for protection of insurance consumers In November 2014, the CIRC released Opinions on Strengthening the Protection of Insurance Consumers’ Interests.345 It is the first policy document issued by a financial regulator in China to set comprehensive and detailed guidance on consumer protection for the whole industry. The Opinions set out a number of measures for the insurers to follow in order to improve protection of insurance consumers: (1) to formulate insurance clauses and premium rates fairly and reasonably; (2) to regulate sales practice and activities; (3) to handle and pay claims fairly and promptly; (4) to promote quality of insurance services; (5) to safeguard the safety of consumers’ information; (6) to disclose information relating to insurance products and insurance services; (7) to increase transparency with regard to matters for insurance consumer protection; (8) to severely punish behaviours which harm consumers’ legitimate rights and interests; (9) to improve the mechanism in respect of consumers’ complaint handling; and (10) to enhance consumers’ knowledge of insurance and risk consciousness. In April 2011, the Insurance Consumer Interests Protection Bureau was established by the CIRC in order to improve insurance consumers’ protection. The first hotline (telephone number: 12378) was set up in April 2012, to provide an efficient channel for insurance consumers to make complaints about insurance services and to report unlawful activities or behaviour in the insurance market.346 3.9 The Insurance Association of China The Insurance Law provides that “An insurance company shall join the insurance industry association. An insurance agent, insurance broker or insurance adjusting firm may join the insurance industry association. The insurance association is a self-regulatory organisation of the insurance industry and is a social organisation with legal person status.”347

342  Ibid, art. 145. 343  Ibid, art. 146. 344  Ibid, art. 92. 345  Bao Jian Fa [2014] No. 89, see accessed in April 2016. 346 See accessed in May 2016. 347  The Insurance Law 2015, art. 180.

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The Insurance Association of China (IAC),348 established on 23 February 2001, is a national self-regulatory institution of insurance companies. As of 1 March 2016, the IAC has a total of 360 members, which include 11 group companies, 72 property insurance companies, 75 life insurance companies, 8 reinsurers, 13 asset management companies, 49 professional insurance brokers, 39 insurance assessment companies, 44 professional insurance agencies, 43 local insurance associations (including intermediary associations) and 16 insurance-related agencies. The IAC operates at the national level. The main function of the IAC is to assist the CIRC as an additional channel of regulatory control. The IAC has introduced model insurance policy wordings. The IAC represents the collective interests of China’s insurance industry, and speaks out on issues of common interest, helps to inform and participate in debates on public policy issues, and also acts as an advocate for high standards of customer service in the insurance industry. The IAC’s highest authority is the General Assembly of the Members. The Council is the executive organ of the General Assembly. The IAC implements a full-time presidential responsibility system. The president is responsible for the day-to-day work, assisted by the Secretary-General and the Deputy Secretary-General and other members of staff. The Council of the IAC has 15 professional committees: the property insurance committee, life insurance committee, insurance brokers and agencies committee, insurance adjusters committee, insurance marketing committee, corporate governance committee, legal matters committee, industry culture committee, education and training committee, information technology committee, statistics committee, the compliance committee, Internet insurance business committee, the local association committee and the anti-fraud committee. 3.10 Conclusion In China, insurance companies, insurance businesses and the insurance market are regulated by the Insurance Law, other relevant laws and regulations promulgated by the National People’s Congress and the State Council, and regulations and guidelines enacted by the CIRC. The CIRC, acting as the insurance supervision and regulation authority in China, has enacted a series of regulations, measures and notices to govern business operation, market competition, consumer protection and many other matters. As the insurance industry has been developing very fast, new situations are continuing to occur. The CIRC quickly responds to the market changes and enacts new rules in a timely manner.

348  See the website of IAC, accessed in April 2016.

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CHAPTER 4

Formation of an insurance contract

4.1 Introduction This chapter is concerned with matters of formation of an insurance contract in China from both legal and practical points of view and from perspectives of both traditional ways of formation and modern online formation of an insurance contract. The formalities for concluding an insurance contract and the role of an insurance agent in the formation of an insurance contract will be examined as well. The effectiveness of an insurance contract and the commencement of the insurer’s liability are very important issues, and are examined in more detail in this chapter. Some trouble spots in the process of formation of an insurance contract are also discussed. Making an insurance contract, similar to making other kinds of contract, requires offer, acceptance and agreement on material terms of the particular contract. In addition to examining the rules of offer and acceptance generally applicable to all contracts, certain variations created by insurance market practice will be explored. In order to create a binding contract, other requirements such as consideration and an intention to create legal relations must also be satisfied. Making an insurance contract, regardless of whether a commercial contract or a consumer contract, parties of the contract invariably have the intention to create a legal relationship; this element is automatically satisfied, so intention is not further considered in this chapter. Consideration in the insurance context refers to the payment of a premium by the proposer and the promise to underwrite risk by the insurer. Detailed discussion on premiums is given in Chapter 6, but a brief consideration of premiums is necessary in this chapter in order to discuss issues relating to payment of premiums with formation and effectiveness of an insurance contract as well as the commencement of the insurer’s liability. In this chapter, relevant provisions relating to formation of an insurance contract in the Insurance Law are examined. The Chinese Contract Law1 as a general law governing all contracts is referred to where matters are not covered by the Insurance Law. Rules in relation to formation of an insurance contract as provided in the Supreme People’s Court’s Interpretations on the Insurance Law are also considered.2

1  The Contract Law of the People’s Republic of China was enacted in 1999. 2  The Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China was passed by the Judgement Committee of the Supreme People’s Court on 6 May 2013 and became effective on 8 June 2013 (SPC Interpretation II, 2013).

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4.2 General principles for making an insurance contract 4.2.1 Terminologies It is convenient, before discussing the formation of an insurance contract, to explain some terminologies as defined in the Insurance Law. Insurance. The term “insurance” refers to a commercial insurance transaction whereby a proposer pays a premium to an insurer in accordance with a contract while the insurer assumes liability for payment of insurance moneys for property losses as a result of the occurrence of an event specified in the contract, or when the insured dies, becomes injured or disabled, falls ill or reaches the age or time limit as specified in the contract.3 Insurance Contract. “An insurance contract is an agreement whereby the insurance rights and obligations are agreed upon by the proposer and the insurer.”4 Proposer. “A proposer refers to a party who enters into an insurance contract with an insurer and bears the obligation to pay the premiums in accordance with the insurance contract.”5 Insurer. “Insurer means the insurance company which enters into an insurance contract with a proposer and assumes liability to make indemnity or pay insurance benefits.”6 Insured. “An insured refers to a party whose property or whose physical body is covered by insurance and who is entitled to make claims. A proposer may be the insured.”7 Insured subject matter. “The insured subject matter in personal insurance refers to the life or physical body of the insured. The insured subject matter in property insurance refers to property and its related interests.”8 4.2.2 General principles The Insurance Law establishes general principles for making an insurance contract. First, an insurance contract should be entered into through consultations by the contractual parties, and the parties’ rights and obligations should be allocated in line with the principle of fairness.9 Second, an insurance contract should be entered into on a voluntary basis, except those which have been made compulsory by laws and administrative regulations.10 This reflects the principle of freedom of contract between the parties of the insurance contract. For most types of insurance, it is the insured’s freedom to take out the insurance, and it is the insurer’s freedom to decide 3  The Insurance Law, art. 2. 4  Ibid, art. 10. 5 Ibid. 6 Ibid. 7  Ibid, art. 12. 8 Ibid. 9  Ibid, art. 11. 10  Ibid, art. 11(2). See also the State Council’s Regulation concerning the Amendment on Compulsory Motor Vehicle Transport Accident Liability Insurance Clauses (as effective on 1 May 2012), art. 2 of which provides: “The owner or manager of motor vehicles run on the road within the People’s Republic of China must take out motor vehicle traffic accident liability compulsory insurance in accordance with the Regulations of the People’s Republic of China Road Traffic Safety Law.”

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whether or not to accept the risk. However, there are some types of insurance which are compulsory; the proposer must take out and the insurer has to accept them, such as the Compulsory Motor Vehicle Accident Liability Insurance.11 Another type of compulsory liability insurance is the work-related injuries insurance under the State Council’s Regulation on Work-Related Injury Insurance.12 4.3 The usual steps for making an insurance contract The rules of offer and acceptance applicable to all contracts also apply to insurance contracts, subject to certain variations created by insurance market practice. Generally, the process of forming an insurance contract involves five steps: (1) initial contact between the insurer or its agents and the customers, and especially in life insurance, usually the insurer or its agents introduce different types of insurance to the customers face-to-face or on the telephone; (2) proposer’s offer by submitting proposal to the insurer or its agents; (3) issuance of temporary (or short-term) policy (for some types of insurance); (4) examination of the proposal and investigation of the application by the insurer; (5) communication of acceptance and delivery of the policy by the insurer. For the formation of a life insurance contract, the procedure is more complex because sometimes the life insured is required to undergo a medical examination. Some special steps for the formation of a life insurance contract will be considered in Chapter 20. 4.3.1 Initial contact between the insurer or his agents and the consumers13 In China, almost all insurance companies have marketing staff and insurance agents for sales of insurance products.14 The first step in the process of making an insurance contract is the initial contact between the insurer’s employees or its agents15 and the insurance consumers. The employees or agents often contact the consumers and introduce different types of insurance to the consumers and invite them to take out insurance. This step is known as an invitation to treat.16 If, after the initial contact, the consumer is interested in the insurance product, and wishes to effect a policy

11 Ibid. 12  Regulation on Work-Related Injury Insurance was promulgated by Order No. 375 of the State Council of the People’s Republic of China on 27 April 2003, and came into force on 1 January 2004. 13  In China, consumers refers to all potential insureds; the meaning is different from the consumers in English insurance law, which means individual insureds. 14  Matters on insurance agency are discussed in Chapter 3, section 3.6. 15  Insurance Law, art. 117 provides: “An insurance agent means an entity or an individual who is entrusted by and charges commissions from an insurer to transact insurance business on behalf of the insurer within the scope of the delegated authority.” There are different types of insurance agents in China’s insurance market, see Chapter 3, section 3.6. 16  Article 15 of the Contract Law stipulates: “an invitation to offer is a person’s declaration to have another person make him an offer. Delivered price list, public notices of auction and tender, prospectuses and commercial advertisements, etc. are invitations to offer.”

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with the insurer, the transaction will proceed to the second step: the submission of an application. The application form is also called a proposal form, which is a standard form prepared by the insurer in advance. The consumer, known as the proposer of the insurance, will complete the proposal form. The insurer’s employee or agent may help the proposer to fill in the form but the proposer must sign it personally.17 The employee or agent then takes the completed proposal form to the insurer for examination. The proposal form constitutes the offer which is waiting for acceptance by the insurer. In the following subsections, the general rules and variations governing an offer and acceptance of an insurance contract are examined. (a) Offer by the proposer What is an offer? The Contract Law defines it as follows: “An offer is a person’s declaration of intention to enter into a contract with another person. The declaration of intention shall conform to the following provisions: (1) its content is specific and definite, and (2) it indicates that the offeror will be bound by it upon acceptance by the offeree.”18 In the insurance context, usually it is the proposer who triggers the transaction.19 Article 13(1) of the Insurance Law provides: “An insurance contract shall be formed after a proposer has made an insurance offer and an insurer has agreed to accept such an offer.” It is generally the case that the offer is made by the proposer to the insurer, either by the completion of a proposal form or some similar documents.20 The proposer is required to answer a series of questions relating to the type of insurance sought by them. Among other things, the questions will usually seek information relating to the subject matter of the insurance, the personal circumstances and insurance history of the intending insured. With life and accident or health insurance, information will also be sought about the life insured’s health status and medical history.21 The proposer must provide correct information by truthfully answering the questions raised by the insurer in the proposal form.22 After completing the

17 CIRC “Notice on Certain Issues Concerning Regulating Life Insurance Business Behaviour” Order [2000] No. 133), art. 2(1) stipulates: “In life insurance, the proposal form and the health certificate and financial report and other documents indicating insurance intention and application for modification of the insurance contract, should be filled in by the proposer; if they are filled in by other persons, such as the employee or the agent of the insurer, the proposer must sign the documents, and it is not allowed that the documents are signed by other persons on behalf of the proposer.” 18  The Contract Law 1999, art. 13. 19  Generally, it is common practice in any insurance market that the proposer (or insured) makes an offer for an insurance contract, although there are some exceptional situations in which an insurer makes an offer. This will be discussed in detail later. 20 Proposal forms are standard mass-produced documents prepared by insurers in advance. The contents of the proposal form usually include names of the proposer and insured, type of risks, premium and insurance amount, information disclosed by the proposer and signature of the proposer and his declaration. 21  Almost all insurance companies, in their life insurance proposal forms, ask the question of whether the life insured has suffered or is suffering from certain diseases (a list of the diseases is provided in the proposal form); the proposer must give a truthful answer to the question. Detailed discussion on this point is given in Chapter 8. 22  The Insurance Law, art. 16 concerns the proposer’s duty of disclosure and representation.

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proposal form, the proposer usually submits it directly to the insurer or through the insurer’s agent. Sometimes the information provided by the proposer may cause the insurer to seek further information or to make independent enquiries before deciding whether to accept the offer. (I) TIME WHEN AN OFFER BECOMES EFFECTIVE The Insurance Law does not specify the time when an offer becomes effective. This can be governed by the Contract Law.23 By virtue of the Contract Law, the offer will become effective when it reaches the offeree.24 This rule also applies to an offer of an insurance contract – when the proposal form reaches the insurer, it becomes effective. When the proposal is submitted through the agent, the offer becomes effective when the proposal is transferred from the agent to the insurer unless the agent is authorised by the insurer to make a decision on behalf of the insurer on whether or not the proposal is acceptable. (II) WITHDRAWAL OF AN OFFER This matter is governed by the Contract Law, as the Insurance Law is silent on it. According to the Contract Law, an offer may be withdrawn if the withdrawal notice reaches the offeree before or at the same time as the offer arrives.25 An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.26 In practice, withdrawal of an offer rarely happens or is most unlikely to happen, because the proposer usually, after completing the proposal form, submits the form directly to the insurer or to the insurer’s agent, except if sending the proposal form by post.27 The Contract Law also allows an offer to be revoked. The notice of revocation of the offer must reach the offeree before he has dispatched an acceptance.28 Accordingly, a proposer may cancel his offer before the insurer has accepted it. Where the proposer revokes his offer, the proposal becomes invalid. Usually, a proposal may become invalid in the following situations:29 (1) the proposer revokes the offer before the insurer has accepted it; (2) the insurer refuses the offer and the notice reaches the proposer; (3) the offeree fails to make an acceptance within the time

23  In China, the Contract Law is a general law and the Insurance Law is a special law. If the general law (Contract Law) and special law (Insurance Law) are not consistent in certain aspects, the special law prevails. If the special law does not cover certain issues, the general law is applied to those issues. 24  See the Contract Law, art. 16. This is also the provision of the UN Convention on Contracts for the International Sale of Goods (Vienna Convention) 1980. Article 15(1) of the Vienna Convention provides: “An offer becomes effective when it reaches the offeree.” 25  The Contract Law, art. 17. 26 This rule is provided by art. 2.1.3(2) of the UNIDROIT Principles 2010. Although the Chinese Contract Law does not expressly provide it, it can be inferred from art. 17 of the Contract Law. See also Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002), p. 71. 27  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012), p. 89. 28  The Contract Law, art. 18. This rule is also recognised by international conventions. See art. 16(1) of the CISG (1980) and art. 2.1.3(2) of the UNIDROIT Principles of International Commercial Contracts 2010. 29  The Contract Law, art. 20.

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limit specified in the offer; or (4) the insurer has accepted the offer with material qualifications.30 (b) Acceptance by the insurer Due to the fact that the insurance contract is a standard form contract, for which the proposal forms and the policies are drafted by the insurer in advance,31 the process for making an insurance contract is simpler than that for making other contracts; not much negotiation is needed between the parties except some special types of insurance which involve huge amounts of insurance and very high risks. Because of the special characteristics of an insurance contract, in practice, when the insurer signs the proposal form or puts the stamp on the form, the offer is accepted by the insurer and the acceptance becomes effective immediately. As soon as the insurer has unconditionally accepted the offer on terms which do not differ from those proposed by the proposer, the contract is concluded.32 The time when the acceptance becomes effective is the time when the contract is concluded.33 So the issue of when the acceptance is effective is crucial to the formation of an insurance contract. Upon receiving the completed proposal form, the insurer will examine the application. Based on the information provided by the proposer,34 the insurer will decide whether or not he will take the risk and, if so, on what terms. If, after the examination of the proposal form, the insurer decides to assume the risk without qualification, he will sign the proposal form. The signing of the proposal form by the insurer constitutes the acceptance of the proposer’s application. However, in practice, it is not very easy to determine whether or not an insurer has accepted the offer.35 In many cases, both offer and acceptance are made and given, respectively, through the insurer’s agents. It is important that the agent who accepts the offer for the insurer should be the one authorised to make contracts on the insurer’s behalf. A purported

30 Where the insurer accepts an offer with major qualifications, it is a counter-offer, which will be discussed later. 31  Standard terms are clauses which are prepared in advance for general and repeated use by one party and which are not negotiated with the other party in concluding a contract. The other party of the contract cannot change the terms of the contract and what he can do is to take it or leave it (Contract Law, art. 39(2)). Standard terms thus have two defining characteristics. First they are prepared for general and repeated use. A contract term that is drafted for a particular transaction is not a standard term even though it is prepared by one party without negotiation with the other. Second, standard terms are not negotiated, but are formulated by one party and accepted in toto by the other. It is possible that the parties may negotiate over other non-standard terms of the contract, or the customer may even be allowed to choose between two or more alternative sets of standard terms. Yet as long as the content of the terms in question is fixed in advance and is not negotiable between the parties, they will fall within the definition of standard terms. This feature of standard terms typically indicates the lack of equal bargaining power between the parties and objectionable limitation on the freedom of contract of the weaker party, giving rise to the need for special regulation of standard terms. 32  Baoqing Wu, Explanations on Difficult Issues on Civil and Commercial Case Decisions by Supreme People’s Court’s Authorities and Judges (China Legal Publishing House 2011) p. 302. 33  The Insurance Law, art. 13; the Contract Law, art. 25. 34  A proposer is required by law to provide correct information by truthfully answering the questions raised by the insurer in the proposal form (art. 16 of the Insurance Law). This will be discussed in detail in Chapter 8. 35  Jing Wang, Insurance Cases, Rules of Judgement and Application of Law (The People’s Court Press 2003) p. 2.

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acceptance by someone without actual or ostensible authority to give it does not bind the insurer.36 The general rules as to acceptance of an insurance offer include: (1) the acceptance must be unconditional; (2) the acceptance must be communicated to the proposer; and (3) silence is not acceptance. (I) THE ACCEPTANCE MUST BE UNCONDITIONAL It is a general rule of the law of contract that the contents of the insurer’s acceptance must comply with those of the proposer’s offer. This rule obviously applies to an insurance contract. The insurer’s acceptance, whether it is by way of a letter of notification or issuing a policy, must be on the terms of the proposal. The insurer cannot effect a binding contract by purporting to accept an offer which is made on different terms. If the insurer’s acceptance substantially modifies the contents of the offer, it constitutes a new offer,37 commonly known as a counter-offer. However, if the acceptance does not substantially modify the contents of the offer, it shall be effective, and the contents of the contract shall be subject to those of the acceptance, except if rejected promptly by the offeror or indicated in the offer that an acceptance may not modify the offer at all.38 (II) COMMUNICATION OF ACCEPTANCE Whether an acceptance must be communicated to the offeror is an issue in the context of insurance law. For a general contract, according to the Contract Law, an acceptance must be communicated to the offeror by means of notice except if it is based on transaction practices or if the offer indicates that an acceptance may be made by performing an act.39 The acceptance becomes effective when the acceptance notice reaches the offeror.40 A contract is concluded when the acceptance becomes effective.41 Generally, this rule also applies to insurance contracts but with some variations. In practice, different insurers have different ways to make their acceptance. It is the customary practice that after the examination of the proposal form, the insurer will put its decision in the box of “Authorised Underwriter’s Remarks.” If the insurer agrees to take the risk, it will put the words of “agree to undertake the insurance” and sign the form. The signing of the proposal form with its remarks indicates the acceptance of the offer. Once the insurer has signed the proposal form, it will notify the proposer of its acceptance. Usually a written notice will be given and the proposer will sign a receipt when he receives the notice which is evidence

36 This is also the practice in the insurance market in England. See MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 2-015. 37  The Contract Law, art. 30. 38  Ibid, art. 31. 39 The Contract Law, art. 22 stipulates: “The acceptance shall be made by means of notice except that it is based on transaction practices or that the offer indicates that an acceptance may be made by performing an act.” 40  The Contract Law, art. 26 provides: “An acceptance becomes effective when its notice reaches the offeror. If an acceptance needn’t be notified, it becomes effective when an act of acceptance is performed in accordance with transaction practise or as required in the offer.” 41  The Contract Law, art. 25.

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that the insurer’s acceptance is communicated.42 The acceptance becomes effective when the proposal form is signed and dated by the authorised underwriter.43 The contract is formed when the acceptance becomes effective. The policy may be issued at the same time as the contract is concluded or afterwards. The later issuance of the policy does not affect the formation of the insurance contract. While some other insurance companies’ practice in terms of acceptance may be different, they do not give separate notice of acceptance to the proposer but notify the proposer of the acceptance through issuing and delivering a policy. In this case, the acceptance, the formation and the issuance of the policy take place at the same time.44 If an insurer makes its acceptance this way, the proposer should be informed in advance and be made aware in the application documents or in the policy that the insurer’s acceptance shall take the form of signing and sealing of a policy and that the insurance contract is concluded at the time when the policy is issued.45 (III) CAN SILENCE CONSTITUTE ACCEPTANCE? In China, neither the Insurance Law nor the Contract Law deals with the issue of whether or not silence may constitute acceptance. Under English law, general contractual principles dictate that mere silence by the insurer cannot amount to acceptance. Moreover, it is unlikely that an insurer who sits upon a proposal for an inordinate length of time will be stopped from denying the existence of an agreement.46 In fact, the question of whether silence can constitute acceptance is of particular significance in the insurance context; rules on this aspect should be provided in the Insurance Law, for there may be cases in which the insurer, having received a proposal, either fails to act on it or neglects to notify the proposer of a decision to accept it. Silence may cause harm to the insured. Nevertheless, it may be that silence will amount to acceptance where the insurer has imposed upon itself an obligation to notify the assured within a given period in the event of the proposal being rejected; in such a case, silence as a method of acceptance is not imposed but is freely proffered.47 (IV) INSURER’S DELAY IN RESPONDING TO THE PROPOSER’S APPLICATION During the period that the insurer has the application under consideration, the insured is at risk. In the absence of a temporary cover, the insured has no coverage. 42  Nowadays, many people use Twitter, so the insurer sometimes sends messages to the proposer to inform him that the insurer has accepted the proposal through Twitter. 43  See the Report of the Second Civil Division of the High People’s Court of Jiangsu Province on Investigation of Insurance Dispute Cases trial in the whole province. See also Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 106. 44  It is a customary practice in many insurance companies in China that the insurer’s acceptance takes the form of signing and sealing of a policy, such as the Ping An Insurance Company of China. This information was obtained through personal discussion with Mrs Xiaoling Zhang, the Deputy General Manager of Ping An Insurance Company of China, Qingdao Branch on 18 June 2014. See also Chengmiao Xu, Principles of the Insurance Law and Analysis on Difficult Cases (Law Press China 2011) p. 153. 45  See Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 106. 46  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 1-047. See also Felthouse v Bindley (1862) 11 CBNS 869. 47  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 1-047. See also New Hampshire Insurance Co. v MGN Ltd [1997] LRLR 24; Smith v Merchants’ Fire of New York [1925] 3 WWR 91.

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Due to the lack of statutory rules or regulation on this point in China, in practice it can happen that the insurer does not respond to the proposer’s application in a reasonable time. This can be illustrated by the following case. Here is a hypothetical case about the insurer’s negligence during the process of making an insurance contract. A manufacturer filled in a proposal form for taking out property insurance on its property and submitted the proposal form to the insurer on 20 January 2000. An employee of the insurer told the manufacturer that he would reply to the application soon. The employee investigated the manufacturer and discovered that the manufacturer did not meet the requirements of the insurer for that particular insurance. The employee should inform the proposer the result of the investigation in a timely manner. However, due to the fact that the Chinese New Year was close, the employee was very busy and forgot to inform the manufacturer that the insurer did not intend to insure the manufacturer. On 30 January 2000, a fire was caused in the factory by an explosion of fireworks stored in the warehouse next to the factory. During the time between 20 and 30 January, the manufacturer telephoned and faxed the insurer several times, but no reply had been received before the occurrence of the loss. The manufacturer claimed for the loss, but was turned down by the insurer on the ground that there was no contract concluded between them. It was very clear that the contract had not been formed. However, the issue was whether the insurer should be liable in this situation. There is no solution in the Insurance Law for this issue. According to Chinese Contract Law, if the contract was not concluded due to one party’s negligence, that party should be liable for the loss.48 In this case, the insurer did not answer the proposer’s application in a reasonable period, and the proposer was waiting for the insurer’s decision; if the insurer had informed the insured in a reasonable time, the insured would have turned to another insurer who might accept the risk, and the loss would have been covered by the other insurer. Due to the employee’s negligence, the loss was not covered by any insurer, and the insured must bear the loss itself. According to the Contract Law, the court would hold that the insurer is liable although there was no contract. However, this is a loophole in the law of insurance contracts which needs improvement in order to protect the consumer. The issue here is what period is a reasonable period in which the insurer must answer the proposer’s application. The Insurance Law does not impose a time limit within which the insurer must make a decision on whether or not it will take the risk after it has received the proposal form. This lacuna has caused many problems in practice, as the above case illustrated. The CIRC in 2010 published “Provisions of Basic Services of Life Insurance Business,”49 which provide some rules to regulate this matter in life insurance. Article 15 of the Provisions stipulates that “Where an insurance company agrees to take the insurance and considers that there is no need

48 The Contract Law, art. 42(3) provides: “The party shall be liable for damages if it is under one of the following circumstances in concluding a contract and thus causes losses to the other party: (1) disguising and pretending to conclude a contract, and negotiating in bad faith; (2) concealing deliberately the important facts relating to the conclusion of the contract or providing deliberately false information; (3) performing other acts which violate the principle of good faith.” 49  See the CIRC’s “Provisions of Basic Services of Life Insurance Business,” CIRC Order [2010] No. 4.

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for the insured to have a medical examination and survival survey is not necessary, he should prepare the documents of the contract and deliver them to the proposer within 15 working days from the date when he receives the application from the proposer.” This rule improves the situation where there is no law at all on this matter, but it does not govern non-life insurance business. It is submitted that the period specified in this provision is reasonable, and can be followed for property insurance. In the Macao Commercial Code, there is a provision that specifies a period of 15 days. Article 966(3) of the Macao Commercial Code provides that “In the case of individual insurance, of which the holder is an individual, 15 days after the reception of the insurance proposal, or on the expiration of the agreed period, if the insurer has not notified the proposer of its refusal of the proposal, or of the notice for necessary documents needed for assessment of the risk, including medical certificates, report of investigation for the risk or insurance subject matter, the contract is deemed as concluded based on the terms of the proposal.” 4.3.2 The issuance and delivery of the policy After the conclusion of the contract, the insurer should issue the policy or other insurance documents in a timely manner.50 The insurer will then deliver, usually by post but sometimes through its agent, the policy and other contract documents to the proposer. The date on which the contract becomes effective is usually fixed by the insurer in the policy. For instance, if the insurer accepts the offer on 12 December 2013, the date on which the policy becomes effective may be specified by the insurer as “0:00 hour” on 13 December 2013 to “12.00 hour” on 12 December 2014. 4.3.3 Counter-offer The insurer may simply accept the proposer’s application or may “accept” it with qualifications. In accordance with general principles, there is a binding contract as soon as the insurer has unconditionally accepted the offer on terms which do not differ from those proposed by the proposer.51 Accepting an offer with qualifications may in law amount to a new offer which is known as a counter-offer.52 The proposer is free to accept the counter-offer or reject it. The Insurance Law does not deal with matters of counter-offers. By virtue of the Contract Law, a reply from the offeree that contains material modifications to the terms of the offer is a counter-offer53 and terminates the original offer.54 A reply

50  The Insurance Law, art. 13(1). 51  Ibid, art. 13; the Contract Law, art. 25. 52  See the Contract Law, art. 30. It is provided: “The content of the acceptance shall accord with that of the offer. If the offeree makes material modification of the content of the offer, it is a new offer. The modification relating to the contract object, quality, quantity, price or remuneration, time or place or method of performance, liabilities for breach of contract and the settlement of disputes, etc., shall constitute the substantial modification of an offer.” The new offer is known as a counter-offer. See also Ling Bing, Contract Law in China (Sweet & Maxwell Asia 2002) pp. 75 and 79. 53  The Contract Law, art. 30. 54  Ibid, art. 20(4).

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from the offeree with non-material modification may, under certain conditions, be deemed to be a valid acceptance.55 Material modification (variation) refers to the modification of the subject matter of the contract, quantity, quality, price or remuneration, time of the performance, place or manner of performance, liability for breach of contract, means of dispute resolution and so on.56 In the insurance context, if a modification is made on any of material terms,57 such as the amount of the premium, the nature of the risk, including the subject matter of the insurance, and the duration of the risk, no contract is formed at that point even if the reply by the offeree is purported to be an acceptance.58 However, if the acceptance introduces only immaterial changes, art. 31 of the Contract Law applies; it says: “If an acceptance makes immaterial modification to the content of the offer, the acceptance is effective and the terms of the contract shall accord with those of the acceptance, unless the offeror expresses his objection in a timely manner or the offer indicates that the acceptance may not make any modification of the content of the offer.” 4.4 The time when a contract is concluded By virtue of the Insurance Law, “An insurance contract shall be formed after a proposer has made an insurance offer and an insurer has agreed to accept the offer.”59 An insurance contract is an agreement between a proposer and an insurer on the relationship of rights and obligations in respect of the insurance.60 Accordingly, an insurance contract is concluded when the parties have reached an agreement on the major terms of the contract. Assuming that all material terms have been agreed between insurer and proposer, the contract is formed as soon as the insurer has performed an unqualified act of acceptance.61 So the determination of when the insurer’s acceptance is effective becomes crucial for determining the time when the contract is concluded. As discussed above, different insurance companies have different practices. To summarise, the insurer’s acceptance may be evidenced through the following ways: the insurer may (1) sign or affix a seal on the proposal form; (2)

55  The Contract Law, art. 31 provides: “If the acceptance does not substantially modify the contents of the offer, it shall be effective, and the contents of the contract shall be subject to those of the acceptance, except as rejected promptly by the offeror or indicated in the offer that an acceptance may not modify the offer at all.” 56  The Contract Law, art. 30. 57  Material items which must be included in the insurance contract and are agreed upon by the parties are provided in the Insurance Law, art. 18. 58  Xiaoming Xi, New Insurance Law and Relevant Provisions – Understanding and Application (People’s Court Press 2010) p. 41. English Law has a similar approach. See J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 5.1.3. 59  The Insurance Law, art. 13(1). 60  Ibid, art. 10(1). 61  Ibid, art. 13. The Contract Law has a similar provision. Article 25 states: “A contract is established when the acceptance becomes effective.” The formation of an insurance contract does not require formalities, so as soon as the acceptance is made, the contract is concluded. Usually, an insurer accepts an offer by signing the proposal form submitted by the proposer; he may also do it by issuing a policy depending on the type of insurance.

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it may notify the proposer of its acceptance;62 or (3) it may issue a policy and deliver it to the proposer. An insurance contract is concluded when the insurer’s acceptance becomes effective. 4.5 Offer made by the insurer In some situations, the offer is made by an insurer. For example, for compulsory motor vehicle third party liability insurance, the insurer’s blank proposal form is an offer, the filling in of the proposal form by the proposer amounts to acceptance of the offer. The contract is formed as soon as the proposer has submitted the completed and signed proposal form to the insurer. For this type of insurance, the proposer is free to choose a particular insurer with whom an insurance contract will be concluded.63 Once the proposer fills in a proposal form and submits it to the chosen insurer, the insurer has to accept it.64 Another example where the insurer makes an offer is personal accident insurance against death or injury on aeroplane flights, on the train or on the bus. This kind of insurance policy can be purchased at any airport counter, in a railway station or bus station, by a person who is travelling by air, by train or by bus.65 This is a unilateral offer made by the insurer, the person accepts the offer simply by completing a form and providing the information required on the form. Once the person fills in and signs the form, the contract is concluded. In addition, for some renewals of insurance, where the insurer gives a renewal notice (without reservation of underwriting right) to the insured and invites him to renew the existing policy before it expires, the notice is an offer of the insurer. If the insured agrees to renew the policy, his reply is an acceptance to the insurer’s offer.66 4.6 Online formation of an insurance contract An online insurance business transaction is a paperless transaction which is carried out online. In recent years, with the rapid development of Internet technology, this form of insurance business transaction has been very popular in China.67 The CIRC has recently enacted the Interim Measures for the Supervision of the Internet Insurance Business, which came into force on 1 October 2015 and will remain effective

62 The insurer usually notifies the proposer of his acceptance through an individual agent who will send the insurer’s message of acceptance to the proposer. 63  Some scholars refer to the process for this type of insurance as “automatic process of formation of an insurance contract,” because the scope of proposers, the insurance subject matter, the amount of insurance, insurance period, premium rate, the scope of liability, methods of payment and the insurer all are stipulated by laws or regulations. See Xiaoming Xi, New Insurance Law and Relevant Provisions – Understanding and Application (People’s Court Press 2010) p. 41. 64  Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance, art. 10. 65  This type of insurance business is transacted by the insurer’s agent (airline company, railway company or bus company) on behalf of the insurer. This type of insurance agent is called a part-time (or side-line) insurance agent. 66 Yuquan Li and Zhihong Zhu, The Insurance Law – Law and Practice (2nd edn, Higher Education Press Beijing 2010) p. 112. 67  For detailed discussion, see Z. Jing, “Electronic Transaction of Insurance Business – ‘Self-Service Insurance e Card’ in China” [2014] 127 BILAJ 164.

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for a period of three years.68 The practice of online insurance business transactions is now governed by the CIRC’s Interim Measures and the Electronic Signature Law of the People’s Republic of China.69 On the same day when the Electronic Signature Law became effective (1 April 2005), the People’s Property Insurance Company of China issued the first electronic policy in China and the whole procedure of the transaction was completed online, which marked the beginning of online insurance business transactions in China’s insurance market.70 Since then, more and more insurance companies have employed this new form of insurance transaction.71 However, with the rapid development of online insurance business, some problems relating to online business activities have occurred, especially on the online formation of an insurance contract and the performance of the pre-contract duty of good faith. The former will be considered here, and the latter will be examined in Chapter 8. Generally, there are two types of online insurance business in China: direct insurance business transactions and “self-service insurance card” transactions. 4.6.1 Online direct insurance business transactions Like other online transactions, an online direct insurance business transaction is a form of transaction in which the whole procedure for the formation of an insurance contract is completed online. The application (the offer) for insurance by the proposer, the examination of the application and the acceptance by the insurer, the payment of the premium and the issue of the policy are all carried out online. Under this form of transaction, the insurer advertises its insurance products on its website to invite people to make offers; this is analogous to online advertisements of goods, and constitutes an invitation to treat. If a person, after visiting the insurer’s website, is interested in an insurance product advertised by the insurer, he can make an online application by filling in an e-proposal form following the procedure designed by the insurer and submitting it online.72 If the insurer, upon examining the proposal, agrees to accept the application, it will request the proposer to pay the

68  Bao Jian Fa [2015] No. 69, see accessed in April 2016. For more, see Chapter 3 of this book, section 3.7. 69 The Electronic Signature Law of the People’s Republic of China was promulgated on 28 August 2004, and became effective on 1 April 2005. This is the first e-commerce law that went into effect in China. It includes electric signature law as well as certificate authority regulation. By virtue of art. 1: “This Law is formulated in order to regulate electronic signatures, to establish the legal validity of electronic signatures, and to safeguard the lawful rights and interests of all relevant parties.” Article 2 provides that “For the purpose of this Law, the term ‘Electronic Signature’ refers to the data included and attached in data messages in electronic form used to identify the identity of the signatory and show that the signatory has recognised the contents therein. For purpose of this Law, the term ‘Data Message’ refers to the information created, sent, received or stored by means such as electron, optics, magnetism or similar means.” 70  Jing Wang, Insurance Cases, Rules of Judgement and Application of Laws (People’s Court Press 2013) p. 42. 71 Ibid. 72  To seek to avoid potential problems, the insurer should clearly set out the procedure to be followed for a binding insurance contract to come into existence so that customers have clear knowledge that the contract will not be concluded until that procedure is completed.

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premium. The proposer pays the premium online by providing the insurer with his bank details so that the premium can be transferred from the proposer’s account to the insurer’s account. After having received the premium, the insurer will issue an e-policy to the proposer.73 The contract is then concluded and becomes effective at the same time. The insurer begins to undertake risks in accordance with the agreements specified in the contract.74 4.6.2 “Self-service insurance card” transactions Like an online direct insurance transaction, an insurance card transaction is also a paperless transaction;75 the formation of an insurance contract is completed online without any paper document except the insurance card. It is called a “self-service insurance card” because it is a self-help transaction; the purchaser of the card or the card-holder76 needs to complete the online transaction himself.77 The “self-service insurance card” is an innovative way of selling and buying insurance, so it is worthwhile to discuss it in detail at this junction. The procedure for making an insurance contract by using an insurance card is simple. First, the insurer’s employees and/or its agents introduce the “self-service insurance card” to the customers face-to-face to invite them to buy the card. Any person who wants to take out insurance this way can buy a “self-service insurance card.”78 The card can also be sold on insurer’s websites,79 in a shop, a travel agency, a railway/bus station, an airport, a bank, a post office or other places. After purchasing the card, the purchaser must activate the card on the insurance company’s website80 following the procedure designed by the insurer. There are a card number and a PIN on the card. The purchaser of the card can visit the insurance company’s website to activate the card by inputting the card number and the PIN. He must do it following the online instructions provided by the insurance company. When the process of activation has been completed, an e-policy will

73  In the e-proposal form, the proposer is required to put his email address so that the e-policy can be sent to him through email. If no email address is provided, the policy will be sent to the proposer’s home address if required by the proposer. 74  Tian Yin and Zili Ren, Insurance Law Review (Law Press China 2012) p. 272. 75 For detailed discussion on “self-service insurance card” transactions, see Z. Jing, “Electronic Transaction of Insurance Business – ‘Self-Service Insurance e Card’ in China” [2014] 127 BILAJ 1. 76  Here the card-holder refers to the person who receives a “self-service insurance card” from the purchaser of the card as a gift. The card-holder has the right to activate the card on the insurer’s website. 77  He can also ask the insurer or the insurer’s agent to help him complete the transaction. 78 The insurance companies sell “self-service insurance cards” to any person who is 18 years old or over with full civil capacity and who is interested in an insurance card transaction. In recent years many insurance companies have opened insurance card businesses, such as the People’s Property Insurance Company of China, the People’s Life Insurance Company of China, Ping An Life Insurance Co. Ltd, Hua Xia Life Insurance Company, An Bang Insurance Company and Zi Jin Property Insurance Company and so on. 79 For example, the China Life Insurance Company’s website is accessed 10 May 2016; Ping An Life Insurance Company’s website is accessed 10 May 2016. 80  For example, the activating website of Ping An Insurance Company of China is accessed 10 May 2016.

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be produced which becomes effective immediately.81 Alternatively, the parties may determine a date on which the policy will become effective.82 This form of insurance transaction is designed specifically for some simple types of insurance such as household insurance and short-term personal accident insurance. The options include accident insurance for travel by air, public transport accident insurance and motor vehicle accident insurance, etc. The durations of insurance cover for different products vary from several days, several months, and half a year to one year.83 An insurance card transaction has many advantages. The insurer’s running costs are low; the premium is low; the procedure for making a contract is simple and quick. These advantages make this form of transaction popular.84 However, some legal issues have arisen and may continue to arise from selfservice card transactions. The most important issues are at what time the insurance is deemed concluded, who the proposer is for the contract where a person buys an insurance card as a gift and transfers it to a friend, and how the parties perform their duties of good faith in a card transaction.85 Completion of an insurance card transaction includes two stages: the first stage is buying an insurance card, and the second stage is activating the card online. So it is disputable at what stage the contract is deemed to be concluded. Because an insurance card can be transferred to another person, the person who buys the card and the person who activates the card may not be the same person, so there is no clear answer to the question of who is the proposer. Due to the lack of rules of law to govern such a transaction, different views on these issues have been expressed by academics, judges, legal practitioners and industry professionals, mainly on the following aspects. 4.6.3 When the contract is concluded under an insurance card transaction This is a controversial issue. The first view is that the insurance contract is concluded when the sale of the card transaction is completed. By this view, the person who pays the money to purchase the card is making an offer, and the insurer or its agent who receives the money and passes the card to the purchaser is accepting the

81  Some people suggest that the words “to register” should be used instead of the term “to activate” the card on the particular insurance company’s website, because the procedure of activating is in fact a procedure of registration. See Tian Yin and Zili Ren, Insurance Law Review (Law Press China 2012), p. 273. 82  For example, Ping An Insurance Company provides that the proposer may choose a date for the policy to be effective but the date must be on day six or later from the date when the proposer activated the card. The information is available on accessed 10 May 2016. 83  The shortest period is seven days and the longest is one year. The premium is relatively cheap and varies from ¥10 yuan, ¥50 yuan to ¥100 yuan. The highest insured amount can be up to ¥1,000,000 yuan. The premium and the insured amount are fixed. The information is available at accessed 30 May 2016. 84  It was said that since 2008 when the company began to run card transactions, more than 30 types of insurance products had been provided online by 2012; 500,000 people have been covered by these transactions; and a person spends only ¥100 yuan to buy a card, but may get ¥50,000 yuan payment upon the occurrence of the insured event, according to Jian Xu, the deputy manager of Hua Xia Life Insurance Co. Ltd, Jiangsu Branch, in the seminar on “China’s Electronic Policy – Law and Practice,” 9–10 June 2012 in Nanjing, Zhejiang Province, China. 85  This issue is discussed in Chapters 8 and 9.

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offer.86 In Mr Zhang and others v Huaxia Life Insurance Company Jiangsu Branch,87 Mr Zhang bought a “self-service insurance card” for accident insurance from the agent of Huaxia Insurance Company in October 2010. The insurance covered all family members of the proposer. The insured amount was ¥150,000 for personal injury or death, and ¥5,000 for medical treatment. The card was not activated in due course. On 20 October 2010, Mr Zhang and his wife were injured in a traffic accident, and his wife died in hospital during treatment. After the accident, on 30 October, Zhang asked the insurer’s agent to activate the card. The card had not expired, so it was successfully activated. However, Zhang’s claim was rejected by the insurer. The Nanjing Trial Court held that the insurance contract was concluded and entered into effect when the proposer paid the fee for buying the card and the insurer or its agent accepted the money. The insurer would begin to undertake liability from the time when the card was activated. Because the card was not activated when the insured event occurred, the insurer was not liable for the loss. Zhang appealed. The Nanjing Intermediate Court upheld the trial court’s decision but dealt with the dispute through mediation and asked the insurer to pay part of the insured amount to the proposer.88 Both parties accepted the Intermediate Court’s decision. From this case, it is clear that the courts held that in an insurance card transaction, the contract is concluded and becomes effective at the time of buying the card. The insurer begins undertaking the risk from the time when the card is activated and the e-policy is issued. The second view is that, in an insurance card transaction, the payment for the card can be regarded as the pre-paid premium and the insurance contract will be concluded at a later stage, that is, at the time when the insurance card is activated. At that time, the proposer, the insured and the insurance period are determined. The e-proposal form is filled in by the proposer, and the insurer accepts the risk if the requirements for the insurance are met, an e-policy is issued, and the contract is then concluded.89 By this view, an insurance contract cannot be concluded before the insurer agrees to take the risk. By virtue of art. 13 of the Insurance Law, an insurance contract is formed when the insurer accepts the offer made by the proposer. In a card transaction, the issue of an e-policy amounts to the insurer’s acceptance of the insurance. The e-policy can only be produced when the procedure for the insurance

86  Sha Yinhua, Insurance Law Review, edited by Tian Yin and Zili Ren (Law Press China 2012) p. 275. That is also the view of the Intermediate People’s Court of Gulou District of Nanjing City, Jiangsu Province. 87  This case was cited by Jiadong Xing in the book Insurance Law Review, edited by Tian Yin and Zili Ren (Law Press China 2012) p. 143. 88  In the Chinese judicial system, the courts have a function of mediation in settling civil disputes. So the case was eventually solved through mediation by Nanjing Intermediate Court, and the insurer paid ¥3,500 yuan to the insured. 89  See Jing Wang, Insurance Cases, Rules of Judgement and Application of Laws (People’s Court Press 2013) p. 43. See also Chengli Liu, judge of the Supreme People’s Court, expressing his view on the Seminar on “China’s Electronic Policy”, held on 9–10 June 2012, in Nanjing, China. See also Zhengqin Lu, who expressed his view at the same seminar.

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card activation is completed, so the contract is concluded at that time. The parties can also agree for the insurance to become effective on a certain date.90 In Mr Li v Life Insurance Co. Ltd,91 Mr Li bought a “self-service insurance card” in October 2011. He was seriously injured in March 2012, but by then he had not activated the card. The insurer rejected his claim on the ground that the insurance contract had not been formed and the policy had not become effective when the insurance event occurred. The court held that the card must be activated within the period specified on the card; beyond that period, the card would become invalid and could not be activated. The insured had not activated the card before the accident occurred, the insurance contract was not concluded, and the insurer therefore was not liable.92 The third view holds that two contracts are concluded in completing an insurance card transaction – one is the sale of card contract and the other is the insurance contract. When the person purchases the card, the sale contract is concluded. The insurance contract is concluded when the purchaser or the card-holder activates the card.93 The fourth view presumes that, in an insurance card transaction, the purchase of an insurance card is a preliminary contract94 which is formed at the time of the purchasing of the card with the purpose of making a main contract (the insurance contract) by activating the card. When the card is activated, the main contract is concluded.95 It is submitted that this view is more convincing and could essentially explain the nature and the characteristics of an insurance card transaction. Although a preliminary agreement has never been used in a traditional insurance transaction, it is submitted that the preliminary contract approach can well describe the nature and the purpose of buying an insurance card, that is, buying an insurance card is an arrangement for making an insurance contract by activating the card. Buying an insurance card is buying a right to submit an application for the insurance on the insurer’s website. It is the first step in making the main contract (the insurance contract). The payment for the card could be deemed to be deposit for making the formal insurance contract, and the insurer’s promise to enable the card-holder

90 The parties can agree on a fixed time at which the contract will become effective. The Insurance Law, art. 13(3) provides: “A lawfully formed insurance contract shall take effect upon its formation. The proposer and the insurer may attach conditions or a term for the contract to take effect.” 91  accessed 10 June 2014. 92 The card-holder must beware and not forget to activate the card in the specified time. It is also important that the insurer or his agent must tell the purchaser of the card to activate the card. If the insurer or his agent failed to tell the purchaser of the card about the activation, the question is who should be liable? Does the insurer or its agent have a duty to explain to the purchaser or to remind him, or should it be deemed that the purchaser is aware of the procedure? What is the duty of proof? Rules of law or regulations should be provided to govern these issues. 93 This view is expressed by Zili Ren in the seminar on “China Electronic Insurance Policy: Law and Practice” held on 9–10 June 2012 in Nanjing, China. This view was cited in the book Insurance Law Review, edited by Tian Yin and Zili Ren (Law Press China 2012) p. 275. 94  According to Black’s Law Dictionary, a preliminary contract is a contract, in which the parties agree to conclude another contract, i.e. the main contract. See also Macao Civil Code s. 404. 95  Zhang Xiuquan and Liu Xuesheng have the same opinion. They expressed their views at the seminar on “China Electronic Insurance Policy: Law and Practice” held 9–10 June 2012 in Nanjing Province, China. Their opinions were cited in the book Insurance Law Review, edited by Tian Yin and Zili Ren (Law Press China 2012) 274.

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to access the online system (by giving a card number and a PIN) for making the insurance contract is the consideration for the preliminary contract.96 4.6.4 Whether the card is returnable Another issue with the insurance card transaction is whether the card can be returned to the insurer if the card becomes invalid due to the card-holder’s failure to activate the card within the specified period. Some insurance cards contain a vague term that the card is non-returnable,97 but does not explain under what circumstances the card cannot be returned. The term seems to indicate that the card cannot be returned for any reason. It could be suggested that whether the non-returnable term is fair for the cardholder depends on different situations. If, for instance, the card is not activated within the specified period due to the card-holder’s own fault, it is reasonable to make the card non-returnable. However, it is submitted that the purchaser of the insurance card should be allowed to return the card in the following situations: (1) the purchaser of the card is not told by the seller (the insurer or its agent) that the card must be activated before it expires; (2) where the insurer rejects the application because the proposer does not meet the conditions of the insurance; or (3) if the proposer is not happy with the exclusion clauses and does not want to go ahead to complete the activation procedure.98 The purchaser of the card or the card-holder should be allowed to return the card if there is no fault on his part.99

96  In China, there is no legislation on preliminary contracts. The Supreme People’s Court (SPC) published its “Interpretation on the Questions concerning Applicable Law for Hearing Cases for Sales Contract Disputes” in 2012, No. 8. Article 2 of the Interpretation concerns elements of preliminary contracts for the formation of a sale of goods contract. From the SPC’s Interpretation, it is clear that the preliminary contract can be adopted in sale of goods cases. It is not clear whether it can be used in other areas, such as insurance transactions. 97  accessed 27 June 2014. 98  Xuesheng Liu raises the same issue and argues that if the view of “a preliminary contract and a main contract” is deemed as a good way to explain the insurance card transaction, a problem should be solved, namely whether the purchaser may return the card and get the money back in the following situations: (1) if the purchaser does not activate the card within the period specified on the card (i.e. whether the purchaser is bound to activate the card); (2) if the activation is not successful due to the fact that the proposer’s application is rejected by the insurer after the examination of the online proposal; (3) if the proposer does not want to take out the insurance after reading the terms of the policy, especially the exclusions, during the process of activating the card. See Tian Yin and Zili Ren, Insurance Law Review (Law Press China 2012) p. 275. 99  Xiaohua Xu, Manager of Internal Management Department of China Life Insurance Company, Jiangsu Province, pointed out that the proposer can return the card if it is not successfully activated online. Xu gave a talk at the seminar on “China’s Electronic Policy – Law and Practice”, held on 9–10 June 2012 in Nanjing, Zhejiang Province, China. His comment was cited in the book Insurance Law Review, edited by Tian Yin and Zili Ren (Law Press China 2012) p. 270.

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4.6.5 The determination of the proposer in an insurance card transaction A proposer is the person who enters into an insurance contract with the insurer. In most insurance card transactions, a person buys an insurance to insure himself, so the purchaser of the card is the proposer and also the insured of the insurance contract. However, sometimes a person may buy an insurance card as a gift and give it to a friend or other family members or give it to his employee as welfare, or buy an insurance card on behalf of another person. The person who receives the card (the card-holder) can activate it on the insurance company’s website.100 It is important to determine who the proposer is, because it relates to the performance of pre-contract duties by the proposer and also the insurer. The Insurance Law requires the proposer (not another person) to perform the duty of disclosure,101 and the insurer to explain the policy terms to the proposer (not to another person).102 This issue should be discussed in conjunction with the issue of when the insurance contract is deemed to be concluded. To determine who the proposer is, one must determine who enters into the contract with the insurer. In the insurance card transaction, identifying who is the proposer depends on when the contract is concluded – at the time of buying the card or of activating the card? It also depends on whether a person buys a card for himself or for another person. If the purchaser is also the person who activates the card (card-holder), he is of course the proposer; if they are different persons, the card-holder is the proposer. The policy terms and the exclusion clauses can be read online by the card-holder during the process of activating the card. During this process, both parties may perform their duties, namely, the insurer explains the terms to the proposer when the proposer reads the terms, and at the same time, the proposer answers the questions raised by the insurer online – he performs his duty of good faith by truthfully answering these questions. Electronic insurance business and insurance card transactions have become increasingly popular in China’s insurance market in recent years due to their advantages (simpler, quicker and cheaper) over the traditional type of insurance transactions. But the lack of legal rules to govern this kind of insurance activity gives rise to difficulties and many disputes in industrial and judicial practice. To keep pace with the rapid development of electronic insurance business and insurance card business, it is necessary to develop new legal rules to govern the contractual activities in order to facilitate healthy development of such business. 4.7 Agreement on essential terms of an insurance contract For a binding insurance contract, parties must reach an agreement on certain major terms. According to art. 18 of the Insurance Law, an insurance contract shall contain the following particulars: (1) name and address of the insurer;

100  If the purchaser buys an insurance card for another person or transfers the card to a friend as a gift, the person who receives the card (card-holder) should activate the card. 101  The Insurance Law art. 16. See Chapter 8 of this book for detailed discussion. 102  The Insurance Law art. 17. See Chapter 9 of this book for detailed discussion.

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(2) names and addresses of the proposer and the insured and, in the case of personal insurance, name and address of the beneficiary; (3) insured subject matter; (4) scope of cover and exclusions; (5) period of insurance and commencement of insurance liability; (6) sum insured; (7) premium and method of premium payment; (8) method of payment of indemnity or insurance benefits; (9) liabilities arising from breach of contract and resolution of disputes; and (10) the day, month and year of the signing of the contract. The insured and the insurer may agree on any other matters relating to the insurance. Among the above particulars, there are certain essential terms which must be agreed: the subject matter of the insurance; insurance liability and exclusions of insurance liabilities; duration of the insurance; the amount of the insurance (the maximum amount of payment by the insurer); and (5) the amount of the premium. (The premium is the consideration given by the insured in return for the insurer’s undertaking to cover the risks insured against in the policy of insurance.)

(1) (2) (3) (4)

4.7.1 Subject matter of insurance The subject matter of insurance refers to the object which is covered by the policy and to which the obligations and rights of an insurance contract point.103 According to the Insurance Law, in life and personal insurance, the insured subject matter is the life or physical body of the life insured,104 and in property insurance, the insured subject matter is the property itself or its related interests.105 The subject matter of insurance must be clearly described in an insurance contract. If the description of the subject matter is ambiguous, a lot of disputes may be caused in practice. For instance, in life insurance, it happens that the proposer puts “my wife” in the policy as the life insured or the beneficiary of the insurance.106 This term is very vague because it might be the situation that the proposer divorces his wife after the conclusion of the contract and remarries another woman, and when the insured event occurs his wife is not the same person as that mentioned in the policy. It is a difficult issue to be dealt with by the courts. The Insurance Law does not provide the legal consequences for this situation and does not render such a contract invalid. In order to avoid or reduce disputes on this point, the subject matter of insurance must be

103  See Xu Guojian and Lu Guoming, Insurance Law in China (CCH 2007) p. 109. 104  The Insurance Law, art. 12(3). 105  Ibid, art. 12(4). 106  See Z. Jing, “Beneficiaries in Life Insurance in Chinese Law and Practice,” [2013] 5 JBL 463; See also Li Baoming and Ju Weihong, “The problems about life insurance beneficiaries” (1998) 7 Insurance Studies 39.

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clearly described in the policy. The Insurance Law should provide consequences for the failure to do so. Under English law, if there is any ambiguity as to the subject matter of the insurance, there is no contract.107 American law has the same approach as that of the English law. Two American fire insurance decisions illustrate the rule.108 4.7.2 Insurance liability and exemptions of the liability Insurance liability refers to the insurer’s liability to make indemnity or to give proceeds to the insured or the beneficiaries upon the occurrence of an event insured against in accordance with the contract. In property insurance, the insurer is liable to indemnify the insured for the losses or damages to insured property as a result of the occurrence of an insured event agreed upon in the contract.109 In life insurance, the insurer is liable to pay insurance proceeds when the life insured dies, becomes injured or disabled, falls ill or reaches the age or time limit as specified in the contract.110 Insurance exemptions exclude the insurer’s liability for the events which are not covered in the policy. Insurance liabilities and exemptions must be clearly specified in the policy, because they define the basic obligations and exclusions of the insurer in the contract.111 4.7.3 Duration of insurance and the commencement of the insurer’s liability Duration of insurance is the time period during which the insurer bears the risks insured against. The insurer is only liable for insured events that occur during the insurance period. The duration of insurance is usually agreed by the parties in the contract. The commencement of the insurer’s liability refers to the time when the insurer begins to undertake liability for the insured events. Basically, the beginning of the insurance period and the commencement of the insurer’s liability are consistent unless the parties agree otherwise.112 The commencement and duration of the risk must be agreed in the contract.113 However, sometimes the commencement of the insurer’s liability is later than the beginning of the insurance period. For example, if the policy specifies that the duration of the insurance is from 26 January 2012 to 25 January 2013, but there is a term in the policy saying that the insurer shall begin to undertake liability when the proposer pays the premium. In this case, 107  One life assurance case illustrates the principle: Beach v Pearly Assurance Co. Ltd [1938] IAC Rep. (1938–49) 3. See also MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 2-008. 108  Mead v Westchester Fire Insurance Co., 3 Hun. 608 (NY Sup Ct, 1875). Where the proposal was to insure “my house” and the agent accepted the risk believing that the applicant referred to his previous residence, it was held that there was no contract. It is suggested that the details of the insured house must be put into the contract, because the insured might have two or more houses. 109  The Insurance Law, arts 2 and 10(3). 110  Ibid, arts 2 and 10(3). 111 For some examples of property insurance, see Property Insurance Clauses of China Ping An Property Insurance Company; Property Insurance Clauses of China Property Insurance Company; Property Insurance Clauses of Huatai Insurance Company. See also some life insurance clauses such as Life Insurance Clauses and Personal Accident Insurance Clauses of China Ping An Life Insurance Company; Life Insurance Clauses and Personal Accident Insurance Clauses of China Life Insurance Company. 112  For example, the parties may agree that the insurer will undertake the liability after the proposer has paid the premium. 113  The Insurance Law, art. 18(5).

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if the proposer pays the premium on 26 February 2012, the commencement of the insurer’s liability and the duration of the insurance do not start at the same time. However, in this situation, what time the insurance period expires is in issue. This issue will be discussed later. 4.7.4 Insured value and insured amount The insured value is the value of the subject matter of insurance upon which the insured amount shall be calculated. The value of the subject matter must be agreed by the proposer and the insurer, and specified in the policy.114 Where the insured loss occurs, the amount of payment shall be calculated on the basis of the insured value.115 The concept of insured value is applied particularly to property insurance contracts, and their subject matter can be measured by value. The insured amount is the maximum amount of the insurer’s liability agreed to in the insurance contract. The insured amount must not exceed the insured value, and any amount in excess of the insured value will be deemed invalid.116 Where the insured amount is less than the insured value, the insurer shall assume its liability for indemnity in proportion to the insured amount and the insured value unless otherwise specified in the contract.117 4.7.5 Insurance premium The insurance premium is the consideration paid by the proposer to the insurer in return for the insurer’s undertaking to cover the insured risks in an insurance policy. The amount of the premium and the methods and the time of payment of the premium must be provided in the contract.118 The premium can be paid in a lump sum or in instalments in accordance with the contract.119 The premium rate is usually formulated by an insurance company for its insurance products.120 For some types of insurance, the premium rate formulated by the company must be approved by the CIRC, and other types of insurance must be submitted to the CIRC for record purposes.121 Matters of premiums will be discussed in more detail in Chapter 6.

114  Ibid, art. 55(1). 115 Ibid. 116  Ibid, art. 55(3). 117  Ibid, art. 55(4). 118  Ibid, art. 18(7). 119  Ibid, art. 35. 120 The Insurance Law, art. 114 stipulates: “An insurance company shall, in accordance with the provision of the insurance supervision and regulation authority of the State Council, fairly and reasonably formulate insurance clauses and determine premium rates, and may not harm the lawful rights and interest of the proposer, the insured and the beneficiaries.” 121 The Insurance Law 2015, art. 135 provides that the insurance clauses and premium rates of the insurance products that concern the social public interests, the compulsory insurance products and the newly developed life insurance products shall be submitted to the CIRC for approval. The CIRC follows the principles of protecting social and public interest and preventing unfair competition in examination and approval. The insurance clauses and premium rates of other insurance products shall be filed with the CIRC. The specific rules for examination and approval and filing of insurance clauses and premium rates shall be formulated by the CIRC in accordance with art. 135 of the Insurance Law.

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4.8 Formality of conclusion of an insurance contract By virtue of art. 13 of the Insurance Law, an insurance contract is formed as soon as the proposer’s offer has been accepted by the insurer.122 The Insurance Law does not require any particular form for the conclusion of an insurance contract. However, art. 13 does not mention what possible format can be followed by the parties to make an insurance contract. Relevant provisions of the Contract Law can be referred to here in this aspect. Pursuant to art. 10 of the Contract Law,123 a contract may be made in writing, orally or in other forms. A contract shall be made in written form if the laws or administrative regulations mandate that the contract be made in writing. In order to make the Insurance Law clearer, art. 10 of the Contract Law could be incorporated into art. 13 of the Insurance Law. Accordingly, there is no special formality required for making an insurance contract. The SPC Interpretation III 2015 reflects the same rule and has an article concerning the formality of formation of a life insurance contract and the formality of obtaining the life insured’s consent. Article 1 provides: “Where the parties enter into a contract with death as the condition for recovering the insurance money, in accordance with art.34 of the Insurance Law, the insured may agree and approve the insured amount in writing, orally or in any other form when at the time of contract or ratifying his consent afterwards.” 4.9 The intermediary’s role in the formation of an insurance contract In China, intermediaries play a very important role in the insurance market.124 Many insurance contracts are concluded through agents or brokers. In 2014, insurance intermediaries contributed 79.8% of the total national insurance premium income, of which all full-time institutional intermediaries accounted for 7.3%, all the parttime agencies, 34.6% and individual agents, 37.9%.125 According to art. 117 of the Insurance Law, an insurance agent is an entity or an individual who is entrusted by and charges commissions from an insurer to transact insurance business on behalf of the insurer within the scope of the delegated authority. Article 118 of the Insurance Law defines an insurance broker as an entity which, based on the interests of the proposers, provides intermediary services to facilitate insurance contracting between proposers and insurers and receives commission according to law.

122 This is also the approach for making a marine insurance contract. The Maritime Code, art. 221 provides: “A contract of marine insurance comes into being after the insured puts forth a proposal for insurance and the insurer agrees to accept the proposal and the insurer and the insured agree on the terms and conditions of the insurance. The insurer shall issue to the insured an insurance policy or other certificate of insurance in time, and the contents of the contract shall be contained therein.” 123 The Contract Law, art. 10 provides: “A contract may be made in a writing, in an oral conversation, as well as in any other form. A contract shall be in writing if a relevant law or administrative regulation so requires. A contract shall be in writing if the parties have so agreed.” 124  According to the CIRC Annual Report of the Chinese Insurance Market 2015, as of the end of 2014, there were 2,546 full-time institutional intermediaries in China, of which there were 1,764 fulltime insurance agencies, 445 insurance brokers and 337 loss adjusters. There were 210,108 part-time agencies nationwide, including 179,061 from the financial sector, and 31,047 from other sectors. 125  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 44.

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A full-time insurance agency can engage in the business of selling insurance products as an agent; collecting insurance premiums as an agent; conducting damage surveys and claim settlements for the relevant insurance business as an agent; and other business approved by the CIRC.126 Individual insurance agents are more important than full-time insurance agencies in the insurance market; most of the insurance policies are sold by them, but they usually do not have insurers’ authorisation to conclude contracts. They help the proposers to fill in proposal forms and pass the completed forms to the insurers. When the insurers agree to underwrite the risks proposed, the individual agents will then deliver the insurance policies to the proposers. An insurer is liable for the acts of its insurance agents when they transact insurance business on behalf of the insurer in accordance with the delegated authority. Where an insurance agent enters into a contract in the name of an insurer, while the agent has no authority of agency or acts beyond the scope of the authority, or its authority of agency ceases, in such a way that the proposer has reason to believe that the agent has authority, the act of agency is effective. The insurer may pursue the insurance agent for liabilities for ultra vires acts according to law.127 An insurance broker is liable for loss and damage caused to the proposer or the insured due to its fault.128 4.10 Insurance documents Proposal form. A proposal form is a standard form document prepared by the insurer which is one of the most important documents required for an insurance contract. It needs to be completed and signed by the proposer for the formation of an insurance contract.129 A completed proposal form constitutes the offer of the proposer, which gives detailed information required by the insurer and helps the insurer to estimate the risk to be insured and hence enable it to decide whether or not to accept the risk and, if so, on what terms and conditions and what premium will be charged. An insurer issues a policy on the basis of information provided in a proposal form. Once the insurer accepts the offer, the proposal shall form part of the contract. Insurance policy. An insurance policy is a formal instrument which contains a contract of insurance. An insurance contract is a standard term contract and its clauses are drafted by the insurer in advance. Policy clauses for the main types of insurance such as property insurance or motor vehicle insurance must be submitted to CIRC for approval. An insurance contract may exist independently of a policy, but the insurer is required by law to issue a policy in a timely manner after the conclusion of an insurance contract.130

126 The Supervision and Administration of Full-Time Insurance Agencies (2015 Amendment), art. 26. 127  The Insurance Law, art. 127. 128  Ibid, art. 128. 129 The proposal form needs to be completed by the proposer who may seek the assistance of the insurer’s employee or agent to fill it in. The proposal form must be signed by the proposer. 130  The Insurance Law, art. 13(1).

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Certificate of insurance. There is no express provision in the Insurance Law or any CIRC regulation dealing expressly with a certificate of insurance. But the Insurance Law art. 13 mentions “other insurance certificates,” and provides that upon the formation of an insurance contract, the insurer should issue the policy or other insurance certificates to the proposer in a timely manner after the conclusion of the contract. The phrase “other certificates,” it is submitted, may include a certificate of insurance. A certificate of insurance is a document issued by an insurer which certifies that an insurance policy has been bought and provides verification of the insurance. It shows an abstract of the most important provisions of the specific insurance contract. A certificate usually contains information on types and limits of coverage, insurance company, policy number, named insured and the policy’s effective period, etc. But a certificate of insurance is not a substitute for the formal policy, and it is normally a non-negotiable document – it cannot be assigned to a third party, and is unacceptable under the terms of a letter of credit and in making a claim. In export practice, much use is made of an insurance certificate which, though lacking the legal characteristics of an insurance policy, nevertheless acknowledges that insurance cover has been obtained. In marine insurance (where cargo is insured against a floating insurance policy) a certificate of insurance serves to assure the consignee that insurance is in effect for the goods in transit and a proper policy will follow. The holder of a certificate of insurance is entitled to demand the issue of a policy on the terms of the certificate and to claim for losses.131 In a group life and health insurance plan, a certificate of insurance is issued to the members of a group insurance plan, evidencing their participation. The proper policy is kept by the group leader. Short-term (or temporary) policy. A short-term policy is similar to a temporary cover note. A cover note used to be used in China, but it is rarely used nowadays. A short-term policy is used instead. In practice, if the amount to be insured is large, negotiation is needed between the parties, or where the insurer needs to investigate the proposal or the insurer needs time to make the decision, the insurer usually issues a short-term policy which covers the risk temporarily until the time when the insurer decides to undertake the risk and issues the policy or rejects the risk. The effect of a short-term policy is equivalent to a formal policy. The insurer is obliged to pay if a loss occurs before a formal policy is issued. A short-term policy is used in the following situations for non-life insurance: (1) where the risk is huge and is beyond the right of decision-making of a branch of an insurance company, a short-term policy may be issued while the branch reports the risk to the head office for approval; (2) where the proposer and the insurer have agreed on the major terms of the contract, but some other terms need to be discussed by the parties; (3) for an export transaction, before the insurer has issued the policy, the exporter may use a cover note as an insurance document to arrange the settlement of exchange for his export transaction.132

131  See Yuquan Li, The Insurance Law – Law and Practice (2nd edn, Higher Education Press Beijing 2010) p. 111. 132  Ibid, p. 110.

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For life insurance in China, a receipt for a pre-paid premium is often used in which a term states that the insured is covered between the application for insurance and the acceptance of the application, and this term is regarded by some scholars as a temporary cover note.133 A cover note is also used for life insurance in the US.134 And it is commonly used for compulsory motor insurance in the UK.135 4.11 The effectiveness of the insurance contract Effectiveness of a contract is distinguished from the formation of a contract; they are different concepts. Formation of a contract means that after the negotiation through the process of offer and acceptance, the parties of the contract have reached an agreement on essential terms of the contract. It is primarily a question of factual determination whether the parties have declared the agreement.136 While the effectiveness of a contract means that the parties of the contract begin to perform their contractual duties,137 effectiveness of contract always presupposes the formation of the contract. This rule applies to insurance contracts as well. According to art. 13(3) of the Insurance Law, an insurance contract is formed after a proposer has made an insurance application and an insurer has agreed to underwrite the insurance business.138 Where the contract is concluded in accordance with law, it shall take effect upon its formation.139 The distinction between formation and effectiveness of an insurance contract may not have practical significance in many cases. The formation of a contract and its effectiveness often take place at the same time. If a contract complies with all the relevant legal requirements for the validity of a contract,140 the contract becomes effective immediately upon its formation, and the time when the contract is concluded is usually the time when it becomes effective. It does not mean that the contract shall always become effective and enforceable automatically and immediately after the conclusion. A contract, after being

133 In Zhong Youlai v China Pingan Insurance Company Huizhou Sub-branch, there is a declaration in a pre-paid premium receipt which states: “Where the Company receives the first sum of the premium, and confirms that the proposer/insured has completed the process of application required by the insurer to the time when the Company agrees to undertake the insurance and issues a policy (not longer than 30 days), if the insured dies as a result of the occurrence of an insurance event, the Company shall give insurance proceeds up to ¥200,000.” Some scholars regard this declaration as a temporary cover note. See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 84; see also Jing Wang, Insurance Cases – Rules of Judgement and Application of Laws (People’s Court Press 2013) p. 17. 134  Robert H. Jerry and Douglas R. Richmond, Understanding Insurance Law (5th edn, LexisNexis, 2012) p. 200; See also Malcolm A. Clarke, The Law of Insurance Contracts (6th edn, Informa 2010) para. 12-1C. 135  Robert Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 1-083. 136  Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 59. 137 Ibid. 138  The Insurance Law, art. 13(1). 139  Ibid, art. 13(3): “An insurance contract concluded according to law enters into effect at the time when it is concluded. The proposer and insurer may attach conditions or a term for the contract to take effect.” 140  Elements for an enforceable contract should be satisfied, such as the capacity of the parties, and this will be discussed shortly under the subsection of “validity of the contract.”

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concluded, becomes effective only if it satisfies the requirements of the statutory law or some agreements of the contract. The Insurance Law provides that a lawfully formed contract becomes effective when it is concluded.141 That means that where the conditions for forming a contract and the conditions for the effectiveness of the contract are met, the contract is formed and becomes effective immediately. The Insurance Law also allows the parties to attach additional conditions and the effective time relating to the effectiveness of a contract. The contract with entry-into-force conditions shall be effective when such conditions are accomplished.142 For example, the parties may agree that the payment of the premium would be a condition precedent for the contract to come into effect. The parties may agree on a conditional time period for the contract to come into force. A contract subject to an effective time period shall come into force when the time comes.143 For instance, the parties may agree that the policy will become effective from a specified time. The contract will not enter into effect until the time period expires. In summary, the following conditions must be met. First, a contract must be formed “in accordance with law.” This means that the contract must be one that satisfies the legal requirements for the validity of a contract. Second, the Insurance Law allows the parties to attach collateral conditions or a time period for the contract to take effect upon conclusion.144 Where collateral conditions are attached, the contract becomes effective only when such conditions are accomplished.145 Where the contract is attached with a conditional time period,146 the contract shall become effective when the period expires.147 4.12 Legal elements for the validity of an insurance contract As examined above, formation of contract is essentially a matter of the intention of the parties, and the effectiveness of a contract means that the concluded formed contract comes into force. The validity of a contract is primarily a matter of legal requirements. Several elements required by law may affect the validity of a contract, and these are also applied to an insurance contract. First, the parties shall have appropriate capacity for civil acts.148 Capacity is one of the essential elements for an insurance contract to come into force. The Insurance

141  The Insurance Law, art. 13(3). 142  Ibid, art. 13(3); the Contract Law, art. 45. 143  The Insurance Law, art. 13(3); the Contract Law, art. 46. 144  The Insurance Law, art. 13(3). See also the Contract Law, art. 46. 145 The Insurance Law, art. 13; the Contract Law, art. 45. For example, the contract shall become effective after the premium has been paid by the proposer. 146  The parties may fix a date on which the contract shall come into force. 147  The Contract Law, art. 46. 148  Article 58 of the General Principles of the Civil Law provides that “Civil acts in the following categories shall be null and void: (1) those performed by a person without capacity for civil conduct; (2) those that according to law may not be independently performed by a person with limited capacity for civil conduct; (3) those performed by a person against his true intentions as a result of cheating, coercion or exploitation of his unfavourable position by the other party;

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Law does not have an express provision on the capacity of the parties for making an insurance contract. According to the Contract Law, when concluding a contract, the parties shall have the appropriate capacity for civil rights and capacity for civil acts.149 Parties to a contract include natural persons, legal persons or other organisations.150 The same requirement should be applied to an insurance contract. The insurer must be a company or other organisation established by law or regulations or administrative orders;151 the proposer must be a legal person or an organisation or an individual who is at or above the age of 18 and has full civil capacity for civil acts.152 Second, the content of the contract must be lawful; an illegal insurance contract will never become valid. According to art. 52 of the Contract Law, a contract is void in one of the following situations: (1) where a party uses fraud or duress to conclude the contract, thereby harming the interests of the state; (2) where it involves malicious collusion to harm the interests of the state, a collective organisation or a third person; (3) where it conceals an illegal purpose in a lawful form; (4) where it violates the public interest; or (5) where it violates mandatory provisions of laws or administrative regulations. Third, the intention of the parties to make an insurance contract must be genuine. An insurance contract must be concluded by the parties on a voluntary basis, except those insurances made compulsory by laws and administrative regulations.153 A contract is void where it is concluded through duress, fraud, inducement or undue influence or mistake.154 Fourth, if the contract is concluded through an agent, the authority of the principal must be obtained by the agent before the conclusion of the contract, or ratification must be obtained after the conclusion of the contract.155 This element is

(4) those that performed through malicious collusion are detrimental to the interest of the state, a collective or a third party; (5) those that violate the law or the public interest; (6) economic contracts that violate the state’s mandatory plans; and (7) those that performed under the guise of legitimate acts conceal illegitimate purposes. Civil acts that are null and void shall not be legally binding from the very beginning.” 149 The Contract Law, art. 2 provides: “In concluding a contract, the parities shall have appropriate civil capacity of right and civil capacity of conduct.” The requirement of appropriate capacity is based on concerns over the inability of minors and persons suffering from a mental illness to properly recognise, understand and judge the nature and consequences of their act and protect their own interests. The declarations of intention by these persons, even if “genuine,” are considered to be intrinsically defective and should not be judged as in the interests of minors and persons with a mental health. See Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 116. 150  The Contract Law, art. 2. 151  Articles 67 and 68 of the Insurance Law concern the legal requirements for establishing an insurance company. Article 67(1) provides: “The establishment of an insurance company is subject to the approval of the insurance supervision and regulation authority of the State Council.” Article 68 stipulates some conditions for the establishment of an insurance company. 152  According to the General Principles of the Civil Law of the PRC: “A citizen aged 18 or over shall be an adult. He shall have full capacity for civil conduct, may independently engage in civil activities and shall be called a person with full capacity for civil conduct” (art.11); “A mentally ill person who is unable to account for his own conduct shall be a person having no capacity for civil conduct and shall be represented in civil activities by his agent ad litem” (art. 13). 153  The Insurance Law, art. 11. 154  The Contract Law, art. 52. 155  The Insurance Law, arts 117, 126 and 127.

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particularly important in the insurance context, because many insurance contracts are formed through an agent. Where all the above conditions are satisfied, the contract is a valid contract. For the validity of an insurance contract, in addition to the requirements mentioned above, there are special requirements. (1) The requirement of insurable interest.156 For a life policy to be valid, when a contract is concluded the proposer must have an insurable interest in the life insured.157 (2) In life insurance, a contract with the death of the life insured as the condition for payment of insurance money is void without the life insured’s consent thereto and approval of the sum insured in writing.158 (3) The Insurance Law also provides that “A proposer may neither apply for nor an insurer may underwrite a personal insurance on a person without capacity for civil acts where the death of such a person whose life is insured is set as the condition for payment of the sum insured.”159 Such a contract shall be void if it is entered into. These special elements are examined in other relevant chapters in this book. 4.13 Commencement of the insurer’s liability The commencement of the insurer’s liability refers to the time when the insurer begins to bear the insurance risk, and it is distinguished from the formation of the insurance contract and the effectiveness of the contract. According to art. 14 of the Insurance Law, after the formation of the insurance contract, the proposer shall pay the premium in accordance with the agreement and the insurer shall begin to assume insurance liability from the agreed time.160 It is common practice that the insurer commences to bear the risk after it has received the premium. However, parties may reach an agreement to specify when the insurer shall begin to assume liability. In practice, most policies include a clause regarding the commencement of the insurer’s liability. Commencement of the insurer’s liability can be found in the following situations: (1) Payment of premium and commencement of liability: In many policies, a clause may state that the insurer shall not begin to assume risk until the proposer has paid the premium. In this situation, the payment of the premium is a condition precedent for the commencement of the insurer’s liability. For example, in the Motor Vehicle Insurance Clauses of the China People’s Property Insurance Company, a clause states that “The proposer should pay the premium in a lump sum at the time of contract; the insurer shall

156  Ibid, art. 12, arts 31 and 48. 157  Ibid, art. 31(3). 158  Ibid, art. 34(1). 159  Ibid, art. 33. 160  Ibid, art. 14.

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not be liable if the loss occurs before the payment of the premium.”161 Other insurance companies have also adopted a similar clause in their policies.162 (2) The issue of a policy and commencement of liability: Some policies specify that the insurer will begin to assume liability on the issue of a policy. In this case, the risk is not to commence until the insurer has issued the policy, even though the contract has been concluded. For example, in the Life Insurance Policy of Ping An Life Insurance Company of China, clause 1.2 states “The contract shall take force after we have received the first instalment of the premium and upon the issue of the policy.” This clause indicates that the commencement of the liability is based on two conditions, namely the payment of the premium and the issue of the policy. (3) Specified time and commencement of liability: In some insurance policies, it is stated that where the contract has been concluded and the proposer has paid the premium, the risk is to commence at “0:00 hour” on the following day when the contract enters into force.163 For example, the policy stated that the insurance period is 0:00 hour, 30 April 2012 to 24:00 hour, 29 April 2013. In this case, the insurer will begin to assume liability on a specified time and specified date. (4) Specified place and commencement of liability: If a policy specifies that liability will commence when a specified event happens, then the insurer will begin to assume liability on the occurrence of that event. For example, in marine cargo insurance, a “warehouse to warehouse” clause is usually included in the policy providing that “This insurance attaches from the time when goods leave the warehouse or place of storage at the place named herein for the commencement of the transit, and continues during the ordinary course of transit.” By this clause, the insurer begins undertaking risk when the goods are carried from the consignor’s warehouse.164 Another example is that for travel accident insurance by air, railway, ship or bus, the insurer’s liability starts from the time when the insured is on board the aeroplane, train, ship or bus.165 From both law provisions and policy clauses, it is obvious that the commencement of the insurer’s liability is solely a matter of the parties’ agreement. Where the contract has been concluded and entered into effectively, insurer’s liability will not start until a given condition has been fulfilled or a specified time is due.

161  Motor Vehicle Insurance of the China People’s Property Insurance Company, art. 28. A similar clause appears in the Household Insurance Clauses of the China Life Insurance Company, wherein it is provided that “Unless there is agreement otherwise in the policy, the proposer should pay the premium in a lump sum when the contract is concluded. The insurer shall not be liable if a loss occurs before the payment of the premium.” See Household Insurance Clauses of China Life Insurance Company, art. 18. 162  Such as Ping An Property Insurance Company of China, Huatai Insurance Company and Pacific Ocean Insurance Company of China, and so on. 163  Personal Accident Insurance Policy of the Samsung Life Insurance Company, art. 7. 164  Marine Cargo Insurance of Ping An Insurance Co., Ltd, art. 3(1). 165  Ping An Insurance Company Travel Accident Insurance, clause 5. See accessed in May 2016.

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4.14 Consideration Another element in making a contract is the consideration. All contracts require consideration. A contractual agreement is not usually binding unless it is supported by what is called consideration. To put it simply, this means that each party must give something in return for what is gained from the other party, so if one party wishes to enforce the other party’s promise, he must prove that he gave something in return for that promise. In the insurance context, the premium is the consideration given by the proposer in return for the insurer’s undertaking to cover the risks specified in the policy. The insurer’s undertaking to cover the risks is the insurer’s consideration to the insured’s payment of the premium.166 The payment of the premium will be examined in Chapter 6, and the insurer’s liability to pay the insurance money will be considered in Chapter 15. 4.15 Some trouble spots in the process of formation of an insurance contract Many disputes can arise during the formation of an insurance contract; some of these issues are discussed here. 4.15.1 Whether a contract is void without the proposer’s signature on a proposal form Whether the proposer must sign the proposal form personally is a controversial issue. There are no statutory rules on this point in the Insurance Law. In practice, a lot of disputes between the parties arise in respect of whether the contract is valid without the proposer’s signature in the proposal form and other relevant documents. In 2000 the CIRC in the “Notice on Certain Issues Concerning Regulating Life Insurance Business Behaviour”167 set out some rules in this respect. Article 2(1) of the Notice provides that “Life insurance proposal, health and financial reports . . . should be filled by the proposer personally. Where they are completed by other persons, the proposer must sign them personally, and they cannot be signed by any other person.” By this provision, in life insurance, the proposal form and other insurance documents must be signed by the proposer personally. However, the Notice does not specify the remedy for lack of the proposer’s personal signature. In judicial practice, courts usually do not render an insurance policy void simply because the proposer did not sign the documents personally. In Mr Gao v Pingan Life Insurance Co. Shanghai Branch,168 the proposer took out a life insurance on his wife in May 2007; he filled in the proposal form but did not sign it. Upon receiving the completed proposal form and the payment of the premium, the insurer issued

166  By virtue of the Insurance Law, art. 14, upon the formation of the insurance contract, the proposer shall pay the premium and the insurer shall start undertaking to cover the risk in accordance with the agreement. The paying of the premium and the undertaking to bear the risk are the considerations of the parties. 167 See the CIRC’s “Notice on Certain Issues Concerning Regulating Life Insurance Business Behaviour” (Bao Jian Fa [2000] No. 133). 168  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 86.

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the policy and sent it to the proposer. But some months later the proposer asked the insurer to return the premium he had paid and claimed that the insurer had induced him to enter into the contract, and he did not sign the proposal form, therefore the contract was invalid. So the insurer should return the premium. To determine whether or not there is a valid contract, the court looks at all circumstances relating to formation of the contract. In this case, the court held that there was a valid contract, considering the actions of the insurer and the proposer: the proposer had paid the premium, and the insurer had issued the policy which was sent to the proposer, who issued a receipt to the insurer when he received the policy. All the conduct of the parties indicated that there was a binding contract; the mere fact that the proposer failed to sign the proposal form did not affect the validity of the contract and it was not the sole element for determining the existence of an insurance contract. In another case, Na Li v China Life Insurance Company, Nanyang Branch,169 the court held that there is no formality for concluding an insurance contract – the contract cannot be rendered void simply because the proposer did not sign the proposal form personally if other documents may prove that there is agreement between the proposer and the insurer, and the proposer has paid the premium. Generally, it is judicial practice that the signing of an insurance document by another person on behalf of the proposer is valid in the following situations. (1) The proposer expressly agrees that the document is to be signed by another person. For example, the proposer is illiterate and asks the insurer or his agent to sign the document on his behalf.170 (2) Where the insurance document is signed by an other person, but the proposer ratifies it by paying the premium. The SPC Interpretation II 2013 provides a rule on this matter: “When concluding an insurance contract, where the proposer or his agent fails to sign or stamp the proposal form personally, but the insurer or the insurer’s agent signs or stamps the proposal form on behalf of the proposer, it does not bind the proposer. However, if the proposer has paid the premium, it can be deemed that the proposer has ratified the action of the insurer or the insurer’s agent of signing or stamping the proposal form.”171 According to the SPC’s provision, the signing of an insurance document by the insurer or its agent on behalf of the proposer does not bind the proposer. However, the SPC introduces the doctrine of ratification to make a document valid which is signed by the insurer or the insurer’s agent on behalf of the proposer. The payment of the premium by the proposer can be deemed as ratification of the insurer or the insurer’s agent signing the document. 4.15.2 Dispute on the term that cover will commence from “0:00 hour” It is the customary practice in China’s insurance market that, after the conclusion of the contract, the insurer, in the proposal form or the policy, puts the duration of the insurance from “0:00 hour xx date to 24:00 hour xx date.” Thus the insurance 169 Ibid. 170  Xiulin Yu v PICC Life Insurance Co., Jiujiang Branch (2004) Jiangxi Court. This case was cited by Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 84. 171  The SPC Interpretation II 2013, art. 3.

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will not come into effect immediately after the contract has been formed. For example, the contract is concluded at 10:00am xx date, but the cover will not start until “0:00 hour” (midnight) of the following day. The insurer is not liable for a loss occurring between 10:00am and “0:00 hour.” The CIRC in its Notice on Management of Compulsory Motor Vehicle Insurance Underwriting (2009)172 expressly addresses that the insurer’s liability shall commence immediately upon the conclusion of the contract for compulsory motor vehicle insurance.173 However, some insurers do not follow the regulation and still use the “0:00 hour” term in their policies, which has caused a lot of disputes. The following case illustrates the problem.174 The insured took out insurance with the insurer at 8:00am on 29 June 2009 for compulsory motor vehicle third party liability insurance. The insured paid the premium and the insurer issued the policy at 8:06am. The policy stated that the insurance period was “0:00 hour, 30 June 2009–24:00 hour, 29 June 2010.” That means that the policy would become effective at “0:00 hour” in the following day after the contract was concluded. There was obviously a gap between the time when the contract was concluded and the time when the insurance became effective. The vehicle was damaged in a road accident at 11:00am on the same day that the contract was concluded; that means the accident occurred before the time when the insurance came into effect but after the conclusion of the contract. The issue was whether the insurer was liable for the loss during this period. The insured claimed, but the insurer rejected the claim on the ground that the insurer’s liability had not commenced when the accident occurred. The court held that the insurer should pay the insured because the insurance contract had concluded and the insured had paid the premium. The insurer appealed and argued that the insurance period is one of the policy terms which had been agreed by the parties when the contract was concluded, and that it should be deemed that the proposer agreed with the insurance period and the starting point of the insurance cover. The Appeal Court rejected the appeal and held: (1) This policy is a compulsory motor vehicle third party liability insurance. The process of forming a contract for compulsory motor vehicle insurance is different from that for making an ordinary insurance. For compulsory insurance, the contract is concluded when the insured has submitted the completed proposal form to the insurer and paid the premium. It is unnecessary to wait for the insurer’s acceptance, because the insurer is not allowed to reject compulsory motor vehicle insurance. In essence, for such an insurance contract, the insurer is the offeror and the proposer is the offeree. 172  CIRC Letter (2009) No. 91. 173  The Notice on Management of Compulsory Motor Vehicle Insurance Underwriting (2009) states that in order to protect the insured’s interest, insurance companies, in the process of underwriting compulsory motor vehicle insurance, can take the following ways: first, in the special agreement column of the policy, insurance duration is specifically stated “with immediate effect,” i.e. the policy becomes effective immediately when it is issued. Second, when issuing the policy, the instant time can be typewritten into the policy to replace the starting time of the duration of the policy “0:00 hour xx day xx month xxxx year.” For example, if at 3:00pm on 30 May 2016 the policy is issued, the duration of the policy can be written into the policy as 15:00 hour 30 May 2016 to 15:00 hour 30 May 2017. 174  Xian Xie and Lougen Li, A Hundred Selected Insurance Cases (Law Press China 2012) p. 109.

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As soon as the proposer fills in the proposal form, the insurance contract is concluded. So in this case, the insurance contract had been concluded when the proposer submitted the completed proposal form. (2) Although the “0:00 hour” starting point is a common practice in the insurance market, it is not fair to the insured, because there is gap between the time of the contract and the time of beginning of the cover. In the gap period, the insured is not covered. This is inconsistent with the purpose of creating this type of compulsory liability insurance. (3) The insurance contract is a standard form contract, and the contractual terms are drafted by the insurer in advance; some terms are obviously in favour of the insurer’s interest and against the insured’s interest. The insurer should, as required by the law,175 explain policy terms and especially those terms which limit or exclude the insurer’s liability. If the insurer fails to explain such terms (including the “0:00 hour” term), they will not be valid. In another recent case,176 the insured took out compulsory motor vehicle insurance on 25 March 2013, and the “0:00 hour” term still appeared in the policy. It said that the cover would start from “0:00 hour” on 26 March. The insured had a road accident at 8:00pm on 25 March, and as a result a man on a bicycle was injured and died five days later. The insured paid the cost of ¥50,000 for hospital treatment for the injured person and ¥60,000 to the beneficiaries of the deceased. Then the insured claimed for insurance payment. The insurer rejected the claim on the ground that the insurance cover had not commenced when the accident occurred. The court held that, according to the Insurance Law 2009,177 the insurance becomes effective at the same time as the contract is concluded, unless the insured and the insurer agree otherwise. The policy including a term showing that the cover starts from “0:00 hour” does not mean that the insured in fact agreed with it, because that is a term in the standard form contract and the insured had no choice. Such a term should not be valid unless the insurer clearly explains it to the insured when the contract is concluded. The insurer’s argument that the insured was deemed to know and agreed with the standard term is unacceptable. Because the “0:00 hour” term has caused a lot of disputes and it is unfair to the insured, it is suggested that the Insurance Law or the SPC should provide rules to prohibit or limit its application.

175 The Insurance Law, art. 17 provides: “When concluding an insurance contract, by adopting the standard terms drafted by the insurer, the policy terms should be attached to the proposal form, and the insurer shall explain the details of the terms and conditions of such a contract to the proposer. When concluding an insurance contract, the insurer shall make notes on clauses which exempt it of its liabilities on the proposal from, the insurance policy, or other insurance certificates that are so conspicuous as to draw the proposer’s attention, and make specific and clear explanations thereof to the proposer orally or in writing; otherwise such clauses shall not take effect.” 176  accessed 8 February 2014. 177  The Insurance Law, art. 13.

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4.15.3 Pre-payment of the premium before the conclusion of the contract This issue is about the relationship between pre-payment of the premium and conclusion of the contract, namely, whether the insurer’s collection of the premium paid by the proposer before concluding the contract can be deemed as the acceptance of the risk and therefore signifies that the contract has been concluded. By virtue of arts. 13 and 14 of the Insurance Law, a basic formula for the process of the formation of an insurance contract could be set up, that is, offer – acceptance – formation of the contract – issue of the policy – payment of the premium – commencement of risk. By law, the proposer is required to pay the premium after the contract has been concluded, and it is also general practice.178 The proposer’s primary contractual duty is to pay premiums,179 so paying the premium is in fact to perform his contractual duty. This should be done after, not before, the conclusion of the contract. However, for some types of insurance, especially for life insurance, the insurer often asks the proposer to pay part of the premium when it is sitting on the proposal and before it has decided whether or not it will accept the risk.180 If the insurer, after the evaluation of the proposal, decides to accept the risk, the contract is concluded, and the pre-paid money will become part of the premium.181 If the insurer decides not to accept the risk, there will be no contract and the insurer must return the money to the proposer.182 Disputes may arise if loss occurs before the insurer has made the decision but after it has received the premium from the proposer. The pre-payment of the premium may cause misunderstanding that the collection of the premium by the insurer amounts to its acceptance of the risk and means that the contract has been formed; the insurer therefore should be liable for the loss. Judges, insurance experts and academics have different views on this point.183 Some have the view that if the insurer has accepted the premium, it should be deemed that it has accepted the proposer’s offer, and the insurance contract should be deemed concluded and entered into effect. Others argue that, in this situation, if the insurer has sufficient evidence to prove that the proposal does not meet the conditions and requirements of the insurance and it would not accept the insurance, the contract could not be deemed concluded. The third view is that a time limit should be set up for an insurer to examine the proposal – the proposal should be deemed

178  Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 304. 179  The Insurance Law, art. 14. 180  In life insurance, in practice, usually the marketing staff or the agents help the customers to complete the proposal form and ask the proposer to sign the form and then take the completed form with part of the premium to the insurer for consideration. 181  See Chengmiao Xu, Principles of Insurance Law and Analysis of Difficult Cases (Law Press China 2011) p. 158. 182  Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 304. 183 On 18–19 October 2010, when the Insurance Law 2009 as published was one year old, the High People’s Court of Guangdong Province, the China Insurance Regulatory Commission Guangdong branch, Guangzhou Judge Association, and Guangdong Insurers Association jointly organised a symposium (or a seminar) on the new version of the Insurance Law. One of the topics which was discussed was the issue of the formation of an insurance contract and its effectiveness. This is available at accessed 26 June 2014.

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accepted if it has not been answered by the insurer within the time limit, and the contract is then deemed concluded. Some guiding rules on this issue are provided by some courts. Guangdong High People’s Court treats the pre-paid sum of money as part of the premium, and provides that “Where the insurer has not issued the policy or other insurance certificates but has accepted the proposal form and the premium tendered by the proposer, if the proposer claims that the contract has been formed, the People’s Courts should support the claim, except in the situation when in life insurance the life insured is asked to take a medical examination and the insurer is waiting for the results of the examination or where there is other agreement on this point.”184 Now the issue is settled by the SPC Interpretation II.185 Article 4 of Interpretation II provides that where the insurer has received the proposal form submitted by the proposer and accepted the premium paid by the proposer, but has not decided whether or not to take the risk: if the insured event occurs, and the insured or beneficiary requests the insurer to indemnify the loss or pay the insurance proceeds, the People’s Courts shall support the claim if the proposer’s application meets the insurer’s underwriting conditions. While the People’s Courts shall not support the claim if the proposer’s application does not meet the insurer’s underwriting conditions, the insurer is not liable for the loss but should return the premium it has received. Due to the fact that pre-payment of the premium often happens in life insurance when making a contract, the issue will be discussed in more detail in Chapter 20. 4.15.4 Payment of the premium and commencement of the insurer’s liability The issue here is whether the payment of the premium may affect the commencement of the insurer’s liability. By virtue of art. 14 of the Insurance Law, after the conclusion of an insurance contract, the proposer shall pay the premiums according to the agreement and the insurer shall begin to assume insurance liability from the agreed time. It seems that the proposer should pay the premium first, and then the insurer will begin to assume liability. Could the payment of the premium be taken as a condition precedent to the commencement of the insurer’s liability? It seems not, as art. 14 does not provide an order of priority for the payment of the premium and the commencement of the insurer’s liability. The parties shall perform their duties according to their agreement. If there is no particular term to specify that paying the premium is a condition precedent to the insurer’s undertaking of the risk, the insurer cannot reject a claim on the ground of non-payment of the premium by the insured before the loss occurs.186 However, if the parties agree that the effectiveness of the contract or the commencement of the liability depends on the payment of the premium, then the insurer is not at risk before the premium is paid. In practice, parties often insert terms into the contract regarding the payment of the premium, the effectiveness of the contract and the commencement of the

184 The Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Guangdong Province HPC 2011). 185  The SPC Interpretation II (2013). 186  Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 302.

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insurance liability. The parties may sometimes agree that the proposer will pay the premium on the specified date, and the insurer starts to bear risk from the time when the contract is concluded. For example, the insurance contract is formed on 6 May 2013 and entered into effect on the same day, and the parties agree that the premium must be paid by 10 May 2013. If the loss occurred on 8 May, the insurer cannot reject the claim on the ground that the proposer had not paid the premium. In such a case, the payment of the premium is not a condition precedent for the effectiveness of an insurance contract or for the commencement of the insurer’s liability. If there is agreement stipulating that the insurer will begin to bear risk after the proposer has paid the premium, the insurer will not be liable for a loss which occurs before the proposer has paid the premium.187 Some insurance companies have inserted provisions in their policies on the payment of premiums. In the Inland River Coast Hull Insurance Policy of Ping An Insurance Company of China, clause 16 stipulates: “The insured should pay the premium in a lump sum when the contract is concluded. The insurer shall start assuming liability upon the payment of the premium by the proposer except where otherwise agreed by the contract.” This is clear that the payment of the premium by the insured is a condition precedent for the insurer’s liability for loss.188 In the Comprehensive Property Insurance Policy of People’s Property Insurance Company of China, clause 20 provides: “The proposer shall pay the premium according to the agreement of the contract before the contract enters into the effect.” This article indicates that the payment of the premium is a condition precedent for the effectiveness of the insurance contract. If there are terms providing that the insurer will not start assuming liability before the proposer has paid the premium, then any loss occurring before the payment of the premium will not be paid by the insurer. So when the premium must be paid is solely a matter of agreement of the contract. 4.15.5 Late payment of the premium It often happens that the insurance contract has been concluded, and the policy has been issued to the proposer, but due to some reasons, the proposer has not paid the premium on the date specified in the contract. The issue is, if the loss occurs before the payment of the premium, whether the insurer may refuse the claim on the ground that the insurance has not yet become effective due to the failure to pay the premium on time. As discussed above, whether the insurer has the right to reject the claim in this situation depends on whether the payment of the premium is a condition precedent based on the agreement of the contract. If the parties agree that commencement of

187  See the Supreme People’s Court’s Response to the Queries of the PICC Jiangyin Branch about the Disputes on Insurance Contract and Insurance Amount (Supreme People’s Court, No. 280) (2000). See also Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 304. 188  See also Motor Vehicle Insurance Policy of Ping An Insurance Co. of China, art. 8 of which states: “The proposer shall pay the premium in a lump sum when the contract is concluded unless the contract provides otherwise. The insurer shall not be liable for a loss which occurs before the entire premium has been paid.”

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the insurer’s liability depends on the payment of the premium, then the insurer is not at risk before the proposer pays the premium. This can be seen in the following case. The insured, a supermarket, took out fire insurance for the contents and the building of the supermarket for the period from January 2003 to January 2004. A policy term stipulated: “the proposer shall pay the premium according to the agreement before the insurance enters into effect. If the proposer fails to perform the duty of paying the premium, the insurer has the right to refuse to pay the claim or terminate the contract by serving a 15-day notice.” A fire occurred in the supermarket in June 2003 which caused a serious loss for the supermarket. The insured had not paid the premium when the loss occurred. The insurer rejected the claim on the ground that the insurance contract had not entered into effect because the insured had not paid the premium before the loss had occurred. The insured argued that the contract had been concluded and the insurer had issued the policy, so the insurer should be liable for the loss. The court held that the insurer had the right to reject the claim because the contract had a term stating that the contract would not become effective until the premium was paid. This term made the payment of the premium a condition precedent to the effectiveness of the contract and for the commencement of the insurer’s liability.189 4.15.6 Duration of the insurance and the commencement of the insurer’s liability The duration of the insurance is the period in which the insurer is liable for the loss caused by the event insured against. Usually, the date of the beginning of insurance duration and the commencement of insurance liability overlap. However, it is not always the case. Sometimes, they are different in time. If there is special agreement between the parties that the payment of the premium is a condition precedent to the commencement of the insurance liability, then the insurer will not begin to assume liability until the payment of the premium, even though the duration of the insurance may have started. An interesting case illustrates the issue. In Anshun Property Development Co. v PICC Property Co. Dangyang Branch,190 Anshun Co. took out insurance for its car, for the period between 28 March 2002 and 27 March 2003. The parties agreed that the insurance would take effect after the payment of the premium by the proposer. Anshun paid the premium on 30 May 2002, and the insurer started to undertake the risk on the same day. Ten months later, on 31 March 2003, the car was damaged in an accident. The insured claimed against the insurer, the insurer rejected the claim on the ground that the event occurred beyond the duration of the insurance (28 March 2002 to 27 March 2003). Anshun Co. sued the insurer. The issue was, where the commencement of the insurer’s liability starts later than the beginning of the duration of the insurance specified in the policy, whether the expiration date of the duration should be changed to make up the one-year period of insurance liability. The court held that the one-year insurance duration should run from the date when the proposer paid the premium, and the insurer started

189  Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 302. 190  Zhan Hao, The New Insurance Law – Interpretation of Practice Highlights and Case Analysis (Law Press China 2010) p. 41.

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to undertake the liability on 30 May 2002. It is submitted that the judgment was reasonable because before the date on which the premium was paid, the insurer had never been at risk. Otherwise, the duration of the insurer’s liability would be shortened and the insured could not obtain one-year cover but paid the full premium for one year.191 However, if a policy term states that the commencement of the insurer’s liability will start from the time when the premium is paid but the date of expiration of the insurance period will not change, this term should be subject to the unfair term test in art. 19 of the Insurance Law. It is unlikely that this term would be treated as a valid term. If the parties agree that the proposer must pay the total sum of the premium (say ¥1,000) but the proposer has only paid half of the lump sum (say ¥500), and the loss occurs, what amount should the insurer pay, the whole loss or part of the loss? Some scholars argue that the insurer should pay the money proportionately corresponding to the premium paid. Some others suggest that the insurer should pay the whole loss, but may deduct the arrears of the premium.192 According to art. 67 of the Contract Law, where both parties have obligations towards each other and there has been an order of priority in respect of the performance, and the party who should perform his duty first has not performed it, the other party has the right to reject the first party’s request for performance. Where the party who should perform his duty first violates the terms of a contract in fulfilling his obligations, the other party has the right to reject the former’s corresponding request for performance. Accordingly, it could be understood that where the proposer has paid only a partial premium, the insurer is entitled to pay partial insurance money to him. 4.16 Conclusion This chapter has examined rules and issues in relation to the formation of insurance contracts by traditional ways of formation and modern Internet formation of contracts. The process of forming a contract typically involves four steps: initial contact of the insurer’s agent and the proposer (inviting the proposer to make an offer); completion and submission of the proposal form to the insurer (offer); insurer’s examination of the proposal form and issuance of a policy (acceptance); and delivery of the policy to the proposer (conclusion of the contract). Online insurance business and self-service insurance card transactions have different procedures. Some legal issues on online insurance business and self-service insurance card transactions are unclear, such as when the contract is concluded, when and how the insured performs his duty of disclosure and when and how the insurer performs its duty of explaining contract terms – these issues need legislative and judicial attention. And finally, some trouble spots in the formation of insurance contracts were also explored.

191  However, the decision was different in the earlier case of Company A v PICC (2000) which was cited in the book Insurance Contract Law – Case Studies, edited by the Law Department of Ping An Insurance Company of China (Qing Hua University Press 2006) p. 65. 192  Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 305.

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CHAPTER 5

Terms of contracts and construction of the terms

5.1 Introduction The rights and obligations of the insurer and the insured in an insurance contract are recorded and reflected by terms (or clauses) of the contract. The intention of the parties and purpose of a contract are conveyed by its terms. Different terms have different functions, and breach of them results in various consequences, such as rescission of the contract or refusal of the claim or paying damages to the injured party, depending on the types of the terms and the seriousness of the breach. Where the language in an insurance contract is clear and express, the contract and all its terms should be enforced between the parties and subject to statutory control and judicial scrutiny, because the contract is the law between the parties.1 On the other hand, in many cases the insurers fail to make their intention clear in the wording which they adopt, giving rise to disputes as to the meaning of the terms relating to the risks covered or risks/liabilities excepted, or as to whether a particular term is incorporated into the contract or whether it is effective. In modern insurance practice, standard form contracts are usually adopted to conclude contracts. It is the insurers who are in the position, using their professional knowledge, skills and expertise in insurance business, to formulate the standard form contracts for business efficacy and consistency of transaction of business; while the insureds are in a position of “taking it or leaving it.” It is for this reason that the terms of an insurance contract are subject to statutory control and judicial scrutiny for the purpose of striking a balance of rights and obligations between the parties, and for the protection of insurance consumers. In this chapter, we will consider terms of insurance contracts, their functions and consequences for breach of them, and then construction of these terms by courts and judicial control of certain kinds of terms in an insurance policy. 5.2 Terms of insurance contracts In China, terms of an insurance contract can be conveniently divided into two types: terms which must be included in the contract mandatorily by law, and terms which can be freely agreed by the parties. In terms of function, terms can be classified into

1  Charter Re Co. Ltd v Fagan [1996] 1 Lloyd’s Rep. 261, at 266, per Staughton LJ.

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three types: terms that describe risks covered and risks excepted, insurance conditions and insurance warranties. 5.2.1 Terms required by law The Insurance Law requires that a contract must contain certain elements which are described and defined by the terms in the contract. These terms may be called terms required by law. Article 18 of the Insurance Law provides that an insurance contract shall contain the following elements: (1) name and address of the insurer; (2) names and addresses of the proposer and the insured and, in the case of personal insurance, name and address of the beneficiary; (3) insured subject matter; (4) scope of cover and exclusions; (5) period of insurance and commencement of insurance liability; (6) sum insured; (7) premium and method of premium payment; (8) method of payment of indemnity or insurance benefits; (9) liabilities arising from breach of contract and resolution of dispute; and (10) the day, month and year of the signing of the contract. The insured and the insurer may agree on any other matters relating to the insurance. The terms which are used for defining the elements of the contract can either be terms describing the risks or terms of conditions. For example, it is the usual practice that in a policy, there are a number of terms which are used to define the risks covered by the policy and risks excepted by the policy. Insurance conditions are usually contained in the policy in relation to the insured subject matter, validity of the policy or the insurer’s liability for paying claims, etc. Some terms of conditions are simply copies of provisions as provided in the Insurance Law, while some others may be formulated in accordance with the Insurance Law. All the terms of the contract must be explained to the insured at the time of concluding the contract. The terms which exclude or limit the insurer’s liabilities must be clearly explained to the insured so that the insured can understand the content and the meaning of the exception clauses.2 This performance of the obligation by the insurer to clearly explain the exception clauses to the insured prior to the conclusion of the contract is a condition precedent to the effectiveness of the exception clauses. This is a unique feature under Chinese insurance law and will be examined in detail in Chapter 9. 5.2.2 Insurance conditions An insurance condition is either an obligation on the insured to act in a particular way, or a contingency – which may be outside the control of the insured – upon which the validity of the contract or of any claim may depend. As the nature and

2  The Insurance Law, art. 17.

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types of the insurance conditions vary so widely, the consequences of a breach are not uniform, and may range from the right to rescind the contract or to refuse a claim or to reduce the extent of the insurer’s liability for a loss. Generally, conditions can be divided into three classes: conditions precedent of the policy or risk; conditions precedent to the insurer’s liability; and other conditions.3 (a) Conditions precedent to the policy or to the risk The condition precedent to the contract must be met or else there is no contract between the insurer and the insured. For example, a condition precedent to the validity of a compulsory motor vehicle liability insurance policy is that the insured has not effected another policy for the same vehicle, the same kind of policy and for the same period of time with another insurer. In the event that the insured has taken out more than one policy, only the one with the earliest starting time of the insurance period is effective; other policies are not valid.4 For a life policy to be valid there must be an insurable interest on the life insured at the time of the contract. Here the existence of an insurable interest is a condition precedent to the validity of the life policy. For example, in the Life Policy of People’s Insurance Company of China, clause 6.2 states that the proposer must have an insurable interest on the life insured at the time of applying for the insurance. Conditions precedent to the attachment of the risk mean that the risk has not attached until the insured has met the requisite conditions. A typical example relates to the payment of the premium. It is invariable that a clause is contained in a policy which states that the insurer will start assuming insurance liability only when the premium has been paid. Here paying the premium is the condition precedent to the inception of the risk. (b) Conditions precedent to the insurer’s liability Most conditions precedent are related to claims. If the insured has failed to comply with the conditions, the insurer may repudiate its liability for the claims, but is not entitled to rescind the contract. In certain policies of employer’s liability,5 a clause states that where the insured has caused damage or injury to his employee, the insurer shall not pay the insured under the policy before the insured has paid the employee. The insured’s payment of compensation to his injured employee is the condition precedent to the insurer’s liability for paying insurance money to the insured. The insured is usually required to provide evidence and relevant documents in respect of the claim; if the insured’s failure to supply the required documents results in the extent of the loss being hard to ascertain, the insurer may reduce its payment corresponding to the portion which cannot be ascertained.6 So supplying

3  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 7.001. 4 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 2 practical procedure in claims, section 5(4)(6), Zhong Bao Xie Fa [2009] No. 216. For the topic of double insurance, see Chapter 11 of this book. 5  For example, see clause 25 of the Employer’s Liability Policy of the Ping An Insurance Company of China. 6 For example, see clause 23 of Household Property Insurance Policy of the Ping An Insurance Company of China.

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relevant documents relating to the claim is a condition precedent to the insurer’s liability (or the extent of its liability) for the claim.7 Usually an insurance policy contains a number of clauses under the heading of “the Insured’s Obligations.” If the insured has failed to comply with the obligations, the insurer can either rescind the contract, raise the premium or reduce the amount of payment. So these clauses are conditions of the insurer’s liability. For example, clause 19 of the Household Property Insurance Policy of the Ping An Insurance Company of China states that the insured has the duty to maintain the safety of the insured subject matter. Where the insured fails to fulfil his duties to ensure the safety of the insured subject matter, the insurer shall have the right to demand an increase in the premium or to rescind the contract.8 Here maintaining the safety of the insured subject matter is a condition of the extent of the insurer’s liability. (c) Conditions for the insurer to comply with Some insurance policies contain clauses under the heading of “the Insurer’s Obligations.” These clauses are very often related to the insurer’s duty in examining and settling the claims in a timely manner.9 These clauses are very similar to arts 23 to 25 of the Insurance Law. For instance, art. 23(1) of the Insurance Law provides: “The insurer shall, after receipt of a claim for indemnity or insurance benefits from the insured or the beneficiary, determine the matter in a timely manner; if the claim is complicated, the insurer shall make a determination within 30 days, unless otherwise agreed on in the contract. The insurer shall inform the insured or the beneficiary of the result of the determination; where the claim is covered, the insurer shall fulfil its obligations to pay indemnity or insurance benefits within 10 days after reaching an agreement on the amount of indemnity payment or insurance benefits with the insured or the beneficiary. Where there are provisions in the insurance contract as to the period within which indemnity or the payment of the insurance benefits should be effected, the insurer shall fulfil its obligation accordingly.” Clause 16 of the Household Property Insurance Policy of the Ping An Insurance Company of China is almost the same as art. 23(1) of the Insurance Law. But clause 16 does not provide a remedy to the insured where the insurer is in breach of the condition to handle the claims promptly. Article 23(2) of the Insurance Law clearly provides: “Where the insurer fails to fulfil its obligations as prescribed in the preceding paragraph in a timely manner, the insurer shall compensate the insured or the beneficiary for any damage incurred therefrom, in addition to payment of the amount insured.” Chinese law recognises damages for late payment of valid claims. So the proper remedy available to the insured is damages for consequential loss given rise to by the insurer’s late payment of valid claims.10 In other words, if the insurer does not comply with the condition to handle claims promptly, the insured is entitled to damages for consequential loss.

7  The topic of making claims is examined in detail in Chapter 14 of this book. 8  The topic of prevention of the risks covered is examined in detail in Chapter 13 of this book. 9  For example, see clauses 14 to 17 of the Household Property Insurance Policy of the Ping An Insurance Company of China. 10 The topic of the insurer’s duty to pay valid claims in a timely manner is examined in detail in Chapter 15 of this book.

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5.2.3 Insurance warranties (a) Warranties under English law Unlike the term of warranty in the general law of contract, warranty in insurance contracts is a fundamental term. An insurance warranty is a pre-contractual promise by the insured that a given fact is true, or that a given fact will remain true, or that he will behave or refrain from behaving in a particular way.11 Generally, there are two types of warranties, warranties of past or present fact, in which the policyholder “affirms or negatives the existence of a particular state of facts”; and warranties of future conduct, in which the policyholder undertakes “that some particular thing shall or shall not be done.” Under English law, the remedy for breach of warranty was very harsh in several aspects: (1) a warranty must be exactly complied with;12 (2) breach of a warranty automatically discharges the insurer from liabilities;13 (3) later remedy for breach of a warranty is irrelevant;14 (4) there is no need for any causal connection between the breach of warranty and the loss;15 and (5) a statement may be converted into a warranty using obscure words that most insureds do not understand.16 As one of the fruits of the Law Commission’s recent reform of the insurance contracts law, warranties as to past and present facts, which were mainly created by “basis of contract” clauses, have been abolished for consumer insurance contracts17 by the Consumer Insurance (Disclosure and Representation) Act 2012,18 and also for non-consumer insurance contracts19 by the Insurance Act 2015.20 Under both Acts, a representation is not capable of being converted into a warranty by means of any provision of the insurance contract (or of the terms of the variation), or of any other contract (and whether by declaring the representation to form the basis of the contract or otherwise).21 For the remedy of a breach of promissory warranty, the Insurance Act 2015 (UK) provides that “(1) any rule of law that breach of a warranty (express or implied) in

11  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 7.001. 12  The Marine Insurance Act 1906 (MIA), s. 33(3). 13  The MIA, s. 33(2); Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd, The Good Luck [1991] 3 All E.R. 1. 14  The MIA, s. 34(2). 15  The MIA, s. 33(3). 16 The Law Commission and the Scottish Law Commission, Insurance Contract Law: The Business Insured’s Duty of Disclosure and the Law of Warranties, A Joint Consultation Paper, para. 12.17, 26 June 2012. 17 “Consumer insurance contract” means a contract of insurance between (a) an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession, and (b) a person who carries on the business of insurance and who becomes a party to the contract by way of that business (whether or not in accordance with permission for the purposes of the Financial Services and Markets Act 2000); “consumer” means the individual who enters into a consumer insurance contract, or proposes to do so. 18  Section 6 of the Consumer Insurance (Disclosure and Representations) Act 2012 deals with representation made by consumers in connection with a proposed consumer insurance contract or variation. It provides that such representations cannot be converted into warranties of fact in a policy, dealing with similar issues to matters dealt with in the application form. 19  “Non-consumer insurance contract” means a contract of insurance that is not a consumer insurance contract. 20  The Insurance Act 2015 (UK), s. 9. 21  The Consumer Insurance (Disclosure and Representation) Act 2012, s. 6; the Insurance Act 2015 (UK), s. 9.

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a contract of insurance results in the discharge of the insurer’s liability under the contract is abolished; and (2) an insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied.”22 The main change as to the remedy for breach of a warranty is to treat warranties as suspensive conditions under which if the breach of a warranty has been remedied the cover is restored. It is argued that this change can only resolve one problem – that is, a breach of warranty can be remedied, but does not resolve the problems of strict compliance, automatic and immediate suspension of the cover, and there being no need for causal connection between the breach and the loss.23 (b) Warranties under Chinese law The doctrine of warranty is not adopted in the Insurance Law; instead, the concept of alteration of risk is adopted.24 For non-marine insurance, in practice, however, the basis clauses have been widely used in various insurance proposal forms for both life and non-life insurance, and both consumer and commercial insurance.25 It is well established that a “basis of the contract” clause is a legal device used to turn representations made in the proposal form into warranties. Typically, proposers are asked to sign a proposal form containing a clause declaring that they warrant the accuracy of all the answers they have given. The basis clause usually states that the answers “form the basis” of the contract; the effect of the breach of the clause is notoriously harsh, enabling the insurer to avoid the contract entirely, irrespective of the issue of the test of materiality.26 So far as consumer insurance is concerned, as in the Life Insurance Proposal Form of Ping An Insurance Company of China, the basis clause is adopted. At the end of the proposal form, the proposer is required to declare: “The statements and answers made by me in the proposal are completely true. I hereby agree that the statements shall be the basis of the contract based on which the Company shall decide whether they will cover the risk and the proposal shall form part of the contract. If there are any untrue statements the Company may rescind the contract according to law.”27

22  The Insurance Act 2015 (UK), s. 10. 23  Zhen Jing, “Warranties and Doctrine of Alteration of Risk during the Insurance Period: A critical evaluation of the UK Law Commissions’ proposals for reform of the law of warranties” (2014) 25(2) Ins LJ 183. 24  Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) JBL 842. The topic of increase of risk during the insurance period is discussed in Chapter 10 of this book. 25  Zhen Jing, “A potential trap for the insureds: The application of the ‘basis of the contract’ clauses in China’s insurance market” (2008) 19 Ins LJ 160. 26  At the end of the proposal form the insured has to sign a declaration, of which the following is typical: “I/We agree that this proposal form has, to the best of my/our knowledge, been completed correctly; to the best of my/our knowledge and belief nothing material affecting any of the risks proposed has been concealed; this proposal shall be the basis of and shall form part of the Contract between myself/ourselves and the Insurance Company.” 27  Many other consumer insurance proposal forms also contain the basis clause.

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The Proposal Form for Personal Insurance of Tai Ping General Insurance Company Ltd has a declaration: “The Company has supplied the standard clauses to me and has clearly explained the exception clauses to me. The content and information in this proposal form are all true. All the representations and the declaration form the basis of this contract and are a part of this contract. If there is a misrepresentation or non-disclosure, the Company has the right to rescind the contract within the time-limit as provided by law.”28 In China, although the basis clauses are widely used in proposal forms,29 no reported cases have so far been found in which the insurer has avoided a policy or repudiated liability by relying on the basis clauses. Two possible reasons may be given here: first, the basis clause was introduced from England into China and some proposal forms were translated from English to Chinese, so most Chinese insurers may not fully understand the effect of the basis clauses and therefore, are unable to use them technically to defend the insured’s claim; and second, some insurers might know the effect of the clauses, but they are unwilling to use them simply because they want to keep their consumers for renewal of their policies. In practice, however, this clause is partly in operation in the sense that the insurer who knows the “role” of the basis clause may hold this card to bargain with the insured in dealing with the claim where the insured gave an untrue statement in the proposal form.30 In marine insurance, the doctrine of warranty is adopted.31 Article 235 of the Maritime Code provides that “The insured shall notify the insurer in writing immediately where the insured has not complied with the warranty clauses as stipulated in the contract. The insurer may, upon receipt of the notice, terminate the contract or demand an amendment to the terms and conditions of the insurance coverage or an increase in the premium.” Apparently, this article, on the one hand, imposes the duties of notification upon the insured if there is a breach of warranty; on the other hand, it allows the insurer to enjoy the right to: (1) terminate the contract; (2) demand an amendment to the terms and conditions of the insurance cover; or (3) an increase in the insurance premium. However, no definition of “warranty” is given in this article, nor can it be found in chapter 12 or elsewhere in the Maritime Code. 28  See the website of Tai Ping General Insurance Company Ltd, accessed in May 2016. 29 There are many examples: in the Proposal Form of Public Liability Insurance of Xinda Property and Casualty Insurance Company Ltd, the proposer declares that “the presentation made by the proposer in this form and relevant documents supplied to the insurer are all true. There is no intentional or grossly negligent misrepresentation. It has been agreed that this proposal is the basis of this contract.” See the website of the company, accessed in May 2016. In the AXA Smart Traveller Insurance Plan (B) Proposal Form, the declaration at the end of the proposal form states that “I/We declare that the statements and information given in this application are, to the best of our knowledge and belief, true and complete and accept that this proposal and declaration shall be the basis of, and be incorporated in, the contract between AXA Tianping Property & Casualty Insurance Company Limited and myself/ourselves.” See the website of AXA Tianping Property & Casualty Insurance Company Limited, accessed in May 2016. 30  Personal discussion with Mrs Zhang Xiao Ling, deputy manager of Ping An Insurance Company of China, Qingdao Branch. 31  Ling Zhu, Xiuhua Pan and Zhen Jing, “Marine Insurance Warranty: Comparing Common and Civil Law Approaches and their Implications for the Reform of Chinese Law” (2016) JBL (forthcoming). Wenhao Han, Warranties in Marine Insurance: A Survey of English Law and Other Jurisdictions with a View to Remodelling the Chinese Law (2006) PhD thesis, University of Southampton.

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Detailed examination of warranty in marine insurance can be found in Chapter 24, “Marine Insurance.” 5.3 Construction Construction of a term of the contract is a process whereby the contractual rights and obligations of the parties that arise from their agreement represented by that term are ascertained.32 The disputes which are likely to arise in the construction of contract terms may fall into a number of categories. First, there may be disputes as to the meaning of words relating to the cover provided. Second, there may be disputes as to whether a clause is an exception clause. If it is, it is then subject to the insurer’s clear explanation before concluding the contract.33 Third, there may be disputes as to whether a clause exempts the insurer of the obligations that he should have borne according to law or aggravates the obligations of the insured, or denies the insured or the beneficiary the rights that he should have been entitled to according to law. If it does, it is invalid.34 Fourth, there may be an apparent contradiction between different clauses in the same policy. And finally, there may be disputes as to the effectiveness of a special agreement clause inserted into the standard form policy. The construction of a term is always a matter of law for the court to determine. It is the judges’ daily work to construe or interpret legal documents; without correct construction of policy terms, there would be no correct judgment for an insurance dispute. 5.3.1 The rules of construction under the Insurance Law In the 1995 version of the Insurance Law,35 art. 30 provides: “When a dispute over a term of the insurance contract arises between the insurer and the proposer, the insured or the beneficiary, the People’s Court or arbitration organisation shall interpret such a term in favour of the insured and the beneficiary.” Here the application of the doctrine of contra proferentem is divorced from the ambiguity of the term. In the event that the insurer’s intention as reflected by the words and the insured’s understanding of the term are not matched, the court will interpret the term in favour of the insured, and thus the insurer would lose the battle. It seems that this approach is harsh to the insurer. Having recognised this problem, the 2009 version of the Insurance Law takes a different approach. Article 30 of the Law gives a more confined meaning of construction of a term of the contract, in providing that “With respect to an insurance contract entered into by adopting the standard-form contract supplied by the insurer, where there is any dispute arising out of or in connection with the contract terms between the insurer and the insured or the beneficiary, the terms shall be interpreted in accordance with the usual understanding of the terms. Where there are

32  Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 226. 33  The Insurance Law, art. 17. 34  Ibid, art. 19. 35  Article 31 of the 2002 version of the Insurance Law has the same meaning as art. 30 of the 1995 version.

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two or more interpretations of a term of the contract, the People’s Court or arbitration organisation shall interpret such a term in favour of the insured and the beneficiary.” The article sets forth two rules: first, a contract term should be interpreted in its usual understanding of its meaning; and second, the doctrine of contra proferentem can be applied only where the term is ambiguous − two or more interpretations can be found for that term. These rules are only applicable to standard form contracts. It implies that any terms which are negotiated by the parties are not subject to these rules of construction. Article 30 of the Insurance Law does not provide rules as to the determination of the usual understanding of the terms, so it is necessary to look at approaches adopted in the Contract Law 1999. 5.3.2 The usual understanding of the terms in the Contract Law The Contract Law 1999 spells out general rules for construction of contract terms, which are applicable to all contracts, including insurance contracts. Article 125(1) of the Contract Law provides: “If there is a dispute between the parties over the understanding of a term of the contract, the true meaning of that term shall be determined in light of the words and expressions used in the contract, the related terms in the contract, the purpose of the contract, the usage of transaction and the principle of good faith.” The provision presupposes that a valid contract has been concluded. The issue here is not about any difference in the declared intention of the parties to the contract as a whole, but the disagreement over the understanding of the terms of the contract. In ascertaining the true meaning of a term, the court shall employ five approaches: literal approach (words and expressions used in the contract); contractual context approach (the related terms in the contract); the purposive approach (the purpose of the contract); the custom approach (the usage of transaction); and the good faith approach (the principle of good faith). Article 125(1) seems to adopt the objective approach and looks to what a reasonable person in the position of the parties would understand as the meaning of the contract term in question.36 In construing contractual terms, the aim must be to find the meaning that the term would convey to a reasonable person having all the background knowledge that would reasonably be available to the parties in the situation in which they were at the time of the contract. First, by the literal approach, the literal meaning of the words and expressions used in a contract is of considerable significance in determining the meaning of a contract term. Although civil law theory admonishes against slavish reliance on the literal meaning of words, the literal meaning of a term, if the wording is clear and unambiguous, is a significant factor in determining the true intention of the parties.37 However, the ordinary meaning of the words may not prevail where a word has a technical meaning. This will generally be the case in respect of words describing cover or exceptions to it. For example, the tip of the insured’s finger was cut off by a machine. He claimed for insurance payment for loss of a finger. The

36  Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 227. 37 Ibid.

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insurer rejected the claim because the cutting-off of the tip of his finger did not meet the definition of the technical terms in the policy, which said that loss of a finger means the loss of a whole finger or the loss of part of the finger to the joint. So the cutting-off of his fingertip could not be interpreted as loss of a finger.38 Second, the contractual context approach reads the words and expressions in the context in which they appear rather than in isolation. A term of the contract should be construed in light of all the related terms in the contract as a whole. Third, the purposive approach looks into the nature and purpose of the contract in determining the true meaning of a term. Where two interpretations are possible for the same term, the one which is more suitable to the purpose of the contract should be taken. Fourth, the custom approach takes the general custom of the market in a particular trade in which the parties are operating as an aid to the construction of the contract. Where the parties are shown to have established a consistent course of dealings between themselves in a sufficient number of past transactions, or where a usage of trade is shown to be observed extensively by the persons engaged in the same trade, it is consistent with the commercial reality to presume that the parties, when using a particular term in their contract that bears a special meaning under the usage of transaction, intend to use the term in that special meaning. Usage of transaction is thus especially pertinent to showing that a meaning different from the plain, ordinary meaning of the term should be adopted.39 Finally, the good faith approach can be used for interpreting a contract term. Good faith requires that a contract should be construed in such a way that the rights and obligations of the parties should be appropriate to each other and the interests of the parties are balanced in accordance with the notion of fairness. The application of the approaches mentioned above should produce a true interpretation of the term in question. In the case where there are still two or more reasonable interpretations for the same term, the doctrine of contra proferentem may be applied as the last resort. 5.3.3 The doctrine of contra proferentem The words of written documents are construed more forcibly against the party putting forward the document. The rule is based on the principle that a party putting forward the wording of a proposed agreement may be assumed to have looked after its own interests, is responsible for ambiguities in its own expression, and has no right to induce another to make a contract on the supposition that the words mean one thing, and then argue for a construction by which they would mean another thing, more to its advantage. This is particularly true in the case of a standard form contract. The insurer is in a position to draft the terms of the contract clearly to reflect its real intention. If a term has two or more different meanings, the court will construe it in favour of the insured.40 38  Mr Li v China Life Insurance Company Beijing Branch; this case was reported in the book by Jianxun Liu, Resolution to the Classical and Difficult Cases of Insurance Law (Law Press China 2010) p. 116. 39  Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 230. 40  The Insurance Law, art. 30.

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5.3.4 Inconsistency between a standard term and a non-standard term Article 30 of the Insurance Law does not provide a rule in the case of inconsistency between a standard term and a non-standard term. This lacuna has been filled by the SPC, art. 14 of the SPC Interpretation II 2013 which provides that where an inconsistency occurs between a non-standard term and a standard term in the insurance contract, the non-standard term prevails over the standard term. A non-standard term means a term which is negotiated between the parties and therefore more accurately reflects the real intention of the parties. 5.3.5 Judicial control of contract terms Contract terms are subject to three forms of judicial scrutiny. First, exclusion clauses are subject to the identification and test of effectiveness under art. 17 of the Insurance Law. Second, policy terms are subject to a fairness requirement by art. 19 of the Insurance Law and art. 40 of the Contract Law. Third, ambiguous terms are subject to the doctrine of contra proferentum. (a) The effectiveness test of the exclusion clauses According to art. 17 of the Insurance Law, policy terms which exclude or limit the insurer’s liability must be clearly explained to the insured at the time of the contract; otherwise, the exclusions are ineffective. Disputes often occur as to whether a term is an exclusion clause, and if so, whether it was clearly explained to the insured prior to entering into the contract. It is the courts’ task to scrutinise the terms to decide whether it is an exclusion clause when there is a dispute about the clause. If it is, the court will then look for three requirements which must be met by the insurer at the time of the contract so as to pass the test of effectiveness: first, the insurer has supplied the insured with a copy of the standard form contract; second, the insurer has made notes to the exemption clauses in the contract or other insurance documents to draw the attention of the insured; and third, the insurer has clearly explained to the insured the content of the exemption clauses so that a reasonable person in a similar position to the insured would understand the meaning of the exclusion clauses. If any of the three requirements is not met, the court shall determine that the insurer has failed to perform the duty of explanation, and thus the exemption clauses are ineffective. A detailed discussion of this concept can be found in Chapter 9, “The insurer’s pre-contractual duty of good faith.” (b) The fairness requirement Article 19 of the Insurance Law provides: “the following terms and conditions in an insurance contract concluded by adopting the standard-form contract provided by the insurer shall be invalid: (1) those that exempt the insurer of the obligations that the insurer should have borne according to law or that aggravate the obligations of the proposer and the insured; and (2) those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law.” For example, the Insurance Law requires the insurer to handle claims in a timely manner and to make a decision for a complex claim within 30 days of receiving the claim. By implication, the insurer must make a decision in less than 30 days for 157

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simple claims.41 If a clause in an insurance contract extends the 30-day time limit to 50 days, this means that if the insurer denies the insured’s statutory right or limits its obligation, the courts will set aside such a clause in accordance with art. 19 of the Insurance Law. The Contract Law also sets out a list of unfair or unlawful circumstances under which a term of the contract or the whole contract can be treated as being void. Article 40 of the Contract Law provides that “A standard term is void if it involves any of the circumstances provided for in arts. 52 and 53 of this Law, or if it excludes the liability of the party supplying the standard term, increases the liability of the other party or deprives the other party of a major right.”42 5.4 Conclusion The terms of insurance contracts, their functions and consequences for breach of them have been considered in this chapter. Under Chinese law, some terms must be included in the contract mandatorily by law, and some others can be freely agreed by the parties. They are classified into three types: terms describing risks covered or excluded, conditions and warranties. The doctrine of warranty is not adopted in the Insurance Law; instead, the concept of increase of risk is adopted for the management of alteration of risks. The Insurance Law is consumer oriented. There are a number of mechanisms to be used for the control of unfair terms in order to protect insurance consumers. Contract terms are subject to three forms of judicial scrutiny. First, exclusion clauses are subject to the identification and test of effectiveness under art. 17 of the Insurance Law. Second, policy terms are subject to a fairness requirement under art. 19 of the Insurance Law and art. 40 of the Contract Law. Third, ambiguous terms are subject to the doctrine of contra proferentem.

41  Ibid, art. 23. For the topic of claim settlement, see Chapter 15 of this book. 42  Article 52 of the Contract Law: A contract is void in one of the following situations: (1) Where a party uses fraud or duress to conclude the contract, thereby harming the interests of the state; (2) Where it involves malicious collusion to harm the interests of the state, a collective organisation or a third person; (3) Where it conceals an illegal purpose in a lawful form; (4) Where it violates the public interest; (5) Where it violates mandatory provisions of laws or administrative regulations. Article 53 of the Contract Law: The following exception clauses in a contract are void: (1) One that exempts liability for personal injury caused to the other party; (2) One that exempts liability for property loss caused to the other party either intentionally or as a result of gross negligence.

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CHAPTER 6

Premiums

6.1 Introduction The premium is the consideration given by the insured in return for the insurer’s undertaking to cover the risks insured against in the policy of insurance.1 According to art. 14 of the Insurance Law, after the conclusion of an insurance contract, the insured shall pay the premiums according to the agreement and the insurer shall begin to assume insurance liability from the agreed time. Paying the premium is the insured’s primary contractual obligation.2 The insured should pay the premium to the insurer in accordance with the agreed time, the amount, the method of payment, the time period and place of payment. In practice, there have been many disputes as to the payment of the premium and the effectiveness of an insurance contract; this topic has been considered in Chapter 4, “Formation of an insurance contract.” In this chapter, we will discuss rules of law and practice in relation to premium payment, the method of payment and the way of demanding payment, the consequence of late or non-payment, modification of premiums during the insurance period, and the circumstances under which the premium paid by the insured may be returned to the insured or retained by the insurer. 6.2 Payment of premiums By law, paying a premium is not a condition precedent to the effectiveness of the contract. A lawfully formed insurance contract takes effect upon its formation unless otherwise agreed by the parties.3 In practice, however, most insurers stipulate in the insurance contracts that only when the full premium or the first instalment has been

1 There is no definition of “premium” in Chinese Insurance Law. According to some English insurance law authorities, “the premium is the consideration given by the insured in return for the insurer’s undertaking to cover the risks insured against in the policy of insurance.” Lewis v Norwich Union Fire Insurance Co. [1916] AC 509 at 519; Holiday v Western Australian Ins. Co. Ltd (1936) 54 Li L Rep 373, at 376; Standard Steamship Owners’ P & I Assn (Bermuda) Ltd v Gann [1992] Lloyd’s Rep 528; Re Claims Direct Test Cases [2003] Lloyd’s IR 677. (See J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 10.0; R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 8-001; M. Clarke, The Law of Insurance Contract (6th edn, Informa 2009) para.13-1; MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 7-002). 2 The insurer’s primary obligation is to pay valid claims in a timely manner for losses caused by an insured event. See Chapter 15. 3  The Insurance Law, art. 13(3). For more, see Chapter 4 of this book, section 4.11.

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paid can the contract then become effective.4 This kind of practice shows that the insurer has attached a condition to the effectiveness of the contract. This does not contravene the statutory rule, as the Insurance Law permits the parties to attach conditions or a term for the contract to take effect.5 If the insurer has issued the insurance policy to the insured, but the policy does not clearly specify that payment of a premium is a condition for the policy to become effective, this may result in the situation that the insurer has to pay claims under the policy even if the insurer has not yet paid the premium. For instance, in a property insurance case,6 the local government effected a household property insurance for all households for a village in April 1998. A clause in the policy stated that “the premium shall be paid in two instalments by November 1998.” In July 1998 there was an extremely heavy rainfall; all the households were flooded. The local government claimed for insurance payments to all the households. The insurer rejected the claim on the ground that the premiums were not paid, so the insurer was not liable for the losses. It was held that the policy did not specify that payment of the premiums was a condition for the effectiveness of the policy. Although the insured had not yet paid the premiums, the insured did not breach the contract because the policy only required the insured to pay a premium by November 1998. The insurer was liable for the losses. 6.2.1 The person to whom the premium is paid The insured can pay the premium to the insurer or the insurer’s agent. If the insured pays the premium to the insurer’s agent, it is deemed that the insurer receives the premium. In Mr Yingzhong Li v China Life Insurance Company Ltd Xiayi Branch,7 the insured paid the premium to the insurer’s agent, but the agent did not transfer the premium to the insurer; the court held that the insurer’s agent was authorised to undertake insurance business, his act of collecting the premium was a part of the business activity, and the insurer was liable for the act of its agent when the agent transacted insurance business on behalf of the insurer in accordance with the delegated authority. The insured’s paying the premium to the insurer’s agent was equivalent to paying the premium to the insurer. According to art. 127(2) of the Insurance Law, in the case where the agency contract between the insurer and the agent has ceased, the agent still collects the premium in the name of the insurer, in such a way that the insured has reason to believe that the agent has authority and the act of the agent is effective.8 If the insured pays the premium to the agent, this is equivalent to paying the premium to the insurer. In

4  For example, in the Household Property Insurance Policy of Ping An Insurance Company of China, clause 13 stipulates that the insurer is not liable for losses which occur before the insured has paid the premium. 5  The Insurance Law, art. 13(3). 6  The case was cited in the book Insurance Law and Analysis of Cases, written by the China Life Insurance Company Ltd (China Financial Press 2010) p. 65. 7  This case was decided by the People’s Court, Xiayi County, Henan Province, Civil Court Judgment (2010) No. 39, and is cited in the book Life Insurance Law and Practice by Zhenyu Liu (Law Press China 2012) p. 90. 8  The Insurance Law, art. 127(2).

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Qilan Zhong v China Life Insurance Company Ltd Huichang Branch,9 it was held that although the agency contract had ceased, the agent did not tell the insured about it, so the insured paid the premium to the agent on trust that she was the insurer’s agent. The agent’s collection of the premium was equivalent to the insurer’s collection of the premium. 6.2.2 The mode for payment of the premium According to art. 35 of the Insurance Law, the insured can pay the insurer the premiums in a lump sum or in instalments in accordance with the contract. Usually, the mode for the payment of the premium is agreed by the parties in the contract. In property insurance, it is usual that the insured is required to pay the full premium in a lump sum, but some insurers or some policies give the insured the choice of paying the premium in a lump sum or in instalments.10 In life insurance, paying premiums periodically by instalment is the usual practice.11 For short-term medical or personal accident insurance, the insured is required to pay the premium as a lump sum. There is no legal requirement on the methods of paying premiums. In practice, generally three methods for payment of the premiums can be used. The insured may pay the premium through the bank: he may transfer money through his bank account to the insurer’s bank account, or he may give his bank account details to the insurer and authorise the bank and the insurer to take the premium from his account.12 This is a very popular method for payment of premiums.13 Another method to pay the premium is that the insured pays by using a bank card; this method has been commonly used in recent years. The third method is to pay the premium by cash or cheque to the insurer or to the insurer’s agents. A question may arise here about when the payment of the premium is deemed to be effective. The answer to this question depends on the mode by which the premium is paid. If the premium is paid by cash, the payment of the premium can be effective immediately after the insurer or his agent has received the money. If the premium is paid by a cheque, the payment is conditional on the cheque being honoured. If the cheque is honoured, payment is deemed to have been made at the date on which the cheque was given. If the premium is paid through bank account

  9 This case was decided by the Intermediate People’s Court, Ganzhou City, Jiangxi Province, Civil Court Judgment (2008) No. 163, and is cited in the book Life Insurance Law and Practice by Zhenyu Liu (Law Press China 2012) p. 91. 10 For example, in the Household Property Insurance Policy of Ping An Insurance Company of China, clause 12 stipulates that the insured can pay the premium in a lump sum or by instalments. 11  In some life policies there are terms about payment of the premium by instalments. In the Life and Health Insurance Policy of China Life Insurance Company, clause 3.2 states: “The premiums can be paid at one time or by instalments. To pay the premium by instalments, the insured can pay yearly or every half a year or in any other way agreed by the Company.” See accessed in May 2016. 12  In the proposal form there is a column asking the proposer to give his bank account details. When the proposer fills in the proposal form, he needs to fill in that column. The company will transfer the money from the proposer’s account to the company’s account before or after the proposal is accepted. 13  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 91.

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transfer, the payment will become effective when the money has successfully been transferred from the insured’s account into the insurer’s account.14 6.2.3 When the premium must be paid By virtue of art. 14 of the Insurance Law, when an insurance contract is concluded, the insured shall pay the premium in accordance with the terms of the contract. As a general rule, the premium should be paid after the conclusion of the contract. Usually, the time at which the insured is required to pay the premium is a matter of contractual agreement. In practice, for some types of insurance, especially for life insurance, the insurer often requests the insured to pay the single premium or the first instalment of the premium when the proposal form is submitted.15 Disputes often occur as to whether the insurer is liable for the loss if the insured event occurs during the period when the insurer is sitting on the proposal and before the contract is concluded. Some insurers have adopted the practice that at the time when the insured submits the proposal and the first instalment of the premium, the insurer issues a “temporary receipt for the life insurance” with a declaration that “During the period from the time when the Company has received the first instalment of the premium, and affirmed that the proposer and the life insured had completed the application procedure provided by the Company, to the time when the Company has agreed to take the insurance and issued the policy (this period is usually 30 days), if the life insured is injured or dies in an accident, the Company shall be liable to pay the insured amount up to ¥200,000.” A case illustrates this. In Zhong Youlai v Ping An Life Insurance Co. Ltd, Huizhou Sub-branch,16 the insured bought two life insurance policies on his own life, and appointed his mother as the beneficiary of the policies. The insured paid the first instalment for the two policies when he submitted the proposals and before the contract had been concluded. The insured died in an accident when the insurer was sitting on the proposal. The contract had not been concluded when he died. But according to the declaration in the “temporary receipt for the life insurance,” the insurer must be liable for the event irrespective of whether or not the contract had been concluded. However, it is submitted that the mere fact that the insurer has collected the premium paid by the insured does not of itself amount to the acceptance of the risk, as there may be other conditions to be met by the insured. Now the issue of premium pre-payment has been resolved by the SPC. In the case where the insurer has received the proposal form submitted by the insured and accepted the premium paid by the insured, if the insured event occurs before the conclusion of the contract, and the insured or beneficiary claims for insurance

14  Ibid, p. 93. 15  In life insurance, in practice, usually the marketing staff or the agents help the customers to complete the proposal form and ask the proposer to sign the form, and then take the completed form and the premium paid to the insurer for consideration. 16 This case is cited by Y. H. Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 82.

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payment, the People’s Courts shall (or shall not) support the claim if the insured’s application meets (or does not meet) the conditions of the insurance.17 6.3 Grace of payment By virtue of art. 36 of the Insurance Law, “Where the contract specifies payment of the premiums in instalments and the proposer has paid the first instalment but fails to pay the current instalment for over 30 days from the date when the insurer presses for payment or over 60 days from the agreed time limit, the contract shall be suspended, or the insurer may reduce the sum insured in accordance with the contract, unless otherwise agreed in the contract. Where an insured event occurs in respect of the life insured within the time limits provided in the preceding paragraph, the insurer shall pay the insurance benefits according to the contract, but may deduct the outstanding premiums.”

It is obvious that the law provides a grace period for payment of premiums where they are to be paid by instalments. Where the contract agrees that the insured may pay the premium by instalments, after having paid the first instalment, the insured should pay the subsequent instalments on time. The insurer may press (or remind) the insured to pay the instalment when it is due.18 The Insurance Law provides some days of grace for payment of the premium where the premium is paid by instalments for life insurance. The instalments must be paid in the “days of grace”; otherwise, the contract becomes suspended. There are two grace periods: a 30-day period in the case where the insurer presses the insured to pay the instalment due, and a 60-day period from the date when the instalment is due.19 The insured is covered during the days of grace. If the insured event occurs, the insurer is liable for insurance payment, but the premium in arrears is deducted from the insurance payment.20 If the insured fails to pay the instalment due within the days of grace, the contract shall be suspended automatically from the date when the period of grace expires, or the insurer may reduce the insured amount agreed in the contract. Therefore it is important that the insured stays up to date in meeting the obligation to pay the premium.21 The above-mentioned grace periods are statutory periods for life insurance. In practice, some property policies also give a grace period in the case of premiums to be paid periodically by instalments. For example, in the Household Property Insurance Policy of Ping An Insurance Company of China, clause 13 stipulates that

17  The SPC Interpretation II, art. 4. 18  The Insurance Law, art. 36(1). 19 Ibid. 20  Ibid, art. 36. 21  English law is different on this point. There is no grace period for payment of instalments. If the insured fails to pay the instalment due, the policy will lapse. See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 8-010. Professor Merkin wrote: “If a life policy has lapsed following the assured’s failure to pay a premium, then if accrued benefits are to be carried over it is necessary for the parties to enter into a fresh agreement to revive the policy. The ordinary rules of offer and acceptance are here applicable, so that if the assured under a lapsed life policy has sent the premium to the insurers but they have accepted subject to the assured completing a declaration of good health, there is no cover until the declaration has been made.” (See Fontana v Skandia Life Assurance Ltd, Unreported, 2003.)

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where the premiums are to be paid by instalments as agreed, the insurer starts to assume liability when the first instalment has been paid. A 60-day grace period starts from the date when the instalment is due. The insurer is liable for paying insurance money within the grace period, but shall deduct the premiums in arrears. Where the insured fails to pay the premiums due after the grace period, the policy will become ineffective from 0:00 hour of the next day after the expiration of the grace period. 6.4 Payment of premiums and reinstatement of a life policy Where the insured fails to pay the instalment due after the days of grace in a life insurance policy, the policy shall be suspended immediately and automatically. However, the policy can be reinstated within two years from the date the last instalment was due, upon the agreement of the parties. The insured must pay the outstanding premiums for the reinstatement of the policy. This is provided in art. 37 of the Insurance Law, which states: “A contract which lapses in accordance with art. 36 of this Law is reinstated where the insurer and the proposer have reached an agreement through consultations and the proposer has paid the outstanding premiums. However, the insurer has the right of rescission where no agreement has been reached by the parties within two years from the date of the lapse of the contract.” The insurer is not liable if the insured event occurs during the period of suspension of the policy. There is an issue about the term “outstanding premium,” namely whether the “outstanding premium” includes the premium for the period of suspension or whether it refers only to the premium in arrears before the suspension. Many people have the view that the “outstanding premium” refers to the premium in arrears before the suspension of the contract as well as the premium which should be paid during the period of suspension.22 Some others have different opinions, arguing that “outstanding premium” should not include the premium for the period when the policy is suspended, because the insurer is not liable for any loss that occurs during that period. However, it can also be argued that due to the fact that there is a saving element in an endowment insurance, the insurer’s paying insurance proceeds to the insured will take place when the insured period expires (e.g. when the insured reaches the mature age of the policy, usually 60 for an endowment policy in China) and the duration of the policy will not be extended due to the suspension of the contract, it is not unreasonable for the insured to pay the premium for the period of suspension of the policy.23 The suspended policy can be reinstated where the insurer and the insured have reached an agreement and the insured has paid the outstanding premiums.24

22  Y. H. Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 285. 23 Ibid. 24  “Outstanding premium” here refers to the unpaid premium and interest before the suspension and during the period of suspension. See Y. H. Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 85.

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6.5 Consequences of late or non-payment of premiums Where the insured is required to pay a single premium, or to pay the premiums by instalments, he must do so by the due date specified in the policy. The consequence for the late or non-payment of the premium varies in accordance with the contractual agreement and statutory requirements. There are a number of consequences. (1) If the contract specifies that the payment of the premium is a condition precedent to the conclusion of the contract, then the contract will not be concluded before the payment of the premium. (2) If the contract specifies that the payment of the premium is a condition precedent for the contract to become effective, then the policy will not become effective until the insured has paid the premium. (3) If the contract specifies that the payment of the premium is a condition precedent for the insurer to undertake the liability, the insurer is not at risk until the premium has been paid. If a loss occurs, the insured’s claim for insurance payment will be rejected. (4) If an insurance policy has taken effect, in the absence of any specific policy term to the effect that payment of premium is a condition for the insurer’s paying claims, this may result in the situation that the insurer has to pay claims under the policy even if the insurer has not yet paid the premium. (5) In life insurance, as mentioned earlier, the policy will become suspended if the premiums by instalment are not paid within the grace periods according to art. 36 of the Insurance Law. In property insurance, the policy will become ineffective if the premium by instalment is not paid within the grace period according to the contractual agreement. (6) In life insurance, the insurer is prohibited from taking legal action for premiums by virtue of art. 38 of the Insurance Law; while in property insurance, the insurer may do so. This is considered below. 6.6 Premiums cannot be demanded by legal action in life insurance After the conclusion of a life insurance contract, the insured pays the initial premium, and shall pay the instalments according to the agreement of the contract. If the insured fails to pay the instalments on time, the consequences are provided in arts 36 and 37 of the Insurance Law as mentioned above. The insurer is not allowed to sue for the instalment arrears according to art. 38 of the Insurance Law, which provides that “With respect to life insurance, the insurer shall not resort to litigation to demand payment of the insurance premiums by the proposer.” Life insurance is usually a long-term insurance; it has the element of investment. If the insured wishes not to continue or delays paying the instalment because of financial problems, the insurer is not allowed to sue for the payment. Sometimes, the insured may forget to pay the instalment due. The insurer may remind the insured to pay the due instalment, but the insurer is not required by law to remind the insured. In property insurance, there is no statutory restriction on the insurer’s legal action for the premiums due, so the insurer may take action to request the insured pays the premium.25

25  China Life Insurance Company Ltd, Insurance Law and Analysis of Cases (China Financial Press 2010) p. 69.

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In English law, where a premium becomes due to the insurers under a contract of insurance they are entitled to bring an action for its payment.26 6.7 Modification of premiums during the insurance period During the insurance period, if the risk of the insured subject matter is altered, the premium may be modified in the following situations: (1) In the case where the insured misstated the age of the life insured at the time of the contract, the insured paid a lower premium than should have been paid according to the true age of the life insured, and the insurer is entitled to request the insured to make up the balance.27 (2) Where the risk of the insured subject matter increased substantially during the lifetime of the contract, the insurer may increase the premium or rescind the contract.28 (3) Where the insured subject matter is transferred to other person, and as a result, the risk materially increases; the insurer may increase the premium in accordance with the contract or rescind the contract.29 (4) The insured has a duty to maintain the safety of the insured subject matter; where the insured fails to comply with the duty, the insurer has the right to demand an increase of the premium or to rescind the contract.30 6.8 The return of premiums The Insurance Law vests in the insured the right to rescind the insurance contract after it has been concluded,31 and also sets forth rules in respect of refunding premiums paid.32 In the case where the insured requests to rescind the contract before commencement of the insurance liability, the insurer shall refund the premiums after deducting the handling charges; in the case where the insured requires to rescind the contract after commencement of the insurance liability, the insurer shall refund to the insured the premiums paid after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission.33 This is the general rule for return of premiums in the case of the insured’s rescission of the contract. But there are circumstances under which the premium should be returned to the insured and also situations where the insurer can retain the premium paid. These circumstances are considered below. 26  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 8-012. 27  The Insurance Law, art. 32(2). 28  Ibid, art. 52(1). 29  Ibid, art. 49(3). 30  Ibid, art. 51(3). 31  Ibid, art. 15. But there is an exception to this general rule – according to art. 50 of the Insurance Law, with respect to cargo insurance contracts and voyage insurance contract for a means of transport, the parties thereto shall not rescind the contracts after commencement of the insurance liability. 32  The Insurance Law, art. 54. 33  Ibid. This is in contrast to the English common law position that if the insurer has been at risk in any way or for any period, there is no entitlement to recovery of any part of the premium paid (J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 10.2).

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6.8.1 The circumstances under which the premium is returnable According to the Insurance Law and the SPC Interpretation II 2013, in the following situations, the premium should be returned to the insured: (1) A void life policy without insurable interest. For a life insurance policy to be valid, the insured must have an insurable interest in the life insured at the time of entering into the contract; otherwise the policy is invalid.34 The insured is entitled to recover the premium paid. Article 2 of the SPC Interpretation II 2013 provides that in personal insurance where an insurance contract is null and void as a result of the insured’s lack of insurable interest in the life insured, and the insured claims a refund from the insurer of the insurance premiums after deduction of corresponding processing fees, the People’s Court shall support such a claim. (2) A void life policy without the consent of the life insured. A contract with death as the condition for payment of insurance benefits is invalid without the life insured’s consent thereto and acceptance of the sum insured in writing.35 The insured is entitled to recover the premium paid. (3) Over-insurance. The sum insured shall not exceed the insured value of the insured subject matter. Any portion in excess of the insured value is null and void, and the insurer shall refund the corresponding premium.36 In the case of double insurance, the insured of double insurance may, with respect to the portion of the total amount of the sum insured which exceeds the insured value, request each insurer to return the premium pro rata.37 In compulsory motor vehicle insurance, if the insured has effected two or more policies, only the one with the earliest starting time of the insurance period is effective; other policies are not effective.38 The insurers must refund the premium paid. (4) A grossly negligent non-disclosure or misrepresentation. In the situation where the insured failed to comply with the obligation of truthfully disclosing material information to the insurer prior to the conclusion of the contract by gross negligence, the insurer has the right to rescind the contract but must refund the premiums paid.39 (5) Misstatement of the age of the life insured. In life insurance, where the age of the life insured declared by the insured is untrue so that the insured has paid premiums greater than should have been paid, the insurer shall refund the overpaid portion to the insured.40 (6) After the occurrence of a partial loss to the insured subject matter. Article 58 of the Insurance Law provides that where a partial loss occurs to the insured

34  The Insurance Law, art. 31. 35  Ibid, art. 34(1). 36  Ibid, art. 55(3). 37  Ibid, art. 56(3). 38 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 2, Practical procedure in claims, section 5(4)(6), Zhong Bao Xie Fa [2009] No. 216. 39  The Insurance Law, art. 16(4). 40  Ibid, art. 32(3).

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subject matter, the insured may rescind the contract within 30 days after the insurer’s payment for the loss. Unless specified otherwise in the contract, the insurer may rescind the contract as well, provided that it gives the insured 15 days’ prior notice. Where the contract is rescinded, the insurer shall refund the insured the premiums paid for the part of the insured subject matter which is not lost or damaged, after deducting the earned premiums in accordance with the contract from the date of the commencement of the insurance liability to the date of rescission. (7) Pre-paid premium before conclusion of the contract. Some insurers collect premiums before concluding the contract; if the event to be insured occurs during the period from the insurer’s collection of the premium and the insured’s handing in the proposal form to the conclusion of the contract, disputes often occur as to whether the insurer should be liable for paying insurance money. The SPC has now settled the matter. In the SPC Interpretation II, art. 4 provides that where the insurer has received the proposal form submitted by the insured and accepted the premium paid by the insured, if the insured event occurs, and the life insured or beneficiary requests the insurer to indemnify the loss or give the insured proceeds, the People’s Courts shall support the claim if the insured’s application meets the conditions of the insurance. While the People’s Courts shall not support the claim if the insured’s application does not meet the conditions of the insurance, the insurer is not liable for the loss but should return the premium it has received. (8) Rescission of a contract in the case of increase of risk during the insurance period. Where the insured subject matter is transferred to another person, and as a result, the risk materially increases, the insurer may increase the premium in accordance with the contract or rescind the contract within 30 days of receipt of the notice from the transferee. If the insurer rescinds the contract, it shall refund the premiums paid after deducting the premiums for the period from the date of commencement of the insurance liability to the date of rescission.41 Similarly, where the level of risk of the insured subject matter increases substantially during the period of the contract, the insurer may increase the premium or rescind the contract. If the insurer rescinds the contract, it shall refund the premiums paid after deducting the premiums for the period from the date of commencement of the insurance liability to the date of rescission.42 (9) The risk or the insured value of the insured subject matter decreases. Unless otherwise specified in the contract, the insurer shall decrease the premiums and refund the corresponding premiums calculated on the number of days passed, in situations where the risk of the insured subject matter substantially decreases or where the insured value of the subject matter decreases substantially.43

41  Ibid, art. 49(3). 42  Ibid, art. 52(1). 43  Ibid, art. 53.

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(10) Insured’s rescission of an insurance contract during the cooling-off period. A cooling-off period is usually adopted in life insurance, and refers to a short period of about 10 days beginning from the time when the insured receives the insurance policy issued, within which the insured may rescind the contract. If the insured rescinds the contract, the insurer shall return the entire premium paid after deducting administrative fees.44 6.8.2 The circumstances under which the premium is not refundable There are a number of circumstances under which the premium paid is not refundable: (1) Intentional non-disclosure or misrepresentation. In the situation where the insured failed to comply with the obligation of truthfully disclosing material information to the insurer prior to the conclusion of the contract intentionally, the insurer has the right to rescind the contract and does not refund the premiums paid.45 (2) Fraudulent claim for a loss which did not occur. Where no insured event has occurred, the insured or the beneficiary fraudulently claims that an insured event has occurred and caused losses, the insurer is entitled to rescind the insurance contract and retain the premium paid.46 (3) Intentional act to bring about the occurrence of an insured event. Where the insured or the beneficiary intentionally causes the occurrence of an insured event, the insurer has the right to rescind the contract and shall not refund the premium.47 6.9 Conclusion Paying the premium in accordance with the insurance policy is the primary contractual obligation of the insured. Some insurers’ practice of demanding a sum of money to be paid at the time of submitting the proposal form is devoid of legal basis. The money pre-paid cannot be labelled as a premium, because the insurance contract has not been concluded. If the insurers demand pre-payment of a sum of money with the submission of the proposal form, they should issue a temporary cover note which itself is an independent contract under which the insured is covered from the time of paying the sum of money to the time of the insurer’s decision as to the application of the insurance, even if the application is eventually rejected by the insurer. This argument is different from the SPC’s approach,48 but sounds more reasonable. The matters relating to the insured’s payment of premiums, such as the time of payment, the amount, the method of payment, the time period, the place of payment, the payment of premiums and the effectiveness of the contract, etc. are, to a

44  See CIRC “Notice on Regulation of Life Insurance Business Related Issues” [2000] No. 133, art. 3. 45  The Insurance Law, art. 16(4). 46  Ibid, art. 27(1). 47  Ibid, art. 27(2). 48  The SPC Interpretation II, art. 4.

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large extent, matters of contractual agreements. To avoid or reduce disputes about premium payments, it is recommended that the insurer should clearly prepare the wording of the terms to reflect the real intention of the parties. For example, if the insurer intends to start bearing risks at the time when the insured has paid the premium, it may insert a term to that effect, such that “the insurer will start to bear the risks as stipulated in this policy when the insured has paid the entire premium,” and explain this term clearly to the insured prior to the conclusion of the contract. By this term, the insurer is not taking on risk, and thus can reject claims, before the insured has paid the full premium.

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CHAPTER 7

Insurable interest

7.1 Introduction An insurable interest is a basic requirement of a contract of insurance. The fundamental justifications for the requirement of an insurable interest are to discourage gaming and wagering in the guise of insurance and to minimise the risk of destruction by the insured of the subject matter of the insurance. Generally, an insurable interest is required in all types of insurance contract, such as property insurance, life insurance and marine insurance. For an insurance contract to be valid, the person taking out insurance has to be able to show that he has an insurable interest in the subject matter of the insurance. However, rules governing insurable interests for different types of insurance are different; the times at which the interest is required and the consequences for lack of an interest in property insurance, life insurance and marine insurance are all different. The Insurance Law 2009 provides several rules in respect of insurable interests in property1 and personal insurance2 and clarifies some ambiguities in the old versions of the Insurance Law of 1995 and 2002 in respect of the time when an insurable interest is required3 and the effect for lack of insurable interest for property insurance and personal insurance.4 Rules governing property insurance in the Insurance Law5 also apply to marine insurance, because the Maritime Code 1992 which governs (inter alia) marine insurance does not contain any provision regarding insurable interests. The doctrine of insurable interest has been adopted in almost every jurisdiction,6 but rules relating to application of the doctrine vary from one jurisdiction to the

1  Articles 12 and 48 of the Insurance Law provide rules governing matters of insurable interests in property insurance. 2  Articles 12 and 31 of the Insurance Law provide rules governing matters of insurable interests in personal insurance. 3  The Insurance Law 2009, art. 12, states that in personal insurance the insurable interest is required at the time of contract only; for property insurance, the insurable interest is required only at the time of loss. 4 The Insurance Law 2009, art. 31, makes a personal insurance void if the property does not have an insurable interest at the time of contract; art. 48 prohibits the proposer from claiming if he has no insurable interest at the time of loss. 5  Articles 12 and 48 of the Insurance Law regulate property insurance. 6  For example, in England, the most famous legislation relating to insurable interests is the Life Assurance Act 1774 for life insurance and others. The Marine Insurance Act 1906 includes provisions governing insurable interests in marine insurance, and common law governs non-marine insurance. In Australia the requirement of an insurable interest is imposed by the Marine Insurance Act 1909 for marine insurance and the Insurance Contracts Act 1984 (hereinafter, ICA) for general insurance and life insurance.

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next.7 In some jurisdictions, the requirement of an insurable interest in the subject matter is very strict, for example, in English law, for life insurance the scope in which a person has an insurable interest in the life of another is very narrow,8 and the consequences for lack of insurable interest are very harsh.9 In recent years, the Law Commission of England and Wales and the Scottish Law Commission (LCs) have been scrutinising the doctrine of insurable interest and setting up proposals for reforming the law of insurable interests.10 The LCs have proposed redefining the nature of insurable interest and resetting the consequences for lack of insurable interest to mitigate the harshness of the current law. As a result, the Draft Insurable Interest Bill 2016 was published in April 2016 which made significant changes to the current law regarding insurable interests.11 In Australia, the requirement for an insurable interest is less strict than it used to be. For general insurance, it is sufficient to satisfy the requirement of insurable interest if a person has an economic relationship with the subject matter insured.12 Insurable interests in life insurance were abandoned entirely by the Life Insurance (Consequential Amendments and Repeals) Act 1995.13 In this chapter, the rules of law regarding insurable interests in Chinese laws will be examined. In addition, approaches in some other jurisdictions, such as in England and Australia, are discussed where necessary. The following aspects are covered in this chapter: the nature of insurable interests; insurable interest in property insurance and life insurance, time at which an insurable interests is required and the effect of lack of an insurable interest in property and personal insurance; and the insurer’s duty to check the existence of an insurable interest at the time of contract for a personal policy. The recent reform on insurable interests in the UK will be considered as well. 7.2 The nature of the insurable interest in insurance law “At its simplest, the requirement for insurable interest means that, for a contract of insurance to be valid, the person taking out the insurance must stand to gain a

7  See the Life Assurance Act 1774 (UK), s. 1; the Marine Insurance Act 1906 (UK) s. 5; the Insurance Law, art. 12; and the California Insurance Code, s. 10110.1(a). 8  Under English law, in life insurance a person is deemed to have an insurable interest in his own life and the life of his spouse. See Griffiths v Fleming [1909] 1 KB 805. 9  The consequence for absence of an insurable interest in life insurance is that the contract is not only void but also illegal. Harse v Pearl Life Assurance Co. [1904] 1 KB 558; See also R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 18-009. Professor Merkin comments: “The difference between a contract of insurance which is simply void and one which is illegal concerns not its enforcement, but the availability of restitution of premiums: under a void contract premiums are recoverable for a total failure of consideration, but under an illegal contract the maxim in pari delicto potior est conditio defendentis prevents a restitutionary action on the basis that the claimant cannot mount his action without pleading his own illegality.” 10 The LCs Issues Paper 4 (2008), Insurable Interest; The LCs Consultation Paper (2011), Insurance Contract Law: Post-Contract Duties and Other Issues; The LCs Issues Paper 10 (2015), Insurable Interest: Updated Proposals. 11  The final Draft Bill and report is expected to be published in autumn 2016. 12  ICA, s. 17. 13  See the Life Insurance (Consequential Amendments and Repeals) Act 1995, s. 45.

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benefit from the preservation of the subject matter of the insurance or to suffer a disadvantage should it be lost or damaged.”14 The purpose and the function of insurance is to give people who are covered by insurance economic indemnity or insurance money when they suffer a loss caused by the insured event. If a person has no particular relationship with the subject matter of the insurance, he will not suffer any such loss, and he therefore cannot recover anything from the insurer. If he takes out insurance on the subject matter of the insurance to which he has no interest at all, he is gaming or wagering, which is an act against public policy and is prohibited by law.15 This means that the proposer or the policyholder must have a particular relationship with the subject matter of the insurance, and he must stand to gain a benefit from the preservation of the subject matter of the insurance or to suffer a disadvantage should it be lost. However, the issue of what is the nature or the meaning of an insurable interest has been argued for a long time, and there are different approaches to the nature or the meaning of insurable interest in different countries’ laws. The doctrine of insurable interest, like other doctrines, originated and developed from English law, so it is logical to examine the nature of insurable interest in English law first. 7.2.1 Meaning of insurable interest in English law (a) Case law and statutes In English law, the meaning of insurable interest was formulated in the leading classic case of Lucena v Craufurd,16 which has been commonly quoted in discussing the nature of insurable interests. In this case, two main different views on the nature of insurable interests were delivered by different judges. According to Lawrence J’s view:17 “A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it; and whom it importeth that its condition as to safety or other quality should continue. Interest does not necessarily imply a right to the whole or a part of the thing, nor necessarily and exclusively that which may be the subject of privation, but the having some relation to, or concern in, the subject of the insurance; which relation or concern, by the happening of the perils insured against, may be so affected as to produce a damage, detriment or prejudice to the person insuring. And where a man is so circumstanced with respect to advantage or benefit but for those risks or dangers, he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing is to be so circumstanced with respect to it as to have

14  The LCs Issues Paper 10, Insurable interest: Updated proposals (2015) para. 1.8. 15  Marine Insurance (Gambling Policies) Act 1909. 16  Lucena v Craufurd (1806) 2 B & PNR 269. The facts of the cases were: the Commissioners of Admiralty were empowered to take charge of ships captured from the Dutch. They had not taken possession of four enemy Dutch ships which had been captured but nonetheless insured them for their homebound voyage from St Helena to England. The ships were lost due to perils of the sea, and the Commissioners made a claim for this loss under the policy. The House of Lords was required to decide if the Commissioners had sufficient insurable interest to support such a policy. It should be noted that although the Commissioners had not taken possession of the ships in question, there was no doubt that, as a matter of course, these enemy ships would be condemned by the High Court of Admiralty as prizes of war and thereupon the Commissioners would be given possession of these ships for sale and management, as was their right under statute. 17  Ibid, at pp. 302–03.

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the benefit from its existence, prejudice from its destruction. The property of a thing and the interest derivable from it may be very different. Of the first the price is generally the measure; but by interest in a thing, every benefit and advantage arising out of or depending on such a thing may be considered as being comprehended.”

It is clear that Lawrence J suggested a broad test of insurable interest, that to have an insurable interest in something was to “be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction.” On the other hand, Lord Eldon took a more conservative view of what constitutes an insurable interest and chose to limit it to an interest recognised in law; he stated:18 “I have in vain endeavoured however to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party . . . As to expectation of profits and some other species of interest which has been insured in later times, there is nothing to show that they were considered as insurable.”

Lord Eldon set out a narrower test of insurable interest and said that an insurable interest was “a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the position or enjoyment of the party.” Lawrence J formulated a wide idea that a mere expectancy or moral certainty of loss would suffice to find an insurable interest in the subject matter of insurance, while Lord Eldon’s definition rests upon the insured’s ownership of, or right to possess, the insured subject matter. Lord Eldon’s narrow view has been accepted in England as law for more than 200 years.19 Based on the classic decision of Lucena, the narrow approach of Lord Eldon was codified in the Marine Insurance Act 1906 (MIA), and s. 5(2) defines insurable interest in terms of: (1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure; (2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation20 to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof.

From both the decision of Lucena and the definition of insurable interest in the MIA, it is obvious that the limitation is thus imposed by the words “legal or equitable relation.” This rule applies also to non-marine insurance. The typical non-marine insurance case which represents the narrow view of insurable interest is Macaura v Northern

18  Ibid, at p. 321. 19  The LCs in recent years have made proposals for reforming the doctrine of insurable interest. This will be discussed at a later stage. 20  Emphasis added.

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Assurance Co. Ltd.21 Macaura’s decision received wide criticism for the unfairness to the policyholder. Due to the strictness of the rules relating to insurable interest in common law and statutory law, in recent years, the English courts made inroads to accommodate Lawrence J’s broader perspective in view of the need to facilitate commercial convenience.22 In some recent cases, judges resisted adopting the strict narrow view of insurable interest.23 In light of Feasey v Sun Life Assurance Co. of Canada,24 an insured will now be regarded as having the required insurable interest if they have a pecuniary interest in the subject matter of a general insurance contract.25 (b) Law Commissions’ reform on insurable interest in non-life-related insurance To improve the law, the LCs have been undertaking a joint review of insurance contracts since 2006 in order to set out proposals for reform on certain topics of insurance law, including the rules relating to insurable interests. The LCs have published two Issues Papers26 and one Consultation Paper for reform of insurable interests;27 the Draft Insurable Interest Bill was published in April 2016.28 So far as the meaning of the insurable interest is concerned, the LCs set out proposals in relation to insurable interests in Issues Paper 10, of which Proposal 8 states: “Statute should define insurable interest for the purpose of indemnity insurance using a non-exhaustive list of examples of insurable interest.” Proposal 9 reads “The statute should state that an insured has an insurable interest if the insured has: (1) A right in the property which is the subject matter of the insurance or a right arising out of a contract in respect of it;

21  [1925] AC 619. In this case, Macaura, the insured, sold lumber to a limited company in exchange for shares in that company. As the company continued to operate, the insured also become a substantial creditor of the company. The timber was destroyed by fire, and the insured sought to recover in respect of this loss under a fire insurance policy taken out in his name. However, it was held that he did not have an insurable interest in the company’s property. In his capacity as a shareholder he had no legal or equitable interest in the property owned by the company, but merely an entitlement to share in the profits while the company continued to carry on business and to share in the distribution of surplus assets on winding up. This case was clearly decided based on Lord Eldon’s narrow view. If Lawrence J’s broader definition propounded in Lucena had been adopted, the insured could have recovered simply because he had benefited from the existence of the company’s assets and he was prejudiced by their destruction. 22 In Feasey v Sun Life Assurance Co. of Canada [2003] 2 All ER (Comm) 587, Sharp v Sphere Drake Insurance Plc (Moonacre) [1992] 2 Lloyd’s Rep 501 QBD and Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society [1996] 1 Lloyd’s Rep 614 CA, the courts’ decisions tended to follow the broader test of insurable interest. As Yeo comments: although Lord Eldon’s definition was subsequently codified into the UK Marine Insurance act 1906 and affirmed in the oft-cited case of Macaura, Lawrence J’s approach is arguably more aligned with modern-day commercial reality. See H.Y.Yeo,Y. Jiao and J. Chen, “Insurable interest rule for property insurance in People’s Republic of China” [2009] JBL 776. 23  Sharp v Sphere Drake Insurance, The Moonacre [1992] 2 Lloyd’s Rep 501; National Oilwell (UK) v Davy Offshore [1993] 2 Lloyd’s Rep 582; Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society [1996] 2 All ER 487. 24  Feasey v Sun Life Assurance Co. of Canada [2003] 2 All ER (Comm) 587. 25  See Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) p. 195. 26  The LCs Issues Paper 4 (2008) on Insurable Interest and Issues Paper 10 (2015) on Insurable Interest: Updated Proposals. 27 The LCs Consultation Paper 2 (2011) on Post-Contract Duties and Other Issues (December 2011) includes issues relating to insurable interest. 28 The LCs Draft Insurable Interest Bill 2016 was published in April 2016 for comments (by 20 May 2016) and the final draft Bill and report are expected to be published in autumn 2016. (See the LCs Short Consultation on Draft Bill: Insurable Interest, April 2016, p 2.)

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(2) Possession or custody of the insured subject matter; or (3) A reasonable prospect (or similar) either of an economic benefit from the preservation of the insured subject matter, or of an economic loss on its damage or destruction, which would arise in the ordinary course of things.”

For insurance other than life-related insurance, the Insurable Interest Bill 2016 proposes: “For the purposes of such a contract, the circumstances in which an insured has an insurable interest in a subject matter include, in particular, circumstances where the insured – (a) (b) (c) (d)

has a right in it, has a right arising out of a contract in respect of it, has possession or custody of it, or will suffer economic loss if the insured event relating to it occurs.”29

The scope in which the insured is deemed to have an insurable interest is obviously wider than the current law. It will be discussed shortly that the Chinese Insurance Law adopts a narrow concept of insurable interest and defines the insurable interest as a legally recognised interest of the proposer in the subject matter of insurance,30 which is very similar to the current English approach. By contrast, in Australia, the Insurance Contracts Act 1984 (ICA) radically altered the common law with regard to the nature of the insurable interest required in contracts of general insurance. Section 17 of the ICA abandons the English narrow test of insurable interest − the legal or equitable interest – by adopting a wider view of the economic or pecuniary test for insurable interest,31 which has been held to be more reasonable.32 7.3 Test of insurable interest – legally recognised interest and economic interest As mentioned above, there are, in broad meaning, two approaches to the nature of the insurable interest, namely legally recognised interest and economic interest. These two approaches are analysed below. The narrow view of legally recognised interest, which was initially articulated by Lord Eldon in Lucena v Craufurd,33 refers to a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party. By codifying Lord Eldon’s narrow view into the statutory law, the Marine Insurance Act 1906 provides that insurable interest refers to legal or equitable interest.34 Chinese Insurance Law adopts the narrow meaning of the insurable interest and expressly provides that “An insurable interest refers to an interest which the proposer or the

29  The Insurable Interest Bill 2016, clause 3(3). 30  The Insurance Law 2009, art. 12(6). 31  See the ICA, s. 17. 32  See Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) para. 10.11; See also K. Sutton, Insurance Law in Australia (2nd edn, Law Book Company 1991) pp. 372–76. 33  (1806) 2 B & PNR 269. 34  The MIA, s. 5(2).

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insured has in respect of the insured subject matter and is recognised by law.”35 Due to the strictness of the narrow approach, unfair decisions have often been made in judicial practice. The typical (notorious) English case of Macaura v Northern Assurance36 demonstrated the strict view of an insurable interest. In this case it was decided that the insured, as a shareholder, did not have an insurable interest in the company’s property even though he suffered actual loss when the company’s property was destroyed by fire. The English law of narrow test of insurable interest has been criticised by many commentators. For example, Professor Clarke comments: “The insured has an insurable interest in a property, if he has an ‘economic interest’ in the property. That should have been enough for the law of England, as it is in other countries, to allay any anxiety about wagering or arson, but it was not. In England, the insured is also required to stand in ‘a legal or equitable relation’ to the property insured.”37 Some commentators38 argue that “Although Lord Eldon’s definition was subsequently codified into the Marine Insurance Act 1906 (UK) and affirmed in the case of Macaura v Northern Assurance39 Lawrence J.’s approach is arguably more aligned with modern-day commercial reality. It is evident from cases such as Feasey40, Moonacre41and Glengate-KG Properties v Norwich Union42 that the English courts have made inroads to accommodate Lawrence J.’s broader perspective in view of the need to facilitate commercial convenience.” It is also the view of Greg Pynt;43 he said: “Over the last 20 years, the English Common law has aligned itself more closely to Lawrence J’s description of an insurable interest in Lucena v Craufurd.”44 Many other common law jurisdictions have dispensed with the requirement of a legal or equitable interest and have adopted the “economic test,” such as Australia,45 Canada46 and the US.47 A approach opposite to the decision of Macaura48 was established in the ICA. In this Act the strict proprietary interest test was abandoned in favour of one based on economic loss. Section 17 of the ICA provides: “Where the insured under a contract

35  The Insurance Law, art. 12(6). 36  [1925] AC 619. 37  See M. Clarke, Policies and Perceptions of Insurance: An Introduction to Insurance Law (Clarendon Press 1996) p. 29. 38  H. Y. Yeo, Y. Jiao and J. Chen, “Insurable interest rule for property insurance in People’s Republic of China” [2009] JBL 781. 39  (1925) AC 619 HL. 40  Feasey v Sun Life Assurance Co. of Canada [2003] 2 All ER. 41  Sharp v Sphere Drake Insurance Plc (Moonacre) [1992] 2 Lloyd’s Rep 201 QBD. 42  Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society [1996] 1 Lloyd’s Rep 614 CA. 43  Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) para. 10.5. 44  (1806) 2 Bos & PNR 269; 127 ER 630. 45 The ICA, s. 17. See Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) para.10.11. 46  Constitution Insurance v Kosmopoulos (1987) 34 DLR (4th) 208 47  New York State Insurance Law 1939 s. 3401. See also Fidelity Phoenix and Globe Fire Insurance Co. v Raper 6 So 2d 513 (Ala, 1942); Liverpool and London Insuarnce Co. v Bolling 176 Va 182 (2940); see MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 1-045. 48  [1925] AC 619.

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of general insurance has suffered a pecuniary or economic loss by reason that property, the subject matter of the contract, has been damaged or destroyed, the insurer is not relived of liability under the contract by reason only that, at the time of the loss, the insured did not have an interest at law or in equity in the property.” This section changes common law by abandoning the strict proprietary interest test in favour of a test of economic loss and providing that, when the insured suffers pecuniary or economic loss because insured property has been damaged or destroyed, the absence of an interest at law or in equity in the property at the time of loss does not relieve the insurer from liability.49 Canada’s Supreme Court rejected the Macaura principle in Constitution Insurance v Kosmopoulos.50 New York Insurance law, both statutory law and common law, dispenses with the legal or equitable insurable interest approach and adopts the factual expectancy test.51 A New York court in the case of National Filtering Oil v Citizen’s Insurance Co52 held: “Interest legal or equitable in the property burned is not necessary to support an insurance upon it . . . it is enough if the assured is so situated as to be liable to loss if it be destroyed by the peril insured against.” A New Jersey court’s decision in Balentine v New Jersey Insurance Underwriting Ass’n53 represents the view that although the property right approach to the legal interest test is met by the existence of legal or equitable title of virtually any nature and quality, a “thin” property interest is more likely to substantiate the legal interest if it is accompanied by the insured’s pecuniary stake in the property.54 It has been noted that English courts are impatient at the restrictive nature of the English law, but it has been submitted that the requirement of a legal interest or obligation regarding the property cannot be dispensed with except by a reforming statute or by restatement of the law by the House of Lords. As mentioned above, for insurance other than life-related insurance, the Insurable Interest Bill 2016 proposes that it is sufficient to find an insurable interest where the insured will suffer economic loss if the insured event relating to it occurs.55

49  As Greg Pynt comments: “The ICA alleviates that requirement by providing that an insured will be regarded as having an insurable interest in the subject matter of a general insurance contract if they suffer a pecuniary or economic loss as a result of the insured property being damaged or destroyed even if that does not amount to a legal or equitable interest in that property (s.17). The notion of insurable interest is almost certainly irrelevant to indemnity insurance subject to the ICA, because if an insured can prove they have suffered a loss, they will satisfy the ‘s.17’ test for insurable interest.” See Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) para. 10.11. 50  (1987) 34 DLR (4th) 208. See also the comments on this case by Yeo in H. Y. Yeo, Y. Jiao and J. Chen, “Insurable interest rule for property insurance in People’s Republic of China” [2009] JBL 782. 51  New York Insurance Law, s. 3401 states: “No contract or policy of insurance on property made or issued in this state, or made or issued upon any property in this state, shall be enforceable except for the benefit of some person having an insurable interest in the property insured. In this article, ‘insurable interest’ shall include any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage.” 52  13 NE 337 (NY 1887). 53  966 A2d 1098 (NJ Super Ct App Div 2009). 54  Robert H. Jerry, II and Douglas R. Richmond, Understanding Insurance Law (5th edn, LexisNexis 2012) p. 267. 55  Insurable Interest Bill 2016, s. 3(3)(d).

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In some civil law jurisdictions, such as Japan56and Macao,57 an economic insurable interest test is adopted.58 However, in China, art. 12(6) of the Insurance Law expressly provides that insurable interest refers to a legally recognised interest of the proposer in the subject matter of insurance. It is clear that the rigid proprietary test of insurable interest is adopted by Chinese law. The effect of this article is that an insurable interest in property insurance or some interests derived from the proprietary right or possession of the property are enjoyed by persons such as an owner, or a mortgagee on the mortgaged property, or a bailee on the goods under his custody who has a legally recognised relationship with the property. If a person has only an economic interest in the subject matter, but this interest is not recognised and protected by law, the person is not presumed to possess an insurable interest in the property. For example, a bailee has no insurable interest in the full value of goods on bailment, for he has no legally recognised interest in the goods – he only has an insurable interest in his personal liability for the goods. However, it is noted that there are different understandings of the term “legally recognised interest.” Many Chinese writers consider that “legally recognised interest” is opposite to an interest which is obtained from an illegal or unlawful action such as stealing or smuggling. They comment that a person may not be assumed to have an insurable interest on things he has stolen or smuggled.59 Some Chinese scholars suggest that in China there should be twin-track tests for the insurable interest: the insurable interest in property insurance should be a legal one, whereas in personal insurance, insureds who have a specified relationship with the life insured shall be deemed to have an insurable interest.60 Professor Chu said that para. 6 of art. 12 of the Insurance Law emphasises the legal relationship between the insured and the subject matter insured. In judicial practice, the courts have adopted different tests in determining the existence of an insurable interest. The High Court of Shandong Province applied a “legal relationship” test in the case of M/V Rong Sheng, while the Dalian Maritime Court applied an “economic relationship” test in the case of M/V  Yu Hang.61 The SPC Interpretation II 2012 (Draft for Comments) attempted to explain the meaning of the insurable interest in property insurance. Article 1 provides: “Insurable interest in property insurance is the interest recognised by law, including existing interest and any other interest derived from the existing interest, such as interest based on liabilities or expectation interest.” From the Draft Interpretation, it could be understood that the scope of the insurable interest in property insurance is not restricted to the ownership of the subject matter and the existing interest in the 56  Commercial Code of Japan, s. 630. 57  Commercial Code of Macao, s. 995. 58  H. Y. Yeo, Y. Jiao & J. Chen, “Insurable interest rule for property insurance in People’s Republic of China” [2009] JBL 784. In this article, the writers analyse some common law and civil law jurisdictions’ insurance laws relating to the nature of insurable interests. 59  See Li Yuquan, The Insurance Law (Legal Press 1997) p. 73; see also Ding Yunzhou, A Brief Course on the Insurance Law of the PRC (China Banking Press, 1995) p. 34. It is considered that the term “legally recognised interest” refers to interests which are not illegal or unlawful, but they are not recognised or protected by law. The Macaura case is a good example of this point. 60  B. P. Chu, “Current issues and developments in Chinese insurance law” in J. Hjalmarsson and D. J. Huang (eds), Insurance Law in China (Routledge 2015) p. 97. 61 Ibid.

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subject matter, but also includes some interests derived from the existing interest which are legally recognised. However, this Draft Interpretation was not adopted in the formal SPC Interpretation II 2013. Thus it is still unclear in respect of what is a legally recognised interest. Statutory definition or further judicial interpretation on it by the SPC is necessary. It is submitted that the economic test is more reasonable and it is not inconsistent with the principle of indemnity for the following reasons: (1) A strict adherence to the requirement of the legal or equitable interest may cause unfair or unjust results in practice. Under this test, many proposers cannot get insurance cover for their real economic loss in cases similar to Macaura, such as a creditor who has, in the absence of a mortgage or lien, no insurable interest in his debtor’s property, or a would-be purchaser, who has yet to acquire possession or ownership of the goods, and so cannot insure them in transit unless they are at his risk, e.g. a FOB buyer cannot effect a policy for his goods for the pre-shipment period. This gives the insurers a chance to refuse the proposer’s claim technically, and it is not commercially convenient where a proposer has no or has limited insurable interest in the subject matter of insurance, but he insures the property to the benefit of others. (2) On the other hand, the purposes of the requirement of insurable interest are to prevent gaming or wagering contracts and to prevent or reduce deliberate destruction of the insured subject matter by the insured when he has no insurable interest in it. In this sense, the two tests of “strict proprietary interest” and “economic or pecuniary interest” do not make any difference as far as their effects are concerned, and the former test does not play a better role than the latter one in achieving either of the two purposes. The rationale is that the abandonment of the proprietary interest test in favour of one based on economic loss will allow more flexibility to insurers and insureds without in any way promoting gaming and wagering in the form of insurance or adding to the risk of the destruction of the property insured.62 Furthermore, taking the economic interest test would not increase the danger of deliberate destruction of the subject matter insured by the proposer. It is hard to say that a person will have more intention to destroy an insured property in which he has only an economic interest than the property in which he has a legally recognised interest.63

62  See, ALRC, Report No. 20, p. 75, para. 120; See also K. Sutton, Insurance Law in Australia (1991) p. 374. 63 This view can be supported by the Canadian Supreme Court, as in Constitution Insurance v Kosmopoulos ((1987) 34 DLR (4th) 208), the Court rejected the legal or equitable interest approach by the reasoning that having a legal or equitable interest in the insured property need not necessarily be a deterrent to someone planning to destroy it. In fact, a person who has a legal or equitable interest in a property is likely to have “intimate access” to the insured property and will thus be better placed to destroy it without detection; on the contrary, it will be more difficult for a person without such “intimate access” to do so without arousing suspicion. See also H. Y. Yeo, Y. Jiao and J. Chen, “Insurable Interest Rule for Property Insurance in People’s Republic of China” [2009] JBL 782.

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(3) Because the purpose and function of insurance is to offer an economic or pecuniary protection, but not to reinstate the insured’s legal rights, it is sufficient for a person to prove that he would suffer an economic or pecuniary loss where the insured risk occurs. If the above points are reasonable, why not adopt the “economic interest” test for insurable interests in place of the “strict proprietary test”?64 Some scholars even go further to suggest waiving the doctrine of insurable interest. As Yeo comments, it is evident that insurance legislation has to evolve in tandem with economic progress. In fact, there is no shortage of Chinese scholars proffering their views on current developments and suggestions for future reforms – especially those arguing for China to adopt the “factual expectancy” test. In most jurisdictions, modern-day jurisprudence and theories show an inevitable leaning towards a broader concept that accommodates commercial reality where there is increasing recognition that the indemnity concept suffices to underscore the original moral hazard rationale. The industry is also expected to be self-policing with assumption of responsibility by the insurance companies; in other words, insurers can either choose to waive the insurable interest requirement or make their own inquiries (since they are in a position to ascertain the type of risks to be tolerated).65 7.4 Legal framework relating to insurable interests in China In China, the doctrine of insurable interest in property insurance was first introduced in 1983 in the State Council’s Regulations of the PRC on Property Insurance Contracts.66 The doctrine was later adopted into the Insurance Law in 1995. The Insurance Law provides rules relating to insurable interests for property insurance and life insurance. Article 12 of the Insurance Law 2009 is a general provision about insurable interests. It provides: When entering into an insurance contract, the proposer of a personal insurance shall have an insurable interest in the life insured. The insured in property insurance shall have an insurable interest in the subject matter of insurance when an insured event occurs. Personal insurance refers to the type of insurance where the life and physical body of a person are the subject matter insured. Property insurance refers to the type of insurance where properties and the interests therein are the subject matter insured.

64  Some other Chinese writers or commentators are also in favour of the “economic test of insurable interest.” One writer said that “insurable interest, in essence, is a very close economic relationship between the insured and the subject matter of insurance.” See Yao Xinchao, “Insurable interest in marine insurance” (1996) 5 Insurance Studies 59. 65 H. Y. Yeo, Y. Jiao and J. Chen, “Insurable Interest Rule for Property Insurance in the People’s Republic of China” [2009] JBL 787. 66 In 1983, the State Council of China issued the Regulations on Property Insurance Contracts which dealt only with the matters of property insurance, such as the formation, change or assignment of a property policy and the rights and obligations of the parties in property insurance. Article 3 of the Regulations provides: “A proposer for cover of property insurance shall be the owner of the operating manager of the insured property or a person who has an insurable interest in the subject matter insured.”

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An insured refers to a party whose property or life or physical body is covered by an insurance contract and who is entitled to claim for insurance money. A proposer may be the insured. An insurable interest refers to an interest which the proposer or the insured has in respect of the insured subject matter and is legally recognised.67

In addition to art. 12 which provides general rules for insurable interests, art. 31 of the Insurance Law is specifically concerned with the insurable interest in personal insurance; it sets out the category in which the proposer is deemed to have an insurable interest in other individuals and provides the consequence for lack of insurable interest. Another important article relating to insurable interest is art. 48 which spells out the consequence for lack of insurable interest in property insurance. All these provisions will be examined in detail in this chapter. 7.5 Insurable interests in property insurance A contract of property insurance is a contract of indemnity.68 The purpose of indemnity insurance is that, when the insured suffers a loss as the result of the occurrence of an insured event, the insurer will pay him the insurance money in accordance with the terms of the contract. Under the principle of indemnity, to be entitled to recover insurance money for a loss, the insured must have suffered a loss. To have suffered a loss, he must have an insurable interest in the property at the time of loss. If he did not have such an interest, then he has suffered no loss. The requirement of insurable interest is therefore established in property insurance by law. 7.5.1 Meaning of insurable interest in property insurance According to art. 12(4), (5) and (6) of the Insurance Law, property insurance refers to the type of insurance where properties and the interests therein are the insured subject matter. An insured in property insurance refers to a party whose property is covered by an insurance contract and who is entitled to claim for insurance money; a proposer may be the insured. An insurable interest refers to an interest which the proposer or the insured has in respect of the insured subject matter and is legally recognised. Two questions may be raised here from these provisions. First, what is a legally recognised interest; and second, what person may fall into this category who is deemed to have an insurable interest in the insured property. As to the first question, the law does not explain what a legally recognised interest means, and what interests fall into this category. Some provincial High People’s Courts give guiding rules, which are helpful for understanding the meaning of legally recognised interest, although these guiding rules are not consistent from court to court.

67  The Insurance Law, arts 12(1)–12(6). 68  The concept of property insurance in Chinese law is equivalent to the concept of general insurance in English and Australian laws.

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The High People’s Court of Zhejiang Province explains the meaning of insurable interest.69 According to art. 13 of the Guidance of HPC of Zhejiang, three conditions must be met for determining the existence of an insurable interest in property insurance, namely the interest must be lawful, certain and can be evaluated in terms of money. Where the insured subject matter is unlawful, it does not necessarily mean that the insurable interest in the insured subject matter is unlawful. For example, where a person bought a stolen car from a thief, the car itself is an unlawful subject matter, but it could not be said that the buyer has an unlawful insurable interest in the car if he bought the car in good faith and was not aware of the truth that it was a stolen car. Article 13 further provides that insurable interests in property insurance can be divided into the following types: existing interest, interest expected on the basis of the existing interest and interest derived from liability.70 It is worthwhile to discuss these elements further. (1) The existing interest. This type of insurable interest refers to the interest which the proposer or the insured has enjoyed and is continuing to enjoy. It is not limited to ownership. The owner of the property has an insurable interest in the property. The mortgagee, pledgee, or the lien holder has an insurable interest in the property mortgaged, pledged or retained. The lawful possessor of the property has an insurable interest in the property. The person who manages the property has an insurable interest in the property. (2) Factual expectation of interest. This type of insurable interest refers to an interest which does not exist when the contract is entered into, but there is a factual expectation at that time that the proposer will acquire some form of insurable interest during the life of the contract. However, the acquirement of an interest must be based on relevant law and a relevant contract.71 These interests include profit, rent income and freight, etc.72 (3) Interest derived from civil liability. This type of insurable interest refers to an economic interest arising from the civil liability incurred by the insured to another person according to law.73 The insured has an insurable interest in his potential legal liability where he causes, due to negligence, damage or loss to another person and he must pay compensation to the person; such sort of liability may produce an insurable interest.

69  See the Guidance of the High People’s Court of Zhejiang Province concerning Questions of How to Deal with Property Insurance Disputes, Zhe Gao Fa (2009) No. 296, art. 13 (hereinafter, the Guidance of HPC of Zhejiang). 70  See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Material and Problems (Law Press China 2008) p. 18; Xiaoming Xi, The Supreme People’s Court’s Judicial Interpretation of Insurance Law II – Understanding and Implications (Provisions, Interpretation, Rationale and Cases) (People’s Court Press 2014) p. 31. 71  See the Guidance of HPC of Zhejiang, art. 13. See also Zongrong Liu, New Insurance Law, Insurance Contract Law and Practice (China Renmin University Press 2009) p. 97; Xiaoming Xi, The Supreme People’s Court’s Judicial Interpretation of Insurance Law II, Understanding and Implications (Provisions, Interpretation, Rationale and Cases) (People’s Court Press 2014) p. 35. 72 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Material and Problems (Law Press China 2008) p. 18. 73  See the Guidance of HPC of Zhejiang, art. 13.

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The High People’s Court of Guangdong Province explains:74 In property insurance, an insured is deemed to have an insurable interest if he has: (1) (2) (3) (4)

a property right in the subject matter of insurance; a contractual obligation to the subject matter of insurance; an insurable interest on his civil liability according to law; other lawful rights in the subject matter of insurance.

In property insurance, where different insureds take out insurance in the same property separately, the insurer’s liability for each insured shall be determined based on the insurable interest in the property each insured possesses. If an insured claims for an amount exceeding his insurable interest, the court shall not support the claim.75

Accordingly, it could be submitted that all the above-mentioned interests are legally recognised. Some insurance law experts comment that the insurable interest defined in art. 12(2) of the Insurance Law refers to “legally recognised interest” but not “legally recognised right” in the subject matter. “Interest” is wider than “right.” The legal interest refers to the legality of the interest, but does not mean that the interest must be based on a legal right.76 By virtue of the provincial High People’s Courts guiding rules and the experts’ explanations, the term “legally recognised interest” in Chinese insurance law has a different meaning from that under English law. The former is broader than the latter. 7.5.2 Persons who have an insurable interest At this juncture, the second question is analysed, namely who has an insurable interest in the subject matter in property insurance. Reading art. 12(4) and (6) of the Insurance Law together with art. 3 of the Regulations on Property Insurance Contracts77 could be helpful in answering this question. By virtue of art. 3 of the Regulations, “A proposer for the cover of property insurance shall be the owner or the operating manager of the insured property or a person who has an insurable interest in the subject matter insured.” Accordingly, an owner or an operating manager of the property definitely has an insurable interest in the insured property. This article also mentions other persons who should be deemed to possess an insurable interest in the subject matter of the insurance, but it does not define who those other persons are. The answer might be inferred from art. 12(4) of the Insurance Law, which states: “Property insurance refers to the type of insurance where properties and the interests therein are the subject matter insured.” Article 12(4) indicates that the insured subject matter in property insurance is the property itself and the related interest derived from the property; that means the proposer has an insurable interest

74  See the Guidance of the High People’s Court of Guangdong Province on Certain Questions for Hearing Insurance Disputes, 2011, art. 12. 75 The SPC Interpretation II 2013 has a similar rule, and art. 1 provides: “In property insurance, where different insureds take out insurance on the same subject matter of insurance separately, where an insured claims for insurance money under the insurance contract within the scope of his insurable interest, the People’s Court shall support such a claim.” 76  Xiaoming Xi, The Supreme People’s Court’s Judicial Interpretation of Insurance Law II – Understanding and Application (People’s Court Press 2014) p. 49. 77  The State Council Regulations on Property Insurance Contracts, 1983, art. 3.

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in his property itself and some related interests. By virtue of these provisions, it could be submitted that a person who has a particular relationship with a property or has an interest derived from the property is deemed to have an insurable interest in the property. For example, in addition to an owner or a person who manages the property, mortgagees, bailees or carriers, who have an interest derived from the property, are also deemed to fall into the purview.78 These relationships are analysed below. (a) Ownership of the property A person who has an ownership of the property has an insurable interest in the property. According to the Civil Law 1986 (PRC), “property ownership” means the owner’s rights to lawfully possess, utilise, profit from and dispose of his property.79 An owner has a legal right to his property, and so has an insurable interest in the property he lawfully owns, such as the owner of a car or a house or any other things. There is no doubt and no contrary opinion to this view. The problem is that several different types of ownership appear in China following the economic reforms since 1980, which causes some difficulties in determining the extent of the insurable interest in some special cases. To date, China’s economic system is a diversified market economy and is characterised by a co-existence of multi-economic structures, dominated by the public ownership system. In China, property ownership can be categorised into three different types:80 (1) state property ownership; (2) collective property ownership; and (3) private property ownership. Among the three types of ownership, it is undoubtedly true that no individual person may insure state property or collective property in his own name, for no one has a legal right to state or collective property, and he therefore has no insurable interest in such a property.81 Arguments may arise on insurable interest in private ownership. Private ownership can be divided, by law, into three types: the ownership of private enterprises, the ownership of individual businesses and the ownership of citizen’s individual personal property. The question is whether a person who owns a

78  Some scholars have the same view on persons who are deemed to have an insurable interest in the property. See Xiaoming Xi, The Supreme People’s Court’s Judicial Interpretation on Insurance Law II – Understanding and Application, (People’s Court Press 2014) p. 49. 79  Civil Law 1986 (PRC), art. 71. 80  Since the economic reform in 1978, China’s economic system has been changing from a planned economy to a market economy. The socialist public ownership has correspondingly been changed to a co-existence of multi-economic structures which is dominated by the public ownership system. See the Constitution 1982, amended in 1988, 1993 and 1999, arts 6–11. 81  Unlike in England where individuals may have land, railways, banks, airways or mines, etc., and thus an individual has a right to insure such properties; in China, these properties all belong to the state, and are owned by the whole people, so no organisation or individual is allowed to own these properties and therefore no organisation or individual has a right to insure such properties on the basis of property ownership. See the Constitution, arts. 9 and 10; see also the Civil Law 1986, art. 73. Only state-owned enterprises and units which are empowered by law to possess, operate or manage the state property have an insurable interest in such property. Property of collective organisations of the working masses is owned collectively by the working masses. See the Civil Law 1986, art. 74(1)–(5). This means that collective organisations have lawful rights to possess, utilise, profit from and dispose of collective property. Following the economic reform, many different forms of collective organisation have appeared in rural and urban areas in China, such as agricultural cooperative organisations, rural selling cooperative societies, rural credit societies and urban collective enterprises. These organisations have an insurable interest in the collectively owned property. However, no individual is allowed to insure collective property in his own name.

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private enterprise or individual business has an insurable interest in the property of his enterprise or his business. By the Regulation on Private Enterprise of the PRC,82 a private enterprise refers to an economic organisation, which has property owned by private individuals. Its number of employees must be more than eight and its purpose is to gain profit.83 The owner has a legal right to the assets or personal property of the enterprise and he therefore has an insurable interest in the property. However, if the private enterprise is registered as a limited liability company, it becomes a legal person, and the ownership of the company’s property belongs to the company rather than the person who established it.84 The owner of the company therefore may not insure in his own name the company’s property should the strict legally recognised interest test be taken according to art. 12(6) of the Insurance Law.85 It should be noticed that “individual business” was defined by law differently from “private enterprise.” Individual business refers to businesses run by individual citizens who have been lawfully registered and approved to engage in industrial or commercial operation within the sphere permitted by law.86 It is on a smaller scale than a private enterprise. The ownership of the property which is used for the business belongs to the individual owner of the business, who therefore has an insurable interest in everything used in the business and can insure such property in his own name. (b) Co-ownership and common ownership (I) CO-OWNERSHIP Whether or not a person who is the co-owner by shares has an insurable interest in the co-owned property is not an easy question.87 If the co-ownership is an individual partnership, i.e. the property is co-owned by two or more persons with shares for the purpose of business,88 each of them has an insurable interest for his proportion of the co-owned property, for each has proprietary right in his share of the co-owned property.89 Whether or not a co-owner has an insurable interest for the whole value of the co-owned property is not clear. If the legally recognised interest test is strictly adhered to, it is difficult to have a positive answer. However, as a matter of fact, if the co-owned property were damaged or destroyed completely, the co-owners’ business would be seriously impacted or interrupted. In this sense, each

82  The Regulation of Private Enterprises was promulgated in 1988 by the State Council. 83  Ibid, art. 2. 84 As to the qualifications of the establishment of a legal person, see chapter 2, arts 19–36 of the Company Law 1993 of the PRC, which was amended in December 1999; see also the Civil Law 1986, art. 41. 85  It is also a decision of English common law. See Macaura v Northern Assurance Co. Ltd [1925] AC 619. 86  See the Civil Law 1986, arts 26 and 29. 87 The Civil Law, art. 78 provides: “Property may be owned jointly by two or more citizens or legal persons. There shall be two kinds of joint ownership, namely co-ownership by shares and common ownership. Each of the co-owners by shares shall enjoy the rights and assume the obligations respecting the joint property in proportion to his share. Each of the common owners shall enjoy the right and assume the obligations respecting the joint property.” 88  According to art. 30 of the Civil Law, “Individual partnership refers to two or more citizens associated in a business and working together, with each providing funds, material objects, techniques and so on according to an agreement.” 89 The Insurance Law, art. 12 requires a person to have a legally recognised interest in the subject matter of insurance.

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has an insurable interest for the full value of their co-owned properties. On the other hand, if each shareholder is allowed to insure only his own shares, and each of them needs to make an insurance contract with the insurers, it would be very inconvenient for commercial purposes. In this sense too, a shareholder should be assumed to have an insurable interest in the whole value of the co-owned property. Once the loss occurs, he can claim the whole amount from the insurer, keep the money equivalent to his own loss and hold the rest as a trustee for the other shareholders. In the case of Mr Cai v Ping An Insurance Co. of China,90 Mr Cai was a shareholder of a private company. He insured the company’s goods in carriage by using his own name. The goods suffered loss due to being loaded on the wrong vessel, and the insured claimed. The insurer rejected the claim on the ground that as a shareholder the insured had no insurable interest in the company’s goods. The court held that as a shareholder of a private company, the insured had an insurable interest in the company’s goods. However, if the co-ownership is embodied by a registered limited company by shares, the shareholder has no right to insure the company’s property in his own name, even merely for his own shares. Because, as was mentioned earlier, as a matter of law, once the company is established, the property no longer belongs to the shareholders but to the company; the shareholders therefore lose their proprietary right to the company’s property and therefore lose their insurable interest in the property.91 (II) COMMON OWNERSHIP Common ownership refers to two or more persons jointly enjoying a proprietary right for the same object on the basis of common relationship. Common ownership must be established by law or based on relative contract, for example the relations of wife and husband; members of a family; the property inherited in common by two or more inheritors; and partnerships, etc. Each of the joint owners shall enjoy rights and assume liabilities in respect of the joint property.92 Accordingly, each of them has an insurable interest in the jointly owned property. (c) Management or operation rights over the property That an operating manager of the insured property has an insurable interest is affirmed by art. 3 of the Regulations on Property Insurance Contracts 1983. A managing and operating right over property is a form of right based on the possession of property. This right is produced under a contract. According to the Chinese Civil Law, a person or persons (citizens or collectives) contractually have the rights of possession of, utilisation of and profit from a particular property (owned by the state or collectives) under the contract concluded with the state or collectives,93 but they may not dispose of this property.94 Whether or not the persons have an insurable interest in this property depends on the agreement of the parties to the contract. The

90  Zhan Hao, Insurance Law – Interpretations of Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 90. 91  This decision is similar to the English case of Macaura v Northern Assurance Co. Ltd [1925] AC 619. 92  See the Civil Law 1986, art. 78. 93  Ibid, arts 80–81. 94  Ibid, art. 80.

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rights and obligations of the two contracting parties shall be stipulated in the contract in accordance with the law.95 Where the contract stipulates that the operating manager shall assume liability if the contracted property is damaged or destroyed, then he has an insurable interest in the contracted property, for he will obviously be liable for the loss if the property is damaged or destroyed. The Enterprise Property Insurance clauses also stipulate that the property under management or operation by the insured is included in the scope of the insurance policy.96 (d) Other legal relationships with the property Persons who have a legal right over the property include not only the owners and the operating managers of the property but also those who have other identifiable legal or equitable relationships with the property. A mortgagee, for instance, has an insurable interest for the mortgaged property before the mortgage terminates. A mortgage is usually created by a mortgagor (a debtor) based on a debt. A creditor (the mortgagee) has the right to demand his debtor to fulfil his obligations as specified by the contract or according to legal provisions.97 In order to secure the performance of his obligation, the debtor or a third party may offer a specific property as security.98 A mortgage, which is created by the mortgagor (the debtor), refers to a conveyance, assignment or demise of real or personal property as security for the repayment of money borrowed. A mortgage is usually real property, such as a house or a piece of land, and the possession of the property is not transferred from the mortgagor to the mortgagee during the term of the mortgage. The mortgagee (the creditor), for whose benefit the mortgage is created, has the right to dispose of such property if the debtor defaults, and has priority in satisfying his claim out of the proceeds from the auction of the mortgaged property.99 Thus, if such property has been damaged or destroyed before the debtor repays the debt, the creditor would lose the right to dispose of it, and would suffer a financial loss where the debtor fails to perform his obligation. So the mortgagee has an insurable interest in the mortgaged property, but the sum insured is limited to the amount of the debt simply because his legal right is restricted to that amount. A security may also be personal property. The possession of the property under this type of security is usually transferred from the debtor to the creditor. The transfer of the possession of the property to secure the repayment of the debt is called a pledge, which is offered by the pledgor (the debtor) or a third party to the pledgee (creditor).100 The pledgee possesses and controls the pledge until the debtor pays off the debt to him. Under this type of security, the pledgee has a twofold interest which may constitute an insurable interest in the property. On the one hand, during the term of the pledge, he bears the responsibility of keeping the property safe. He is liable to return it back to the pledgor in sound condition if the debtor repays his debt in due time. On the other hand, if the debtor defaults, the pledgee shall be entitled

  95  Ibid. art. 81.   96  See Enterprise Property Insurance Clauses of the PICC, s. 1(2).   97  See the Civil Law, art. 84.   98  Ibid, art. 89(2).   99  The Urban Real Estate Administration Law 1994 (PRC), art. 46; the Civil Law, art. 89(2). 100  See the Civil Law, art. 89(2).

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to keep the pledge to offset the debt or have priority in satisfying his claim out of the proceeds of sale of the pledge pursuant to relevant legal provision.101 Thus once the pledge is destroyed, the pledgee will suffer an economic loss. He therefore has an insurable interest to the full value of the pledge. The position of a lienee, a bailee or a carrier is much the same as in the case of a pledgee. The insurable interest of a bailee in the goods of which he is custodian consists of, first, any liability of his to the bailor in the event of the goods coming to harm and, second, his own contractual entitlement to earned profits or commission for the performance of his services. In general, possession of the property with a degree of legal responsibility over it provides a basis for the existence of an insurable interest in such a property. (e) Expected interest stemming from an existent interest An insurable interest is not necessarily confined to an existent interest but also extended to an expectancy based upon a present interest. Article 12(4) of the Insurance Law stipulates that the subject matter of property insurance shall refer to the property and its related interests.102 It is submitted that the term related interest mentioned in this article refers to the expected interest which stems from the existing interest in the property. In other words, a person has an insurable interest in an interest which does not exist when the insurance contract is effected, but where there is an expectancy of acquiring such an interest upon an actual or existing interest. This expected interest usually means a profit. For example, a manufacturer who owns a building or a machine has an insurable interest in the production profit, because if his building or machinery is damaged or destroyed, he may suffer not only from the destruction of the property itself, but also from the loss of the profit income as expected. So he has an insurable interest not only in the property, but also in the expected profit. The latter interest, however, has to be insured quite separately; the usual indemnity policy on property will not indemnify against consequential losses. Similarly, a user of the property can insure not only the property he possesses but also the profit income. A manager has the right to insure his managing income, a contractor of a project has an insurable interest for his contracting income, a landlord may insure his rent interest, a carrier can insure his freight and a bailee has an insurable interest in his commission for taking care of bailment property.103 In Xinjiang Dawang Co. Ltd v PICC Miquan Branch,104 the plaintiff, Dawang Co, purchased a car from Mr Han in January 1998, but the car transfer registration had not been done in a timely manner. Dawang Co. insured the car in December 1998. In November 1999, the car was stolen. The insured claimed, but the insurer rejected the claim and argued that the insured had no an insurable interest in the car, because it was not the owner of the car due to the fact that the transfer registration had not been done. The court held that Dawang Co. had an insurable

101 Ibid. 102  Emphasis added. 103  See Zhou Yongsheng, Insurance and Law (2nd edn, Shandong People’s Press 1998) pp. 108–20 for more detailed discussion. 104 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 23.

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interest in the car on the basis that it was the user of the car although it was not the legal owner of the car. There is another case in which it was held that the borrower of the car has an insurable interest in the borrowed car on the basis that the possession or usage of the property creates an insurable interest. In Minghui Li v Ancheng Property Insurance Company Beijing branch,105 the insured was Minghui Li, but the registered owner of the car was Mr Zheng. Minghui Li effected a car policy and paid the premium. When the car was damaged, the insurance company rejected the claim on the ground that insured had no insurable interest in the car because he was not the owner of the car. The court held that the insured, as the borrower of the car, had an insurable interest because he possessed the car and used it.106 The above approach that the usage or possession of a property creates an insurable interest is confirmed by the High People’s Court of Shandong Province.107 The High People’s Court provides guiding rules on determining a proposer’s insurable interest by stating that “In property insurance, the insured who is not the owner of the subject matter of insurance shall be deemed to have an insurable interest at the time of loss if he enjoys the rights of possession or usage of the subject matter of insurance based on a leasing, affiliating or custody contract.” In the UK, the LCs proposed that “possession or custody of the insured subject matter” creates an insurable interest in property insurance.108 This proposal has been adopted in the Insurable Interest Bill 2016.109 7.5.3 When an insurable interest is required in property insurance The 1995 and 2002 versions of the Insurance Law did not stipulate the time at which the insurable interest must exist. The rules governing insurable interests in the Insurance Law 1995 and 2002 were exactly the same. It was stated: “The proposer shall have an insurable interest in the subject matter of the insurance. The insurance contract is null and void if the proposer has no insurable interest in the subject matter of the insurance.”110 This provision was ambiguous in terms of time when the insurable interest is required. It seems the law required the insured to show an interest in the insured subject matter at both the time of contract and the time of loss.111

105  See Jing Wang, Insurance Cases, Rules of Judgment and Application of Laws (People’s Court Press 2013) p. 70. 106  Xiaoming Xi, The Supreme People’s Court’s Judicial Interpretation on Insurance Law II, Understanding and Implication (Provisions, interpretation, rationale and cases) (People’s Court Press 2014) p. 43. Several other cases concerning insurable interest derived from the use of the property are cited in this book. 107 The Guidance of High People’s Court Shandong Province Concerning Questions of How to Deal with Insurance (the Guidance of Shandong HPC) was published by the High People’s Court of Shandong Province in 2011. 108  LCs Issues Paper 10 (2015), Insurable Interest: Updated Proposals, Proposal 9, p. 14. 109  Insurable Interest Bill 2016, s. 3(3)(c). 110  The Insurance Law 1995, art. 11; the Insurance Law 2002, art. 12. 111  Some Chinese scholars have different views on this point. Xu said that the insurable interest was required at both time of contract and time of loss; see Xu Xuelu, Insurance Law (Legal Press 2000) p. 55. But Li has a different opinion and said that “insurable interest is not necessary to exist when the policy is effected, it is required only at the time of loss.” See Li Yuquan, Insurance Law (Legal Press 1997) p. 76.

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In the Insurance Law 2009, a new provision (art. 12(2)) was introduced to expressly confirm that in property insurance an insurable interest must exist at the time of loss. Article 48 of the Insurance Law further confirms that the insured is required to have an insurable interest when the insured event occurs; otherwise, he is not entitled to claim against the insurer for indemnity. It is submitted that it is reasonable to require an insurable interest at the time of loss in property insurance. This rule is consistent with the principle of indemnity – no interest, no loss, and therefore no indemnity. The new rule significantly reduces the dispute on the issue when the insurable interest is required, and it is practically convenient for underwriting insurance without requiring an insurable interest at the time of contract; the insured has the right to claim as long as he can show an insurable interest at the time of loss. Under the current English law, for indemnity insurance, it is not always clear when an interest has to exist.112 For marine insurance113 and goods insurance, generally, an insurable interest is not required at the inception of the contract. However, it is essential for the insured to show that at the time of loss he has suffered a loss resulting from the destruction of the subject matter insured to satisfy the principle of indemnity under which the insured may not recover more than he has lost.114 As far as insurance in real property is concerned, it was at one time thought that the Life Assurance Act 1774 (LAA) applies. Accordingly, the insurable interest was required at the time the policy was effected. Since the decision of Mark Rowlands Ltd v Berni Inns115 in which it was held that the 1774 Act applied only to life policies and did not and does not extend to indemnity insurances, the requirement of insurable interest at the time when the contract was concluded has been removed, and the rules applying to goods insurance have been followed in real property. Thus it could be concluded that all indemnity insurance requires an insured to possess an interest in the subject matter insured when the loss occurs. This conclusion applies to the corollary that proof of loss necessarily involves proof of an interest in the subject matter, since if there is no interest there can be no loss. The LCs in Issues Paper 10116 confirm that the insured must have an insurable interest at the time of loss. If he does not have an interest he may not make a claim.117 However, the LCs in the Insurable Interest Bill 2016 expressly require that an insurable interest or a reasonable prospect of acquiring such an interest during the term of the contract must exist at the time of contract; otherwise his claim is void.118 In addition, the insured must have an insurable interest in the subject matter at the time of loss; otherwise

112  The LCs Issues Paper 10, para. 2.8. 113  The Marine Insurance Act 1906, s. 6. 114  Anderson v Morice [1876] 1 App Cas 713; See also Hardy Ivamy, General Principles of Insurance Law (6th edn, Butterworth & Co. 1993) p. 27. 115  [1985] 3 All ER 473, approved by the Privy Council in Siu Yin Kwan v Eastern Insurance Co. [1994] 1 All ER 213 (Liability insurance). 116  The LCs Issues Paper 10 (2015), Insurable Interest: Updated Proposals. 117 The LCs Issues Paper 10 (2015), Insurable Interest: Updated Proposals, para 2.26. It is said that for indemnity insurance, “In deciding whether the policyholder should be entitled to make a claim, the crucial issue is whether there is an insurable interest at the time of loss. We said that, if the insured does not have an insurable interest at the time when the loss occurs, they may not make a claim. This is the position under the current law, and we think it should be confirmed in statute.” 118  Insurable Interest Bill 2016, s. 3(1)(a) and (b).

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his claim is not payable.119 It is clear that an insurable interest is required, under the Insurable Interest Bill 2016, at both the times when the contract is concluded and when the insured event occurs. Australian insurance law does not require an insurable interest at the time of contract for a general insurance contract. Section 16 of the ICA expressly provides: “A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject-matter of the contract.” This section dispenses with the requirement for an insurable interest at the inception of policy, but s. 16 says nothing about an insurable interest being insisted upon at the time of any loss. However, from s. 17 of the ICA, the requirement of an interest at the time of loss is reflected. Section 17 requires the insured to establish a pecuniary or economic loss arising from the damage or destruction of the subject matter of insurance. This indicates that in general insurance, an insured must have an insurable interest at the time of loss, for it can be said that proof of loss is equivalent to proof of interest. It can now be concluded that the requirement of insurable interest in indemnity insurance is not required at the inception of a policy under the Insurance Law. The reason is that the purpose of indemnity insurance is to indemnify the insured for his actual loss when an insured event occurs. Whether or not he suffered a loss or how serious a loss he suffered must be ascertained at the time of loss of the subject matter insured. Provided he can establish that he has suffered loss as a result of an event insured against, he can recover from the insurer. 7.5.4 Consequences of lack of an insurable interest in property insurance The provision in the Insurance Law 2009 relating to the effect of lack of an insurance interest is art. 48. The 2009 Law amended the 1995 and 2002 versions in terms of the consequences of lack of an insurable interest. In art. 12 of the 1995 version120 it was said that “the insurance contract shall be null and void if the proposer has no insurable interest in the subject matter of the insurance.” This covered both property and life insurance. The lack of insurable interest rendered an insurance contract void or null irrespective of the type of the insurance. According to this rule, the presence of an insurable interest in the subject matter is a condition precedent for the validity of an insurance contract. The 2009 version of the Insurance Law changes the old law on this point. Article 48 of the 2009 version provides: “Where the insured does not have an insurable interest when the insured event occurs, he is not allowed to claim against the insurer for the insurance payment.” This article concerns property insurance only; it does not apply to personal insurance.121 By virtue of this article, in property insurance, the absence of an insurable interest in the subject matter does not affect the validity of the contract but the insured’s right for making a claim for the loss. This obviously mitigates the harshness of the consequences for lack of an insurable interest.122

119  Ibid, s. 3(2). 120  The same rule was provided in the Insurance Law 2002, art. 11. 121  In the Insurance Law 2009, arts 48–66 govern property insurance, which are covered under s. 3 “Property Insurance.” 122  Jing Wang, Insurance Cases, Rules of Judgement and Application of Laws (People’s Court Press 2013) p. 68; see also Jianxun Liu, Typical Cases & Judgment Consideration of Insurance Law (Law Press China

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The High People’s Court of Shanghai interprets this article such that “The lack of insurable interest shall not render the contract invalid. The court is not required to hear a case in terms of the validity of the contract due to the lack of an insurable interest in property insurance. Instead, the insured is required to prove that he has an insurable interest at the time of loss. That means that he has a legally recognised and economic relationship with the loss caused by the insured event. If the insured cannot prove such an interest the People’s Court shall not uphold his claim.”123 From art. 48 of the Insurance Law and the Shanghai High People’s Court interpretation on it, a property insurance contract without an insurable interest is not void but valid, and the court does not need to examine the validity of the contract when hearing such a case, as the only effect of lack of an insurable interest is that the insured may lose his right of claim. Where the insured makes a claim, he must prove that he has an insurable interest; if he cannot provide evidence to prove that he has a legal or economic interest in the subject matter at the time of loss, the court shall not support his claim.124 An issue may arise here in respect of the return of the premium, namely, whether the insurer is entitled to keep the premium paid by the insured who is not allowed to claim due to lack of an insurable interest. The Insurance Law does not mention this point. Scholars have different views on this issue. A judge said that in theory, for a valid policy, the premium is not repayable, so the insurer does not need to return the premium paid by the insured.125 However, it could be argued that this view is not right. If, for example, the insured has never had an insurable interest in the insured property, he is never allowed to claim, and this means that the insurer has never borne the risk on this property. It is submitted that the insurer should not be entitled to keep the premium where it does not bear risk. Some others have the view that because the Insurance Law does not make an insurance contract void without an insurable interest, and the contract is valid, the insured may rescind the contract and claim back the premium paid.126 There may be a situation where the insured property suffers partial loss, but the insured has no insurable interest in the property when the insured event occurs, and he has no right to claim for the loss without an insurable interest. However, the lack of insurable interest does not affect the validity of the contract, and the insured now has two options. He may exercise the right vested by law to rescind the contract if he wishes and claim back the premium he paid for the rest of the contract.127 Alternatively, he may want the contract to be 2012) p. 66. As court judges, Wang and Liu both comment that art. 48 is a good rule for providing that the lack of insurable interest does not affect the validity of a property policy. Liu said that, in practice, it is very rare for a proposer to take out insurance for his property where he has no interest in it. Even if a proposer takes out insurance for a property owned by another person, usually the proposer has a relationship with the property, such as the operation of the property, or the usage of the property. So Liu has the view that to separate the concept of insurable interest from the validity of a property insurance contract would not increase moral hazard. 123 The High People’s Court of Shanghai: The Answers to Certain Questions on Hearing Insurance Contract Disputes II, 2013. 124 The High People’s Court of Shanghai: The Answers to Certain Questions on Hearing Insurance Contract Disputes II 2013, art. 6. 125  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Adaptation of the Provisions (China Legal Publishing House 2010) p. 322. 126  Bixin Jiang, Insurance Disputes (Law Press China 2014) p. 17. 127 The Insurance Law, art. 54, provides: “Where a proposer requests to rescind the contract after commencement of the insurance liability, the insurer shall refund to the proposer the premiums received

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continued, so that if the subject matter suffers loss in the future during the contract period, he may claim if he has acquired an interest by then.128 In the UK, the LCs proposed that “We believe that a refund of premiums paid should always be available where the contract is void . . . If the contract is valid, the insurer is entitled to sue for any unpaid premium.”129 This indicates that if the insured has paid the premium for a valid insurance contract, the insurer is entitled to keep the premium paid even though the insured is not allowed to claim for loss when the insured event occurs because of lack of an insurable interest.130 7.6 Insurable interests in personal insurance131 Insurable interests in life insurance are governed by rules provided in arts. 12, 31, 33 and 34 of the Insurance Law 2009. Article 12 provides several rules regarding insurable interests in life insurance; by virtue of these rules, the insurable interest in life insurance is required at the time of contract,132 the subject matter of life insurance is a person’s life or physical body133 and insurable interest refers to a legally recognised interest possessed by the proposer in the life insured.134 Article 31 provides rules to regulate who has an insurable interest in whose life. Article 33 deals with matters regarding insurance on a person whose civil capacity is limited. Article 34 provides that for a death policy, consent of the life insured is an additional ground for the validity of the contract and the insured amount. All these articles will be examined. The major issue in life insurance is who has an insurable interest in whose life. There are different approaches in different jurisdictions on this issue. For example, under current English law, people can insure their own life and that of their spouse based on natural love and affection. However, the law excludes cohabitants and children. The scope in which people are deemed to have an insurable interest in another’s life under Chinese law is much wider than that in English law. It is submitted that the different approaches in different countries on insurable interest largely result from different tradition, culture, other relevant laws, moral status, etc. Whether or not a person has an insurable interest in the life insured largely depends on whether the life insured owes an aliment obligation to that person in a family relationship or whether a pecuniary loss flowing from a legal obligation will or might be suffered by that person on the death of the life insured in other relationships. So the issue of whether a person has an insurable interest in others’ lives is determined not only by insurance law but also by other relevant laws. In China, the Marriage

after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission.” 128  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Adaptation of the Provisions (China Legal Publishing House 2010) p. 322. 129  See the LCs Issues Paper 10 (2015), Insurable Interest: Updated Proposals, para. 2.25. 130  The Insurable Interest Bill 2016, s. 3(2). 131  For detailed discussion on insurable interests in life insurance, see Zhen Jing, “Insurable Interests in Life Insurance: A Chinese Perspective” [2014] 5 JBL 337. 132  The Insurance Law, art. 12(1). 133  Ibid, art. 12(3). 134  Ibid, art. 12(6).

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Law,135 Adoption Law136 and Civil Code are also sources of law for determining insurable interests in life insurance. A number of issues will be considered at this stage: (1) the nature of insurable interest in life insurance; (2) persons who are deemed to have an insurable interest in another’s life; (2) consent of the life insured as an alternative ground for establishing insurable interest and as a condition for a valid life contract; (3) extent of insurable interest; (4) the time when an insurable interest must exist; (5) consequences for life policies without insurable interests; (6) whether an insurer should have a statutory duty to check the existence of an insurable interest at the time of the contract; and (7) assignment of life policies and insurable interests. 7.6.1 The meaning of insurable interest in personal insurance Article 12 provides that insurable interest shall refer to a legally recognised interest of the proposer in the subject matter of insurance. It establishes a narrow and restrictive test of insurable interest – “a legally recognised interest.” This is similar to the current English law position,137 under which the policyholder must show that his insurable interest on the life insured is legally recognised. This strict test has caused uncertainty and unfairness. In judicial practice, courts look for a legally recognised interest. This can be seen in the case of Mr and Mrs Gao v China Life Insurance Co.138 Mr and Mrs Gao married in 1995, but they had no children. In 1999, they heard that a baby girl was abandoned by her parents and was picked up by the local police station. Mr and Mrs Gao adopted the baby girl. They went through adoption formalities in the police station of the local Public Security Bureau by making the Blue Print Residence Registration,139 but did not register formally with a civil affairs department, which must be done for a lawful adoption according to the Adoption Law.140 After the adoption, the father effected a life policy on the girl on 8 September 1999 and nominated himself as the beneficiary. The girl drowned on 10 October 1999. The father claimed, but it was rejected by the insurer on the ground that the father had no legally recognised insurable interest on the girl because the couple failed to adopt by following the requirements of the Adoption Law. Some legal requirements must be met for adopting an infant, and an appropriate procedure must be completed for the adoption. 135  The Marriage Law of the People’s Republic of China was enacted in 1980 and amended in 2001. 136  The Adoption Law of the People’s Republic of China was enacted in 1991 and amended in 1998. 137 In English law, legal interest is required in all types of insurance. Macuara v Northern Assurance [1925] AC 619 for property insurance; s. 5(2) of the MIA for marine insurance; Harse v Pearl Life Assurance Co. Ltd [1904] 1 KB 558 for life insurance. Recently, the LCs have recommended reform on this point and proposed that the test of “a pecuniary interest recognised by law” should be relaxed and replaced by the test of “a reasonable expectation of economic loss.” See para. 13.4(2)(a) of the Joint Consultation Paper. 138 Yuhao Zhou, The Latest Insurance Law and Doctrines: Cases, Materials, and Practice (Law Press China 2008) p. 21. 139 In China, “Blue Print Residence Registration” means that the residence registration is made temporarily in the local Public Security Bureau before the permanent registration is done. The local Public Security Bureau places a blue print on the registration certificate, so it is called “Blue Print Residence Registration.” It is said that this practice was abolished in 2000. See accessed 22 June 2015. 140  The Adoption Law 1991, art. 15.

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For instance, according to the Adoption Law, the adopters must have reached the age of 30,141 but in this case, the couple had not reached 30 when they adopted the girl. They also failed to go through the necessary legal adoption procedure required by law to register the adoption with the Civil Affairs Department of the government at or above the county level.142 Therefore, it was held that the couple did not have a legally recognised insurable interest in the life insured girl. This is obviously unfair and harsh to the policyholder.143 It is submitted that the strict test of “a legally recognised interest” needs reform. 7.6.2 Persons in whom a proposer is deemed to have an insurable interest Article 31 of the Insurance Law sets out a non-exhaustive list of persons on whose lives the proposer has an insurable interest. “A proposer shall have an insurable interest in the following persons: (1) Himself; (2) His spouse, children and parents; and (3) Apart from the above-mentioned, other family members and close relatives bearing foster or support or maintenance relationship with the proposer; (4) A worker who has working relationship with the proposer.144 In addition to the persons mentioned in the preceding paragraphs, the proposer is deemed to have an insurable interest in any insured person who agrees that the proposer may conclude a contract on his life.”

From this article, it could be said that the law establishes four categories for insurable interest in life insurance: interests arising out of natural love and affection which do not require financial loss to be evidenced; interests arising from blood and family relationships which require evidence of fosterage, support or maintenance duties; interests arising out of employment relationships and interests arising out of the life insured’s consent.

141  By virtue of art. 6 of the Adoption Law, adopters shall meet simultaneously the following requirements: (1) be childless; (2) be capable of fostering and educating the adoptee; (3) suffering no such diseases as are medically regarded as unfit for adopting a child; and (4) having reached the age of 30. 142  The Adoption Law, art. 15 provides as follows: “The adoption shall be registered with the civil affairs department of the people’s government at or above the county level. The adoptive relationship shall be established as of the date of registration. Where an abandoned infant or child whose biological parents cannot be ascertained or found is adopted, the civil affairs department in charge of registration shall make an announcement prior to the registration. If the parties involved in the adoptive relationship wish to enter into an agreement on adoption, they may conclude such an agreement. If the parties or one party involved in the adoptive relationship wish that the adoption be notarised, it shall be done accordingly.” 143  This problem has also been found in property insurance. For example, in a Beijing case, the plaintiff, who insured a car, had already paid the full amount for the car but the process to register the transfer of ownership was still in progress at the time of the accident. The court held that the plaintiff had no insurable interest in the car because he was not the owner of the car before the completion of the transfer registration and there was thus no legal right to support his interest. See Yeo et al., “Insurable interest rule for property insurance in the People’s Republic of China” [2009] JBL 790. 144  This is a new rule which was added to the Insurance Law 2009.

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Article 31(1)(1), (2) and (3) concerns interests arising out of natural affection and family relationships, and art. 31(1)(4) regards employment relationships. Article 31(2) is about an insurable interest created by the life insured’s consent only, without proof of the relationships listed above. This could be deemed as an alternative ground for establishing an insurable interest. (a) Interests arising out of natural love and affection Insurable interest supported by natural affection are universally recognised. However, the scope of this category varies from one jurisdiction to the next. The category in Chinese law is wider than that in English law. Most family members have insurable interests in each other’s lives under Chinese law. (I) INSURABLE INTEREST IN ONE’S OWN LIFE No one can prevent a person from effecting a policy on himself. This is confirmed by the Insurance Law.145 The modern forms of life policies are numerous, but in general can be divided into four classes, namely traditional whole life policy, endowment policy, accident policy and investment policy.146 No matter which form it is or whether it is for his own interest or other persons’ benefits, a person definitely has an insurable interest in his own life. Moreover, because the value of one’s life and body cannot be measured by money, a person has an unlimited interest in his own life.147 (II) INSURABLE INTEREST IN THE LIFE OF ONE’S SPOUSE By virtue of art. 31(2), a person has an insurable interest in his spouse, children and parents. This rule is based on natural affection and supported by the Marriage Law. Under the Chinese Marriage Law, a husband and a wife have a legal obligation to maintain each other. If one party fails to perform this duty, the party in need of maintenance has the right to demand maintenance payments from the other party.148 So they have an insurable interest in each other. This does not extend to civil partners, cohabitants and fiancé(e)s, as their relationships are not recognised by law in China.149 (III) PARENTS HAVE AN INSURABLE INTEREST IN THEIR CHILDREN Article 31(1)(2) makes it clear that parents have an insurable interest in the life of their children and vice versa. This is also supported by the Marriage Law, which imposes a

145  The Insurance Law, art. 31(1)(1). 146  See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 18-001. In China, life policies are divided into three types, namely, traditional life insurance, health insurance and accident insurance. See the Notice on “The tentative provisions for names of the life insurance products by China Insurance Regulatory Commission” (No. 42, 2000). 147  In a Chinese case, Jiqing v The PICC Life Insurance, a couple effected several life policies in 1995 on their own lives for their son’s benefit, and the insured sum was as high as ¥1,500,000, which amounts to 100 times a Chinese ordinary worker’s annual salary. It was allowed because the law does not limit the insurance amount in this type of life insurance. For the detailed discussion on the case, see Chen Xuqin, “Some thought arising from a life insurance claim for a huge sum” (1997) 2 Chinese Legal Sciences 114. 148  The Marriage Law, art. 20. 149  However, according to art. 31(2) of the Insurance Law, any person is deemed to have an insurable interest in another’s life and may insure the other person if the other agrees for that person to do so. Thus an insurable interest can be created through the life insured’s consent in the relationships of civil partners, cohabitants and fiancé(e)s.

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legal duty on parents to bring up and educate their children, and a legal duty on the adult children to support and assist their elderly parents.150 It is obvious that the loss of one person amounts to the cessation of the financial support from the other. It is therefore held that parents and their adult children have an insurable interest in each other.151 In China, special circumstances under family planning policy make art. 31(1)(2) more reasonable. In the last three decades, China has been implementing a “one couple – one child” policy to control the rapid growth of the population.152 One of the problems of the family planning policy is that the balance of elderly population and young population is broken. The traditional family composition153 is disappearing and a new type of family composition of “4+2+1” is becoming typical, – families are consisting of four elderly parents,154 two young persons (the couple) and one child. It is obvious that elderly parents, especially the poor ones, may face financial difficulty if their only child dies. There is no doubt that this may place financial pressure on the couple to support the whole family.155 Taking out life insurance is one of the ideal solutions for elderly people. In addition to effecting an annuity policy and an endowment policy, they may take out insurance on the life of their adult child for their own benefit. The law also entitles a parent to effect a death policy on his minor child who has no civil capacity.156 However, the amount of insurance for such a policy is limited to the amount set up by the financial supervision and control department,157 that means that there is a cap on the amount for which a minor child’s life may be insured. The sum insured for a life policy effected by a parent on the life of his minor child should not exceed the limit set by the financial supervision and control department, as stipulated in art.33 of the Insurance Law.158 China Insurance Regulatory Commission (CIRC)

150  The Marriage Law, art. 21. 151  Based on the Marriage Law, the insurable interest may extend to the relationship of the unmarried mother or father and their children. Article 25 of the Marriage Law provides: “Children born from unmarried couples have the same legal position as those born from married couples.” Step-parents and step-children may also be presumed to have insurable interests in each other, as do foster parents and foster children, because the Marriage Law gives them the same rights and imposes on them the same obligations as those of natural parents and their children. See arts 25–27 of the Marriage Law. See also Dingfu Wu, Interpretation of the Insurance Law of PRC (China Finance and Economy Press 2009) p. 86; Xiaoming Xi, The Supreme People’s Court’s Judicial Interpretation on Insurance Law II, Understanding and Implication, Provisions, Interpretation, Rationale and Cases (People’s Court Press 2014) p. 62. 152  The Central Committee of the Chinese Communist Party in the 5th meeting of the 18th session (held 26–29 October 2015) announced that one couple may have two children. It is said that the “one couple – one child” policy which had been implemented for 35 years became history from then: accessed 20 May 2016. 153  In China the traditional family composition is that one couple has several children. 154  Four elderly people are the husband’s parents and the wife’s parents. 155  Some elderly people have pensions. But most people in China have no pension, especially farm workers in the countryside. 156 The Insurance Law, art. 33. The law does not allow a proposer to effect a death policy on a person who has no capacity for civil acts; however, a life policy effected by a parent on the lives of his minor children is an exception from this prohibition. 157 Ibid. The Financial Supervision and Control Department is the China Insurance Regulation Commission (CIRC). 158 The Insurance Law, art. 33, stipulates: “(1) A proposer may neither propose nor may an insurer underwrite life insurance on a person who has no capacity for civil acts where the death of such a person is set as the condition for payment of the sum insured. (2) Proposals for personal insurance by parents for their minor children shall not be governed by the preceding paragraph, provided that the total sum insured payable upon the death of minor children whose lives are insured does not exceed the limit set by the financial supervision and control departments.” If an insurer effects such policy on a person without

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acts as the financial supervision and control department who has the power to set up the limitation of insurance amount for a life policy where the parent insures his child. (I)  AMOUNT LiMiT WHERE a PaRENT EFFECTS a POLiCY ON HiS CHiLD Where a parent effects a death policy on his child, the amount of insurance is limited by the figures set up by the CIRC. The limit of the total sum insured on such a policy or policies was set to ¥50,000 by the CIRC in 1999159 and increased to ¥100,000 in 2010.160 To cope with inflation, in 2015, the CIRC again increased the insured amount limitation for such a policy. In the CIRC’s Notice on matters related to life insurance where parents effect policy on the life of their child under which the death of the life insured is a condition for payment of insurance money,161 art. 1 provides: (1) where the life insured is younger than 10 years old, the insured amount shall not exceed ¥200,000; (2) where the life insured is 10 years old or over but younger than 18 years old, the insured amount shall not exceed ¥500,000. (II) THE iNSURER’S DUTY TO EXPLaiN THE aMOUNT LiMiT TO THE PaRENT Insurers are required, at the time of contract, to explain to the parents the relative rules and regulations in respect of the limit on insurance on minor children, and to ask whether the parents have effected such a policy with other insurers and for what amount. Where the cumulative insured amount with one or more other insurers has already reached ¥100,000, the insurer shall not underwrite a life policy on that minor child.162 If an insurer provides coverage in serious excess of the limit, the CIRC shall order rectification and impose a fine of between ¥50,000 and ¥300,000 on the insurer.163 In Mr Hu v Life Insurance Company,164 Mr Hu effected a life policy on his son’s life (13 years old) in 2001 with the defendant insurer. The insured amount was ¥200,000. Hu had no idea at all of the insured sum limit set by the CIRC. The insurer neither explained the relevant rules to Hu nor asked Hu any question about the total amount insured, but effected the policy. On the death of his son in 2004, Hu claimed. But the insurer was prepared to pay only ¥50,000 (that was the limit then) and return some amount of the premium correspondingly. The court held that (1) the contract was valid only for the part of ¥50,000, and the rest for ¥150,000 was invalid. (2) At the time of contract, the insurer did not perform his duty to explain the limit to Hu, and was thus liable for compensating Hu by paying him an

capacity for civil acts, he will be given a fine between ¥50,000 yuan and ¥300,000 yuan by the financial supervision and control department per art. 164 of the Insurance Law. 159  See the CIRC Notice of “the limitation of the sum insured for death insurance taken out by a parent on his minor child” Bao Jian Fa (1999) No. 43 accessed 28 May 2015. 160  See the CIRC Notice of “the limitation of the sum insured for death insurance taken out by a parent on his minor child” (2010) No. 95 accessed 12 December 2014. 161 The CIRC Notice on “matters related to life insurance where parents effect policy on the life of their child under which the death of the life insured is a condition for payment of insurance money” Bao Jian Fa (2015) No. 90, art. 1. 162 Ibid. 163  The Insurance Law 2009, art. 164. 164 This case was cited in the Insurance Case Book, edited by Li Zongjian (China Modern Economic Publishing House 2007) p. 132.

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additional ¥150,000. The Insurance Law and the CIRC Regulations do not provide any remedy to protect the policyholder if the insured amount exceeds the limit as a result of the insurer’s fault. It is suggested that the remedy to the policyholder should be provided in the CIRC Regulations. There is a point to make from this case. Assuming that Hu had murdered his son for the insurance amount (¥200,000 yuan), but would not have committed the murder if the insured amount were only ¥50,000. Then the question is whether the insurer should be made responsible (at least partially) for such a murder due to his fault in effecting such a policy which induced the murder. The current Chinese law does not cover this point and there have been no reported cases. In the US, issuing a policy without interest in the absence of reasonable investigation is actionable negligence.165 This means that the insurer who issues a life policy to a person who has no insurable interest in the life insured is required by tort law to pay damages to the injured party.166 It is suggested that an insurer should be made liable for paying damages to the injured party if he negligently effected a life policy on a minor child with the insured amount more than the limit and consequently caused the life insured to be murdered. (III) LEGaL GUaRDiaN HaS NO iNSURaBLE iNTEREST iN a MiNOR CHiLD Article 33(1) of the Insurance Law provides: “A proposer shall not apply for and the insurer shall not underwrite a personal insurance under which the death of the life insured is a condition for payment of the insurance money on the life of a person who has no civil acts capacity.” Article 33(2) also provides that “The restriction stipulated in the preceding paragraph does not apply to cases where the parents apply for personal insurance on the life of their children. However, the total amount of payments of insurance money shall not exceed the limit prescribed by the insurance supervision and regulation authority of the State Council.”167 The SPC Interpretation III 2015 provides rules on the application of art. 33(2) of the Insurance Law; it is said that art. 33(2) of the Insurance Law only applies to the situation where a parent insures his child, but does not extend to the situation where the child’s legal guardian and close relatives effect a policy on the child. Where the legal guardian or a close relative insures the child, if the insured event occurs, they cannot make a claim based on art. 33(2) and 34(3), except where the child’s parents’ consent has been obtained.168 Article 6 of the SPC Interpretation III develops arts. 33 and 34 of the Insurance Law. Article 33 of the Insurance Law prohibits a life insurance policy from being effected on a person who has no capacity for civil acts if the policy is a death policy under which the death of the life insured is a condition for payment of the insurance

165  Liberty Nat. Life Insurance Co. vWeldon, 267 Ala 171 (1957). Weldon sued Liberty National Life Insurance Company to recover damages of $100,000 for the wrongful death of his minor child.The Supreme Court of Alabama affirmed a $75,000 judgment of the lower court. This case will be further discussed later. 166  Gary Salzman, “Tort law and insurable interest in life insurance” (1963) 1(2) American Business LJ 25. 167  The CIRC acts as the insurance supervision and regulation authority of the State Council. 168  The SPC Interpretation III, art. 6.

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money.169 However, a policy taken out by a parent on his minor children is an exception to this rule, provided that the total amount of the death benefits thereof shall not exceed the limit as provided by CIRC.170 Article 34 of the Insurance Law makes a policy with death as a condition for payment of the insurance money void without the consent of the life insured and his approval of the amount of the insurance.171 Again, this rule does not apply to the case where a parent takes out an insurance on his minor children.172 Articles 33 and 34 of the Insurance Law do not provide whether the legal guardian of a minor child may take out insurance on the child as his parent can. Article 6 of the SPC Interpretation III fills the gap in the Insurance Law by providing that any person other than the parents of the minor who fulfils the duty of guardianship may not enter into a contract for the minor with death as the condition for the payment of insurance money. If a party claims that the validity of such a contract made by a minor’s legal guardian should be determined in accordance with the provisions of para. 2 of art. 33 and para. 3 of art. 34 of the Insurance Law, the People’s Court shall not uphold such a claim, unless the contract is entered into with the consent of the minor’s parents. So it is clear now that a minor’s legal guardian cannot freely take out a life insurance on the minor without the consent of the minor’s parents. Article 6 of the SPC Interpretation III intends to protect minor children. (IV) A CHILD HAS AN INSURABLE INTEREST IN THE LIVES OF HIS PARENTS That a child has an insurable interest in his parents is affirmed by Insurance Law.173 This rule is certainly based on natural affection and is also supported by the Marriage Law which imposes duties on a parent to bring up his child. If the parent fails to do so, the child who needs his parent’s support has the right to demand the costs of upbringing from his parent.174 So, it is clear and reasonable that a child who is

169  Article 33(1) of the Insurance Law provides: “A proposer shall not apply for and the insurer shall not underwrite a personal insurance under which the death of the life insured is a condition for payment of the insurance money on the life of a person who has no civil acts capacity.” 170  Article 33(2) provides that a life policy taken out by a parent on his minor children shall not be subject to the preceding paragraph. Nevertheless, the total amount of the death benefits thereof shall not exceed the limit as provided by the insurance supervision and regulation authority of the State Council. According to the CIRC’s Notice of “the limitation of the sum insured for a death insurance taken out by a parent on his minor child” (2010) No. 95, the insured amount limitation on the life policy effected by the parents on the life of their minor children was ¥100,000 yuan in 2010. To cope with inflation, in 2015, the CIRC again increased the insured amount limitation for the above type of policy: (1) where the life insured is younger than 10 years old, the insured amount shall not exceed ¥200,000 yuan; (2) where the life insured is over 10 years old but younger than 18 years old, the insured amount shall not exceed ¥500,000 yuan. See CIRC’s Notice on “matters in relation to life insurance where parents effect a policy on the life of their child under which the death of the life insured is a condition for payment of insurance money” Bao Jian Fa (2015) No. 90, art. 1. 171 The Insurance Law, art. 34 provides that an insurance contract with death as a condition for payment of the insurance money is void without the consent of the life insured and his approval of the amount of the insurance. 172  Ibid, para. 2. 173  The Insurance Law, art. 31(2). 174  Article 21 of the Marriage Law.

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a minor has an insurable interest in the life of his parent,175 as the former would undoubtedly suffer financially on the demise of the parent.176 In China, a person who has completed his 18th year becomes an adult.177 The legal duty of aliment ceases when the child reaches 18 years of age, so a child under 18 is deemed to have an insurable interest in his parents. Today most young people at this age are studying in colleges or universities, so they still need their parents’ support to finish their education. They are therefore presumed to have an insurable interest in their parents. It is not very clear whether a person who is over the lawful age of 18 and has completed their education or is married,178 or is financially independent, has an insurable interest in his parents’ lives. The Insurance Law is silent on this point. However, from the wording of art. 31(1)(2), “a proposer has an insurable interest in his children and parents,” it seems that “children” here refers to all children, whatever their age. So it could be deemed that an adult child is entitled by law to take out insurance on his parents based on natural affection and does not need to prove an economically dependent relationship. By contrast, the current English law does not allow an adult child to insure the life of a parent.179 Despite the harshness and strictness of the current law in terms of the scope of insurable interests in life insurance, the LCs have not proposed to extend the category to allow an adult child to insure the life of his parent if the child does not economically depend on the parent.180 Even in the recent Insurable Interest Bill 2016, the category of insurable interest is not extended to cover the situation where a child insures the life of his parents.181 However, the LCs, upon considering some consultees’ views, proposed to widen the test for insurable interest based on economic benefits or economic dependency.182 In Scottish law, a child is entitled to insure the life of a parent in some circumstances; this follows from the obligation of parents to maintain their children (an obligation referred to as aliment). The legal obligation to provide maintenance or aliment may form the basis for a child to have an insurable interest in the life of his or her parents to the value of the obligation. An insurable interest would exist only for as long as the obligation of aliment is owed: an 175 According to art. 12 of the Civil Code, a child between 10 and 18 years old is a person with limited competence, who can enter into a contract of insurance with the written consent of his or her parent or guardian. A minor under 10 years of age is a person without capacity for civil conduct, and in his effecting of an insurance contract must be represented by his parents or guardian. 176  It is unlike the position in English law, under which there is no general statutory right for children to receive maintenance from their parents, even though a child who is a minor could suffer a financial detriment on the death of a parent. See Harse v Pearl Life Assurance Co. Ltd [1904] 1 KB 558. 177 The Civil Code, art. 11, provides: “A citizen aged 18 or over shall be an adult; he has full competence to perform civil acts and may engage independently in civil activities; he is a person with full competence to perform civil acts.” 178  According to the Chinese Marriage Law, the lawful age of marriage is 22 for a man and 20 for a woman (art. 6 of the Marriage Law which was published in 1980 and amended in 2001). 179  Harse v Pearl Life Assurance Co. Ltd [1904] 1 KB 558. 180 The Law Commissions suggested that “Parents should be entitled to take out insurance on the lives of their children of any age, without evidence of economic loss.” Law Commissions’ Issues Paper 10 (2015), Proposal 13. However, the Law Commissions have not proposed that an adult child should have an insurable interest in his parents. 181  For more on the Insurable Interest Bill 2016, see below sub-heading 7.6.3, “Current English law and reform of insurable interests in life insurance.” 182  LCs Consultation Paper (2011), paras 13.27 and 13.28.

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insurable interest ceases when the child reaches 18 years of age, or 25 years of age if the child is in education or training.183 It is submitted that when a child has grown up and is financially independent or gets married, the insurable interest on the life of his parent for a death policy should disappear.184 As Mark Templeman comments: “Insurable interest by way of natural affection seems an anachronistic concept in the twenty-first century. Insurance is a financial instrument. It seems odd, and counter-intuitive, to allow unlimited insurance based on an interest that is not economic (natural affection), but only to allow insurance up to the limit of the value of the interest where the interest derives from economic considerations.”185 By taking financial or economic considerations into account, where an adult child is independent financially, he should not be allowed to take out life insurance on his parents. (b) Insurable interest in other family members and close relatives Apart from the above-mentioned family relationships, in the absence of financial dependency, there is no insurable interest between other family members or close relatives, such as grandparents and grandchildren, siblings, persons related by marriage, cousins, nephews, nieces, uncles or aunts.186 In these relationships, an insurable interest is deemed to exist only when a person who takes out a policy on others can demonstrate that he is fostered, supported or maintained by those others.187 Thus, whether an insurable interest exists between a grandparent and a grandchild depends on whether they are supported by each other. The obligation to support each other between grandparents and grandchildren arises only in some special situations. The Marriage Law stipulates: “Grandparents who can afford it shall have the duty to bring up their grandchildren who are minors and whose parents are dead. Grandchildren who can afford it shall have the duty to support their grandparents whose children are dead.”188 In accordance with this provision, grandparents are legally obliged to bring up their grandchildren who are minors and whose parents have died. The grandchildren in such a situation therefore have an insurable interest in their grandparents. The rule applies vice versa. This interest can be extended to other members of the family such as siblings.189 Close relatives, such as uncle/aunt, nephew/niece, father/mother-in-law and son/ daughter-in-law, may also fall into this category, where they are financially dependent

183  Family Law (Scotland) Act 1985, s. 1(1) provides that the obligation of aliment is owed by a parent to a child, or to a person accepted as a child of the family. Under s. 1(2), the obligation is to provide “such support as is reasonable in the circumstances.” See also LCs Consultation Paper 2011, para. 11.76. 184  This view is also agreed by Zhou Yongseng, Insurance and Law (1998) pp. 134–35. 185  See M. Templeman, “Insurance Interest: A suitable case for treatment” in B. Soyer (ed.), Reforming Marine & Commercial Insurance Law (Informa 2008) p. 224. Mark Templeman’s agreement was cited by the Law Commissions in their Consultation Paper (2011), para. 13.18. 186 See Miss Li v The Life Insurance Company of Xichang City (2003). This case is included in the Insurance Case Book edited by Li Zongjian (China Modern Economic Publishing House 2007) p. 63. In this case, it was held that there was no insurable interest between cousins. 187  The Insurance Law, art. 31(3). 188  The Marriage Law, art. 28. 189 The Marriage Law, art. 29, provides: “Elder brothers or elder sisters who can afford it shall have the duty to bring up their younger brothers or sisters who are minors, if their parents are dead or have no means to bring them up.”

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on each other. Based on the legal aliment provided in the Marriage Law, the Insurance Law expressly stipulates that the proposer also has an insurable interest in other family members and close relatives who have a fostering, supporting or maintaining relationship with the proposer.190 (c) Insurable interests in employment relationships Article 31(1)(4) of the Insurance Law provides that “a proposer has an insurable interest in the life of a worker who has a working relationship with him.” This sub-article is a new provision introduced into the Insurance Law 2009.191 It indicates that an employer has an insurable interest in the life of its employees. This insurable interest is created based on their contract of employment, under which the employer is entitled to effect a policy on its employees. By reading art. 31(1)(4) together with art. 39(2) of the Insurance Law which is also a new sub-article added into the 2009 version of the Insurance Law, it is not difficult to understand that the main purpose of adding these two sub-articles into the 2009 version of the Insurance Law is, on the one hand, to protect the employer from economic loss by enabling him to transfer risk of its liability to an insurer where its employee is injured during the employment. On the other hand, another purpose is to benefit the employee’s (life insured’s) dependents if the employee dies. Article 39(2) provides “The beneficiary of a life insurance shall be designated by the insured or the proposer. Designation of the beneficiary by the proposer is subject to the insured’s consent. Where a proposer applies for insurance of the person in respect of workers with whom it has a labour relationship, the proposer may not designate anyone other than the insured and the insured’s close relatives as the beneficiary.” From this article it seems that for a life insurance policy taken out by an employer on the life of its employee, the employer is not allowed to designate itself as the beneficiary of such a policy – only the employee’s family members and close relatives can be designated as the beneficiaries. This type of insurance is usually welfare stipulated in the contract of employment under which the employer promises to pay a certain amount to the employee’s dependents should that employee die. The promise to pay an amount on the death of the employee is usually known as a death-in-service benefit. The employer may effect a group policy on its employees for the benefits of their family members. From this point of view, the law is right that the beneficiaries of such a policy should be confined to the life insured’s family members or close relatives. However, it is submitted that the law ignores another important element of insurable interests based on employment relationships. Traditionally, an employer is deemed to have an insurable interest in its employee’s life on two grounds: in addition to the above type of insurance that is for the benefit of the employee’s or his family members’ benefit, the employer may take out insurance on a key employee for the benefit of the employer himself – it is called a “key-man” policy.192

190  The Insurance Law, art. 31(1)(3). 191  In the old versions of the Insurance Law 1995 and 2002, this type of insurable interest was not recognised. See art. 12 of the 1995 version and art. 11 of the 2002 version. 192  Some English cases illustrate this: Simcock v Scottish Imperial Ins. Co. (1902) 10 SLT 286; Green v Russell [1959] 2 QB 226; see also Marcel Beller Ltd v Hayden [1978] QB 694. See also some American

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An employer would suffer a financial detriment on the death of its key employee.193 In this case the employer should be allowed to take out a “key-man” policy on its key employee and designate the employer itself as the beneficiary. However, arts. 31(4) and 39(2) do not cover such kinds of insurance by which the employer may benefit itself as the beneficiary if its key employee dies. It is suggested that the law should add a sub-article into art. 31 to fill this gap. In addition, the law does not mention whether an employee has an insurable interest in the life of his employer. The interest in employment relationships is usually mutual, so it could be suggested that the law should also vest in an employee an insurable interest in his employer.194 (d) Consent as an alternative way to create an insurable interest In addition to the relationships mentioned in art. 31(1)(1)–(4), the law intends to create insurable interests in other relationships through an alternative way – the life insured’s consent. This approach is provided by art. 31(2): “In addition to the persons mentioned in the preceding paragraph, the proposer shall be deemed to have an insurable interest in another person’s life who agrees that the proposer may conclude a contract of insurance on his life.” Consent as an alternative means to create insurable interest certainly widens the categories as provided in art. 31(1)(1)–(4) of the Insurance Law. However, in practice, disputes often occur due to the weakness of this alternative approach in establishing an insurable interest which is supported by neither natural affection nor economic dependency but by consent only. The following two cases show the problem of the alternative approach. In Mrs Zheng v Beijing Life Insurance Company,195 Mrs Zheng was a university lecturer. Miss Gu was a student of the university and stayed in Zheng’s house with her family. Gu was to discontinue her studies because of financial problems. Zheng called for donations of money to support Gu’s studies and collected ¥10,000 from her colleagues and students. Gu refused to accept the money. Upon being advised by an insurance agent, Zheng as the proposer effected a life policy on Gu’s life using the donated money as the premium in 2004. Both Zheng and Gu signed the declaration in the proposal form as their consent to the insurance. This life insurance was supported by neither natural affection nor financial dependency. Gu’s consent to the insurance was the sole requirement for an insurable interest. In the spring of 2005, Gu left home without telling Zheng, who thus lost contact with Gu. Zheng now wanted to claim the premium back and said that she had no insurable interest in Gu’s life and the policy was void. The insurer

cases: Mickleberry’s Food Products v Hauesserman 247 SW 2d 731 (Mo, 1952); Wellhouse v United Paper Co. 29 F 2d 886 (CCA 1929); Sinclair Refining Co. v Long 32 P 2d 464 (Sup Ct Kan, 1934). 193  For example, an employer should be deemed to have an insurable interest in the life of a senior executive or of a manager on whom the successful running of a business depends. 194  In other jurisdictions, the mutuality of the insurable interest between the employer and employee has long been established. For instance, in England, an employee is allowed to insure the life of his employer, and the interest is limited to a sum representing his contractual rights against the employer. Hebdon v West (1863) 3 B & S 579. 195 This case is cited in the book New Insurance Law and Cases by Liu Jianxun (Law Press China 2010) p. 59.

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rejected her claim and argued that there was an insurable interest created by Gu’s consent and the contract was valid. The court supported the insurer’s argument.196 An insurable interest created by consent of the life insured can sometimes give rise to wagering on old and vulnerable people in the guise of insurance, and also increased risk of murder. In Zhang v Pacific Life Insurance Co. Cichuan Branch,197 Mr Hu was single, old, poor and not healthy, and Dr Zhang was a medical doctor in a village. Hu visited Zhang regularly for medical treatment. Zhang persuaded Hu to give consent to him to effect life policies on Hu’s life and in return promised to offer Hu free medical treatment and free medicine in Zhang’s surgery. Zhang then effected 18 life policies on Hu’s life (in a form which looked like policies on Hu’s own life, with Hu being the “puppet” proposer) in 2003. The insured amount was ¥10,000 for each policy and the duration of each policy was 20 years. Zhang was designated as the beneficiary for each policy and paid the premiums every year. Zhang in fact had neither natural affection nor a pecuniary relationship with Hu. Hu died of disease in 2005. On his claim being turned down by the insurer on the ground of lack of insurable interest, Zhang sued the insurer and argued that the insurable interest was created by Hu’s consent. The court held that (1) Hu was financially unable to pay premiums. Zhang paid the premiums and was the actual proposer; (2) Hu’s consent to the insurance was not his real intention but induced by Zhang, so his consent could not support an insurable interest. Thus the contract was void. Hu had never been married and had no children. He had no real motive and was unable to afford life insurance. His consent was given under the pressure of financial difficulty and his poor health and induced by the offer of free medical treatment and free medicine. According to art. 58 of the Civil Code, civil acts performed by a person against his true intentions as a result of cheating, coercion or exploitation of his unfavourable position by the other party shall be void, and therefore Hu’s consent should be invalid. This case is similar to the English case of Shilling v Accidental Death Insurance Co.198 It is obvious that consent as an alternative approach for insurable interests is problematic. Some other jurisdictions, such as Canada199 and Spain,200 also take consent as an alternative way of establishing insurable interests when a pecuniary interest or an interest based on natural affection cannot be demonstrated. English law, however,

196  In order to terminate the life policy, Zheng could have invoked art. 47 of the Insurance Law 2009 which allows the policyholder to terminate a life contract and get back the cash value of the policy. 197 The case was cited in a newspaper article, “A patient bought insurance but his doctor benefited from the insurance contract.” See accessed in May 2016. 198  (1857) 2 H & N 42. 199  In some Canadian provinces, insurable interest is not required if the life to be insured consents to the insurance. See Insurance Act (Ontario) RSO 1990 c. 18 s. 178(2). In the case of a minor under the age of 16, consent has to be provided by one of his or her parents or by their guardian (Insurance Act (Ontario) RSO 1990 c. 18 s. 178(3)). 200 In Spain, according to art. 83 of the Insurance Contracts Act (50/1980), insurance can be arranged on one’s own life or on that of another. If the insured and the person whose life is being insured are different persons, it is necessary to obtain written consent from that other person. However, consent would not be necessary where the policyholder’s interest in the existence of the insurance can be presumed. Where the person whose life is insured under the contract is a minor, written consent will need to be obtained from their legal representatives. The Act prohibits life insurance being arranged for anyone who is incapacitated or under the age of 14.

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does not adopt this approach. In Issues Paper 4, the LCs proposed that consent of the life insured should provide an alternative ground for creating insurable interests, where the proposer and the life insured do not fit within the categories of natural affection or a reasonable expectation of loss.201 It was said that the creation of such an alternative would certainly reduce the difficulties arising from the limited nature of insurable interests in current English law. However, in the LCs’ Joint Consultation Paper 2 (2011), this suggestion was overwhelmingly rejected. Many consultees worried that consent might be obtained by duress or other objectionable behaviour, particularly where the life insured was elderly or very young.202 So the LCs did not make any further proposal on this issue. It submitted that to take the life insured’s consent as an alternative way to create an insurable interest is not an ideal device. The life insured’s consent should not be treated as equivalent to the actual possession of insurable interest by the proposer in the life insured. Consent as an alternative ground should be abandoned and replaced by economic relationship. Article 31(2) of the Insurance Law can be rewritten: “In addition to the persons mentioned in the preceding paragraph, the proposer shall be deemed to have an insurable interest in another if he can show an economic dependency on that person or a reasonable expectation of economic loss upon the death or disability of that person.” Consequently, other relationships which are not included in the list of art. 31(1)(1)–(4) but supported by economic interest can be covered by this paragraph.203 Another issue may be raised: who should have an insurable interest in the life insured, the proposer or the beneficiary or both? According to the Insurance Law, only the proposer204 is required to hold an insurable interest in the life insured’s life.205 It is submitted that if the beneficiary is not required to have an insurable interest, it could cause problems.206 This matter will be discussed in detail in Chapter 20, “Life and accident insurance.” 7.6.3 Current English law and reform of insurable interests in life insurance Under current English law, the scope of insurable interests in life insurance is very narrow. In two categories of life insurance, an insurable interest is presumed and need not be proved: an insurance by a person on his own life207 and that of his spouse;208

201  “We tentatively propose that consent of the life insured should provide an alternative ground for establishing insurable interest, where the policyholder and the life to be insured do not fit within the categories of natural affection or a reasonable expectation of loss.” See LCs Issues Paper 4 (2008), para 7.79. 202  The LCs Joint Consultation Paper 2 (2011), para. 13.60. 203 This is also the approach proposed by the UK Law Commissions in the Insurance Interest Bill 2016, s. 2(f). 204  Emphasis added. 205  The Insurance Law, art. 31. 206  See Z. Jing, “Beneficiaries in Life Insurance in Chinese Law and Practice” [2013] 5 JBL 463. 207  Wainwright v Bland (1835) 1 Moo & R 481; (1836) 1 M & W 32. 208  In Griffiths v Flemming [1909] 1 KB 805; Wight v Brown (1849) 15 11 D 459, the court held that a man had an insurable interest in the life of his wife. In Reed v Royal Exchange (1795) Peake Ad Cas 70, the court held that a woman had an insurable interest in her husband. This approach was supported by the Married Women’s Property Act 1882 (45 & 46 Vict C75) s. 11.

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the Civil Partnership Act 2004 added civil partners to this category.209 In other cases where a person takes out life insurance on another, a pecuniary interest must be proved. For example, a child who is a minor would have an insurable interest in the lives of his or her parents, if they are legally obliged to support the child, as the child would clearly therefore suffer financially by the loss of a legal right on their death.210 An adult child can have no insurable interest on the life of his parents, because there would be no pecuniary loss on the death of his parents.211 A parent does not have an insurable interest on a life of his child except possibly to cover funeral expenses,212 because there is no other financial loss arising. As the LCs summarised in the Consultation Paper (2011), “In life insurance, the courts have interpreted the requirement of insurable interest more restrictively. Although the Life Assurance Act does not define an insurable interest, subsequent case law and statutes have established three categories. An interest may arise from:213 (1) Natural affection; (2) A potential financial loss which is recognised by law and can be shown at the time of the contract; (3) Other statutory provisions.”

As Lord Justice Waller in Feasey v Sun Life Assurance Company of Canada,214 upon analysing authorities, states: “in life insurance, the cases indicated a narrow definition, requiring a legal or pecuniary interest.”215 The LCs in the Issues Paper 10 (2015) proposed to widen the category of persons entitled to insure another person’s life to allow cohabitants to insure each other’s lives, and parents to insure the lives of their children without cap on the insured amount and irrespective of their age.216 The Insurance Interest Bill 2016 has, to a large extent, widened the scope in which an insured is deemed to have an insurable interest. Section 2 of the Bill provides: (1) A contract of life-related insurance is void unless at the time the insured enters into it the insured has an insurable interest in the individual who is the subject of the contract. (2) For the purposes of such a contract, the circumstances in which an insured has an insurable interest in an individual include, in particular, circumstances where – (a) the individual is the insured, (b) the individual is, or is treated as, the child or grandchild of the insured, (c) the individual is the spouse or civil partner of the insured or lives with the insured as a spouse or civil partner,

209  Section 253 of the Civil Partnership Act 2004; see also LCs Consultation Paper 2 (2011), para. 11.72. 210  J. Birds, Birds’ Modern Insurance Law (8th edn, Sweet & Maxwell 2010) para. 3.4.1. 211  Shilling v Accidental Death Insurance Co. (1857) 2 H & N 42; Harse v Pearl Life Assurance Co. Ltd [1904] 1 KB 558. 212  Halford v Kymer (1830) 10 B & C 724. 213  The LCs Consultation Paper 2 (2011), para. 11.70. 214  [2003] Lloyd’s Rep IR 637. 215  The LCs Consultation Paper 2 (2011), para 11.90. 216  LCs Issues Paper 10 (2015), Insurable Interest: Updated Proposals, para. 1.14.

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(d) the individual is a member of a pension or other group scheme and the insured is a trustee of the scheme, (e) the contract is for the benefit of the individual, or a nominee of the individual, or (f) there is a reasonable prospect that the insured will suffer economic loss if the insured event occurs.

7.6.4 Australian law on insurable interests in life insurance In Australia, insurable interests in life insurance were abandoned entirely by the Life Insurance (Consequential Amendments and Repeals) Act 1995.217 The 1995 Act repeals s. 16(2) and revises s. 18 of the ICA. Under the new s. 18 of the ICA, an insurable interest is not required in a contract of life insurance and a contract that provides for the payment of money on the death of a person by sickness or accident.218 A contract to which this section applies is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject matter of the contract.219 7.6.5 The limit on insured amount for a life policy Under the Insurance Law, for a death policy, the insured amount must be confirmed by the life insured.220 The law renders a policy void where it is effected without the confirmation of the sum insured by the life insured.221 In practice, sums insured are also limited by the insurer’s willingness to accept the risk and the policyholder’s ability to pay the premium. Most life insurers in China usually set up the maximum insured amount with reference to the age and the total annual income of the life insured. For persons whose age is between 18 and 30, the maximum insured amount is limited to 20 times the person’s total annual income. For those whose age falls into the group between 31 and 40, the insured amount is limited to 15 times the person’s annual income, and for those between 41 and 60, it is 10 times annual income. In addition, the total premium paid by a proposer should not exceed 20% of his total annual income.222 In one case, a proposer tried to take out five life policies from five different insurance companies on the life of his sister-in-law (who had no financial relationship with the proposer) for the amount of ¥9,240,000. His proposals were rejected by the insurers for lack of insurable interest and the exceptionally high amount to be insured.223 In practice, in determining whether the insured amount is reasonable, insurers usually make their judgement based on two factors. First, whether

217  Life Insurance (Consequential Amendments and Repeals) Act 1995, s. 45. 218  The Insurance Contracts Act 1984, s. 18(1)(a) and (b). 219  Ibid, s. 18(2) 220  The Insurance Law, art. 34 221 Ibid. 222  Ma Jie, “Assessment of the insured amount in life insurance for the purpose of reducing moral hazard” in Zongjian Li (ed.), Insurance Case Book (China Modern Economic Publishing House 2007) p. 50. 223 Ibid.

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the extent of the loss to the family (or to the employer) is compatible with the insured amount where the life insured dies or loses his ability to work. Second, whether the personal value of the life insured is compatible with the insured amount.224 If the sum insured for a death policy is unreasonably high, moral hazard would possibly occur and the contract would in effect become gambling in the guise of insurance. It is submitted that to limit the insured amount for a death policy is, in addition to requiring the life insured’s consent, another good measure to reduce moral hazard and to protect the life insured even if the policy is effected based on natural affection. 7.6.6 The time when insurable interests must exist in life insurance (a) Statutory rules The 1995 and 2002 versions of the Insurance Law did not specify the time when an interest is required for any type of insurance contract.225 This caused disputes in practice. In Mr Wang Lianshun v Yingshun Branch of China Life Insurance Company,226 Mrs Wang (the plaintiff ’s wife) was employed by the defendant insurance company who effected cancer screening policies for its female employees for three years (starting from 30 October 1995) as welfare. The insurance company would pay the insured (or her beneficiary) if she were diagnosed with cancer. In July 1997, Mrs Wang changed her employer. In August 1997, the insurance company (as her former employer) terminated Mrs Wang’s policy on the ground of cessation of insurable interest, but did not inform her of this termination. Upon being diagnosed with womb cancer in January 1998, Mrs Wang claimed but was refused by the insurance company on the ground that when she left the company, the company’s insurable interest on her life lapsed and the policy was void. Mrs Wang later died, and her husband, Mr Wang, sued the insurance company. The court gave judgment for the claimant, holding that the insurable interest should be required only at the time of effecting the policy. In order to avoid the uncertainty as to the time when the insurable interest is required in life insurance, a new rule was added to the 2009 Insurance Law; art. 12(1) provides that an insurable interest is required at the time a life policy is effected.227 It indicates that an insurable interest is not required at the time when the insured event occurs.

224  The personal value of the life insured is assessed on a number of factors, such as education, experience, professional skills, job title, annual income, social status, credibility, etc. 225  Article 52 of the Insurance Law 1995 and art. 53 of the Insurance Law 2002. 226  Yearly Report of the Supreme People’s Court of China 2001 (Press of People’s Court 2003). 227 Article 12 provides: “The proposer in life insurance shall have an insurable interest in the life insured at the time the contract is concluded.”

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(b) Rules provided by SPC Interpretation III228 Further to the provisions of the Insurance Law regarding the time when an insurable interest in life insurance is required,229 the SPC Interpretation III 2015 confirms impliedly that an insurable interest in a life insurance contract is required only at the time of the contract. Article 4 of Interpretation III provides: “after an insurance contract is entered into, if a party claims that the insurance contract is null and void on the ground that the proposer has lost the insurable interest on the life insured, the People’s Courts shall not uphold such a claim.” This article means that if the proposer has lost his insurable interest on the life insured after the conclusion of the contract, the validity of the contract is not affected. This article reflects and develops the meaning of art. 12 of the Insurance Law 2009 which requires the proposer to have an insurable interest at the time of the contract only,230 and art. 31 which stipulates that the contract is void where the proposer has no insurable interest at the time of the contract. The Chinese approach on this point is very similar to English case law under which an insurable interest for a life policy is required only at the time when the contract is entered into, but not required at the time when the insured event occurs.231 The LCs have proposed to keep the current rule on this aspect and stated that “we proposed to clarify that, for contingency insurance, the insurable interest must be present at the time of the contract in order for the contract to be valid. It is not necessary for there to be an insurable interest at the time of the loss in order to make a claim.”232 This rule is also retained in the Insurable Interest Bill 2016 which provides that “A contract of life-related insurance is void unless at the time the insured enters into it the insured has an insurable interest in the individual who is the subject of the contract.”233 This approach may, however, give rise to mischievous consequences, because in many situations the interest may lapse after a life contract is effected. Some recommendations for improving the approach were made by the author,234 and other insurance law experts.235 A creditor may insure his debtor’s life for the amount of his debt. The debt may be repaid shortly thereafter, yet the creditor may keep up the policy until the debtor dies. A divorced couple is another example. A man is allowed to continue with the policy until his ex-wife dies. There is certainly an element of wagering and a motive for murder here. It is suggested that a number of methods could be employed to deal with the situation where the interest lapses. First, the law should require proof of interest at date of death in addition to the interest at the time of the contract, the amount recoverable being limited to actual loss. Second, if the debt is repaid before the death

228  SPC Interpretations on Certain Issues Concerning the Application of the Insurance Law of the PRC (III) was published on 25 November 2015 and came into force on 1 December 2015. 229 The Insurance Law, art. 12(1), concerns the time when an insurable interest is required in life insurance and art. 31 provides a list showing who has an insurable interest on the life insured. See Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] 5 JBL 337 for detailed discussion. 230  Article 12 of the Insurance Law provides: “when entering into a personal insurance contract, the proposer shall have an insurable interest in the life insured.” 231  Dalby v India and London Life Assurance Co. (1854) 15 CB 365. 232  Law Commissions Issues Paper 10 (2015), Insurable Interest: Updated Proposals, para. 3.64; see also Proposal 20 of the Issues Paper 10. 233  The Insurable Interest Bill 2016, s. 2(1). 234  Z. Jing, “Beneficiaries in life insurance in Chinese law and practice” [2013] 5 JBL 463. 235  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 3.3.1.

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of the debtor, then the interest lapses, the policy should automatically lapse with it, subject to payment of the appropriate cash value to the policyholder.236 Third, the debtor may take over the policy for his own benefit and change the beneficiary from the creditor to his family member(s), subject to some compensation to the creditor in respect of the premium he has paid.237 And fourth, the policy can easily be converted into the creditor’s own-life policy. He can change the life insured from the debtor to his own life and nominate a new beneficiary in the policy.238 Chinese law allows the life insured or policyholder to change the beneficiary during the currency of a life policy;239 this would facilitate the application of the third and the fourth methods above. 7.6.7 Insurable interest in an insurance card transaction It is a popular practice nowadays that some kinds of personal accident insurance are available through buying an insurance card in a post office, railway or bus station.240 Some issues may arise for this transaction in terms of insurable interest, namely whether an insurable interest is required and when an insurable interest must exist. For example, in Mrs Li v Shencheng Life Insurance Company,241 Mr Li’s sister, his sister’s husband (Mr Wang), and Mr Wang’s sister and brother purchased 20 personal accident insurance cards for Mr Li (they in fact had no insurable interest in Mr Li) from a post office in December 2005. The cards were issued by the defendant insurer and sold by post offices as the insurer’s agents. Some terms were printed on the cards: “The holder of the card is the life insured. Each card has insurance amount ¥5,000. Premium is ¥10 for each card. The insurance duration is one year from the date of purchase.” In August 2006, Mr Li died by an electric shock. Mrs Li (his wife) claimed but was refused by the insurer on the ground that the purchasers of the cards had no insurable interest in the life insured – according to art. 31(1)(1), if the proposers have no insurable interest in the insured at the time of contract, the policies shall be void. The court held that (1) the insurance contracts were void because of lack of insurable interests between the proposers242 and the life insured;243 (2) however, that the contract became void was due to the insurer’s fault, as there was no term or condition about insurable interests on the card, so the insurer was liable to pay the insured amount as compensation to Mrs Li.244 The

236 R. Merkin, “Gambling by insurance – A study of the Life Assurance Act 1774” (1980) 9 Anglo-American LR 352. 237  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 3.3.1. 238 Ibid. 239  Insurance Law, art. 41. See Zhen Jing, “Beneficiaries in life insurance in Chinese law and practice” [2013] 5 JBL 463 for more on beneficiaries. 240  See Chapter 4, “Formation of an insurance contract” and Zhen Jing, “Electronic Transaction of Insurance Business – ‘Self-service Insurance Card’ in China” [2014] 127 BILAJ 164, for detailed discussion of insurance card transactions. 241  This case was reported in the newspaper Liao Shen Evening on 17 November 2007. 242 They were in fact not proposers of the policies but only buyers of the insurance cards. See Chapter 4, “Formation of an insurance contract” and Zhen Jing, “Electronic Transaction of Insurance Business – ‘Self-service Insurance Card’ in China” [2014] 127 BILAJ 164 for discussion of who is the proposer in an insurance card transaction. 243  It is submitted that the court’s reason was not correct on this point. 244  According to the Contract Law, art. 58, “The party at fault shall compensate the other party for losses incurred as a result therefrom.”

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insurer appealed but was turned down. It is submitted that the insurance card is in fact a gift insurance card which is intended to be sold to any person; it is therefore not necessary to require the buyer of the card to have an insurable interest in the life of the life insured (the recipient of the card).245 Such a policy usually covers the injury of the insured in an accident, so the beneficiary is the life insured himself. On the other hand, if such a policy is proposed to include a death element, namely the death of the life insured is set as the condition for payment of the insurance money, the beneficiary should be the members of the family of the life insured who are deemed to have an insurable interest in the life insured. 7.6.8 Consequences for life policies without insurable interests Under the Insurance Law 2009, the consequence of lack of an insurable interest in life insurance is different from that in property insurance.246 By virtue of art. 31 of the Insurance Law, the contract is void where the proposer has no insurable interest in the life insured at the time of the contract. It is obvious that the possession of an insurable interest by a proposer of life insurance is a condition precedent for the validity of an insurance contract. The absence of an insurable interest may render a life insurance policy null and void. Some courts also provide guidance for hearing a life insurance case without an insurable interest from the judicial perspective. The Shanghai High People’s Court provides that “In a life insurance contract, the contract shall be void where there is no insurable interest. So a court shall hear a case using its power to check whether the proposer has an insurable interest at the time of contract and the court’s hearing on insurable interest is not bound by the parties’ assertions.”247 However, the Insurance Law does not say what the legal consequences are of a void contract. In judicial practice, judges usually turn to the Contract Law for solutions. Article 58 of the Contract Law provides: “If a contract is void or rescinded, property obtained under that contract shall be returned; where it is impossible or unnecessary to return it, its value shall be made good. The party who was at fault shall compensate the other party for the loss caused thereby; where both parties were at fault each party shall bear his corresponding liability.” Accordingly, there can be different remedies for a void insurance policy as a result of lack of an insurable interest, depending on whose fault causes the contract to be void. The SPC Interpretation II also provides rules on this matter.248

245  In England, this sort of policy has long been treated as a gift, and no insurable interest is required. Crabb v Crabb (1834) 1 My & K 511; Moate v Moate [1948] 2 All ER 486; in Pettitt v Pettitt [1970] AC 777, it was held that where the payer is the parent or spouse of the life assured, the law assumes that the payment is a gift, but in other cases matters may not be so straightforward. See Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 19-006. 246  In the Insurance Law 1995 (art.12) and the Insurance Law 2002 (art.11), the consequences were the same for lack of insurable interest in property and life insurance. 247  Shanghai High People’s Court’s Answer to Certain Questions on Hearing Insurance Contract (II) (2013), art. 7. 248 The Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China II was published in 2013.

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(a) Return of premium If the invalidity of the policy is due to the fault of the proposer (where no fraud is involved), the insurer is not liable to pay insurance money, but should return the premium to the proposer. Article 2 of the SPC Interpretation II states “In a life insurance policy, where the policy is void for lack of an insurable interest, if the proposer requires the insurer to return the premium after deducting the insurer’s administrative costs, the courts shall support the claim.” (b) Insurer pays the insurance money as compensation to the insured By virtue of art. 58 of the Contract Law, “the party who was at fault shall compensate the other party for the loss caused thereby.” Accordingly, if the invalidity of the policy is due to the insurer’s fault, it must take responsibility for its fault and pay compensation by paying the insurance money. There may be two situations in terms of the insurer’s fault: (1) the insurer did not raise questions on insurable interests at the pre-contractual stage, so the proposer did not know he should disclose what relationship he had with the life insured; (2) the insurer was aware of the fact that the proposer did not have an insurable interest but still issued the policy. In both these situations, the insurer cannot reject a claim on the ground of lack of an insurable interest of the proposer. The insurer must be liable for the culpa in contrahendo (fault in conclusion of a contract). Where a party acts in violation of a pre-contractual duty, causing loss to the other party, the law of pre-contractual liability allows the aggrieved party to claim compensation for the loss. The party who has contravened its pre-contractual duties is deemed to have committed a fault or culpa in contrahendo and shall be liable therefor.249 On the other hand, avoidance of the contract and recovery of the premium paid are not effective remedies for the insured where the insured event has occurred and he has suffered a loss which is covered by the contract. Effective remedies should be available to compensate the insured for his loss due to the insurer’s pre-contractual culpa in contrahendo. If the insurer’s pre-contractual fault results in the invalidity of the insurance, the insurer must be liable for its fault and pay the insurance benefits. There is a case which concerns the consequence of a void policy due to the insurer’s fault. In Mr Xu v The Life Insurance Company, the employer effected a comprehensive accident insurance policy with the insurer on the lives of their employees (including Mr Xu) for the benefits of the employees’ families. As agreed, the employer paid half of the premium and the lives insured paid the other half. Mr Xu presented his ID card and other relevant documents to the insurer’s agent. The insurer would pay ¥60,000 for accidental death of the life insured under the policy. The insurer’s agent did not ask the life insured to sign the proposal form, but he himself signed

249  Pre-contractual liability is recognised by the Contract Law. Article 42 of the Contract Law spells out the general rule on pre-contractual liability, and it provides: “A party shall be liable for compensation if he, in the course of concluding the contract, causes damage to the other party in one of the following situations: (1) he negotiates in bad faith under the pretext of concluding a contract; (2) he intentionally conceals a material fact relevant to the conclusion of the contract or gives false information; or (3) he engages in other acts that violate the principle of good faith.”

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the form on behalf of the lives insured without the authority of the lives insured. Mr Xu was injured by a car and died as a result of the accident. His beneficiary claimed the insurance benefits but was turned down by the insurer on the grounds that the insurance policy was void because Mr Xu did not give his consent to the policy as he did not sign the proposal form. According to the Insurance Law, a contract with death as the condition for payment of insurance benefits is invalid without the insured’s consent thereto and acceptance of the sum insured in writing. It was held that the invalidity of the contract was due to the insurer’s fault, so the insurer was liable for paying the insured amount (¥60,000 yuan) to the beneficiary as compensation.250 (c) Both parties bear the consequences If the invalidity of the policy is because of the fault of both proposer and the insurer, the remedy is that each party shall bear his relative responsibility. This can be seen from the case of Mrs Zhou Jinfeng v Pingan Life Insurance Company Beijing Branch.251 Mrs Zhou effected a policy on her adult son in October 2002. As the proposer, she signed the proposal form and also signed it on behalf of her son without the son’s knowledge and consent.252 In 2006, Zhou claimed for return of the premium in full on the ground that the contract was void without her son’s consent and the form was signed by herself on behalf of her son. The court held that the contract was void. Zhou took major responsibility, and the insurer was partially responsible for the void contract, because the insurer neither took reasonable steps to warn the proposer about the conditions for a void contract nor checked the signatures on the proposal form. The insurer was required to return 80% of the full premium. Because there are no clear-cut rules to be followed on the allocation of the relative fault of the two parties, the court made the decision at its discretion, with reference to the Contract Law.253 Nowadays, when the courts handle a void life insurance case, relevant rules of the Contract Law are followed. It is suggested that to be fair to policyholders and insurers and to reduce the disputes between the parties and reduce the uncertainty in judicial practice, rules for handling void life policies should be provided either by the Insurance Law or by CIRC regulations or by SPC interpretations. This is certainly an area that deserves careful consideration and further improvement. Under current English law, life insurance made without an insurable interest is not only void but also illegal.254 Due to the harshness of the remedies, the LCs have proposed reform and suggested that in life insurance, “as with indemnity insurance if an insurable interest is not present, the contract should be void but not illegal.”255

250  See Z. J. Li, Insurance Cases (China Modern Economic Publishing House 2007) p. 208. 251  Liu Jianxun, Case Book of Insurance Law (Law Press China 2007) p. 238. 252  As discussed, according to the Insurance Law, where the insurance policy is a death policy, the consent of the life insured in terms of the contract itself and the amount insured must be obtained (art. 56 of the Insurance Law 2002, which was in operation then). 253  See the Contract Law, art. 58. See also Liu Jianxun, Case Book of Insurance Law (Law Press China 2007) p. 244 for the comments on this case. 254  Harse v Pearl Life Assurance Co. [1994] 2 AC 199. 255 The LCs, Issues Paper 10 (2015), Insurable Interest: Updated Proposals, para. 3.62 and Proposal 18 of Issues Paper 10.

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This would mean that there would be no valid insurance cover, but that the policyholder would be entitled to recover premiums paid.256 In the LCs’ “Short Consultation on Draft Bill: Insurable Interest” (2016), Clause 4 concerns consequences of the contract being void. It says: “When a contract is void, it is as if the contract had never existed. Generally the position at law is that money paid under a void contract can be recovered. There are numerous reasons why a contract may be held to be void and the ability to recover money paid may vary depending on the reason.”257 The LCs expressed the view that in an insurance contract, the basis for the insured’s payment of the premium is that the insurer runs the risk of having to indemnify against the insured event. If the insurer has never been at risk, the contract is void, as the basis for payment of the premium has failed. This was held to be the case in Re London County Commercial Reinsurance Office Ltd,258 where insurance premiums were recoverable in relation to reinsurance contracts which were void because they had been entered into subject to a policy proof of interest (PPI) condition.259 The general rule is therefore that premiums would be reclaimable by the insured if the contract were void for lack of insurable interest.260 7.7 Insurer’s duty to check the existence of insurable interests at the time of the contract in life insurance Whether or not the insurer should have a statutory duty to check the existence of an insurable interest in life insurance at the time of contract is a controversial issue. Different jurisdictions have different approaches. In China, the Insurance Law does not impose on the insurer a legal obligation to check the existence of an insurable interest for a life policy at the time of contract. Thus the insurer is given an opportunity to turn down the policy at the time of claim on the ground of lack of an insurable interest. In China, life policies are often sold by incompetent sale persons and unskilled commission agents. In order to gain more commission, the agents persuade people to take out life insurance without paying particular attention to the question of whether the proposer has an insurable interest in the life insured. They sometimes fill in proposal forms for a proposer, and even sign the forms on behalf of the proposer and life insured which should be signed by the proposer and the life insured themselves. When the completed proposal forms go to the hands of the insurer for examination, the insurer may keep one eye closed, without checking the forms carefully, but accept the risk, and does not even care whether or not the proposer has an insurable interest in the life insured. However, when a claim is made to the insurer, it checks the contract carefully to see if an insurable interest existed at the outset of the contract or to find out if there is any other defence for rejecting the claim. Consequently, disputes often arise from an insurer’s malpractice.

256  The LCs, Issues Paper 10 (2015), Insurable Interest: Updated Proposals, para. 3.62. 257  The LCs, Short Consultation on Draft Bill: Insurable Interest, 2016, para. 4.1. 258  Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67. 259  The LCs, Short Consultation on Draft Bill: Insurable Interest, 2016, para. 4.3. 260  Ibid, para. 4.4.

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In Mr Xu v Life Insurance Company,261 Mr Xu was employed in a thermo-products factory. His employer effected a group policy of personal accident insurance in April 2004. Xu presented to the insurer his ID card and other relevant documents upon requirement of the insurer. The agent of the insurer signed the declarations on behalf of the proposer and the life insured. Xu died in a road accident in July 2004. His wife claimed but was refused by the insurer, who argued that Xu did not give consent to the insurance (he did not sign the proposal form), so the policy was void. It is difficult to see why the insured rather than the insurer should bear the consequence of the agent’s misconduct or malpractice. If an insurer considers employing agents who are inadequately trained to be an economic advantage, it is absolutely unfair that it should be allowed to declare a life policy void and refuse to pay insurance money due to their agents’ deficiencies and malpractice. In order to stop the problem at the source, it is necessary to impose on the insurer a statutory duty to check the existence of insurable interests before issuing the policies, as the onus of preventing insurance without interests should be placed on those best equipped to bear it.262 An ordinary person usually does not know what an insurable interest is all about, and who has an insurable interest on whose life, so an insurer should elicit, by a list of clear questions in the proposal form, information which it needs for the judgement whether or not an insurable interest exists. The insurer should be bound by a policy it issued even if it was without an interest, unless it can show that it could not reasonably have discovered the lack of interest. The policyholder would benefit from this statutory requirement of insurers checking insurable interests at the time of the contract, as this would remove the possibility of the policy being declared void at some future date on the ground that no insurable interest existed when it was effected. It is recommended that a new paragraph is added to art. 31 of the Insurance Law, which would read: “Insurers shall check whether an insurable interest exists when a life insurance contract is concluded. If it effects a policy without an insurable interest, it is not allowed to reject a claim on the ground that the proposer has no insurable interest at the time of contract.” A statutory obligation would be effectively placed on the shoulders of the insurer. Some judges comment that an insurer, as a professional in insurance, has more knowledge of the rules of law regarding the requirement of insurable interests in life insurance, and when the insurer is examining the life insurance proposal form, one of the most important aspects it must consider is whether the proposer has an insurable interest in the life insured. If the insurer fails to perform the duty to check it, or even if it is aware that the proposer has no insurable interest in the life insured but still accepts the proposal and issues the policy, it needs to bear the culpa in contrahendo liability.263 When the insured event occurs, the insurer should bear the liability to pay the insured money, and it cannot deny the claim on the ground that

261  See Zongjian Li, Insurance Case Book (China Modern Economic Publishing House 2007) p. 208. 262 R. Merkin, “Gambling by insurance – a study of the Life Assurance Act 1774” (1980) 9 Anglo-American LR 331, at 339. 263 Where a party acts in violation of a pre-contractual duty, causing loss to the other party, the law of pre-contractual liability allows the aggrieved party to claim compensation for the loss. The party who has contravened its pre-contractual duties is deemed to have committed a fault or culpa in contrahendo and shall be liable therefor.

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the proposer did not have an insurable interest on the life insured when the contract was concluded.264 English law does not impose a duty on insurers to check whether an insurable interest exists at the time of the contract.265 The law allows insurers to underwrite risks, collect premiums and then refuse to pay claims on the ground of lack of insurable interest. No penalty is imposed on an insurer who does this. Professor Merkin made suggestions for reform in this respect. He was of the view that it is necessary to place on the insurer the major burden of ensuring that policies without interests are not issued.266 The LCs have raised this issue in their Issues Paper 4 (2008), asking whether insurers should be under a statutory duty to check that the policyholder had an insurable interest in the life insured at the outset of any contract of life insurance,267 and whether insurers who fail to inquire should be prevented from relying on lack of insurable interest as a defence to a claim. The majority of responses (9 out of 13) did not support the proposal of imposing a statutory duty on insurers and said that the insurer should check as a matter of course, but it was unnecessary to impose a statutory duty. The reasons are that it might contribute to additional costs or duplicate other regulatory requirements, including the principle of  Treating Customers Fairly.268 So the LCs did not pursue the issue further.269 It is disappointing that the LCs put this important issue back on the shelf. As to the concern about additional costs, it can be argued that policyholders would rather pay a little more premium (to cover the additional costs) for certainty of their claims not being refused for the reason of lack of insurable interest. So the reasoning that imposing a statutory duty might contribute to additional costs seems unconvincing. Unlike English law, American law makes it an actionable negligence for insurers to issue a policy without interests in the absence of reasonable investigation. Liberty National Life Insurance Co. vWeldon270 is the first case in the US holding a life insurance company responsible in tort law when it negligently sells a life policy to a proposer/ beneficiary who has no insurable interest and who subsequently murders the life insured.271 In another American case,272 a wife effected a life policy on her husband without his knowledge and consent, and then she poisoned him with arsenic for 264  Jing Wang, Insurance Cases, Rules of Judgement and Application of Laws (People’s Court Press 2013) p. 73. 265  In practice, insurers usually take reasonable care to ensure that they do not allow those without insurable interests to take out policies. Once they have concluded a contract they would not refuse to pay for lack of insurable interest at a later stage. But, an insurer in financial difficulties or a closed book in run-off without a reputation to maintain might not take the same approach given its conflicting duty to shareholders. See LCs Issues Paper 4 (2008), paras 4.21–4.23. 266  See R. Merkin, “Gambling by insurance – a study of the Life Assurance Act 1774” (1980) 9 Anglo-American LR 331, at 359. 267  The LCs Issues Paper 4 (2008), para 7.90. 268 The Treating Customers Fairly principle, regulated by the Financial Service Authority, requires that insurers must pay due regard to the interests of the customers and treat them fairly. 269 The LCs Joint Consultation Paper, Insurance Contract Law: Post-Contract Duties and Other Issues, (2011), para. 3.62. 270  Liberty Nat. Life Insurance Co. v Weldon, 267 Ala 171 (1957). Weldon sued Liberty National Life Insurance Company to recover damages of $100,000 for the wrongful death of his minor child. The Supreme Court of Alabama affirmed a $75,000 judgment of the lower court. 271  Gary Salzman, “Tort law and insurable interest in life insurance” (1963) 1(2) American Business LJ 25. 272  Ramey v Corilina Life Insurance Co., 135 SE 2d 362 (1964).

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the insurance proceeds. The husband sustained severe injuries and subsequently accused the life insurer of wrongdoing. The South Carolina Supreme Court gave a judgment for the husband. In this case, the husband’s signature on both the proposal form and the inspection for life insurance form was a forgery. The insurer was aware of the forgery, but still issued the policy. The issuance of a life insurance policy without the consent of the life insured gives rise to a cause of action in tort in favour of the life insured. Generally, an insurance company has a duty to take reasonable care not to issue a life policy without an insurable interest and without the consent of the life insured.273 7.8 Conclusion In order to obtain an insurance policy, the proposer must have an insurable interest in the subject matter of the insurance. In life insurance, the insurable interest must exist at the time of the contract; otherwise the contract is void. In property insurance, the insurable interest must exist at the time of loss. Under Chinese insurance law, the insurable interest must be a legally recognised interest.274 The term of “a legally recognised interest” is vague, narrow, restrictive and interpreted differently in different courts, consequently giving rise to uncertainties in practice and unfairness to policyholders. It is suggested that the strict test of “a legally recognised interest” be replaced by the broad test of “pecuniary loss or a reasonable expectation of economic loss.” Instead of looking for “a legally recognised interest,” an economic loss, a reasonable expectation of loss or an economic dependency could suffice regardless of its being legally recognised or not. The Insurance Law provides three categories of insurable interest in life insurance: interest based on natural affection and family relationships; interest supported by employment relationships; and interest created by the consent of the life insured.275 For relationships other than family or employment ones, the law adopts consent of the life insured as an alternative ground for establishing insurable interest.276 This alternative ground has proved problematic. It is suggested that this alternative ground be abolished. The proposed test of “a reasonable expectation of economic loss” would cover other relationships not set out in art. 31(1)(1)–(4). By the proposed new test, any person who is likely to suffer a pecuniary or economic loss as a result of the death of some other person is deemed to have an insurable interest in the life of that other person. The Insurance Law also makes the life insured’s consent an additional requirement for a valid death policy. This requirement should be retained. The Insurance Law does not impose a statutory duty on insurers to check whether there is an insurable interest and whether the life insured has given his consent to the insurance at the time of the contract; this gives the insurer an opportunity to turn down life policies technically at the time of claim on the ground of lack of an

273  Liberty Nat. Life Insurance Co. v Weldon, 267 Ala 171 (1957); Ramey v Carolina Life Insurance Co., 135 SE 2d 362 (1964); Weston v National Manufacturers and Stores Corp., 253 Ala 50345 So 2d 459. 274  The Insurance Law, art. 12. 275  Ibid, art. 31(1)(1)–(4). 276  Ibid, art. 31(2).

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insurable interest or the life insured’s consent. As a consequence, disputes often occur. It is submitted that, in order to stop the problem at source, it would be wise to impose on insurers a statutory duty to check the existence of insurable interests and the written consent of the life insured (for a death policy) when the contract is entered into. If the insurer has issued such a policy, it should not be allowed to refuse a claim for lack of an insurable interest or not obtaining the consent of the life insured.

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CHAPTER 8

The insured’s duty of disclosure and representations

8.1 Introduction It is well known that an insurance contract is a contract uberrimae fidei – of utmost good faith, i.e. each party is under a duty to exercise the utmost good faith towards the other in respect of any matter arising under or in relation to the contract.1 Perhaps the most important consequence of the uberrimae fidei principle is the doctrine of disclosure. During the negotiations for a contract of insurance, both parties are under a duty to disclose to each other information which is material to the risk and which is not known by the other party. This chapter is concerned with the insured’s duty of disclosure and misrepresentation, while the insurer’s duty of good faith and the duty to explain the content of the contract will be discussed in Chapter 9. The nature of an insurance contract is that the insured transfers the risk of some uncertain and adverse events to the insurer by paying premiums to the latter who in return promises to compensate the former when such events occur and cause losses. In order to assess the risk to the best extent, the insurer must acquire, before entering into the contract, the relevant facts about the risk, upon which the insurance contract is built. The relevant facts, however, lie more commonly in the knowledge of the insured only.2 Because of this information asymmetry,3 the insured is under a legal duty to disclose to the insurer, prior to the conclusion of the contract, facts which are material to the insurer’s decision on whether to accept the risk and, if so, on what terms.4 If the insured fails to comply with the duty, the insurer may plead the defence of non-disclosure or misrepresentation to rescind the contract and repudiate liability.5 In China, the current rules of law relating to the insured’s duty of disclosure or representations are provided in art. 16 of the Insurance Law, arts 5 to 8 of the Supreme People’s Court of China (SPC) Second Interpretation on Certain Issues

1  The Marine Insurance Act 1906, s. 17. For more on the history and development of the doctrine of disclosure in English law, see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 6-002. 2  Carter v Boehm (1766) 3 Burr 1905, at 1909. 3 See F. D. Rose, “Information asymmetry and the myth of good faith: back to basics” [2007] LMCLQ 181. 4  For example, see the Insurance Law 2009, art. 16; the Consumer Insurance (Disclosure and Representations) Act 2012 (UK), s. 2; the Australian Insurance Contracts Act 1984, s. 21; and the German Insurance Contract Act 2008, s. 19. 5  The Insurance Law 2009, art. 16(2).

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Concerning the Application of the Insurance Law of the People’s Republic of China (hereinafter, Interpretation II),6 and art. 5 of the SPC Third Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China (hereinafter, Interpretation III).7 Some High People’s Courts (HPC) at the provincial level have published guiding rules on handling insurance disputes; these rules are not binding the lower courts but guide them in hearing insurance cases.8 This chapter is concerned with the insured’s duty of disclosure and representations, materiality of facts to be disclosed, remedies available to the insurers for breach of the duty, and restrictions on the insurers’ defence of non-disclosure or misrepresentation. 8.2 The concept of good faith in Chinese law In China, the principle of good faith applies to all civil activities and all contracts. In the Civil Law 1986, it is provided: “Civil activities must be carried out in accordance with the principles of voluntariness, fairness, exchange of equivalent values, honesty and good faith.” The Contract Law 1999 has a similar provision which states: “The parties shall observe the principle of good faith in the exercise of their rights and performance of their duties.”9 The principle of good faith is expressed in Chinese as the principle of honesty (Chengshi)10 and faithfulness (xinying). In its literal meaning, the principle of good faith means that parties shall be truthful in their representations and shall not deceive the other party. They shall honour their promises and fully perform their obligations.11 This principle is embodied in all contracts including the contract of insurance. Article 5 of the Insurance Law provides: “Parties engaged in insurance activities shall follow the principle of good faith when exercising rights and performing obligations.” In addition to the general principle of good faith, the Insurance Law also introduces the doctrines of disclosure and representation which may be regarded as “utmost” good

6 The Supreme People’s Court Second Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China was passed by the Judgment Committee of the Supreme People’s Court on 6 May 2013 and became effective on 8 June 2013. According to arts 5 and 6 of the Stipulation of the Supreme People’s Court on the Judicial Explanation (2007 No. 12), the Supreme People’s Court stipulations, judicial explanations or decisions have legal effect. This means that the Supreme People’s Court stipulations, judicial explanations or decisions are one of the legal sources in China. 7 The Supreme People’s Court Third Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China was passed by the Judgment Committee of the Supreme People’s Court on 21 September 2015 and became effective on 1 December 2015. 8  For example, the Guidance of Beijing City High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2005 (the Guidance of Beijing City HPC 2005); the Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Guangdong Province HPC 2011); and the Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Shandong Province HPC 2011). 9 Article 6 of the Contract Law of the People’s Republic of China, which was enacted by the 2nd Session of the Ninth National People’s Congress in 1999. 10 Chinese ping yin. 11  For more, see B. Ling, Contract Law in China (Sweet & Maxwell Asia 2002) para. 2.037.

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faith particularly applicable to insurance contracts.12 The requirement of extended good faith, it is submitted, is based on the special feature of the insurance contract by which the risk is transferred from one party to another, and on the other feature that the insured knows the subject matter of the insurance better than the insurer. 8.3 The statutory law relating to the doctrine of disclosure In China, the doctrine of disclosure was first adopted in the Regulations on Property Insurance Contracts 1983,13 based on which the Insurance Law 1995 set out rules in more detail relating to the duty of disclosure or representations.14 The 1995 version of the Law was amended in 2002. The Law in respect of disclosure or representations in the 2002 version was exactly the same as provided in the 1995 version. The 2002 version was further amended in 2009. The current statutory position in respect of disclosure and representations is provided in art. 16 of the Insurance Law 2009. For the convenience of later discussion on relevant rules relating to disclosure, this article is shown below: Article 16(1): When concluding an insurance contract, the insurer may raise questions concerning relevant details of the insured subject matter or of the insured. The proposer15 shall truthfully disclose such details to the insurer. Article 16(2): The insurer shall have the right to rescind the insurance contract where the proposer fails to fulfil the obligation of truthful disclosure provided in the preceding paragraph intentionally or by gross negligence so that the failure of disclosure or representation shall sufficiently influence the insurer’s decision on whether he will accept the insurance or raise the premium rate. Article 16(3): The right of rescission provided in the preceding paragraph shall lapse where the insurer does not exercise it 30 days after he knows that there is a cause for rescission. Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payment or paying insurance benefits.

12  See arts 16 and 17 of the Insurance Law. Although the exact words of “utmost good faith” cannot be found in the Insurance Law, the meaning of this principle is embodied in arts 16 and 17. 13  Article 7 of the Regulations states: “At the time a contract of insurance is concluded, the insurer shall advise the proposer of all matters related to the way of effecting insurance, and the proposer shall, as required by the insurer, disclose all material circumstances of the risk which the insurer needs to know in deciding whether or not to accept the risk or on fixing the premium.” It also stipulates the remedy: “Should it be discovered after the conclusion of the contract of insurance that there is any non-disclosure, concealment or misrepresentation by the proposer of the material circumstances of the risk mentioned in the preceding paragraph, the insurer shall be entitled to rescind the contract of insurance or disclaim liability.” For more on the development of Chinese Insurance Law, see Z. Jing, The Fundamental Principles of Insurance Contract Law and Practice in the People’s Republic of China: A Comparative Study with English and Australian Counterparts (2001) PhD thesis, Queen Mary, London University, p. 168. 14  Article 16(1) of the Insurance Law 1995 provides: “When concluding an insurance contract, an insurer shall explain the details of the terms and conditions of such a contract to the proposer and may raise questions concerning relevant details of the insured subject matter, or of the insured. The proposer shall truthfully disclose such details to the insurer.” 15 The person who makes an application for insurance is called the proposer. When the insurer has agreed to underwrite the risk, the proposer is now called the insured or the policyholder. This chapter uses the term “the insured” for the proposer or the insured.

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Article 16(4): Where the proposer fails to perform his duty of disclosure and truthful representation of information to the insurer intentionally, the insurer shall not be liable for making indemnity payments or paying insurance benefits in connection with the insured events that occur prior to the rescission of the contract, and shall not refund the premium. Article 16(5): Where the failure of the proposer to perform his duty of disclosure and truthful representation by gross negligence has a material impact on the occurrence of the insured events, the insurer shall not be liable for making indemnity payments or paying insurance benefits in connection with the insured events that occur prior to the rescission of the contract, but he shall refund the premium. Article 16(6): Where the insurer knows that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits. As compared with the 1995 and 2002 versions of the Insurance Law, three major amendments have been introduced into the 2009 version for the purpose of restricting the insurer’s right of rescission by defence of material non-disclosure or misrepresentation: first, the merely negligent breach of the duty of disclosure will no longer entitle the insurer to rescind the contract; instead, only intentional or grossly negligent breach will give rise to an insurer’s right to rescind.16 Second, the insurer’s right of rescission of the contract is now limited by time.17 Third, the insurer is restricted from pleading the defence of non-disclosure to rescind the contract and repudiate liability if it knew before the inception of the contract that the insured had failed to disclose material facts.18 8.4 The way of performing the duty 8.4.1 Inquiry disclosure in non-marine insurance The Insurance Law adopts the way of inquiry disclosure, i.e. “asking and answering” questions in the proposal form.19 According to art. 16(1) of the Insurance Law, the insured is required to disclose only the information asked by the insurer on the proposal form, while the insurer may not be allowed to rescind the contract on the ground that the insured did not disclose something material which is beyond the scope of the questions raised in the proposal form even if it is material.20 Interpretation II made it clear that “The insured’s duty of disclosure is limited to the scope and content of the insurer’s inquiry; where the insurer and the insured dispute the scope and content of the inquiry, the onus of proof rests upon the insurer.”21 Accordingly, the insured is deemed to have performed the duty of disclosure if he

16  The Insurance Law, art. 16(2). 17  Ibid, art. 16(3). 18  Ibid, art. 16(6). 19  In contrast to the inquiry disclosure in non-marine insurance, voluntary disclosure is adopted for marine insurance. 20  See Z. Jing “Insured’s duty of disclosure and test of materiality in marine and non-marine insurance laws in China” [2006] JBL 681. 21  Interpretation II, art. 6(1).

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has truthfully answered the questions in the proposal form. He has no duty to volunteer information to the insurer even if the information is material. Sometimes a situation may occur where the insured has voluntarily disclosed some information without being asked by the insurer, but the information is untrue and misleading. Neither the Insurance Law nor Interpretation II provides any rule for this situation. The HPC of Beijing City provided a guiding rule that if the insured has voluntarily disclosed some information without being asked by the insurer and has written down the information on the proposal form, it is deemed that the insurer has made inquiry as to that information and the insured owes the duty to disclose that information truthfully.22 If the information is untrue, it means that the insured does not perform his duty. This issue should be resolved by the SPC in the future, or a provision should be added to the Insurance Law. It is submitted that inquiry disclosure is reasonable and suitable to the Chinese situation where a large part of the population in China lives in the countryside; it would be difficult for the insureds to understand what facts they should disclose to the insurer without being specifically asked by the insurer. Inquiry disclosure is thus important and necessary for the protection of the insureds in China. 8.4.2 Voluntary disclosure in marine insurance In China voluntary disclosure was adopted in the Maritime Code 1992 for marine insurance.23 Article 222 of the Code provides: “Before the contract is concluded, the insured shall disclose to the insurer material circumstances which the insured has knowledge of or ought to have knowledge of in his ordinary business practice and which would influence the insurer in deciding the premium or whether he agrees to insure or not.” This article is similar to s. 18(1) of the MIA 1906 (UK) and s. 24(1) of the Australian MIA 1909 in terms of disclosure. 8.4.3 Approaches to the performance of the duty in other jurisdictions (a) In English law For consumer insurance, the Consumer Insurance (Disclosure and Representation) Act 2012 (CIDRA) abolishes the duty of consumers to volunteer material facts. Instead, consumers are required to take reasonable care not to make a misrepresentation.24 This means that consumers must take reasonable care to answer insurer’s questions fully and accurately. If consumers do volunteer information, they must take reasonable care to ensure that the information is not misleading. For non-consumer insurance,25 the duty of fair presentation is now provided in s. 3 of

22  The Guidance of Beijing City HPC 2005, art. 18. 23 The Maritime Law of the People’s Republic of China was enacted at the 28th Meeting of the Standing Committee of the Seventh National People’s Congress on 7 November 1992, promulgated by Order No. 64 of the President of the People’s Republic of China on 7 November 1992, and became effective on 1 July 1993. 24  Section 2(2) of the CIDRA. 25  “Non-consumer insurance contract” means a contract of insurance that is not a consumer insurance contract. This includes insurance for charities, micro-businesses and small or medium enterprises, as well as large risks, marine insurance and reinsurance.

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the Insurance Act 2015 (UK).26 The major element of a fair presentation is a duty of disclosure which provides two ways to satisfy the duty of disclosure (voluntary disclosure). Section 3(4)(a) effectively replicates the disclosure duty in s. 18(1) of the MIA 1906. Its key features are that the insured must disclose “every material circumstance” which the insured “knows or ought to know.” The second way to satisfy the duty is intended to operate where the insured has failed to satisfy the strict duty in s. 3(4)(a) but has nevertheless disclosed enough information. Under s. 3(4)(b), the insured has satisfied the disclosure duty if he has disclosed sufficient information to put a prudent insurer on notice that the insurer must make further enquiries which, when answered, would reveal material circumstances which the insured knows or ought to know. Section 3(4)(b) represents the key change to the duty of disclosure. It reflects the trend in case law of accepting the fact that it may not be possible or necessary for every material circumstance to be disclosed.27 In summary of the English position in respect of the duty of disclosure, for consumer insurance, inquiry-based disclosure (i.e. representation) is adopted in the CIDRA; for non-consumer insurance, voluntary disclosure has been preserved in the Insurance Act 2015, but the strictness of the duty of voluntary disclosure has nevertheless been mitigated to some extent by s. 3(4)(b) of the Insurance Act 2015. (b) In Australian law Both voluntary disclosure and inquiry disclosure are used in Australian law. For eligible contracts of insurance (contracts for new business covering, inter alia, motor vehicles, home buildings, home contents, sickness and accident, consumer credit and travel insurance),28 s. 21A of the Insurance Contracts Act 1984 (ICA) requires the insurer to provide the insured with specific questions that are relevant to its decision whether to accept the risk and, if so, on what terms, thereby giving some assistance to the insured in fulfilling his disclosure obligations. For other contracts of insurance not covered by s. 21A of the ICA, voluntary disclosure is required by s. 21(1) of the ICA. The insured’s duty of disclosure is not limited to answering the insurer’s specific questions. Section 21(1) of the ICA requires a much broader disclosure: an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind.

26 The Insurance Act 2015 received Royal Assent on 12 February 2015. For more on this new Act, see Robert Merkin and Ozlem Gurses, “The Insurance Act 2015: Rebalancing the Interest of Insurer and Assured” (2015) MLR 1004. 27  For example, CTI v Oceanus [1984] 1 Lloyd’s LR 476; Garnat Trading and Shipping v Baominh Insurance Corporation [2011] EWCA Civ 773. 28  The Insurance Contracts Regulations 1985, reg. 2B.

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(c) In German law Inquiry disclosure is adopted in German law. The insured is required to disclose to the insurer, before concluding the contract, risk factors known to him which are relevant to the insurer’s decision to conclude the contract with the agreed content and which the insurer has requested in writing.29 8.4.4 The insurer’s duty to inform the insured of the duty of disclosure In China, an ordinary person does not usually know about the duty of disclosure and the consequences for failure to comply with the duty. Therefore, it is an important question whether an insurer has a duty, at the time of negotiating the contract, to inform the insured of the duty of disclosure and the consequence of breach of the duty. According to art. 17 of the Insurance Law, when standard clauses provided by the insurer are used for concluding an insurance contract, the insurer shall attach the standard clauses to the proposal form, and explain the contents of the contract to the insured.30 Usually a standard clause about the insured’s duty of disclosure is provided in insurance contracts.31 Thus the insurer’s duty to explain the contents of the contract should include the explanation of the disclosure clause to the insured. In practice, some insurers provide a notice, at the beginning of a proposal form, about the duty of disclosure and the consequences for breach of the duty.32 However, the Insurance Law does not provide any remedies for the insurer’s failure to explain the contents of the contract to the insured, except for the standard exclusion clauses.33 This means that the Law encourages the insurers to explain the duty of disclosure to the insured but does not punish the insurers who fail to do so. The Intermediate People’s Court of Quanzhou City, Hunan Province, expressed the view that where the insurer did not explain to the insured the duty of disclosure and the consequences for breach of the duty, the insured should not bear the duty of truthful disclosure. Thus in order to find whether the insured has performed the duty of disclosure, courts should first examine whether or not the insurer has performed the duty of explaining to the insured the clause about the insured’s duty of disclosure in the contract. Particularly, where an inquiry form containing questions is used, courts should examine whether the insurer has explained to the insured the relative professional or medical terms in the questions. In the situation where the questions asked are unclear and ambiguous and mislead the insured to give inaccurate or wrong answers, the insurer is taken to have waived disclosure of information

29  The German Insurance Contract Act 2008, s. 19(1). 30  The Insurance Law, art. 17. 31  For example, see clause 8.1 about the insured’s duty of disclosure and the insurer’s duty of explanation in the Endowment Policy of China Ping An Life Insurance Company Ltd (2013 version). 32  For example, see the reminder of duty of disclosure in the proposal form for the Life Policy of Samsung Air China Life. 33  Article 17(2) of the Insurance Law requires insurers to explain clauses which exclude or exempt the insurer from liability to pay insurance benefits, and to include notice of these exemptions in the proposal form, the insurance policy and any other insurance certificate in a way that attracts the insured’s attention. Failure to properly notify the insured of these exemption clauses will render them void. This topic will be discussed in detail in Chapter 9 of this book.

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in relation to the matters, rather than the insured having failed to perform the duty of disclosure.34 In some other jurisdictions, the insurers are obliged to inform the insured of the duty of disclosure and the consequences for breach of the duty; otherwise, the insurers have no remedies for the insured’s breach of the duty of disclosure. For instance, under s. 19(5) of the German Insurance Contract Act 2008, the insurer shall not be entitled to exercise his rights in respect of a failure to comply with the duty of disclosure if it has not instructed the insured in writing in separate correspondence of the consequences of any breach of the duty of disclosure. In Australia, under the ICA, the insurer is obliged, before a contract is entered into, to clearly inform the insured in writing of the general nature and effect of the duty of disclosure.35 The Insurance Contracts Regulation 1985 prescribes a form of writing to be used for informing an insured of the matters in respect of disclosure; the writing to be used may be in accordance with the form so prescribed.36 An insurer who has not complied with the duty of informing the insured of his pre-contract duty of disclosure is restricted from exercising a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent.37

34  Intermediate People’s Court of Quanzhou City, Fujian Province, “Report on difficult problems in hearing insurance disputes” [2007] People’s Judicature, see the website at http://www.zwmscp.com/a/ caipanbaogao/20100726/9069.html> accessed in January 2015. 35  The ICA, s. 22. 36  Section 2 of the Regulation 1985. In February 2014, the Exposure Draft of the Insurance Contracts Amendment Regulation 2014 (No. 1) was released for public consultation by the Treasury, Australian government. The proposed amendments in the Draft Regulation prescribe written notices in relation to contracts of general insurance, life insurance and eligible contracts of insurance and to the duty of disclosure for a person who will be insured by others. For example, Part 2 of the Draft Regulation provides the following writing for contracts of life insurance: Your duty of disclosure Before you enter into a contract of life insurance with us, you have a duty, under the Insurance Contracts Act 1984, to disclose to us every matter that you know, or could reasonably be expected to know, is relevant to our decision whether to accept the risk of the insurance and, if so, on what terms. This duty of disclosure applies until the contract is entered into. You have the same duty to disclose those matters to us before you renew, extend, vary or reinstate the contract. The duty however does not require disclosure of a matter: • • • •

that diminishes the risk to be undertaken by us; or that is of common knowledge; or that we know or, in the ordinary course of business, ought to know; or as to which compliance with your duty is waived by us.

Non‑disclosure   If you fail to comply with your duty of disclosure and we would not have entered into the contract on any terms if the failure had not occurred, we may avoid the contract within 3 years of entering into it. If your non‑disclosure is fraudulent, we may avoid the contract at any time. If we are, or have been, entitled to avoid a contract of life insurance but do not avoid it, we may elect, at any time, to reduce the sum that you have been insured for in accordance with a formula that takes into account the premium that would have been payable if you had disclosed all relevant matters to us. If the contract is for insurance of the life of another person, any failure by him or her to tell us a matter that he or she knows, or could reasonably be expected to know, is relevant to our decision whether to enter into the contract and, if so, on what terms may be treated as a failure by you to comply with your duty of disclosure. 37  Section 22 of the ICA. For more on this point, see G. Pynt, Australian Insurance Law: A First Reference (3nd edn, LexisNexis Butterworths 2015) paras 8.50 and 8.51.

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It is suggested that a new provision relating to the insurer’s duty to inform the insured of the duty of disclosure and the effect of breach of the duty be introduced into art. 16 of the Insurance Law as follows: “The insurer shall, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure. The insurer who has failed to do so may not exercise a right in respect of the insured’s failure to comply with the duty of disclosure.”38 In practice, a notice about the duty of disclosure coloured red or in bold font must be placed at the beginning of a proposal form to draw the attention of the insured. The insurer should not be allowed to take the defence of non-disclosure if it has failed to provide such a notice. 8.4.5 Making inquiry of the insured or insured’s guardian The insurers should make inquiry to the insured, not to other persons. Sometimes it occurs that an insurer may make inquiry of persons other than the insured; this can be treated as an invalid inquiry. For example, in Mr Yinan Li v China Ping An Insurance Company Ltd Beijing Branch,39 the insurer made inquiry about the insured’s state of health to the teacher of the insured in a nursery school. The court held that the teacher was neither the insured nor the insured’s guardian, so the inquiry to the teacher was not effective. For health insurance for school pupils, insurers should ask pupils or their parents for information about the state of health of the pupils (the insureds). If the insurers ask a wrong person, the insured’s duty of disclosure is not triggered. The HPC of Jiangsu Province published a guiding rule to govern this situation that People’s Courts will not uphold the insurer’s defence for the insured’s breach of the duty of disclosure where the insurer made inquiry of the school teachers but not of the pupils or their guardians.40 In some situations, an insurer’s inquiry made to the person who is deemed to have acted on behalf of the insured can still be treated as an invalid inquiry. In Mr Chen v China Ping An Life Insurance Company Ltd Bangbu Branch,41 the insurer’s agent asked the mother of the insured about the insured’s health and she gave negative answers to questions about diseases of the insured. The insured was present but did not say anything. The trial court held that the insurer’s agent did not make inquiry of the insured, so the insured had no duty to volunteer information about his health to the agent. The insurer appealed, and the appeal court settled the matter by mediation. It can be argued that according to art. 66 of the General Principles of the Civil Law of the People’s Republic of China,42 the insured should bear civil liability for the act performed by his mother, because the insured was aware that as “a civil act

38  This is the approach in s. 22 of the ICA. 39 This case was decided by the People’s Court, West District, Beijing City, Civil Court Judgment (2009) No. 16562, see accessed in June 2016. 40 Article 18 of the Guidance of Jiangsu Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Jiangsu Province HPC 2011). 41 This case can be seen at accessed on 24 January 2015. 42 The General Principles of the Civil Law of the People’s Republic of China were adopted at the 4th Session of the Sixth National People’s Congress on 12 April 1986 and promulgated by Order No. 37

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[was] being executed in his name but [he] fail[ed] to repudiate it, his consent shall be deemed to have been given” to his mother to act on his behalf.43 In this case, the insured was an adult and had full capacity of civil activity. His mother misrepresented his state of health, but he did not correct his mother’s misstatement. His mother’s misrepresentation should be treated as the insured’s misrepresentation. 8.4.6 Written inquiry and oral inquiry Article 16(1) of the Insurance Law is unclear on the question of whether the insurer may raise questions orally (by telephone or face-to-face), because it does not expressly stipulate that the inquiry and answer must be given in writing on a proposal form. In practice, the usual way for performing the duty of disclosure and representation is for the insured to answer the questions on the proposal form in writing. On some proposal forms, a clause is usually printed on the first page to inform the insured to answer the questions in writing. It states: “Any information disclosed by the proposer must be in written form, oral disclosure is not effective.”44 The advantage of adopting written inquiry is that it is easier for the insured to show proof of disclosure and for the insurer to show proof of inquiry. The HPC of Guangdong Province expressed the view that “at the time of concluding or reinstating the insurance contract, the insured’s and life insured’s duty of disclosure is limited to the extent of the insurer’s written inquiry.”45 It is sufficient for the insured to correctly answer the questions put to him on the proposal form. It is beyond the insured’s duty to tell the insurer any information outside the scope of the written questions. It is a common practice to effect policies of motor insurance by telephone in China. The advantage of a telephone sale is that it is quick, convenient and with lower premiums. If written inquiry were still required for this kind of business, it would be impractical. The disadvantage of a telephone sale is that it is relatively more difficult to prove that the insurer has made inquiries and the insured has performed his duty of disclosure. It is thus suggested that when taking out insurance on telephone or orally, a record must be used to record the conversation between the insurer and the insured. For oral inquiry, the burden of proof should rest on the insurer. The HPC of Zhejiang Province stipulated that the content of inquiry is not limited to the content of inquiry raised in the proposal form, but the insurer must prove that it had made inquiries in addition to those raised in the proposal form.46

of the President of the People’s Republic of China on 12 April 1986. The Law came into force on 1 January 1987. 43  The General Principles of the Civil Law of the People’s Republic of China, art. 66. 44  See proposal forms of life insurance, personal accident insurance and child safety insurance, etc., of the Ping An Insurance Company of China. 45  The Guidance of Guangdong Province HPC 2011, art. 7. 46 The Guidance of Zhejiang Province High People’s Court Concerning Questions of How to Deal with Property Insurance Disputes 2009 (the Guidance of Zhejiang Province HPC 2009), art. 5.

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8.4.7 The insurers’ questions (a) General question A general question (or a catch-all question), such as “Is there any other information within your knowledge that is likely to affect our consideration of this proposal?” is designed to include all other information which has not been asked for by specific questions in the proposal form. In essence, this kind of question places the insured in the position of voluntary disclosure and is treated as an invalid question by some courts.47 For instance, in Mr Li Huang v China Life Insurance Company,48 the proposal form specifically listed a number of questions about the insured’s diseases in the last 10 years. The disease of kidney syndrome was not included in the list. The last question was a general one, “Have you had any other diseases in the last 10 years in addition to those mentioned above?” The insured gave a negative answer to this question. When the life insured died, the insurer refused liability on the ground that the insured did not disclose the fact that he had a kidney syndrome before the contract was made. Evidence showed that the life insured had a kidney disease and was treated in hospital, but the doctor (who treated the life insured) said that the life insured’s kidney disease was not a kidney syndrome. The trial court held that there was no evidence that the life insured had a kidney syndrome, so the insured should not be said to have failed to disclose the disease, and that the general question was flawed and should not be valid. The appeal court upheld the trial court’s decision. But some other courts expressed the view that the insured must comply with the duty of disclosure to truthfully answer a general question. This can be explained by Mr Ying Bai v China Life Insurance Company Shanghai Branch.49 There, in the proposal form, a number of different diseases were listed in the questions and the insured was requested to answer “yes” or “no” to the questions. A duodenal ulcer was not included in the list of questions. The insured had a duodenal ulcer but replied in the negative to a general question: “Besides the diseases listed here, do you have any other disease?” The insurer did not show evidence that it had ever orally asked the insured whether he had a duodenal ulcer. The trial court held that the insured has no duty to inform the insurer of his duodenal ulcer without being specifically asked by the insurer. But the appeal court reversed the trial court’s decision, holding that the insured had a duodenal ulcer for more than 20 years and took medicine for the disease for the years, but failed to inform the insurer of the disease, and thus was in breach of the duty of disclosure; and the trial court’s judgment that the insured had no duty to inform the insurer of his duodenal ulcer without being specifically asked by the insurer was inappropriate. In order to avoid the situation that similar cases in respect of general questions are treated differently by different courts and to limit the use of general questions, the SPC enacted rules in relation to general questions. Article 6(2) of Interpretation II provides: “The People’s Courts will not uphold the insurer’s rescission of the 47  The Guidance of Beijing City HPC 2005, art. 12; the Guidance of Shandong Province HPC 2011, art. 42. 48  This case was reported in the book People’s Court Selected Cases, vol. 4, published by People’s Court Press in 2001. 49 This case was decided by the Intermediate People’s Court, Shanghai City, Civil Court Judgment (2000) No. 1722.

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contract on the ground that the insured was in breach of the duty of disclosure if he failed to reply to a general question in the proposal form, except where there are limits in the general question.” By this provision, the SPC does not allow the insurer to use general questions without any limits. A question such as “Have you had any other diseases which are not asked in the above questions?” should not be valid; but the SPC does allow the insurer to use general questions which are confined within reasonable limits, for example, a question such as “Have you had other cardiovascular disease in the last five years?” should be allowed.50 In English law,51 the leading authority in respect of general questions is Connecticut Mutual Life Insurance Co. of Hartford v Moore.52 In this case, the relevant question, in a life policy, was “Have you had any other illness, local disease or personal injury?” The life insured had replied in the negative, although some 12 years previously he had suffered a partial fracture of the skull. The Privy Council expressed the view that “the insurer could not reasonably expect a man of mature age to recollect and disclose every illness, however slight, or every personal injury . . . It is manifest that this question must be read with some limitation and qualification to render it reasonable.” The courts have tended to construe general questions ejusdem generis with the preceding specific questions.53 (b) The questions must be clear and precise Matters which insurers have found to be material should be the subject of clear questions on the proposal form. If there is something important, but it is not included in the proposal form, the insurer should not be entitled to a defence on the ground that the insured did not disclose the material fact which had decisively influenced him in decision-making when the contract was concluded.54 It is suggested that insurers should not be allowed to ask questions which would require expert knowledge beyond that which the insured could reasonably be expected to possess or obtain or which would require a value judgement on the part of the insured. Questions should be clear and precise in plain language. If the question is ambiguous and leads to an inaccurate representation or non-disclosure, it is 50  See X. M. Xi, Understanding and Application of the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 171. 51  See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 6-033. 52  (1881) LR 6 App Cas 644. 53  Roberts v Plaisted [1989] 2 Lloyd’s Rep 341; and State Insurance v Peake [1991] 2 NZLR 287. 54  In a Chinese case (Z. H. Huang, “The Analysis for an Insurance Case of Fish Insurance” (1995) 5 Insurance Studies 53), the insured effected a fish breeding insurance in 1993. The contract did not include a term to specify the species of the fish and the place where they were bred, and the insurer neither raised any question on these matters in the proposal form nor asked any question orally. In fact, the fish were imported from the US at a low price. Those fish were more difficult to grow than the local species in the hot weather in south China and so most fish died shortly after the conclusion of the insurance contract. The insurer rejected the claim on the ground that the insured did not disclose these material facts. The insured argued that he had no obligation to disclose the facts which the insurer had not asked. The court settled this case through mediation and required the insurer to pay the insured 30% of the amount claimed in order to balance the interests of both parties by the reasoning that both parties were at fault, in that the insured concealed the material fact deliberately, and the insurer did not ask these questions clearly. It must be noted that this case occurred before 1995 – the Insurance Law 1995 had not been enacted, and the court made judgment according to art. 7 of the Regulations on the Property Insurance Contracts 1983. This case would have been judged for the insured according to the Insurance Law 1995.

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deemed that the insurer has not made the inquiry and the insured is not responsible for his non-disclosure to that inquiry.55 For example, in Mrs Guiying Zhu v Kangtai Life Insurance Company Ltd Zhoukou Branch,56 in response to the insurer’s question about the life insured’s profession, the insured wrote the word “peasant” in the proposal form. He was in fact working as an electric welder then. The court held that the life insured’s household registration book57 showed that the life insured was a peasant, so it was correct to fill in the proposal form with the word “peasant” in replying to the question about his profession. The insured should not be taken to have breached the duty of disclosure. In English law, whether or not a consumer has taken reasonable care not to make a misrepresentation is to be determined in the light of all the relevant circumstances. An example of such circumstances is how clear and how specific the insurer’s questions were.58 In the Principles of European Insurance Contract Law (PEICL), the questions put to the insured by the insurer must be clear and precise.59 (c) Incomplete or unanswered questions If an insured does not answer or gives an obviously incomplete or irrelevant answer to a question in the proposal form, the insurer who, having been put on inquiry, proceeds to issue a policy without further inquiries is deemed to have waived further specific information in relation to the relevant matter. In Mrs Lihong He v China Life Insurance Company Ltd Feshan Shunde Branch,60 the insured did not answer the question of “Have you applied for insurance or been insured by any other insurance company?” It was held that even if the insured did not give an answer, this was deemed an intentional breach of the duty of disclosure. The insurer clearly knew the breach, but issued the policy and received the premium without making further inquiry on the question. The insurer should be deemed to have waived disclosure in relation to the matter, so it was not allowed to use the defence of non-disclosure. If the insured makes contradictory answers to a question, the insurer who fails to make further inquiry is deemed to have waived the disclosure of the information. In Mrs Weili Zhang v China Life Insurance Company Ltd Zhumadian Branch,61 the insured answered in the negative to the question of “Have you ever had any disease and been treated in a hospital in the last five years?” in the proposal form, but Mrs Zhang (the life insured’s wife) gave to the insurer’s agent the insured’s medical record which

55  See Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 163. 56 This case was decided by the People’s Court, Chuanhui District, Zhoukou City, Henan Province, Civil Court Judgment (2009) No. 819, and the report of the judgment can be seen at accessed in June 2016. 57  In China, each household must register with the local Public Security Bureau and is given a household registration book which keeps information about each member of the household: home address, date of birth, ID number, sex, marital status, job title, education, etc. 58  The CIDRA, s. 3. 59  The PEICL, art. 2.101. 60 The Supreme People’s Court Bulletin, 2008 No. 8, accessed in June 2016. 61  This case was decided by the People’s Court, Yicheng District, Zhumadian City, Henan Province, Civil Court Judgment (2010) No. 901, and the report of the judgment can be seen at accessed on 28 December 2014.

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showed that the life insured suffered from coronary heart disease. So the agent knew the fact that the life insured had suffered the disease, but did not make any further inquiry. It was held that when faced with contradictory information, the insurer did not take further steps to resolve the contradiction but issued the policy, so the insurer should be deemed to have waived its right of rescission of the contract. Similarly, in English and Australian law, if the insured leaves a blank to a question which is accepted without inquiry by the insurer, this will normally be taken as a waiver by the insurer of any duty of disclosure in respect of the matters covered by the question.62 Under the ICA, if the insured failed to answer, or gave an obviously incomplete or irrelevant answer to a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.63 An insured shall not be taken to have made a misrepresentation by reason only that he failed to answer a question included in a proposal form or gave an obviously incomplete or irrelevant answer to such a question.64 Under the PEICL, remedies for breach of the duty of disclosure shall not be available to the insurer in respect of a question which was unanswered, or information supplied which was obviously incomplete or incorrect.65 In summary, Chinese insurance law does not provide any statutory rule in relation to an incomplete, irrelevant or unanswered question in the proposal form. The approach discussed above was the approach taken by the courts. Different courts may take a different approach in a similar set of facts, so it is necessary to introduce a new provision into art. 16 of the Insurance Law to govern the situation. This new provision could be phrased as follows: “Where the insured failed to answer, or gave an obviously incomplete or irrelevant answer to a question included in a proposal form about a matter, if the insurer did not make further inquiry on this question, the insurer is deemed to have waived compliance with the duty of disclosure in relation to the matter covered by this question.66 Remedies for breach of the duty of disclosure shall not be available to the insurer in this situation.” (d) Does an insurer have a legal duty to verify the information disclosed by the insured before entering into the contract? It is reasonable and fair that an insurer should have a duty to check that the insured has answered all questions on the proposal form. If the insurer finds that there are ambiguous or incomplete answers or no answers to the questions, it should have a duty to make further inquiry in relation to the relevant matters. If it does not, it is deemed to have waived the insured’s compliance with the duty of disclosure in relation to the matters. However, it may be unreasonable for the insurer to be obliged to verify the information provided by the insured.

62  Roberts v Avon Insurance Co. [1956] 2 Lloyd’s Rep 240. 63  Section 21 of the ICA. For more on this point, see G. Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis Butterworths 2015) para. 8.9. 64  The ICA, s. 27. 65  The PEICL art. 2:103(a). 66  This is the approach in s. 21(3) of the ICA.

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There is no answer, either in the Insurance Law or in the SPC’s Interpretation II, to the issue of whether the insurer has a duty to verify the information provided by the insured before the contract is entered into. As a result, sometimes the courts take the view that the insurer should verify the information provided by the insured; otherwise, it should take the legal consequence for failure to do so. This can be explained by the case of Mrs Bai v The Life Insurance Company Ltd,67 where the life insured died of cirrhosis, but the insurer rejected the claim on the grounds of non-disclosure of the fact that the life insured suffered hepatitis and stayed in a hospital for treatment for 15 days before the conclusion of the contract. The insured said that the insurer’s agent completed the proposal form and the insured disclosed to him the life insured’s hepatitis, which was evidenced by witness testimony. The court held that the insured had performed the duty of disclosure, but expressed the view that it is the insurer who is in the position to make the final decision on whether or not to conclude the contract. If the life insured does not meet the insurer’s requirements and conditions for the contract, the insurer should not conclude the contract with the insured. Since the insurer concluded the contract with the insured, the insured is deemed to have met the insurer’s condition for entering into the contract. Even if the insured did not meet the insurer’s conditions, it was the insurer’s fault for failing to verify the information carefully but entering into the contract, so the insurer should take the consequence for its fault. It could be argued that conclusion of the contract is based on the belief that the information provided by the insured is true. If the information is untrue and the insurer would not have entered into the contract had it known the true information, it cannot be said that the insured had met the insurer’s conditions for concluding the contract. It is incorrect to hold that the insurer has a duty to verify the information provided by the insured before concluding the contract. If the insurer were to be obliged to verify the information, once the contract is entered into, in essence the insurer would later be precluded from any defence of non-disclosure even if the insurer was induced by the undisclosed fact. Investigation and verification of the information provided by the insured is time-consuming and costly, and would increase the costs of purchasing insurance. It is impracticable and difficult to verify all the information for every contract. It would also increase the frequency of intentional non-disclosure. Thus it is suggested that insurers should not be obliged to verify the information provided by the insured before concluding the contract. However, where the insurer is put on notice by the answers to the questions asked in the proposal form, it should have a duty to make further inquiry about or to investigate into the specific matter. Failing to do so, the insurer should be taken to have waived the information in relation to the matter.

67 This case was decided by the People’s Court, Yancheng District, Henan Province, Civil Court Judgment (2009) No. 1552, and the report of the judgment can be seen at accessed on 27 December 2014.

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8.5 The scope of the duty of disclosure 8.5.1 Insured’s actual knowledge Article 16(1) of the Insurance Law requires the insured to disclose material information to the insurer at the time of the contract, but does not give any provision about the insured’s knowledge. If the insured does not know the information which is asked by the insurer, he is not able to disclose it and should not be said to have breached his duty of disclosure. But some judges are of the view that the insured’s knowledge should include what the insured has actually known and what he ought to have known.68 The HPC of Guangdong Province provides that the People’s Courts will not uphold the insurer’s refusal of liability and its rescission of the contract on the ground of non-disclosure of circumstances which the insured had not known or ought not to have known.69 The SPC has eventually clarified art. 16(1) of the Insurance Law in respect of the insured’s knowledge, providing that “When entering into an insurance contract, circumstances about the subject matter of insurance or of the insured which are to be truthfully disclosed by the insured as required by art.16(1) of the Insurance Law are those which the insured actually knows.”70 This article clearly defines the scope of the knowledge within which the insured is required to disclose, that is, to disclose only what he actually knows, not what he ought to know. Constructive knowledge is irrelevant. In judicial practice, disputes on whether the insured has actually known the material circumstances relating to the insurance proposed occur mostly in life insurance cases. If an insured knows he has a disease but answers “no” to a question about the disease in the proposal form, this is certainly non-disclosure. Sometimes the insured has a disease but he himself does not know the fact that he has the disease, and he cannot be said to fail to comply with the duty of disclosure if he gave a negative answer to the question about the disease. So for a judgement of the insured’s knowledge of a disease, two questions need to be considered: first, whether the insured has the disease in question; second, whether the insured knows he has the disease. In Mr Yao v The Life Insurance Company,71 the insured had a surgery to remove a small intestinal stromal malignant tumour a few months before entering into the contract. But his family told him that the tumour was benign. At the time of applying for the life policy, he told the insurer’s agent the fact that he had a surgery to remove a benign tumour, and the agent said that a benign tumour would not affect the insurance. The insurer neither asked the insured to have a medical examination nor asked the insured to provide medical evidence of the surgical treatment, but issued the policy. Two years later the insured was found to have a liver tumour and it was removed by surgery. The insurer rejected the claim for medical costs on the ground of non-disclosure of the fact that the insured had a malignant tumour before

68  See X.M. Xi, Understanding of the Provisions and of their Application of the Insurance Contract Law of the People’s Republic of China (China Legal Publishing House 2010) p. 87. 69  The Guidance of Guangdong Province HPC 2011, art. 4. 70  Interpretation II, art. 5. 71  This case is reported in the book by Xian Xie, A Hundred Insurance Cases (Law Press China 2012) p. 88.

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conclusion of the contract, and the insurer would not have entered into the contract had it known the undisclosed fact. It was held that the insured did not know the fact that the tumour was malignant, so he could not be said to have failed to perform the duty of disclosure. The insurer knew that the insured had a medical treatment but did not ask him to have a medical examination nor request him to provide evidence of the surgical treatment, but issued the policy. So the insurer was liable. German law is similar to Chinese law in respect of the insured’s knowledge. The insured is only obliged to disclose to the insurer what he knows, not what he ought to know.72 If the contract is effected by the insured’s representative, the representative’s knowledge shall be taken into account.73 By contrast, under English and Australian law, information known to an insured includes what he actually knows and what he would have known if he had not wilfully shut his eyes to the truth.74 This is also the approach adopted by the PEICL which provides “when concluding the contract, the applicant shall inform the insurer of circumstances of which he is or ought to be aware.”75 8.5.2 Medical examination cannot replace the insured’s duty of disclosure The Insurance Law does not concern the question of whether medical examination arranged by the insurer can replace the insured’s duty of disclosure. In judicial practice, some courts are of the view that medical examination of the life insured cannot substitute for the insured’s duty of disclosure of health conditions of the life insured. If the insured withheld a material fact about his health and the medical examination did not reveal the fact, the insured is deemed to have failed in the duty of disclosure. This can be illustrated by the case of Mr Liu v The Life Insurance Company.76 There, Mr Liu applied for a life policy with critical illness cover and had a medical examination in the hospital (which was designated by the insurer). After the medical examination, the insurer effected the policy in August 2006. In July 2008, Mr Liu was diagnosed with coronary heart disease, hypertension, hyperlipidemia and fatty liver and treated in hospital. The insurer rejected Liu’s claim for medical expenses by reason of non-disclosure of the fact that Liu was treated in hospital for hypertriglyceridemia and suspected hypertension in January 2006, but he had answered “no” to the question: “Have you had any medical treatments in hospital in the last five years?” in the proposal form. Liu argued that he had taken the medical examination arranged by the insurer before the contract was entered into, so the insurer should not be allowed to refuse its liability on the ground of non-disclosure. The court held that a medical examination cannot replace the insured’s duty of disclosure.

72  Section 19(1) of the German Insurance Contract Act 2008 provides: “The policyholder shall disclose to the insurer before the contract is concluded the risk factors known to him which are relevant to the insurer’s decision to conclude the contract with the agreed content and which the insurer has requested in writing.” 73  The German Insurance Contract Act 2008, s. 20. 74  Economides v Commercial Union Co. plc [1998] QB 587, at 601–02. 75  The PEICL, art. 2:101. 76 This case was decided by the People’s Court, Xingqing District, Yinchuan City, Ningxia Autonomous Region, Civil Court Judgment (2009) No. 312, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2010) vol. 2, p. 15.

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The HPC of Beijing City, the HPC of Guangdong Province and the HPC of Shandong Province provide a guiding rule that in life insurance, the insured’s duty of disclosure cannot be replaced by a medical examination carried out by the medical agents authorised by the insurers.77 The question of whether medical examination arranged by the insurer can replace the insured’s duty of disclosure has been answered by art. 5 of the SPC Interpretation III 2015, which provides “when entering into an insurance contract, upon being requested by the insurer, a medical examination has been carried out on the life insured in a designated hospital, the People’s Courts will not uphold the relevant party’s demand that the insured’s duty of disclosure can be exempted. Where the insurer knows the result of the life insured’s medical examination and demands a rescission of the contract on the grounds that the insured did not perform the duty of disclosure, the People’s Courts will not uphold such a demand.” This provision indicates that even if the life insured takes a medical examination which may show the health problems (if any), the insured still owes the duty of disclosure, and the medical examination cannot replace the proposer’s duty. The insured cannot argue that the medical examination report may tell the insurer the physical condition of the life insured, so that it is not necessary for him to disclose the fact to the insurer about the health status of the insured. On the other hand, where the insurer knew the fact which was revealed by the medical examination, but still entered into the contract, if it demands to rescind the contract on the ground of the insured’s non-disclosure of the relevant fact, the People’s Court shall not uphold such a demand. 8.5.3 Circumstances under which the insured’s duty of disclosure is excepted The Insurance Law and the SPC Interpretation do not provide any rules in relation to exceptions to the insured’s duty of disclosure. The HPC of Beijing City provides a guiding rule that “the insured is not required to disclose a circumstance if – (1) it may diminish the probability of occurrence of the risk; (2) the insurer knows it or ought to know it; or (3) it is something as to which the insurer expressly waives information.”78 Similarly, the HPC of Zhejiang Province also provides that “The insured is not deemed in breach of the duty of truthful disclosure where he did not provide an answer upon being asked by the insurer in respect of the following matters that: (1) the insurer knew; (2) according to common sense, in the ordinary course of its business the insurer should have known; and (3) the insurer declared that the insured did not need to disclose.”79 Accordingly, the insurer should be prevented from using the defence of non-disclosure of such information. This is similar to the English and Australian approaches. In English law, for non-consumer insurance, s. 3(5) of the Insurance Act 2015 provides: “In the absence of enquiry, subsection (4) does not require the insured to disclose a circumstance

77  The Guidance of Beijing City HPC 2005, art. 9; the Guidance of Guangdong Province HPC 2011, art. 5; and the Guidance of Shandong Province HPC 2011, art. 6. 78  The Guidance of Beijing City HPC 2005, art. 14. 79  The Guidance of Zhejiang Province HPC 2009, art. 9.

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if – (a) it diminishes the risk,80 (b) the insurer knows it,81 (c) the insurer ought to know it,82 (d) the insurer is presumed to know it, or it is something as to which the insurer waives information.” In Australia, exceptions to the insured’s duty of disclosure are provided by s. 21(2) of the ICA, which lists the matters the insured need not disclose, being matters that diminish the risk, that are of common knowledge, that an insurer knows or that in the ordinary course of its business as an insurer ought to know,83 or as to which compliance with the duty of disclosure is waived by the insurer. If an insured does not answer or gives an obvious incomplete or irrelevant answer to a question in a proposal form, the insurer is deemed to have waived compliance with the duty of disclosure in relation to that matter.84 In China, sometimes the insurer’s agent fills in the proposal form and answers the questions in the proposal form on behalf of the insured, and even signs the proposal form for the insured. Under these circumstances, the insured’s duty of disclosure can be excepted.85 But where the agent answered the questions in the proposal form, and the insured has confirmed the answers by signing the form, the answers are deemed to be the true representations of the insured, unless there is evidence of the agent’s fraud or duress.86 8.6 The duty of disclosure is on the insured only Who owes the duty of disclosure of material circumstances to the insurer at the time of conclusion of the contract? This question is particularly important in life insurance for the situation where the insured and the life insured87 are not the same person. To be more specific, does only the insured (or both the insured and the life insured) have the duty of disclosure? Article 16(1) of the Insurance Law provides: “When concluding an insurance contract, the insurer may raise questions concerning relevant details of the insured subject matter or of the insured. The proposer shall truthfully disclose such details to the insurer.” It is clear by this article that the insured (the proposer) is obliged to perform the duty of disclosure. It is, however, unclear whether or not the life insured is also required to comply with the duty of disclosure.

80  Inversiones Manria SA v Sphere Drake Insurance Co. Plc (The Dora) [1989] 1 Lloyd’s Rep 69. 81  Kingscroft Insurance Co. v Nissan Fire and Marine Insurance Co. Ltd (No. 2) [1999] Lloyd’s Rep IR 603. 82  For example, the insurer should be aware of matters of a commercial nature (Noble v Kennaway (1780) 2 Doug KB 510). 83 What an insurer “knows” may include information contained in a newspaper extract if it is part of the insurer’s formal records or is filed in a place where the insurer’s relevant employees have seen it or could be expected to see it in the performance of their duties. See G. Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis Butterworths 2015) para. 8.42. 84  The ICA, s. 21(3). 85  The Guidance of Beijing City HPC 2005, art. 7. 86  The Guidance of Shandong Province HPC 2011, art. 8. 87  The life insured is the person on whose life (or health) the insurance contract is effected.

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In life insurance, the insured can effect a policy either on his own life or on the life of another person (the life insured).88 When the insured effects a policy on his own life, the insured and the life insured are the same person, so the insured must perform the duty of disclosure. Where the insured and the life insured are not the same person, the question of who should perform the obligation of disclosure becomes important for two reasons: first, sometimes the insured may not fully know the state of health of the life insured, while the life insured has better knowledge about his own health. In this situation, if the insured is the only person who is required to disclose, he may not be able to give a full and accurate representation of the life insured’s health. Consequently the insurer may enter into the contract on the basis of ill-informed or inaccurate circumstances. Second, if the life insured is not required to perform the duty of disclosure, where he wants to effect a policy on his own life but knows himself certain facts about his own health which would, if disclosed, enable the insurer to raise premium or to refuse underwriting the risk, he may bypass his duty of disclosure of these facts by asking another person to effect the policy on his life.89 In practice, insurers usually require the life insured to have a medical examination after receiving the insured’s application a life (or health) insurance contract.90 The doctors usually make inquiries about the life insured’s health. If the life insured is deemed to have no duty of disclosure, his wrong answer to doctor’s questions would have no adverse effect on the validity of the contract. This would certainly be unreasonable to the insurer and it is against the principle of good faith.91 The courts adopt various approaches to the issue of whether the life insured should comply with the duty of disclosure. In the guiding rules on how to deal with insurance disputes published by the HPC of Beijing City and the HPC of Guangdong Province, the courts implicitly stipulate that both the insured and the life insured owe a duty of disclosure.92 But the HPC of Shandong Province has a different view that “where the insured and the life insured are not the same person, the People’s Courts will not uphold the insurer’s defence of the life insured’s failure to perform the obligation of disclosure and his refusal of liability on the ground of the life insured’s non-disclosure.”93 The different approaches would lead to different decisions for similar cases. In summary, it is unsettled in China whether or not the life insured owes a pre-contract duty of disclosure – the statutory law and industrial practice are inconsistent, and the High People’s Courts have different approaches. In order to solve

88  If the insured effects a life policy on other person, he must have an insurable interest in the person. If the life policy is a death policy, the insured must obtain the person’s consent; otherwise, the policy is invalid (art. 34 of the Insurance Law). For more on insurable interests in life insurance in Chinese law, see Z. Jing “Insurable interests in life insurance: A Chinese perspective” [2014] JBL 337. 89  This other person must, of course, have an insurable interest in the life insured and must not know the circumstances which are exclusively within the knowledge of the life insured. 90  For instance, China Ping An Life Insurance Company requires any life insured of age 45 or over to take a medical examination, while a life insured of less than 45 may be randomly chosen for a medical examination. 91  The Insurance Law, art. 4. 92  Article 13 of the Guidance of Beijing City HPC 2005; art. 7 of the Guidance of Guangdong Province HPC 2011. 93  Article 5 of the Guidance of Shandong Province HPC 2011.

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the problem of inconsistency between law and practice and between the approaches in the courts, it would be beneficial to take a look at approaches in some other jurisdictions. In England, the CIDRA makes provision in relation to insurance taken out by a consumer on another person’s life.94 When answering questions posed by the insurer, the life insured has a duty to take reasonable care not to make a misrepresentation. If the life insured makes a misrepresentation, the insurer will have the same remedies it would have had if the insured taking out the policy made the misrepresentation. In Australia, if the life insured makes a misrepresentation to the insurers, the insurers are entitled to treat the misrepresentation as if it had been made by the insured himself.95 By the latest Insurance Contracts Amendment Act 2013, a new section (s. 31A) is inserted into the ICA to impose a new duty of disclosure on the life insured, which states that if the life insured failed to disclose to the insurer a material matter, the insurer is entitled to treat the failure to disclose as if it had been made by the insured himself.96 So the current position in Australia is that the life insured is required to comply with the duty of disclosure and representation of material facts at the time of the contract. In Germany, the duty of disclosure is limited to the insured only,97 but the life insured’s knowledge and conduct shall be taken into account when considering the scope of the insured’s knowledge. Section 47 of the Insurance Contract Act 2008 provides the following. (1) Insofar as the knowledge and conduct of the policyholder are of legal significance, in the case of insurance on the account of a third party, account shall also be taken of the knowledge and conduct of the life insured. (2) Account shall not be taken of the knowledge of the life insured if the contract was made without his knowledge or it was impossible or unreasonable for him to inform the insured in good time. The insurer need not accept the objection cited against it that the contract was made without the knowledge of the life insured if the insured made the contract without being instructed to do so by the life insured and did not indicate to the insurer at the time the contract was made that he was concluding the contract without having been instructed to do so by the life insured. In summary, these three jurisdictions adopt different approaches to the life insured’s duty of disclosure. Australian law imposes on the life insured the duty of disclosure and representation of material information at the time when the insurance contract is entered into.98 Under English law, information provided to the insurer by

94  Section 8 of the CIDRA is concerned with insurance on the life of another, which provides “(1) This section applies in relation to a consumer insurance contract for life insurance on the life of an individual (‘L’) who is not a party to the contract. (2) If this section applies – (a) information provided to the insurer by L is to be treated for the purpose of this Act as if it were provided by the person who is the party to the contract, but (b) in relation to such information, if anything turns on the state of mind, knowledge, circumstances or characteristic of the individual providing the information, it is to be determined by reference to L and not the party to the contract.” 95  Section 25 of the ICA provides: “Where, during the negotiations for a contract of life insurance but before it was entered into, a misrepresentation was made to the insurer by a person who, under the contract, became the life insured or one of the lives insured, this Act has effect as though the misrepresentation had been so made by the insured.” 96  Section 31A of the ICA. 97  Section 19(1) of the German Insurance Contract Act 2008. 98  Sections 25 and 31A of the ICA.

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the life insured is treated as if it were provided by the insured; this implicitly imposes on the life insured the duty to take reasonable care not to make a misrepresentation to the insurer. The insurer will have a remedy if either the insured or the life insured fails in this duty.99 German law differs from Australian and English law in that the duty of disclosure is limited to the insured only, but the life insured’s knowledge and conduct are taken into account when considering the scope of the insured’s knowledge. Having considered the approaches to the duty of disclosure in various jurisdictions for the situation where the insured and the life insured are not the same person, it is suggested that the duty of disclosure should remain on the insured only in the Insurance Law. This is in conformity with the doctrine of privity of contract – the life insured is not a party to the contract, so he should not be obliged by the duty of disclosure.100 However, the life insured’s knowledge should be taken into account when considering the scope of the insured’s knowledge.101 The insured should be deemed to know what the life insured knows. This would help to avoid difficulty in the situation where the insured does not fully know the state of health of the life insured and thus may misrepresent the life insured’s health. This would also encourage the insured to consult with the life insured to acquire knowledge (which the life insured knows himself) as to the health of the life insured so as to avoid misrepresentation of the life insured’s health.102 Where the contract was entered into without knowledge of the life insured or it was impossible or unreasonable for the life insured to inform the insured in good time, the life insured’s knowledge should not be taken into account.103 8.7 The time when the duty is to be performed 8.7.1 At the time of concluding the contract It is generally understood that the insured’s duty of disclosure is limited to the pre-contract stage. The pre-contract stage can be divided into two periods: the period from completing a proposal form to submitting the application to the insurer, and the period from submitting the application form to the conclusion of the insurance contract. Sometimes the circumstances of the subject matter of the insurance or of the insured may change after handing in the proposal form to the insurer and before issuance of the policy; in this situation, the question of whether or not the insured is obliged to inform the insurer of such a change of circumstances becomes important. According to art. 16(1) of the Insurance Law, the insured is required to disclose material information to the insurer when concluding an insurance contract. This implies that the insured’s duty of disclosure lasts until the conclusion of the contract. However, the inquiry made by the insurer or its agent, whether it is written or oral, usually takes place at the time of completing the proposal form. Once the

  99  Section 8 of the CIDRA. 100  Article 16(1) of the Insurance Law. 101  This will be discussed later. 102  This suggestion is formulated with reference to s. 47 of the German Insurance Contract Act 2008. 103 Ibid.

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application has been submitted to the insurer, the insured is deemed to have performed his duty of disclosure if the insurer does not make any further inquiry. In practice, during the period from submitting the application form to the issuance of the insurance policy, if the insured becomes aware of a new material circumstance, he is under no obligation to inform the insurer of such a circumstance without being requested. In Mrs Lihong Zhao v China Life Insurance Company Puyang Branch,104 the life insured was diagnosed with mental breakdown disorder after submitting the application form to the insurer and one day prior to the issuance of the life policy. When the life insured died, the insurer refused liability on the ground of the insured’s non-disclosure of the life insured’s mental breakdown disorder when entering into the contract. The court held that there was no evidence that the life insured had the disease at the time of submitting the application form, so the insured should not be deemed in breach of the pre-contract duty of disclosure. There are many similar cases supporting the courts’ decision that the insured is not obliged to disclose material information after handing in the proposal form and prior to issuance of the policy.105 In life insurance, it is not uncommon that the life insured’s health may alter in some respect or he may be diagnosed with a disease while the insurer is perusing the proposal and medical reports sent to it. In some other jurisdictions, the insured’s pre-contract duty of disclosure lasts until the conclusion of the contract or the contract becoming effective. For instance, in English law,106 the time up to which full disclosure of facts material to the risk proposed must be made is the moment when a binding contract is concluded.107 The practical effect of this rule is that the insured is bound to disclose any material circumstances concerning the insurance proposed which come to his notice while negotiations are proceeding and before the proposal is accepted. Thus in Looker v Law Union and Rock Insurance Co. Ltd,108 the insured represented in his proposal form that he was free from disease and ailments. The insurers informed him that the insurance would become effective when the first premium due was received. Five days after this information came, he became seriously ill with what was diagnosed as pneumonia. Four days later he died, a cheque for the premium being received one day prior to his death. Acton J held that the insurers were not liable because of the insured’s failure to discharge his duty to inform the insurers of material change in the nature of the risk to be undertaken by them.109 In consumer insurance, the current English position in respect of updating information previously given before the contract is entered into or varied is that a failure by the

104 This case was decided by the People’s Court, Hualong District, Puyang City, Henan Province, Civil Court Judgment (2009) No. 2943. 105  Mrs Zhanxian Xue v China Pacific Life Insurance Company Jiaozuo Branch, the People’s Court, Jiyuan City, Henan Province, Civil Court Judgment (2009) No. 126; and Mrs Xuexian Ye v Kang Tai Life Insurance Company Heyuan Branch, the People’s Court, Ping County, Guangdong Province, Civil Court Judgment (2008) No. 341. 106  For more, see J. Birds, B. Lynch and S. Milnes, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 17-023. 107  Ionides v Pacific Ins. Co. (1871) LR 6 QB 674, at 684; (1872) LR 7 QB 517; Haydenfayer v British National Ins. Soc. Ltd [1984] 2 Lloyd’s Rep 393, at 398; Newbury Int. Ltd v Reliance National Ins. Co. (UK) Ltd [1994] 1 Lloyd’s Rep 83, at 85. 108  [1928] 1 KB 554. 109  Ibid, at 558.

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consumer (the insured) to comply with the insurer’s request to confirm or amend particulars previously given is capable of being a misrepresentation by virtue of s. 2(3) of the CIDRA. In Australia, the duty of disclosure continues until the contract of insurance has been accepted by the insurer and a policy is issued.110 That means the insured and the life insured have a duty to update any disclosures made to the insurer if any change to the insured’s circumstances occurs in the period up until the insurer has issued the contract of insurance.111 The ICA also provides that the insured must comply with the duty of disclosure before the contract is renewed,112 extended, varied113 or reinstated.114 In German law, during the period from submitting the application form to the insurer’s acceptance of the contract, the insurer may ask questions relating to the insurance proposed, and the insured is under the duty of disclosure as regards these questions.115 According to art. 16(1) of the Insurance Law, it is suggested that the time up to which the insured must disclose material circumstances to the insurer should be the moment when a binding contract is concluded, rather than the moment when the application form is submitted. If the insurer does not ask any question in relation to alteration of the circumstances previously disclosed to the insurer, the insured is under no duty to volunteer any information which comes to his notice after submitting his application form to the insurer. If the insurer wants the insured to inform it of any change of circumstances during the period from submitting the application to the conclusion of the contract, the insurer should place a notice in the application form to request the insured to do so. A failure by the insured to comply with this request should be treated as a failure to comply with the duty of disclosure.116 8.7.2 At the time of renewal The current Chinese law limits the insured’s duty of disclosure to the time when the contract is made. But in practice, when the contract is renewed the insurer usually requires the insured to disclose information in relation to the renewal.117 The HPC of Fujian Province provides a guiding rule in this regard that the renewal of a contract

110 See the Application Form for Life Insurance of the MLC Insurance Company, accessed in February 2015. 111  See the Macquarie Life Application form, accessed in February 2015. 112  Unless informed otherwise, an insurer is entitled to assume that the answers in the original proposal for insurance apply to the renewal (Mercantile Mutual Insurance (Australia) Ltd v Gibbs [2001] WASCA 271.) 113 Any remedy for a breach of the duty of disclosure or for misrepresentation in relation to the variation is limited to the variation. It does not affect the original contract (Mercandian Continent [2001] EWCA Civ 1275; 2 Lloyd’s Rep 563). 114  The ICA, ss. 21, 21A and 11(9). 115  The German Insurance Contract Act 2008, s. 19(1). 116  The CIDRA, s. 2(3). 117  For example, in the application form for variation or reinstatement of the contract (China Ping An Life Insurance Company, 2014 version of the form), the insured is required to disclose relevant information.

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is not regarded as the continuation of the original contract, but a new contract. The insured should perform the duty of disclosure, and the insurer should perform the duty of explaining the clauses of the contract.118 8.7.3 At the time of reinstatement of life policies The rules for reinstatement of a suspended contract are stipulated in art. 37 of the Insurance Law, which provides “A contract which lapses in accordance with art. 36 of this Law119 is reinstated where the insurer and the proposer have reached an agreement through consultations and the proposer has paid the outstanding premiums. However, the insurer has the right of rescission where no agreement has been reached by the parties within two years from the date of the lapse of the contract.” According to this article, the insured can apply for a reinstatement and the application must be agreed by the insurer. The insurer needs to check if the suspended contract meets the requirements of the reinstatement. It is unclear whether or not the insured has a duty to disclose material facts to the insurer at the time of reinstatement of the contract, as the Insurance Law does not give any stipulation in this regard. Some HPCs adopt the approach that the insured has a duty to disclose material information at the time of reinstatement of a suspended contract.120 In practice, insurers usually require the insured to disclose new information about the reinstatement. The insurer can either agree to reinstate the contract or to reject the application for reinstatement based on the information supplied by the insured. It is reasonable for the insurer to request the insured to disclose new information relating to the reinstatement of the contract, because it is often the case that after the contract is suspended, the insured has found the life insured to have a disease and then wishes to reinstate the suspended contract. This is called adverse selection. If an adverse selection is not limited, it would not be fair to the insurer. On the other hand, the insurer should not be allowed to refuse an application for reinstatement on the ground of a disease which developed or was diagnosed prior to the suspension of the contract. It is suggested that art. 16(1) of the Insurance Law should be reformulated to extend the insured’s duty of disclosure on renewal, variation or reinstatement of the contract.

118 Article 7 of the Guidance of Fujian Province High People’s Court (the second civil court) Concerning Questions of How to Deal with Insurance Disputes, see accessed in January 2015. 119  Article 36 of the Insurance Law 2009 provides: “Where the contract specifies payment of the premium in instalments and the proposer has paid the first instalment but fails to pay the current instalment over 30 days from the date when the insurer presses for payment or over 60 days from the scheduled date of payment, the contract shall be suspended, or the insurer may reduce the sum insured in accordance with the contract, unless otherwise agreed in the contract.” 120  See the Guidance of Beijing City HPC 2005, art. 13; and the Guidance of Guangdong Province HPC 2011, art. 7.

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8.8 Materiality 8.8.1 “Prudent insurer decisive influence test” in non-marine insurance Article 16(2) of the Insurance Law gives the statutory definition of materiality: a material fact is a fact which “shall sufficiently influence the insurer’s decision on whether or not he will accept the insurance or raise the premium rate.” The question that arises here is what the phrase “sufficiently influence” means. It is suggested that the meaning of this phrase is that before the insurer can avoid the contract, it must prove that an insurer would have made a different decision or raised the premium rate had it known the fact undisclosed or misrepresented by the insured. This is because the law used the words “sufficiently influence the insurer’s decision,” not those such as “would influence the judgment” employed in s. 18(2) of the MIA 1906. It is submitted that the words “sufficiently influence” are sufficient to establish the “decisive influence test.”121 It is suggested that the term “insurer” mentioned in this article should denote a “prudent insurer” or “reasonable insurer.”122 The Intermediate People’s Court of Quanzhou city in Fujian Province reported that with regard to the standard for the test of a material fact, the majority courts were of the view that unless there are special clauses in the contract, or the actual insurer can prove that it is its practice that it would not have entered into the contract or would have raised the premium rate had the insured disclosed the fact, the practice or the relevant contract clauses of a prudent insurer or majority of other insurers should be used as a standard for the test of materiality of a fact.123 This would be regarded as a subjective–objective test with the emphasis on the objective test.124 Through the analysis of art. 16(2) of the Insurance Law, it can be concluded that the test of materiality for non-marine insurance can be determined as a “prudent insurer decisive influence” test. 8.8.2 “Prudent insurer mere influence test” in marine insurance The test of materiality in marine insurance is different. Article 222 of the Maritime Code 1992 provides: “Before the contract is concluded, the insured shall disclose to the insurer the material circumstances which the insured has knowledge of or ought to have knowledge of in his ordinary business practice and which would influence the insurer in deciding the premium or whether he agrees to insure or not.” In this

121  See Z. Jing, “Insured’s duty of disclosure and test of materiality in marine and non-marine insurance laws in China” [2006] JBL 695. 122 Ibid. 123 The Intermediate People’s Court of Quanzhou City, Fujian Province, “Investigation report on handling difficult problems in hearing cases on insurance contracts,” see accessed on 9 November 2014. 124  Under a subjective standard, the insurer claiming there is a material non-disclosure or misrepresentation must prove through witness testimony (such as from the underwriter who handled the specific policy at issue), or specific criteria for underwriting the risk, that it would not have issued the policy on the same terms but for the non-disclosure or misrepresentation, regardless of industry practice or what any other insurers would have done. By contrast, under an objective standard, the test of materiality is whether a “prudent insurer” or a “reasonable insurer” would have offered the same insurance on the same terms if there had been no non-disclosure or misrepresentation.

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article the key words relating to the test are the phrase “would influence the insurer’s decision.” This article is, to a large extent, a copy of s. 18 of the MIA 1906 (UK), so the test of materiality could be determined as a “prudent insurer mere influence test.” By comparing art. 222 of the Maritime Code and art. 16(2) of the Insurance Law, it is clear that two different tests of materiality can be determined: “the prudent insurer decisive influence” test for non-marine insurance, and “the prudent insurer mere influence” test for marine insurance. This is caused by the different degrees of the “influence” used in the two articles. In art. 16(2) the word “influence” is adorned by the word “sufficiently” which strengthens the force of the word “influence.” It is suggested that “sufficiently influence” and the unadorned “influence” present different thresholds of the test of materiality. Article 222 uses the unadorned “influence” which presents the lower threshold of the test, namely the “prudent insurer mere influence” test which was interpreted as meaning that a material circumstance is one which if disclosed would have had an impact upon the formation of a prudent insurer’s opinion and on its decision-making process. 8.8.3 Test of materiality in English and Australian law (a) English law Before the CIDRA came into force in April 2013, the definition of materiality was provided in s. 18(2) of the MIA 1906, which states: “Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.” The precise meaning of this statutory definition was seriously discussed in Container Transport International Inc (“CTI”) v Oceanus Mutual Underwriting Association (Bermuda) Ltd.125 The key issue was focused on the phrase “would influence the judgement.” The judges had two different interpretations for this phrase, i.e. “decisive influence” and “mere influence.” Upon the different interpretations, two tests of materiality could be established: (1) Prudent insurer decisive influence test: under this test it is necessary for the insurer to satisfy the court when it declines a claim on the ground of non-disclosure by the insured that a prudent insurer would have acted differently as regards the premium or risk had the information withheld or misstated been made available to it. (2) Prudent insurer mere influence test: under this test it is sufficient for the insurer to demonstrate that a prudent insurer would have wished to know the information in question when making its decision, and would not necessarily have acted any differently as regards the premium or the risk. The Court of Appeal in CTI adopted the “mere influence” test by rejecting the lower court judge’s opinion of the “decisive influence” test. The decision in CTI has thus received heavy criticism for its harshness.126 125  [1984] 1 Lloyd’s Rep 476. 126  See Brooke, “Materiality in Insurance Contracts” [1985] LMCLQ 437; Khan, “A New Test of Materiality in Insurance Law” [1986] JBL 37; Clarke, “Failure to Disclose and Failure to Legislate: Is it Material?” [1988] JBL 298; and Yeo Hwee Ying, “Common Law Materiality – an Australian Alternative”

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In 1994, the House of Lords added a further test, in the case of Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. Ltd. The court held that the insurer must show that it has been “induced” to enter the contract: that is, if the insurer had known the truth, it would not have entered into the contract at all, or not on the same terms. In other words, it would have done something different, either by refusing cover, increasing the premium or changing the policy terms. Since Pan Atlantic, the duty of disclosure has been composed of a two-limb test: (1) There is a right to avoid a contract of insurance only when an undisclosed fact is “material.” A material circumstance is one that would be taken into account by a prudent insurer when assessing its risk; (2) Before a particular insurer can avoid a contract for non-disclosure of a material fact, it must be shown that it had actually been induced by the non-disclosure to enter into the policy on the relevant terms. The current English law position in relation to the test of materiality and inducement is now provided in the CIDRA and the Insurance Act 2015. For consumer insurance, the CIDRA abolishes the “prudent insurer mere influence” test of materiality; the concept of “inducement”127 has been preserved.128 It means that the insurer must show that without the misrepresentation it would not have entered into the contract, or would have done so on different terms.129 For non-consumer insurance, the “prudent insurer mere influence” test of materiality remains unchanged. Section 7(3) of the Insurance Act 2015 provides: “A circumstance or representation is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.” This echoes s. 20(2) of the MIA 1906. The inducement approach has also been preserved in s. 8(1) of the Insurance Act 2015. (b) Australian law Section 21(1) of the ICA provides: “An insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) The insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) A reasonable person in the circumstances could be expected to know to be a matter so relevant.” The duty of disclosure is recast in this section. The common law “prudent insurer” test of materiality is abolished. Instead, materiality to a prudent insurer has become

[1990] JBL. 97. See also N. J. Hird, “Rationality in the House of Lords” [1995] JBL 194. In that article, Hird comments: “How can anything be said to influence someone’s judgement if, at the end of the day, it actually did not.” 127  Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. Ltd [1995] 1 AC 501, [1994] 3 WLR 677, [1994] 3 All ER 581, HL. 128  Section 4(1) of the CIDRA provides: “An insurer has a remedy against a consumer for a misrepresentation made by the consumer before a consumer insurance contract was entered into or varied only if – (a) the consumer made the misrepresentation in breach of the duty set out in section 2(2), and (b) the insurer shows that without the misrepresentation, that insurer would not have entered into the contract (or agreed to the variation) at all, or would have done so only on different terms.” 129  The CIDRA, s. 4(1)(b).

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relevant to the particular or actual insurer.130 The focus of attention is thus moved from the prudent insurer of the common law to the particular insurer in question, and to the actual knowledge of the insured or constructive knowledge of a reasonable person. By virtue of s. 21(1) of the ICA, a fact will be relevant if the insured knew or ought to have known that it would have been relevant to the insurer because it was a fact of interest to all insurers,131 and a fact will also be relevant if the insured knew or ought to have been aware of particular considerations taken into account by the insurer in question. In the same way, if a fact of general significance is thought by the insured not to be relevant to the insurer in question, there is no obligation to disclose it.132 This is somewhat narrower than the common law prudent insurer test of materiality, and involves a “mixed subject and objective test,” i.e. the actual insurer and a reasonable person test. It must be noted that before any remedy is available to the insurer, the actual inducement of the insurer in question must be established.133 In the final report on the review of the ICA, the Review Panel noted that the main criticism of s. 21 of the ICA is that it puts an unreasonable burden on insureds in that they are expected to know what the insurer regards as relevant.134 The Panel agreed that the mixed objective/subjective duty of disclosure test would be elucidated if it was required to be applied by having regard to the following factors: (a) the nature and extent of the cover provided by the contract of insurance; (b) the class of persons who would ordinarily be expected to apply for cover of that type; and (c) the circumstances in which the contract of insurance is entered into including the nature and extent of any questions asked by the insurer.135 Thus it was recommended by the Panel that s. 21 of the ICA should be amended to include non-exclusive factors that can be taken into account when determining the application of the duty of disclosure test.136 Consequently, the Insurance Contracts Amendment Act 2013 has reformulated s. 21(1)(b), which states “a reasonable person in the circumstances could be expected to know a matter to be so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind.” 130  See Fung, “Section 21 of the Insurance Contracts Act 1984 – The death and rebirth of the ‘prudent insurer’ test?” [2001] Ins LJ 108. 131  To that extent, the prudent insurer concept has been retained: Toikan International Insurance Broking v Plasteel Windows Australian Pty Ltd (1989) 94 ALR 435; Ayoub v Lombard Insurance Co. (Aust) Pty Ltd (1989) 166 CLR 606. 132  See R. Merkin, “Reforming insurance law: is there a case for reverse transportation?” A report for the English and Scottish Law Commissions on the Australian experience of insurance law reform (2007), para 4.6. 133  The ICA, s. 28. 134  See s. 4.7 of the final report of the second stage of the review of the ICA released on 5 January 2005, accessed in June 2016. However, there are different opinions. Phillips Fox states that such an argument is overstated. This is because “it ignores s21(1)(b) which expressly addresses this concern by limiting the duty to matters which ‘a reasonable person in the circumstances could be expected to know to be . . . relevant to the insurer.’ ” Cf. submission by Phillips Fox of 21 April 2004, at p. 3. See the final report, n. 49. 135  See s. 4.18 of the final report of the second stage of the review of the ICA. It was argued, however, that this proposal would seem to add additional criteria to the test that seem to add to the uncertainty, rather than clarifying the way in which the test should be applied (see “Focus: Insurance and Reinsurance” June 2004, ). 136  See the Recommendation, s. 4.1 of the final report of the second stage of the review of the ICA.

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8.9 Material facts As the materiality or otherwise of a particular piece of information is a question of fact, something which is regarded as material in one case cannot, ipso facto, be regarded as material in all subsequent cases. The materiality of a particular fact has to be determined within the context of the case itself. So it is difficult or impossible to formulate some unified standard by statutory law to test what facts are material facts in all circumstances.137 In China, due to the fact that the duty of disclosure is performed by the insured by answering the questions on proposal forms, the questions on the proposal form are normally regarded only as the scope of the material information. In practice, facts regarded as material have traditionally been classified into two broad categories: facts relating to physical hazards and facts relating to moral hazards. It is appropriate to consider them separately. 8.9.1 Physical hazards Physical hazards are determined by the physical condition and nature of the subject matter of insurance and the scope of the insurance. Considered below are some of the physical hazards recognised in some main types of insurance in China, and they are also the questions most frequently raised in proposal forms. In life insurance, the life insured’s age and health condition are clearly material to a life insurance policy, since they affect his life expectancy, and so directly influence the insurer’s decision either in accepting the risk or in determining the premium. This will be discussed in Chapter 20, “Life and accident insurance.” In property insurance, what facts can be regarded as physical hazards depends upon the type of property and the risks to be covered by the policy. Generally, the following categories of information are regarded as material for all types of property insurance: the location of the property, the condition of the property, the use of the property and the age of the property. This will be discussed in Chapter 19, “Property insurance.” 8.9.2 Moral hazards Information relating to the insurance history of the insured and information relating to criminal convictions of the insured are usually described as moral hazards in England.138 The insurance history is regarded as a material fact in China which the insured is required to disclose on the proposal form.139 However, the information in relation to the criminal convictions of the insured has never been required by insurers on proposal forms. Insurance history includes claims which have been made by the insured, refusals by an insurer to issue or renew a policy, cancellation of policies or imposition of a

137 In common law, case decisions on the materiality of particular facts can only be regarded as guidelines in subsequent cases. 138  See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) paras 6.071 and 6.083. 139  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 234.

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higher rate of premium. It is almost invariably true that an insured is required to give details of any previous insurance claims which he has made, or refusals of claim or avoidance of policy by any insurer. There are two aspects to insurance history, i.e. the insurance history of the insured in relation to the type of insurance he is seeking, and the insurance history of the insured in respect of the type of insurance he is not seeking. In the former situation, the insurance history of the insured is definitely a material fact.140 The latter situation is not very clear in China, and the question in relation to the latter situation has not been found in any proposal form. In China, there is no requirement for the disclosure of an insured’s criminal record either by the Insurance Law or on proposal forms. Some criminal offences may have no direct connection with the insurance which the insured is applying for. An insurer can, however, judge the insured’s moral character from his criminal record. It is obvious that an insurer would bear a higher risk in providing insurance to a person who has a record of criminal offences than a person who has not. So it is suggested the insured should be asked by the insurer to disclose his recent serious criminal convictions, such as convictions during the last five years or so. The amount and the source of the insured’s income are regarded as a material fact in life insurance. In most life insurance proposal forms,141 this information is required to be disclosed. Indeed, particularly for a long-term policy, the information of the insured’s income may cause an insurer to consider whether the insured has the ability to pay premiums for a long period of time, and thus influences the insurer’s decision on whether or not to take the risk. 8.10 Remedies for breach of the duty 8.10.1 The right to rescind the contract Non-disclosure or misrepresentation can be made intentionally, by gross negligence, or innocently. The Insurance Law provides different remedies for breach of the duty of disclosure depending on the types of the breach. The insurer is entitled to rescind the contract where the insured fails to comply with the duty of truthful disclosure intentionally or by gross negligence so that the failure of disclosure or misrepresentation shall sufficiently influence the insurer’s decision on whether it will accept the insurance or raise the premium rate.142 It is implied in art. 16(2) of the Insurance Law that for an innocent or merely negligent non-disclosure or misrepresentation, the insurer is not entitled to rescind the contract even if the undisclosed information is material.

140 For example, in the life insurance proposal of China Ping An Insurance Company Ltd, it is asked: “Has any life insurer cancelled, refused to accept, refused to continue or agreed to continue only on special terms any insurance for the proposer or the insured?” But in property insurance, no such kind of question is asked. In England, an insured’s insurance history for the type of insurance he is seeking is regarded as material at common law. See the English case of Arterial Caravans Ltd v Yorkshire Insurance Co., [1973] 1 Lloyd’s Rep 169. 141  For example, Life Insurance Proposal Form of China Ping An Insurance Company Ltd. 142  The Insurance Law, art. 16(2).

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Before the insurer is allowed to rescind the contract, a number of conditions must be met:143 (1) the insurer must have made inquiries about the relevant facts in questions raised in the proposal form prior to the conclusion of the contract;144 (2) the insured must have actually known the relevant facts;145 (3) the insured failed to perform the duty intentionally or by gross negligence;146 (4) the undisclosed information must be material in that it sufficiently influences the insurer’s decision on whether or not it will accept the insurance or raise the premium rate;147 (5) when concluding the contract, the insurer did not know that the insured had failed to provide truthful information;148 (6) the insurer’s right of rescission of the contract must be exercised within 30 days after having learned of the insured’s breach of the duty, or within two years from the date of conclusion of the contract;149 and (7) during the insurance period, if the insurer become aware of or should have known of the non-disclosure, but still collected premiums, its right of rescission will be lost.150 In English law, under the CIDRA, if a consumer breaches the duty to take reasonable care not to make a misrepresentation,151 and this misrepresentation induces the insurer to enter into the contract, the insurer will have a remedy. The nature of the insurer’s remedy depends on the nature of the consumer’s misrepresentation and, in particular, the consumer’s state of mind. (1) For a deliberate or reckless misrepresentation,152 the insurer is entitled to avoid the contract and treat the contract as if it never existed and refuse all claims. The insurer may also retain the premium unless it would be unfair to do so.153 In contrast, for an honest and reasonable misrepresentation, the insurer is not entitled to rescind the contract and must pay the claim. (2) For a careless misrepresentation,154 the insurer’s remedies are based on what it would have done if the consumer had complied with the duty to take reasonable care not to make a misrepresentation. If the consumer would not have entered into the contract on any terms, the insurer may avoid the contract and refuse all claims, but must return the premium paid. If the insurer would have entered the contract on different terms, the contract may be taken to include those different terms. If the premium would have been higher, the insurer must reduce proportionately the

143  For more, H.Y. Yeo, Z. Yu and J. Chen, “Of remedies and non-disclosure in the insurance law of the People’s Republic of China” [2011] JBL 566. 144  The Insurance Law, art. 16(1), and Interpretation II, art. 6(1). 145  Interpretation II, art. 5. 146  The Insurance Law, art. 16(2). 147 Ibid. 148  Article 16(6) of the Insurance Law provides: “Where the insurer knows that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits.” 149 The Insurance Law, art. 16(3). The incontestability provision is discussed in detail in section 8.11.2 of this chapter. 150  The Interpretation II, art. 7. 151  The CIDRA, s. 2(2). 152  A misrepresentation is deliberate or reckless if the consumer (a) knew that it was untrue or misleading, or did not care whether or not it was untrue or misleading, and (b) knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer (s. 5(2) of CIDRA). 153  The CIDRA, para. 2, schedule 1. 154  A misrepresentation is careless if it is not deliberate or reckless (s. 5(3) of CIDRA).

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amount to be paid on a claim.155 For treatment of the contract for the future, where the insurer would have contracted on different terms or for a higher premium (or both): (a) in non-life insurance, either side is entitled to terminate future cover on reasonable notice; (b) for life insurance, the insurer is not allowed to terminate the contract and must continue the policy either on the existing terms or on amended terms.156 Under the Insurance Act 2015, for non-consumer insurance, the insurer has a remedy for a breach of the duty of fair presentation if the insurer can show that but for the breach it would not have entered into the contract at all, or would have done so only on different terms.157 The insurer may avoid the contract for deliberate, reckless or even innocent breach of the duty if the insurer can show inducement. 8.10.2 Remedies in relation to pre-rescission losses and premiums paid Under the Insurance Law, the legal consequences in respect of losses which occurred prior to rescission of the contract and of premium paid by the insured depend on whether the breach of the duty of disclosure is intentional or by gross negligence. For intentional non-disclosure or misrepresentation, the insurer is not liable for losses that occurred prior to the rescission of the contract whether or not the loss is caused by the undisclosed facts, and shall not refund the premium.158 The insurer may rescind the contract ab initio, as if the insurer has never been at risk under the policy. The retroactive effect of a rescinded contract seems to be unilateral to the insurer in the sense that only the insurer is entitled to demand restoration of the status quo ante, but the insured is not entitled to recovery of premiums paid. The retention of the premium by the insurer can be regarded as a penalty to the insured for his intentional breach of the duty of disclosure. In the case of non-disclosure or misrepresentation by gross negligence, there are two different remedies, depending on whether or not the fact undisclosed or misrepresented has a material impact on the occurrence of the insured events. The insurer is not liable for losses that occurred prior to the rescission of the contract if the fact undisclosed or misrepresented has a material impact on the occurrence of the insured events, but the insurer must refund the premium.159 In this case, the rescission of the contract is retroactive. If there is no causal connection between the occurrence of the insured event and the undisclosed fact, the insurer is liable for

155  The CIDRA, paras 3 to 8, schedule 1. 156  For more, see J. Birds, B. Lynch and S. Milnes, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) paras 19-047 and 19-048. 157  The Insurance Act 2015, s. 8. 158 Article 16(4) of the Insurance Law provides: “where the proposer fails to perform his duty of disclosure and truthful representation of information to the insurer intentionally, the insurer shall not be liable for making indemnity payments or paying insurance benefits in connection with the insured events that occur prior to the rescission of the contract, and shall not refund the premium.” 159  Article 16(5) of the Insurance Law provides “where the failure of the proposer to perform his duty of disclosure and truthful representation by gross negligence has a material impact on the occurrence of the insured events, the insurer shall not be liable for making indemnity payments or paying insurance benefits in connection with the insured events that occur prior to the rescission of the contract, but he shall refund the premium.”

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losses that occurred prior to the rescission of the contract. In this case, the rescission of the contract is not retroactive, but prospective, i.e. from the moment of rescission. The question whether or not the rescission of the contract is retroactive is important in some circumstances. If, for example, the insured is paid for a loss under a health policy, and then, on the occasion of a second loss, the insurer discovers that there has been an intentional or a grossly negligent non-disclosure or misrepresentation by the insured, it is very material to know the moment in time from which the policy is deemed to be rescinded. If the contract is rescinded only from the moment of rescission, the insured would keep the money paid to him for his earlier claim. This is so in the case of a grossly negligent non-disclosure which has no material impact on the occurrence of the insured events. If the contract is rescinded ab initio, and not merely for the future, the insurer should be deemed to have never been at risk, and the insured should repay the money to the insurer. This is so for the case of an intentional non-disclosure, and also for the case of a grossly negligent non-disclosure which has a material impact on the occurrence of the insured events. 8.10.3 Determination of intentional or grossly negligent breach of the duty As discussed above, the legal consequences for intentional or grossly negligent breach of the duty of disclosure are different in respect of liability for losses which occurred prior to rescission of the contract and return of the premiums paid by the insured. So it is necessary and important to distinguish these two types of breach. The Insurance Law does not define the term “intentional.” The definition of the term “intentional” is provided in the Criminal Law of China.160 An intentional crime refers to an act committed by a person who clearly knows that his act will entail harmful consequences to society but who wishes or allows such consequences to occur.161 By analogy, a non-disclosure or misrepresentation can be deemed to be intentional if the insured actually knows the fact or information but does not disclose to the insurer or provides an untrue answer to the insurer’s question, with a culpable state of mind that the insurer would act on the fact or information and enter into the contract which the insured would otherwise not have been able to enter into. Intention is a state of the subjective mind of the insured. Unless the insured admits intent, his subjective intention can only be reflected and judged by the facts of the case in question. In judicial practice, the courts usually treat a breach of the duty of disclosure as an intentional one if the insured (1) knew the existence of the fact in question,162 (2) knew that the fact was relevant to the insurer,163 and (3) knew that his answer to the question was untrue or misleading, with the intention that the insurer acted on it in the sense that it induced the insurer to enter into 160 The Criminal Law of the People’s Republic of China was adopted by the Second Session of the Fifth National People’s Congress on 1 July 1979, amended by the 5th Session of the Eighth National People’s Congress on 14 March 1997, promulgated by Order No. 83 of the President of the People’s Republic of China on 14 March 1997, and effective from 1 October 1997. 161  The Criminal Law of China, art. 14. 162  According to art. 5 of Interpretation II, the insured’s knowledge refers to actual knowledge and constructive knowledge is irrelevant. 163  Interpretation II, art. 5.

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the proposed contract. For example, in Mrs Wang v The Life Insurance Company Yuxi Branch,164 the insured effected a critical illness policy on her daughter’s life on 26 October 2010. The life insured was diagnosed with acute myelogenous leukaemia on 11 October 2010, but the insured gave a negative answer to the question in the proposal form which asked “Has the life insured been diagnosed with leukaemia, or any other blood or lymphatic disease?” The life insured died of leukaemia in January 2012. The court held that the insured knew the fact that the life insured suffered from leukaemia and concealed that fact, so the failure to comply with the duty of disclosure was intentional. The insurer would not have entered into the contract had the insurer known the undisclosed fact, thus the insurer was not liable. The Insurance Law provides no definition for the term “gross negligence.” The definition of the term of “negligent crime” is provided in the Criminal Law. A negligent crime refers to an act committed by a person who should have foreseen that his act would possibly entail harmful consequences to society but who fails to do so through his negligence or, having foreseen the consequences, readily believes that they can be avoided, so that the consequences do occur.165 Gross negligence connotes a significantly higher degree of negligence. Negligence is the opposite of diligence, or being careful. The standard of ordinary negligence is what conduct one expects from the proverbial “reasonable person.” By analogy, if somebody has been grossly negligent, that means they have fallen so far below the ordinary standard of care that one can expect, to warrant the label of being “gross.”166 It is also described as a lack of care that even a careless person would use.167 There is perhaps some room for argument on whether gross negligence amounts to recklessness.168 In English law, recklessly asserting a statement without caring whether the facts are true is tantamount to an intentional act of misrepresentation,169 although the culpability of a reckless misrepresentation is, in principle, a shade less than that for intentional deceit. Extrapolating from this analogy, the term of gross negligence in art. 16 of the Insurance Law could arguably be viewed as reckless negligence which is a shade less than intentional negligence. In practice, the insured’s failure to disclose material facts by gross negligence can be found by courts for the following situations:170 (1) The insured failed to know the materiality of the relevant facts due to his gross negligence. The Insurance Law adopts inquiry-based disclosure; the insured is obliged to disclose only the facts which are inquired by the insurer in questions in proposal form. The insured has no duty to volunteer

164 This case was decided by the Intermediate People’s Court, Yuxi City, Yunnan Province, Civil Court Judgment (2012) No. 550, and is reported in the Annual Report of Typical Insurance Cases (Law Press China, 2013) vol. 5, p. 19. 165  Article 15 of the Criminal Law of China. 166  See the Wikipedia page at . 167  L. H. Fang, Insurance and Law (Press of Beijing University 2009) p. 264. 168  For more, see H. Y.Yeo, Z. Yu and J. Chen, “Of remedies and non-disclosure in the insurance law of the People’s Republic of China” [2011] JBL 567. 169 See Derry v Peek (1889) LR 14 App Cas 337 HL. 170 X. M. Xi, Understanding and Application of the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 156.

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information to the insurer.171 Sometimes, even if the insurer puts questions in the proposal form, the insured fails to understand the meaning of the question due to his gross negligence, and therefore fails to disclose the material facts to the insurer; this constitutes grossly negligent non-disclosure. (2) In some situations, although the insured knew the relevant facts and also knew that the facts were material, he failed to disclose the material facts to the insurer due to his gross negligence. Sometimes the insurer’s agents sell insurance products in an inappropriate manner. The agent fills in the proposal form and answers the questions raised in the proposal form, and then asks the insured to sign the completed proposal. According to art. 3 of the SPC Interpretation II 2013, in the situation where the insurer or its agent completes the proposal form, and the insured then signs the proposal, the content provided by the insurer or the agent is treated as the real representations of the insured himself. If the insured does not read the completed proposal form but simply signs it, he may not be able to find any inconsistency between what was put in the form and what was true in reality. Thus the insured is deemed to fail by gross negligence to disclose the true facts which he knew, but not intentionally, as the insured has no subjective intention to mislead the insurer to make a wrong judgement and decision as to the proposed contract. The following two cases explain how courts find gross negligence. In Mrs Zhang v The Life Insurance Company Beijing Branch,172 Mrs Zhang effected a life policy on the life of her uncle in September 2010.173 In the proposal form, a number of questions about the state of the life insured’s health were raised: (1) “In the last three years, has the life insured had any physical abnormality found by medical examination? (2) “In the last year, has the life insured visited any hospital for medical tests, received any treatments or taken any medicine?” The insured answered the questions in the negative. The life insured died from gas (carbon monoxide) poisoning in March 2011. After the life insured’s death and upon being asked by the insurer, Mrs Zhang told the insurer that she took the life insured for a medical examination in a hospital in Beijing in July 2010 and there was no abnormality in the life insured’s health. Based on the information provided by Mrs Zhang, the insurer further investigated the case and found in the medical examination report from the hospital that the life insured’s blood cell number had decreased and the doctor had advised him to have a further test. The insurer refused the claim by reason of the insured’s failure to disclose the material fact. According to the normal practice of underwriting, the insurer would not issue a life policy if the life insured had any abnormality found in blood test. Mrs Zhang said that the proposal form was filled in by the insurer’s agent. She was asked by the agent to sign the proposal. She did not read the proposal but signed it. The court noticed that the insurer would not have discovered the life insured’s

171  The Insurance Law, art. 16(1). 172 This case is reported in the book by Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 269. 173  She had an insurable interest in her uncle; for more on insurable interest, see Z. Jing, “Insurable interest in life insurance: a Chinese perspective” [2014] JBL 337.

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blood test abnormality had Mrs Zhang not told the insurer after the death of the life insured the fact that the life insured had taken a medical examination and the details of the hospital where the medical examination was carried out. This shows that Mrs Zhang did not intend to conceal the material fact in order to mislead the insurer intentionally, and her statement that the insurer’s agent filled in the proposal form and she did not read the proposal should be accepted as being true. Thus it was held that the insured’s failure to disclose the material fact was not intentional but by gross negligence. The “gross” negligence in this case is reflected by the facts that if the insured had taken a little care to read the proposal, she would have found the misrepresentation made by the agent. It was also held that according to art. 16(5) of the Insurance Law, in the case of gross negligence, if the undisclosed fact has a material impact on the occurrence of the insured events, the insurer is not liable for paying insurance benefits in connection with the insured events that occur prior to the rescission of the contract. In this case, the life insured died of gas poisoning and there was no causal connection between the undisclosed fact (decrease in blood cell number) and the death of the life insured, so the insurer was liable for paying the insurance proceeds. In Mrs Zhou v The Insurance Company,174 Mrs Zhou effected on the life of her husband a life policy with coverage of hospital expenses in January 2005. The insurer asked questions in the proposal form: “Have you had any blood test in the last two years?” “Have you had any blood disease, or suspected blood disease?” The answers to the questions were negative. In March 2005, the life insured visited a hospital. He was suspected to have a blood disease, which was not confirmed. The insured paid for the hospital expenses. On another occasion in May 2005, the life insured visited a hospital again for treatment and was diagnosed with myelodysplastic syndrome. The insured paid for the costs of treatment. In August 2005, the life insured died of leukaemia. It was discovered after the death of the life insured that before the contract was entered into, the life insured visited a hospital in March 2003 and was diagnosed with pneumonia and suspected aplastic anaemia. The court held that the insured must then have been aware of the blood disease but failed to disclose it to the insurer. As to the question of whether the non-disclosure was intentional or by gross negligence, the court found that in the proposal form, the box to be filled in with the communication detail of the life insured’s son and/or daughter was filled with the words “the same as the proposer.” The word of “proposer” is a professional word. Mrs Zhou was lacking insurance knowledge and should not be able to use the word “proposer.” Moreover, some details about the life insured, such as height and weight of the life insured were incorrect. So all the evidence showed that the insured’s statement that the proposal form was not completed by her but by the insurer’s agent and she did not read the proposal but only signed the completed form should be treated as being true. The insured should have read the proposal form before signing it but she failed to do so, so her failure to disclose was held to be by gross negligence. The court went on to find whether there was any causal

174 This case is cited in the book by X. M. Xi, Understanding and Application of the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 157.

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connection between the undisclosed fact and the occurrence of the insured event. In this case, the insured died of leukaemia and the undisclosed disease was suspected aplastic anaemia. There was an apparent causal connection between the death of the life insured and the undisclosed disease. Thus the insurer was not liable but should return the premium to the insured. From the cases discussed above, it can be said that the courts determine a gross negligence non-disclosure by taking into account all relevant circumstances of the contract. 8.10.4 Causation Proof of any connection between the insured loss and undisclosed fact is unnecessary for intentional breach of the duty of disclosure.175 However, a causal link must be established before the insurer can be discharged from liability for pre-rescission loss in the case of a grossly negligent non-disclosure.176 This can be illustrated by the case of Mr Chao Li v China Ping An Life Insurance Company Ltd Hainan Branch,177 where the insured effected a life policy on her own life in June 2004. She died due to serious head injury from a robbery in January 2005. The insurer refused to pay the claim on the ground of non-disclosure of a material fact that she suffered from chronic myeloid leukaemia before conclusion of the contract. Mr Li (the son of the insured) argued that the proposal form was completed by the insurer’s agent even though the insured signed the proposal, so the answers to the questions about the insured’s health could not reflect the true representations of the insured. The court held: (1) the insured’s failure to perform the duty of disclosure was not intentional but due to the insured’s negligence; and (2) the insured died of head injury not of the disease – the undisclosed fact had no causal connection with the happening of the insured event– so the insurer was liable to pay the insurance benefit. As discussed earlier, Chinese courts interpret the term “material impact” as a “causal connection.” The current position in respect of the insured’s failure to comply with the duty of disclosure by gross negligence is that the People’s Courts will not uphold an insurer’s repudiation of liability for pre-rescission loss if there is no causal connection between the undisclosed fact and the happening of the insured event.178 However, the extent of the causal connection varies according to the guiding rules for handling insurance disputes provided by different courts: the HPC of Shandong Province seeks a “causal connection,”179 the HPC of Guangdong Prov-

175  The insurer is allowed to rescind the contract where there is an intentional breach of the duty (art. 16(4) of the Insurance Law). 176  The Insurance Law, art. 16(5). 177 This case was decided by the Intermediate People’s Court, Haikou City, Hainan Province, Civil Court Judgment (2009) No. 75. 178  The Guidance of Guangdong Province HPC 2011, art. 6(2); the Guidance of Shandong Province HPC 2011, art. 7; and the Guidance of Zhejiang Province HPC 2009, art. 7. 179  See the Guidance of Shandong Province HPC 2011, art. 7 of which provides: “People’s Courts shall not uphold the insurer’s repudiation of liability for losses which occurred prior to rescission of the contract on the ground of non-disclosure or misrepresentation where there is no causal connection between the fact undisclosed by the insured’s gross negligence and the occurrence of the insured event.”

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ince demands a “direct causal connection,”180 while the HPC of Zhejiang Province looks for “the proximate causal connection.”181 It is submitted that the “direct causal connection” and the “proximate causal connection” have the same meaning, that is, the loss is indeed caused by the event. As to a simple “causal connection,” some commentators are of the view that a simple causal connection does not look for a very high probability between the happening of the event and the undisclosed fact, but a certain connection is sufficient, for example, a connection exists between smoking and lung cancer, hypertension and heart attack, anaemia and leukaemia, hepatitis and liver cancer.182 The issue of causal connection is complex and needs further clarification by the SPC. 8.10.5 Is rescission of the contract a condition precedent for refusing claims? An insurer is entitled to rescind the contract if the non-disclosure or misrepresentation was made intentionally or by gross negligence and the undisclosed fact is material.183 Article 16(4) and (5) of the Insurance Law provides remedies for the insured event which occurred prior to the rescission of the contract. So a question of whether rescission of the contract is a condition precedent for refusing claims for pre-rescission losses arises. There are two different views on the question raised above. The first view is that rescission of the contract should not be regarded as a condition precedent for repudiating liability for losses which occurred prior to the rescission of the contract. The reason for holding this view is that the right of rescission and the right of repudiating liability on the ground of breach of the duty of disclosure are two independent rights; there is no causal connection between the two rights. The insurer has the option to exercise one or both rights.184 It could be argued that if the insurer is allowed to refuse claims without rescinding the contract first, any insurer would logically choose to refuse claims, yet keep the contract alive for the future. But this argument seems unpersuasive for two reasons. First, when the insurer takes the defence of non-disclosure to refuse a claim, this can be evidence that the insurer has known the cause of rescission of the contract; if the insurer does not exercise the right to rescind the contract within 30 days

180 See the Guidance of Guangdong Province HPC 2011, art. 6(2) of which states: “Where the insured failed to comply with the duty of disclosure by gross negligence as stipulated in art. 16(5) of the Insurance Law, and there is no direct causal connection between the undisclosed fact and the occurrence of the insured event, People’s Courts shall not uphold the insurer’s repudiation of liability on the ground of the insured’s failure to disclose the fact.” 181  See the Guidance of Zhejiang Province HPC 2009, art. 7 of which provides: “Where the fact undisclosed by the insured’s gross negligence was not the proximate cause of the occurrence of the insured event, and there was no decisive causal connection to the insurer’s liability, the insurer’s refusal of liability on the ground of non-disclosure will not be upheld.” 182 X. M. Xi, Understanding and Application of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 90, and Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 274. 183  Article 16(2) of the Insurance Law. 184  See Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 268.

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after having learned of the cause for rescission, the right of rescission will be distinguished.185 Consequently, the insurer is no longer permitted to refuse claims on the defence of non-disclosure. Second, there is a possibility that the insurer can collect a premium within the 30-day period and then rescind the contract before the 30-day period lapses. But once the insurer has received a premium after having known the insured’s breach of the duty of disclosure, it is taken to have waived the right of rescission and is thus precluded from rescinding the contract from the moment of receiving the premium.186 The second view holds that the insurer can refuse to pay claims only after it has rescinded the contract by reason of a material non-disclosure.187 It seems that this view is consistent with the legislative intent. Article 16(4) and (5) of the Insurance Law uses the phrase “insured events that occur prior to the rescission of the contract.” If no rescission is performed, there would be no “insured events that occur prior to the rescission,” so the insurer cannot take the remedies as provided in art. 16(4) and (5) of the Insurance Law to refuse claims for pre-rescission losses in the case of intentional or grossly negligent non-disclosure. The adoption of this “condition precedent” is intended to protect the insured and prevent the insurer from abusing its right of rescission on the ground of non-disclosure. However, in some situations, rescission of the contract may benefit neither the insured nor the insurer. Some policies may cover several risks, and some policies have long lifetimes. It is detrimental to the insured’s interest and may also be undesirable to the insurer if the insurer has to rescind the whole policy in order to refuse a claim for loss after occurrence of a single insured event. For example, it is typical that a life policy may have attached to it some other cover, such as accident cover or medical expenses coverage. If an accident happens and the insured incurs loss, and the insurer wants to refuse claim for the loss on the ground of a material nondisclosure, it has to rescind the contract first according to the “condition precedent” view. As a result, the insured would lose the interest in the whole policy and the insurer would lose the opportunity to keep the policy alive for the future. Therefore, it is desirable and necessary to permit the parties to negotiate and make agreement on the matters of claim and continuation of the policy when a dispute occurs on the matter of non-disclosure in the situation where the insurer has become aware of the insured’s non-disclosure and still collected a premium. The SPC has therefore adopted a flexible approach to the issue of whether or not rescission of the contract on the ground of a material non-disclosure is a condition precedent for repudiating liability for losses which occurred prior to the rescission of the contract. On the one hand, the insurer is required to rescind the contract first before rejecting claims by reason of a material non-disclosure; on the other, the parties are permitted to depart from this general rule by agreement. Article 8 of the SPC Interpretation II provides: “Where the insurer has not exercised his right

185 The Insurance Law, art. 16(3). The 30-day and two-year contestability periods are discussed in detail in section 8.11 of this chapter. 186  Interpretation II 2013, art. 7. 187 X. M. Xi, Understanding and Application of the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 203.

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of rescission of the contract, but rejects the claim on the basis of the circumstances as stipulated in art. 16(4) and 16(5) of the Insurance Law, People’s Courts will not uphold such rejection of the claim, except that the parties involved have reached an agreement on the matters of rejection of the claim and continuation of the contract.” This is similar to English law under which the insurer cannot refuse to pay a claim on the ground of non-disclosure or misrepresentation, yet keep the contract alive for the future,188 unless the contract provided otherwise.189 The current legal position in respect of the relationship between rescission of the contract and refusal of claims on the grounds of non-disclosure or misrepresentation can be summarised as follows. First, where the insurer has no right of rescission, or has lost the right of rescission, it cannot plead the defence of non-disclosure to refuse claims.190 The remedies for the insured’s breach of the duty of disclosure as provided in art. 16(4) and (5) of the Insurance Law are available to the insurer only after it has rescinded the contract, but not available where the insurer has no right or has lost the right to rescind the contract.191 Second, where the insurer has the right of rescission, it can refuse to pay claims only after it has rescinded the contract.192 Third, the parties involved in the insurance contract are permitted to negotiate and reach an agreement on the matters of claim and continuation of the contract.193 Sometimes rescission of the contract may not benefit any parties, so when the insured event occurs they can negotiate so as to reach an agreement as to the matter of claim and survival of the contract. It is noteworthy that this kind of agreement can only be reached after the dispute occurs. Prior to the occurrence of the dispute on breach of the duty of disclosure, the parties are not allowed to make any agreement which permits the insurer to refuse the claim before rescission of the contract.194 8.10.6 Deficiencies of the law relating to remedies The current position for a grossly negligent breach of the duty of disclosure is that a causal connection needs to be established between the loss and the undisclosed fact if the insurer can refuse to pay the loss which occurred prior to rescission of the contract. The law is seemingly reasonable, but there is a major flaw in it. In some situations, the insurer would not have entered into the contract or would have entered into the contract with a higher premium had it known the undisclosed fact at the time of the contract. The insurer is nevertheless liable for the loss if there is no causal connection between the undisclosed fact and the occurrence of the insured event. 188  West v National Motor & Accident Union [1955] 1 Lloyd’s Rep 207. 189  Tilley & Noad v Dominion Ins. Co. Ltd (1987) 284 EG 1056. See M. Clarke, The Law of Insurance Contracts (6th edn, Informa 2009) para. 23-17C. 190  The Insurance Law, art. 16(2) and (3). 191  See X. M. Xi, Understanding the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 206. 192  The Insurance Law, art. 16(4) and (5). 193  Interpretation II, art. 8. 194 X. M. Xi, Understanding and Application of the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 208.

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Thus the insurer may receive a lower premium but bear higher risk. For example, if the insured paid a ¥1,000 annual premium for a death policy for the amount of ¥40,000, but the insured did not inform the insurer of the fact that he had high blood pressure at the time of the contract. The insurer would still have issued the policy but would have charged a higher premium of ¥1,300 had it known the fact of the hypertension. The insured died of liver cancer. The insurer is liable for the loss, as no causal connection can be established between the death and hypertension. In this situation, the insurer received ¥1,000 premium and paid ¥40,000 for the loss. The insurer would have received a ¥1,300 premium and paid ¥40,000 for the loss had the insured performed his duty of disclosure. It would be fairer and more reasonable if the doctrine of proportionality were adopted in this situation. It is suggested that the insurer should be allowed to reduce the amount to be paid on the claim proportionately to the ratio of premium it received and the premium it should have received. Accordingly, the insurer should pay ¥30,769 (¥40,000 × ¥1000/¥1300 = ¥30,769), instead of ¥40,000 if the doctrine of proportionality applies. In English and Australian law, the doctrine of proportionality has been adopted. In the CIDRA, for careless misrepresentations, if the insurer would have entered into the consumer insurance contract, but would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.195 This is also the approach for neither deliberate nor reckless breach of the duty of disclosure for non-consumer insurance in the Insurance Act 2015.196 In the ICA, for general insurance, where the insured failed to comply with the duty of disclosure or made a misrepresentation to the insurer before the contract was entered into, if the insurer is not entitled to avoid the contract or being entitled to avoid the contract has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.197 8.10.7 Recommendations for amendment of the law Having discussed the shortcomings of the current law in respect of remedies for grossly negligent breach of the duty of disclosure at the time of the contract, recommendations have been worked out for amendment of the law as follows: (1) For a grossly negligent breach of the duty of disclosure by the insured: (A) Where the insurer can show a causal connection between the occurrence of the insured event and the material fact undisclosed or misrepresented, the insurer shall not be liable for the insured events which occurred prior to the rescission of the contract, but shall refund the premium paid.

195  The CIDRA, para. 7, schedule 1. 196  The Insurance Act 2015, para. 6, schedule 1. 197  The Insurance Contracts Act 1984, s. 28.

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(B) Where there is no causal connection between the occurrence of the insured event and the material fact undisclosed or misrepresented, (a) if the insurer would not have entered into the contract had he been informed by the insured of the material fact, the insurer shall not be liable for the insured events which occurred prior to the rescission of the contract, but shall refund the premium paid; (b) if the insurer would have entered into the contract, but would have charged a higher premium had he been informed by the insured of the material fact, the insurer may reduce the amount to be paid proportionately to the ratio of premium he received and the premium he should have received. (2) It is also suggested that the Insurance Law should provide definitions for the terms intentional and grossly negligent non-disclosure or misrepresentation. Recommendations for the definitions are as follows: (A) A non-disclosure or misrepresentation is intentional if the insured (a) knew the existence of the fact in question,198 (b) knew that the fact was relevant to the insurer, and (c) knew that his answer to the question was untrue or misleading, with the intention that the insurer acted on it in the sense that it induced the insurer to enter into the proposed contract. (B) A non-disclosure or misrepresentation is grossly negligent199 if the insured (a) did not care whether or not it was untrue or misleading, (b) did not care whether or not it was relevant to the insurer, but (c) had no intention that the insurer acted on it in the sense that it induced the insurer to enter into the proposed contract.200 8.11 Restrictions on the insurer’s defence of non-disclosure Basically, there are two major kinds of restriction on the insurer’s defence of non-disclosure or misrepresentation. First, an insurer is restricted from pleading the defence of non-disclosure if it has waived the duty of disclosure in certain circumstances or in relation to certain matters.201 Second, the Insurance Law provides time limits within which the insurer may exercise its right of rescission.202 The insurer is restricted from exercising its right of rescission beyond the time limits in order to prevent the insurer from abusing the right of rescission.203 In the following sections, these two kinds of restrictions are critically discussed.

198  Interpretation II, art. 5. 199  This refers to the definition of reckless misrepresentation in s. 5(2) of the CIDRA. 200 Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 274. 201  Article 16(6) of the Insurance Law and art. 7 of Interpretation II. For more, see Z. Jing and L. Zhu, “Restrictions on the insurer’s defence of non-disclosure or misrepresentation in Chinese Insurance Law” [2015] Ins LJ 145. 202  The Insurance Law, art. 16(3). 203  For a comparative analysis of time limitation on insurers’ right of rescission of contract on the ground of non-disclosure or misrepresentation, see Z. Jing and M. Zhong, “Incontestability provisions in insurance law and policies” [2016] JBL 252.

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8.11.1 Circumstances under which insurers are deemed to have waived disclosure or right of rescission Waiver refers to the intentional relinquishment of a known right.204 Through action or inaction, an insurer may waive compliance with the duty of disclosure, or certain information about the subject matter of insurance, or the potential right of rescission of the contract, before entering into the contract.205 The insurer may waive its right of rescission by affirmation of the contract after becoming aware of the insured’s breach of the duty of disclosure during the insurance period.206 Whenever the waiver occurs and whatever such a waiver is related to, once the waiver has been made, the insurer is later precluded from pleading the defence of non-disclosure to rescind the contract and repudiate liability. No insurer would readily waive the insured’s compliance with the duty of disclosure, but under certain circumstances it can be deemed that an insurer has waived the insured’s compliance with the duty of disclosure, or waived information relating to certain matters, thus the insurer is later restricted from pleading the defence of non-disclosure of the facts waived. These circumstances are considered below. (a) Insurer’s knowledge of non-disclosure before the contract is concluded As mentioned earlier, the 2009 version of the Insurance Law introduced a new provision which provides that “Where the insurer knows that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits.”207 In Mr Yang v The Life Insurance Company,208 Mr Yang effected a life policy with critical illness cover in January 2010. He gave a negative answer to a question in the proposal form: “Have your medical examinations in the last three years shown any medical abnormality?” A few days later, without being asked, he submitted to the insurer a report of a medical examination which he took in November 2009 in a hospital. It was clearly shown in the report that he was found to have a thyroid nodule. The insurer then arranged two medical examinations on Mr Yang. The policy was then issued. In November 2010, the insured was diagnosed with thyroid cancer which was later removed by surgery in the hospital. The insured claimed for critical illness payment but was refused by the insurer on the grounds that the insured failed to disclose the fact that he was diagnosed with a thyroid nodule at the time of the contract. The

204  For the doctrine of waiver in respect of non-disclosure or misrepresentation in English insurance law, see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) paras 6-108, 6-109 to 6-111 and 6-115 to 6-116. 205  In English law, in respect of non-disclosure, waiver arises principally at three points: waiver of the duty of disclosure, waiver of further information and waiver of right to rescission. See M. Clarke, The Law of Insurance Contracts (6th edn, Informa 2009) para. 23-11. 206  Interpretation II, art. 7. This will be discussed later. 207 The Insurance Law, art. 16(6). This is similar to German law, under which an insurer does not have the right to rescind the contract if the insurer was aware of the undisclosed risk factors or the incorrectness of the disclosure (s. 19(5) of the German Insurance Contract Act 2008). 208  This case was decided by the People’s Court, Dongying District, Dongying City, Shandong Province, Civil Court Judgment (2011) No. 249, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2012) vol. 4, p. 27.

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court held that the insurer was aware of the fact that the insured had a thyroid nodule which was clearly shown in the medical report at the time of the contract. The insurer accepted the risk after two medical examinations, so it should not be allowed to rescind the contract on the ground of non-disclosure. Two points about art. 16(6) of the Insurance Law need to be considered here. The first point is concerned with the insured’s failure to make a truthful disclosure. The phrase “the insured fails to make truthful disclosure” must mean that the insured fails to make truthful disclosure intentionally or by gross negligence and the undisclosed fact is material. If the insurer knew that the insured had made such a non-disclosure before concluding the contract, it will lose the right of rescission. When an insured event occurs, the insurer cannot invoke the remedies as provided in art. 16(4) and (5) of the Insurance Law to refuse liability. Where the insured had made an immaterial non-disclosure intentionally or by gross negligence, or made a material non-disclosure innocently or negligently, even if the insurer knew of such a non-disclosure prior to entering into the contract, the insurer still has no right to rescind the contract and is liable for paying insurance moneys. The second point is concerned with the insurer’s knowledge. Two questions may be raised in this regard. The first one is whether the insurer’s knowledge should be actual knowledge only, or should include constructive knowledge. The HPC Beijing City expressed the view that constructive knowledge should be included by providing that “Before entering into the contract or before the occurrence of the insured event, if the insurer knew or ought to have known that the insured had failed to perform the duty of disclosure but still entered into the contract, his exercise of rescinding the contract or repudiating liability after occurrence of the insured event should not be upheld.”209 The SPC has so far not given an interpretation in this regard for the situation before concluding the contract, but it provided a rule for the situation after concluding of the contract that if the insurer becomes aware of or ought to have known the insured’s failure to disclose material facts after the conclusion of the contract, but still collected premiums, the insurer’s defence of non-disclosure or misrepresentation should not be upheld by the courts.210 It is suggested that the insurer’s knowledge before concluding the contract should include both actual and constructive knowledge. Accordingly, art. 16(6) of the Insurance Law could be amended by adding the phrase “ought to know” into it as follows: “Where the insurer knows or ought to know that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits.” The second question is how to determine that the insurer knew or ought to have known the insured’s failure to perform the duty of disclosure prior to the conclusion of the contract. In the following part, the circumstances under which the insurers are deemed to know the insured’s breach of the duty of disclosure are considered.

209  The Guidance of the Beijing City HPC 2005, art. 10. 210  Interpretation II, art. 7. This will be discussed further in the text below.

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(I) INSURER’S AGENT KNOWS MEANS THE INSURER KNOWS An insurer’s agent is authorised by the insurer to negotiate insurance contracts on behalf of the insurer, and the insurer must take legal consequences for the agent’s acts within the scope of authorisation.211 Thus if the agent knows that the insured has failed to perform the duty of disclosure, the insurer is deemed to know that as well, and is thus prohibited from using the defence of non-disclosure. In Mrs Guihong Li v China Pingan Insurance Company Shanghai Branch,212 Mrs Li’s husband suffered from hepatitis and went to a hospital on 7 December 2000. While her husband was staying at the hospital for treatment, Mrs Li effected a life policy on her husband’s life through an agent of the insurer (Mr Xie) on 8 December 2000. She gave negative answers to all questions about the state of the life insured’s health in the proposal form. Mr Xie stated in his business report to the insurer that he met the life insured on 8 December 2000. The life insured died of cirrhosis in August 2001. The insurer repudiated liability by reason of the insured’s failure to perform the duty of disclosure when applying for the insurance. The issue in argument was whether the insured intentionally withheld the fact of the life insured’s hepatitis, or whether the insurer knew that fact but still entered into the contract. The trial court held that the contract was entered into when the life insured was in hospital for medical treatment for hepatitis. Mr Xie met the life insured in the hospital so he was aware of the illness of the life insured. The appeal court held that the insurer was deemed to know the fact of the life insured’s illness, thus should not be allowed to repudiate liability on the ground of non-disclosure. In another case,213 the insured took out an all-risk policy for his ship which had been rebuilt from an old ship. However, due to the fact that the certificate of the ship still retained the words the “date of the building” and the “manufacturer of the building” rather than the “date of the rebuilding” and the “manufacturer of the rebuilding,” the insured filled in the proposal form by giving information about the ship according to the certificate and he did not disclose the fact that the ship was rebuilt from an old ship. The agent of the insurer knew the fact that the ship had been rebuilt and checked the ship in the port before the conclusion of the contract, but he did not ask the insured any further questions about this. The ship was destroyed by a collision with another ship. The insurer repudiated the liability on the grounds that the insured failed to disclose the material fact of the rebuilding of the ship. The court rejected the insurer’s argument and held the insurer liable. (II) A CIRCUMSTANCE WHICH THE INSURER’S AGENT CAN OBSERVE IS TAKEN TO BE KNOWN BY THE INSURER

Sometimes, courts hold that the insurer is deemed to have known the circumstance which the insurer’s agent can notice by observation, and the insured is released from disclosing such circumstance to the insurer. In Mr Jiangang Guo v China Life

211  The Insurance Law, art. 127. 212 This case was decided by the Second Intermediate People’s Court, Shanghai City, Civil Court Judgment (2003) No. 110. 213  See China Maritime Law Association News Letter (1999) No. 48, p. 17.

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Insurance Company Ltd Hebi Branch,214 the life insured had surgery to remove a tumour from her brain (anaesthesia intracranial tumour resection). A few days later, an insurer’s agent visited her and persuaded her to take a life policy. The insured told the agent about the life insured’s disease and the treatment by surgery. The life insured’s hair had not grown out. The agent would easily notice the fact that the life insured had just had brain surgery, but the agent (who completed the proposal form) gave negative answers to the questions about diseases in the proposal form. When the life insured died, the insurer refused to pay on the ground of non-disclosure of the disease. The court held that the life insured had an anaesthesia intracranial tumour resection, her hair did not grow out, and the agent would easily see that from her appearance, so the insurer should have known the life insured’s circumstance, thus the defence of non-disclosure was not upheld. In some situations, it is unreasonable to expect the insurer’s agent to know the state of health of the life insured by observation of the appearance of the life insured. For example, in Mr Huang Chen and Mr Tao Chen v Prudential Life Insurance Company Ltd Guangdong Branch,215 the life insured had diabetes and long-standing retinal detachment but did not disclose the fact to the insurer. The trial court held that an insurer’s agent should observe the life insured’s state of health from the appearance of the life insured according to the common sense of a man, and then decide whether or not to take the risk. The appeal court found such a judgment by the trial court unreasonable. It would be very unlikely for any person to notice such an eye disease by mere observation of the appearance of the life insured. (III) IF THE INSURER’S AGENT IS A FRIEND OR A RELATIVE OF THE INSURED, IS HE DEEMED TO KNOW THE INSURED’S STATE OF HEALTH? Some courts hold that if the insurer’s agent is a relative or a friend of the life insured, he is deemed to know the state of the life insured’s health, thus the insured is released from the duty of disclosure. For example, in Mr Jianxiang Li v China Life Insurance Company Shangli County Branch,216 it was held that as the insurer’s agent who negotiated the life policy with Mr Li (the insured) was a friend of Mr Li and Mrs Li (the life insured), and he should have been aware of the state of the life insured’s health. It is rather arbitrary and unpersuasive to make such a judgment. A friend of the insured may have more opportunity to know the state of the life insured’s health, but it does not necessarily mean that the friend must know the state of the life insured’s health. Whether or not a friend of the insured knows of the life insured’s disease must be determined in the light of relevant facts of the case. For example, as a friend of the life insured, if the agent takes the life insured to hospital for treatment of some kind of disease, the agent should be deemed to know the fact that the insured has the disease. 214 This case was decided by the Intermediate People’s Court, Hebi City, Henan Province, Civil Court Judgment (2010) No. 81. 215  This case was decided by the Intermediate People’s Court, Guangzhou City, Guangdong Province, Civil Court Judgment (2009) No. 4198. See accessed on 30 December 2014. 216  This case was decided by the Intermediate People’s Court, Pingxiang City, Jiangxi Province, Civil Court Judgment (2009) No. 75. See accessed on 29 December 2014.

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(IV) THE OBSERVATION BY MEDICAL EXAMINATION AND THE INFORMATION DISCLOSED BY THE INSURED ARE INCONSISTENT, BUT THE INSURER STILL ENTERS INTO THE CONTRACT In the situation where the insurer has discovered from the report of a medical examination that the life insured suffered from a disease which the insured did not disclose, but has still issued the policy, the insurer is precluded from pleading the defence of non-disclosure of the disease. In Mr Zhongqi Li v Hezhong Life Insurance Company Pingdingshan Branch,217 Mr Li insured his wife’s life in February 2008. The life insured had a kind of heart disease before the contract was concluded. The insurer arranged a medical examination for the life insured which revealed that the life insured had coronary heart disease. The insurer accepted the risk at a higher rate of premium. The life insured died of heart failure in April 2008. The court held that the medical examination showed that the life insured had heart disease. The insurer accepted the risk and demanded a higher premium. The insurer’s defence of non-disclosure was unfounded and should not be upheld. Even if the insured failed to disclose the disease, the medical examination revealed it, and the insurer should not be allowed to plead the defence of the non-disclosure of the disease. The medical examination institution is sometimes appointed by the insurer. If this is the case, it is the representative of the insurer. Where the medical examination institution finds a disease of the insured but fails to report it to the insurer, and the insurer nevertheless enters into the contract, it is deemed that the insurer has waived disclosure of the disease. The HPC of Jiangsu Province expressed the view that “The People’s Courts will not upheld the insurer’s plea for rescission of the contract on the ground of the insured’s failure to comply with the duty of disclosure in the situation where the insurer had known of the inconsistency between what the medical examination showed and what the insured disclosed but still underwrote the risk, or where the agent of medical examination did not report the result of the medical examination but the insurer underwrote the risk.”218 (b) The insurer’s knowledge of non-disclosure after the contract is concluded As discussed above, the Insurance Law provides rules restricting an insurer from exercising the right of rescission of contract using the defence of a material non-disclosure where the insurer knew of the non-disclosure before concluding the contract. By law, an insurer is entitled to rescind the contract where it becomes aware of a material non-disclosure after the conclusion of the contract.219 In practice, more often than not, some insurers continue to collect premiums after they become aware of the breach of the duty of disclosure, so a question of whether or not the insurer can still rescind the contract and repudiate liability in this situation arises. In the absence of a statutory provision, there are two different viewpoints in judicial practice on this question. The first view is that this situation is different from that as provided in art. 16(6) of the Insurance Law, i.e. the insurer is inhibited from rescinding the contract using

217 This case was decided by the Pingdingshan Intermediate People’s Court, Henan Province, Civil Court Judgment (2009) No. 261. See accessed on 13 November 2014. 218  The Guidance of Jiangsu Province HPC 2011, art. 19. 219  The Insurance Law, art. 16(2).

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the defence of a material non-disclosure where the insurer knew the insured’s failure to comply with the duty of disclosure before concluding the contract. Where an insurer becomes aware of, after the conclusion of the contract, the insured’s failure to disclose material facts and continues to collect a premium, its right of rescission of contract and repudiation of liability should not be restricted.220 The second view is that if an insurer becomes aware of the insured’s failure to disclose material facts after the conclusion of the contract and goes on to collect a premium, it should be deemed to have waived the right of rescission, so it should be precluded from exercising the right of rescission and the right of repudiation of liability.221 The SPC has answered this question, in providing that “After the contract was entered into, if the insurer becomes aware of or should have known of the insured’s failure to comply with the duty of disclosure, but still collected a premium, the courts will not uphold the insurer’s request for rescission of the contract on the ground of non-disclosure or misrepresentation.”222 This is similar to the English approach − acceptance of a premium or the grant of an extension of cover after receiving knowledge of a non-disclosure is good evidence of insurer’s waiver to avoid the contract.223 When an insurer has learned that the insured failed to disclose a material fact intentionally or by gross negligence after conclusion of the contract, it is faced with the choice of whether to affirm the contract or to rescind it for the breach of the duty of disclosure. Acceptance premiums are treated by the SPC as evidence of the insurer’s waiver of the right to rescind the contract by affirmation. To bring waiver into play, the insurer must become aware of (or should have been aware of) the undisclosed fact after the conclusion of the contract and must have received a premium after having learned of the non-disclosure.224 But the interpretation by courts of the degree of the insurer’s knowledge of non-disclosure necessary to bring waiver into play varies from court to court. Some courts interpret the degree of the insurer’s knowledge broadly. For instance, in Mr Jianxiang Li v China Life Insurance Company Shangli County Branch,225 the insured effected two life policies with coverage of hospital expenses on her own life in May 2003 and July 2003, respectively, and paid the first annual premium. She successfully claimed for hospital expenses for the treatments of dilated cardiomyopathy and bronchitis in the Second Hospital of Pingjiang City on two occasions (one in November 2003 and the other in April 2004). She paid the second annual premium in June 2004. The insured died of dilated cardiomyopathy in July 2004. Mr Li (the husband of

220 X. M. Xi, Understanding and Application of the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 179. 221 Ibid. 222  The Interpretation II, art. 7. 223  Hemmings v Sceptre Life [1905] 1 Ch 365; Holdsworth v L. & Y. Insurance (1907) 23 TLR 521; Ayrey v British Legal & United Provident Assurance Co. Ltd [1918] 1 KB 136; Simon, Haynes, Barlas & Ireland v Beer (1944) 78 Ll LR 337; Frans Maas (UK) Ltd v Sun Alliance & London Insurance Plc [2004] 1 Lloyd’s Rep 484 at [63]. 224  Interpretation II, art. 7. 225  This case was decided by the Intermediate People’s Court, Pingxiang City, Jiangxi Province, Civil Court Judgment (2007) No. 918, see accessed on 29 December 2014.

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the insured) claimed, but the insurer rejected the claim on the ground of intentional non-disclosure and counter-claimed for return of insurance money paid. The court held that the insured successfully claimed for hospital expenses for the treatments of dilated cardiomyopathy and bronchitis in the Second Hospital of Pingjiang City on two occasions. This hospital is a nominated hospital of the insurer;226 doctors must have known the medical history of the insured. So the insurer was most probably aware of the fact that the insured suffered the disease before entering into the contract. Instead of exercising the right of rescission, the insurer received the second annual premium; this should be deemed a waiver of the right of rescission by affirmation of the contract. The court further held that even if the insured failed to inform the insurer of the material fact at the time of the contract, the insurer should exercise its right to rescind the contract once the insurer became aware of the non-disclosure during the insurance period. The court did not consider the issue of the time period within which the insurer should exercise its right of rescission. As mentioned earlier, the 1995 and 2002 versions of the Insurance Law did not provide a time-bar to restrict the insurer’s right of rescission within a certain period of time. In practice, even if the insurer becomes aware of the insured’s failure to disclose material information, it would normally accept a premium. When the insured event occurs, the insurer would refuse to pay the claim using the defence of a material non-disclosure or misrepresentation and delay in exercising its right of rescission. Thus the insurer would be in a “nothing to lose but all to gain” position. For the sake of protecting the insured and restricting the insurer’s right of rescission, the 2009 version of the Insurance Law provides time limits for the insurer’s rescission of the contract. These time limits are considered below. 8.11.2 Time-bars on insurers’ right of rescission of the contracts – incontestability clause The incontestability clause in its simplest form provides that: “This policy will be indisputable from any cause (except fraud) after it shall have been continuously in force for two years.”227 It is said that the most basic and important clause in a life insurance policy is the incontestability clause.228 The purpose of such a clause is to restrict the insurer to a definite period of time within which to discover any nondisclosure or misrepresentation made by the insured at the time of applying for the insurance and to take appropriate action either to rescind the contract, amend the terms of contract or raise the premium. It prevents the insurer from invoking a defence of non-disclosure or misrepresentation after the specified period of time expires. The incontestability clause was first used by an English company, the London, Edinburgh and Dublin Life Assurance Company in 1843.229 It was in later years 226  This means that insureds should go to this hospital for treatment. 227  Anstey v British Natural Premium Life (1908) 99 LR 765. 228  See G. Salzman, “The incontestable clause in life insurance policies” (1969) Ins LJ 142. 229 The Post Office London Directory, 1843, p. 1590 ( accessed in August 2014). The Company placed a short advertisement in the London Post Office Directory 1843, which said: “Important improvements have been

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adopted by insurers in many other countries.230 In China, the 1995 and 2002 versions of the Insurance Law entitled the insurer to reject a claim and rescind a contract on the ground of intentional or negligent non-disclosure or misrepresentation, but did not provide time limits within which the insurer may exercise the right of rescission of the contract.231 As a result, the insurer often abused its right to reject claims and rescind the contract at any time by reason of non-disclosure or misrepresentation. This was very unfair to the insured, particularly in life insurance where the insured had paid premiums for many years, but could not get anything because of non-disclosure when the life insured died. (a) Incontestability provisions in insurance law and in insurance policies (I) STATUTORY PROVISIONS The doctrine of incontestability was introduced for the first time into the Insurance Law in 2009. Article 16(3) of the Law provides: “The right of rescission provided in the preceding paragraph shall lapse where the insurer does not exercise it thirty days after he knows that there is a cause for rescission. Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits.” The insurer is entitled to rescind the contract where the insured breaches his duty of disclosure intentionally or by gross negligence and the undisclosed fact is material,232 but the insurer’s right of rescission must be exercised within 30 days after the insurer becomes aware of the cause for rescission or within two years from the time of conclusion of the contract. After these time limits lapse, the insurer is barred from contesting the validity of the

introduced into the practice of Life Assurance by this company . . . This company has rendered their Policies indefeasible and negotiable securities by the following clause in their Deed of Settlement: Clause 78 − ‘That every Policy issued by the Company shall be INDEFEASIBLE AND INDISPUTABLE; and the fact of the issuing the same shall be conclusive evidence of its validity; and it shall not be lawful for the Company to delay payment of the money assured thereby, on the ground of any error, mistake, or omission, however important, made by or on the part of the person or persons effecting the same; and that, on the contrary, the amount receivable under the same shall be paid at the time stipulated by the Policy, to the person entitled thereto, as if no such error, mistake, or omission had been made or discovered, unless the Policy shall have been obtained by fraudulent misrepresentation.’ ” 230  See J. Stalson, Marketing Life Insurance: Its History in America (Harvard University Press 1942) p. 317. See also G. Salzman, “The incontestable clause in life insurance policies” (1969) Ins LJ 142. 231 The 1995 and 2002 versions of the Insurance Law did provide incontestability on misstatement of the life insured’s age after two years have lapsed from the date of conclusion of the contract. Article 53 of the 1995 version and art. 54 of the 2002 version are exactly the same, which provide: “Where the age of the insured as declared by the proposer is not true and his true age fails to meet the age requirements set forth in the contract, the insurer may rescind the contract and in this case, he shall refund the premium to the proposer after deducting a service charge, except where over two years have lapsed from the date of conclusion of the contract. Where the age declared by the insured is not true so that the proposer pays a premium less than the premium payable, the insurer shall have the right to adjust the premium and demand the proposer to make up the premium, or pay insurance moneys in accordance with the proportion of the premium actually paid to the premium payable at the time of paying such insurance moneys. Where the age declared by the insured is untrue so that the proposer has actually paid a premium more than the premium payable, the insurer shall return the excess premium received to the proposer.” 232  The Insurance Law, art. 16(1) and (2). For more on the insured’s pre-contract duty of disclosure, see Z. Jing, “Insured’s duty of disclosure and test of materiality in marine and non-marine insurance laws in China” [2006] JBL 681.

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contract on the ground of non-disclosure or misrepresentation.233 The incontestability provision plays an active role in preventing the insurer from abusing its right of rescinding contracts and in protecting the insured or his beneficiaries, but it is not free from difficulties. The Insurance Law also provides rules on misstatement of age of the insured. Article 32 states: “Where the age of the insured as declared by the proposer is not true and his true age fails to meet the age requirements set forth in the contract, the insurer may rescind the contract and in this case, he shall refund the cash value of the insurance policy according to the contract. Where the insurer exercises the right of rescission, the provisions in articles 16(3) and 16(6) of this Law shall be applicable.”234 The incontestability provision improves an insured’s position in insurance bargaining, but there are shortcomings with the provision. It is unclear whether or not the insurer should be barred from contesting the validity of the contract on the ground of fraud or fraudulent non-disclosure or misrepresentation after the expiration of the two-year contestability period. The provision is ambiguous in the situation where the insured event occurs within the two-year contestability period, but the insured postpones filing a claim until the expiration of the two-year period. These shortcomings are discussed below. (II) INCONTESTABILITY CLAUSE IN INSURANCE POLICIES In accordance with the statutory requirements, insurers usually set forth incontestability clauses in life policies which are simply a restatement of art. 16(3) and art. 32(1) of the Insurance Law. For example, clause 8.2 of the life insurance policy of Ping An Insurance Company states: “Our right of rescission provided in the preceding paragraph shall lapse if we do not exercise it 30 days after we become aware of the cause of rescission. If over 2 years have passed from the date of conclusion of this contract, we shall not rescind the contract; where an insured event occurs, we shall be liable for paying insurance benefits.” Clause 8.3 of the same policy states: “Where the age of the life insured as declared by you is not true and his true age fails to meet the age requirements set forth in the contract, we have the right to rescind the contract and in this case, we shall refund the cash value of the insurance policy. Where we exercise the right of rescission, clause 8.2 of this policy shall be applicable.” In the household property policy of Ping An Insurance Company, clause 18 states: “The right of rescission provided in the preceding paragraph shall lapse where the insurer does not exercise it in 30 days after he knows that there is a cause for rescission.235 Where over 2 years have passed from the date of formation of the contract, the insurer may not rescind the contract; where an insured event occurs, the insurer

233  The Insurance Law, art. 16(3). 234 Which continues: “Where the age declared by the insured is not true so that the proposer pays a premium less than the premium payable, the insurer shall have the right to adjust the premium and demand the proposer to make up the premium, or pay insurance moneys in accordance with the proportion of the premium actually paid to the premium payable at the time of paying such insurance moneys. Where the age declared by the insured is untrue so that the proposer has actually paid a premium more than the premium payable, the insurer shall return the excess premium received to the proposer.” 235  It should be noted that “the cause of rescission” refers only to rescission caused by non-disclosure and misrepresentation.

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shall be liable for making indemnity payments or paying insurance benefits.” This is exactly the same as art. 16(3) of the Insurance Law. (b) Scope of application of the incontestability provision The Insurance Law does not mention whether the incontestability provision applies to life insurance only or also applies to property insurance; this causes confusion. Some people236 argue that the incontestability clause is not applicable to property insurance,237 while others argue that the incontestability clause is applicable to life insurance as well as to property insurance.238 It is submitted that the incontestability provision should be applicable to both life and property insurance contracts for the following reasons. First, the incontestability provision is provided in the section of General Provisions in the Insurance Law;239 this implies that it is not limited to being applicable only to life insurance – it should be applied to property insurance as well. Second, the purpose of the incontestability clause is to prevent the insurer from abusing its right of rescission, so it should be applied to both life and property insurance contracts. Third, although the standard form of contract for property insurance is usually for one year, if the contract is specially negotiated, it can be for more than two years.240 There is no particular reason to prevent the two-year incontestability clause from being applied to such a contract. Finally, the 30-day incontestability period should be applied to one-year-term property insurance contracts.241 It can be seen (from the above-mentioned provisions in the Insurance Law and clauses in insurance policies) that the incontestability provisions affect insurers’ right of rescission of the contract based only on insureds’ non-disclosure or misrepresentation of material circumstances or misstatement of the age of the insured,242 and not on any other defences. Incontestability should not apply to any policy for which the insured does not pay premiums as scheduled in the contract. The provisions and the policy clauses regarding incontestability do not entitle the insured to “free” insurance. If the insured does not keep on paying premiums, the policy becomes invalid. In addition, the concept of incontestability does not operate in the

236  R. H. Zhang, “Application of incontestability clause” China Insurance Newspaper, 18 December 2013, accessed in July 2014. 237  For a number of reasons. First, property insurance is usually for one year, while the incontestability clause is to protect the insured’s longer term (two years or more) expectation. Second, the insured in property insurance is usually alive, so he is able to show evidence relatively more easily than the insured in life insurance who died. Third, property insurance is for the protection of the value of property, while life insurance is for the protection of the value of life which is important for the insured’s beneficiaries to have a financial source for a living when the life insured dies and is unable to financially support the beneficiaries anymore. 238 Y. C. Zhang, “Application of incontestability clause in Chinese Insurance Law” accessed in May 2014. 239  In the Insurance Law 2009, the section General Provisions consists of art. 10 to art. 30. These articles apply to both property insurance and life insurance. Articles 31 to 47 are concerned with life insurance contracts. Articles 48 to 66 deal with property insurance contracts. 240  Such as a construction insurance contract. 241  This will be discussed shortly. 242  There are other circumstances where the insurer is entitled to rescind the contract. For example, where the insured is in breach of the duty of notification of increase of risk during the insurance period, the insured can rescind the contract (art. 54 of the Insurance Law 2009). For more, see Z. Jing, “The insured’s post-contract duty of notification of increase of risk: A comparative perspective” (2013) JBL 842.

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situation where there is a lack of an insurable interest. Where the insured does not have an insurable interest in the life insured, the contract is void ab initio.243 (c) A 30-day contestability period from the time the insurer knows the cause for rescission The Insurance Law requires the insurer to exercise its right of rescinding the contract within 30 days after it knows of the insured’s non-disclosure or misrepresentation. If it doesn’t, it will lose its right to rescind the contract after the 30-day period expires,244 and the contract then becomes incontestable. This is explained by the following case. In Mr Zhang v The Life Insurance Company,245 Mr Zhang effected a life policy on his father’s life and named himself as the beneficiary on 28 May 2008. His father was diagnosed with emphysema in a local hospital on 26 May 2008. He concealed this fact at the time of applying for the insurance. The life insured died on 6 January 2010. Mr Zhang claimed. Upon investigation, on 21 February 2010 the insurer discovered from the life insured’s medical records that the life insured had suffered from emphysema before the contract was entered into. The insurer therefore rejected the beneficiary’s claim on the grounds of intentional non-disclosure and gave the rejection notice on 16 March 2010, but did not rescind the contract. The court held that according to art. 16(3) of the Insurance Law, an insurer’s right of rescission of the contract shall lapse where the insurer does not exercise it within 30 days after it knows the cause for rescission. The date on which the insurer was deemed to know the cause of rescission was 21 February 2010 when the insurer learned from the life insured’s medical record that he had suffered from emphysema before the contract was entered into, so the insurer should have exercised the right of rescission within 30 days from 21 February 2010. The insurer failed to rescind the contract within the 30-day time limit and therefore lost the right, thus it should be liable for paying the insurance proceeds.246 As mentioned earlier, the 1995 and 2002 versions of the Insurance Law did not provide time limits for insurers to exercise a right of rescission of contracts by

243 The Insurance Law 2009, art. 31. For more on insurable interests in life insurance in China, see Z. Jing, “Insurable interest in life insurance: a Chinese perspective” (2014) JBL 337. 244  The Insurance Law 2009, art. 16(3). 245  This case was decided by the Intermediate People’s Court, Nan Yang City, Henan Province, Civil Court Judgment (2011) No. 498, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2012) vol. 4, p. 130. 246  In a similar case, Mrs Huang v The Life Insurance Company Xiang Tan Branch (this case was decided by the Intermediate People’s Court, Xiang Tan City, Hunan Province, Civil Court Judgment (2011) No. 71, and reported in the Annual Report of Typical Insurance Cases (Law Press China, 2012) vol. 4, p. 133). Mrs Huang insured her husband’s life. He fell over and died in hospital. Upon investigation of his medical record, the insurer became aware on 19 November 2010 of the fact that the life insured had coronary heart disease before the contract was concluded, but Mrs Huang did not disclose this material fact to the insurer at the time when the contract was concluded. The insurer rejected Huang’s claim and also rescinded the contract on 8 March 2011. The court held that the insurer lost its right to rescind the contract because from the date when he knew the fact of the insured’s non-disclosure to the date when he rescinded the contract, more than 30 days had passed. The contract remained valid, and the insurer was liable for paying the insurance benefit.

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reason of non-disclosure and misrepresentation.247 This is unfair to the insureds. The adoption of incontestability provisions in the 2009 version of the Insurance Law has significantly improved the insured’s position, as can be seen in the case of Mr Xu v The Life Insurance Company.248 There, Mr Xu effected a life policy to cover his wife’s life and severe diseases on 12 May 2006. The life insured was found to have haematuria and stayed at Weifang Hospital for treatment in July 2007. Mr Xu claimed for medical costs on 5 November 2007 but was rejected by the insurer on the ground that Weifang Hospital was not one of the named hospitals in the policy. The insurer continued to collect premiums from Mr Xu annually. On 22 February 2010, the life insured went to Xiamen First Hospital for treatment for thyroid nodules and chronic renal failure syndrome. Mr Xu claimed for medical costs on 28 March 2010. The insurer’s investigation revealed that the life insured was diagnosed with primary nephrotic syndrome and stayed in hospital for treatment on 19 February 2002. After that, the life insured regularly visited the hospital for treatment. The insured concealed this fact at the time of the contract. On this basis, the insurer rejected the insured’s claim and rescinded the contract on 29 April 2010. The court found that when Mr Xu made the first claim on 5 November 2007, he submitted to the insurer the life insured’s medical records with other relevant evidence and information for the claim. The life insured’s medical history was shown in the medical records. The insurer either knew or should have known the fact from the medical records that the life insured suffered from primary nephrotic syndrome before the contract was entered into. The insurer was deemed to know the cause of rescinding the contract at the time when he refused Mr Xu’s first claim.249 Article 17(2) of the Insurance Law 2002 allowed the insurer to rescind the contract on the ground of intentional or negligent non-disclosure or misrepresentation, but did not provide a contestability period within which the insurer should exercise its right of rescission. Instead of rescinding the contract, the insurer continued to collect premiums. The 2009 version of the Insurance Law became effective on 1 October 2009; accordingly, the 30-day time limit for the insurer to exercise his right of rescission as stipulated in art. 16(3) of the Insurance Law 2009 should start to run from 1 October 2009.250 In this case, the insurer rescinded the contract on 29 April 2010 – by then the 30-day contestability period had lapsed. Consequently, the insurer’s rescission was ineffective. On this reasoning, the court held that the contract was valid and the insurer was thus liable for paying the insurance proceeds.

247  Article 16(2) of the Insurance Law 1995 and art. 17(2) of the Insurance Law 2002 are exactly the same, providing as follows: “The insurer shall have the right to rescind the insurance contract where the proposer intentionally conceals the facts and fails to perform his duty of disclosure and truthful representation of information to the insurer or negligently fails to perform such duty, so that the failure of disclosure or representation shall sufficiently influence the insurer’s decision on whether he will accept the insurance or raise the premium rate.” 248  This case is cited in the book Insurance Disputes by B. X. Jiang (Law Press China 2014) p. 223. 249  In English law, refusal to pay a claim while not declaring avoidance of the contract and making a return of premium is evidence of an intent to affirm the contract (Simon Haynes & Barlas v Beer (1946) 78 Lloyd’s Rep 337; West v National Motor Accident & Insurance Union [1955] 1 All ER 800). 250 This rule is provided in art. 5(2) of the Supreme People’s Court First Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China, 14 September 2009.

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The SPC published three typical insurance cases in June 2013, one of which explains how courts apply the 30-day time limit. In Mr Tian v The Life Insurance Company,251 the insurer refused to pay the insurance benefit on the ground that the insured failed to disclose a material fact that the life insured suffered from tuberculosis before the contract was entered into. The trial court held that the insurer was not liable because of the insured’s non-disclosure. But the appeal court found that the insurer sent a letter to the insured to inform him of the refusal to pay the claim but did not rescind the contract on 25 December 2009. The insurer was deemed to have become aware of the non-disclosure on 25 December 2009, but failed to exercise its right of rescission of the contract within the following 30 days, thus it lost the right of rescission. The contract was still alive, so the insurer was not allowed to repudiate its liability. (d) A two-year contestability period from the inception of the contract The Insurance Law provides another contestability period − the insurer’s right to rescind the contract by reason of non-disclosure or misrepresentation must be exercised within two years from the inception of the contract.252 During the two-year period, a potential defence of non-disclosure or misrepresentation must clear both the requirements of intentional or grossly negligent misrepresentation and of materiality in order to be effective. In one case,253 Mr Zhang effected a life policy on his own life, with coverage for death and severe diseases in August 2000. Zhang paid premiums every year and was diagnosed with uraemia in June 2005. His claim for being diagnosed with uraemia was paid by the insurer after investigation of the claim. When Zhang died of uraemia on 13 December 2006, the insurer successfully rejected the beneficiary’s claim on the ground of intentional non-disclosure of the fact that Zhang suffered kidney disease before the contract was entered into. The 2002 version of the Insurance Law did not have the incontestability provision. The insurer was allowed to rescind the contract by reason of non-disclosure or misrepresentation at any time. In this case, the insurer should have discovered the insured’s non-disclosure in June 2005 when it investigated Zhang’s claim for being diagnosed with severe disease (uraemia) and rescinded the contract at that time. Instead, the insurer continued to collect premiums and turned down the beneficiary’s claim for death payment when Zhang died. This is obviously unfair to the insured and the beneficiary. By contrast, in the following case, the insurer had no right to rescind the contract on the ground of non-disclosure and misrepresentation according to the 2009 version of the Insurance Law, although the court upheld the insurer’s rescission of the contract by using the exclusion clause in the policy. In Mr Li v The Life Insurance Company,254 Mr Li took early retirement in October 2010, because he suffered from 251 This case is cited in the book by Xiaoming Xi, Understanding and Application of the Supreme People’s Court’s Second Interpretation on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China (People’s Court Press 2014) p. 204. 252  The Insurance Law 2009, art. 16(3). 253  See the article “How can a beneficiary benefit from the incontestability clause” accessed in May 2014. 254  This case is reported in the book Lawyers ShowYou How to Make a Lawsuit: Insurance Disputes and Cases by Y. L Dai and G. Q. Chen (China Economic Publishing House 2013) p. 9.

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emphysema and was unable to work. Mr Li effected a life insurance on his own life and named his son as the beneficiary. He gave a negative answer to the question about his medical history “whether you have ever had any disease” on the proposal form. He paid premiums and the policy became effective on 10 April 2011. There was an exclusion clause in the policy which stated: “The insurer is not liable for the insured event where there was any act of concealment or fraud by the proposer or the life insured.” Mr Li died of primary pulmonary heart disease (a heart disease caused by lung problems) on 26 October 2013. The beneficiary’s claim was turned down by the insurer on the ground that the insured intentionally concealed the fact that he had emphysema at the time of the contract. According to art. 16(4) of the Insurance Law, the insurer can rescind the contract and reject the claim. But the beneficiary argued that because the contract had been effective for more than two years, the contract became incontestable in accordance with art. 16(3) of the Insurance Law. The court held that the insurer should have been barred from rescinding the contract because the contract became incontestable after the two-year period lapsed. However, in this case, the insurer explicitly excluded its liability in the presence of the insured’s concealment, so the insurer was not liable for the claim. It can be argued that where an exclusion clause is not in agreement with the statutory rules, the exclusion clause should be ineffective according to art. 19 of the Insurance Law.255 In this case, the insured concealed the fact that he suffered from emphysema. His concealment is equivalent to intentional non-disclosure. According to art. 16(3) of the Insurance Law, intentional non-disclosure becomes incontestable after the two-year contestability period expires. The insurer’s exclusion of the liability in the presence of the insured’s concealment should not be effective, because this exclusion exempts the insurer from the obligations that it should have borne according to law.256 If an exclusion clause is allowed for the insurer to exclude liability based on the insured’s concealment at the time of the contract, the insurer would be able to bypass the incontestability provision as stipulated in art. 16(3) of the Insurance Law. By this reasoning, the court’s decision in the above case was incorrect. The insurer should be made liable notwithstanding the exclusion clause.257 (e) Fraud versus fraudulent non-disclosure or misrepresentation The major difficulty with the incontestability provision in art. 16(3) of the Insurance Law is that it is unclear whether or not the insurer should be barred from contesting the validity of the contract on the ground of fraud or fraudulent non-disclosure

255  Article 19 of the Insurance Law 2009 provides: “The following terms and conditions in an insurance contract concluded by adopting the standard clauses provided by the insurer shall be invalid: (i) those that exempt the insurer of the obligations that the insurer should have borne according to law or that aggravate the obligations of the proposer and the insured; and (ii) those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law.” 256 Ibid. 257  There is another kind of exclusion clause in insurance policies, in which the insurer lists the risks which are not covered. For instance, the insurer may exclude liability where the insured dies while driving a helicopter. In other words, this risk of driving a helicopter is not covered by the policy. In this situation, the incontestability clause should not operate to bar the insurer’s defences pertaining to the policy’s coverage. If the incontestability clause took away the insurer’s defences based on coverage, the effect of the clause would be to expand coverage that never existed in the first place.

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or misrepresentation after the expiration of the two-year contestability period. This ambiguity has caused and will continue to cause disputes. In the literal meaning of art. 16(3) of the Insurance Law, an insurer can rescind the contract for intentional and grossly negligent non-disclosure or misrepresentation, but must exercise this right within two years from the inception of the contract. If the insured had a disease but intentionally concealed the fact and gave a negative answer to the question raised by the insurer, the insured’s act can be called intentional non-disclosure or misrepresentation, which should be equivalent to fraudulent non-disclosure or misrepresentation. In English law, fraud is proven when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth or (3) recklessly, careless whether it be true or false. To prevent a false statement from being fraudulent, there must always be an honest belief in its truth.258 If the insured knows that he has hepatitis, but gives a negative answer to the question “have you had any disease in the last three years,” he has knowingly made a false representation. This false representation can be called fraudulent misrepresentation. If the analysis is correct that fraudulent non-disclosure or misrepresentation is equivalent to intentional non-disclosure or misrepresentation, then fraudulent non-disclosure or misrepresentation should be covered by art. 16(3) and can become incontestable after two years from the inception of the contract. As we have seen from the cases discussed above, the non-disclosure or misrepresentation was all made intentionally (or fraudulently); if fraudulent non-disclosure or misrepresentation is not covered by art. 16(3), the scope of the incontestability provision would be confined to grossly negligent non-disclosure or misrepresentation only. This would not be the intention of the legislation. So it is submitted that the insurer should be barred from contesting the validity of the contract on the ground of fraudulent non-disclosure or misrepresentation after the expiration of the twoyear period. The next question to be considered is whether other kinds of fraud should be excepted from the incontestability provision. It is, however, not always easy to distinguish fraudulent misrepresentation from other kinds of fraud, but it is important and necessary to do so in order to find an answer to the question. Fraudulent misrepresentation is a kind of passive act. The insured can answer the questions in the proposal form with either “yes” or “no.” He can conceal the true fact and give a false one, but he does not actively seek to do something else to deceive the insurer. In contrast, if the insured actively takes other steps to deceive the insurer, the insured’s act should be treated as fraud. For example, if the insured employs an imposter (who is in good health) to have the medical examination in place of the sick insured, the insured’s act should be treated as fraud (not fraudulent misrepresentation), because the insured actively seeks to deceive the insurer for the purpose of obtaining the contract which he would otherwise not have been able to obtain.

258  Derry v Peek (1889) 14 App Cas 337 (HL) at 374, where Lord Herschell defined what must be proved.

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This can be illustrated by the case of Ms Shuai Ying v China Life Insurance Company Ltd.259 There Ms Ying effected a life policy in July 1998 and another life policy in March 2000 on her mother’s life and named herself as the beneficiary. A clause in the policy stated: “Any person who is under 70 and healthy can be the person to be insured.” Her mother fell over at home and died of a stroke on 15 March 2003. The insurer paid Ms Ying the full amount of the death proceeds (¥270,000).260 In July 2003, the insurer received a letter with the signatures of more than 10 local people, which said that the insured’s age was wrong and there was fraud in this case. The insurer’s investigation revealed that at the time of applying for the first life policy, the insured’s age was 77, well beyond the insurable age limit of the policy, but Ms Ying misrepresented the insured’s age to be 54. Ms Ying also managed to change her mother’s date of birth from 7 January 1921 to 7 November 1944 in the “Household Registration Book,”261 and employed an imposter to have the medical examination in place of her mother. Upon the death of her mother, she also changed her mother’s date of birth in her own relevant records. The major question in this case is whether Ms Ying’s acts constitute a crime of insurance fraud. According to art. 138 of the Insurance Law 2002,262 if an insured deliberately fabricates the subject matter of the insurance to defraud the insurer of insurance payments, then the insured commits a crime of insurance fraud. So the question whether Ms Ying committed a crime of insurance fraud becomes a question of whether Ms Ying’s misrepresentation of the insured’s age should be regarded as “deliberately fabricat[ing] the subject matter of the insurance.” Ms Ying argued that the subject matter of the life policy is a person’s physical body and lifetime. In this case, the insured subject matter is her mother’s death or life, but not her age. So 259  This case was cited in the book by Y. H. Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 508. 260 The payment was made in a meeting organised by the insurer. Many local people attended the meeting. The event received a great deal of interest from the press and the local people ( accessed in July 2014). 261  In China, a household must register with a local Public Security Bureau. A Household Registration Book (HRB) is given to every household, and it shows the records of date of birth, sex, occupation of every member of the household and address of the household. The HRB can be used as an ID document. All information on an ID card comes from the records in the HRB. 262  Article 138 of the Insurance Law 2002 provides: “An applicant, an insured or a beneficiary, who commits insurance fraud by means of any of the following acts, which constitutes a crime, shall be investigated for his criminal responsibility in accordance with law: (1) in the case of the applicant, deliberately fabricating the subject matter of the insurance and swindling the insured amount out of the insurer; (2) falsely alleging the occurrence of an insured event which in fact has not occurred, and swindling the insured amount out of the insurer; (3) deliberately causing the occurrence of an event which leads to property damage and obtaining the insured amount by fraudulent means; (4) deliberately causing the occurrence of such insured events in the insurance of the person as death of the insured, injury and disability, or illness and obtaining the insured amount by fraudulent means; whereupon an insurance claim is fraudulently made; or (5) forging or tampering with certifications, data or other evidence related to the occurrence of the insured event, or abetting, instigating or bribing others to adduce false evidence, data, or other proofs, or cooking up the cause of the occurrence of the insured event or overstating the extent of loss, thereby obtaining the insured amount by fraudulent means.Administrative sanctions shall be imposed in accordance with the relevant regulations of the State if the circumstances attending any of the acts listed in the preceding paragraphs are minor and do not constitute a crime.”

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her misrepresentation of her mother’s age should not be regarded as fabricating the insured subject matter. Article 54 of the Insurance Law 2002 was concerned with remedies to the insurer for the misstatement of the life insured’s age; it stated that if the age of the life insured as declared by the proposer is untrue and the true age does not fall within the age limit specified in the contract, the insurer may rescind the contract and refund the premium to the proposer after deducting a service charge. However, this does not apply to cases where formation of the contract was over two years ago. During the two-year period, if the insurer finds any untrue statement of the insured’s age, it has the right to rescind the contract. In this case, the insurer neither investigated the truth of the insured’s age nor rescinded the contract during the two-year period, so the insurer should be barred from rescinding the contract because more than two years had elapsed from the time of formation of the contract. The insurer counter-argued that the life policy was supposed to cover a person who was born on 7 November 1944, but this person in fact did not exist. This insured person was a fabricated subject matter of insurance. The person who was born on 7 January 1921 did exist, but should not be covered by the policy. Ms Ying changed her mother’s date of birth at the time of applying for the policy and changed her own relevant documents where her mother’s date of birth was recorded after her mother’s death. By virtue of art. 138 of the Insurance Law 2002, if the insured intentionally fabricates the subject matter of the insurance in order to defraud the insurer of insurance proceeds, his act constitutes insurance fraud and he should be investigated for his criminal responsibility in accordance with law. Ms Ying’s acts were intentional fraud for the purpose of securing the life policy which would otherwise not have been obtained without the misstatement of her mother’s age. The court held: (1) misstatement of age of the insured is not “fabricating the subject matter of insurance” and should not be treated as a crime of insurance fraud; and (2) art. 54 of the Insurance Law 2002 should apply to this case. The insurer did not contest the validity of the contract during the two-year period, so it was barred from rescinding the contract based on misrepresentation after the two-year period had lapsed. The insurer appealed to the High Court of the Yunnan Province. The High Court did not make a decision and reported the case to the Supreme People’s Court. The case has yet to be decided by the SPC. There is no final decision in this case on whether or not Ms Ying’s misstatement of her mother’s age constitutes a fraud. It may be argued that substitution of a healthy person (the imposter) to have a medical examination for her sick mother should be treated as a fraud, and contesting the case should be allowed even though the fraud was successfully concealed for more than two years. Such kinds of cases might be handled on the theory that there was no policy at all in the first place. In English law, an insurer is not barred from contesting the validity of the ­contract on the ground of fraud or fraudulent non-disclosure or misrepresentation after the contestability period expires.263 In Australia, if the non-disclosure or ­misrepresentation 263  Re General Provincial Ex p. Daintree (1870) 18 WR 396. Professor Merkin summarises three possible consequences for insurance fraud: the insured may face an action in deceit; if the policy is avoided the insured will lose the right to recover the premium; and any clause which purports to limit or exclude the insured’s duty of utmost good faith will not as a matter of public policy extend to fraud, as no person

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was fraudulent, the insurer may avoid the contract at any time.264 If the non-disclosure was not fraudulent or the misrepresentation was not made fraudulently,265 the insurer may, within three years after the contract was entered into, avoid the contract.266 In the US the approaches to fraud or fraudulent misrepresentation vary from one state to the next. Fraudulent misrepresentation is excepted from the applicability of the incontestable clause in a few states.267 Sometimes courts allow a fraud defence notwithstanding an incontestability clause if the insured’s fraud at the time of applying for insurance is so profound that public policy would be disserved by enforcing the policy.268 Similarly, in some states, if a person applies for insurance through the use of an imposter, the incontestability clause will not bar the insurer from contesting coverage.269 But in some other states,270 incontestability clauses bar an insurer’s imposter defence.271 German law provides two contestability periods: 5 years for non-intentional non-disclosure, and 10 years for intentional or fraudulent non-disclosure.272 Having considered approaches relating to the applicability of an incontestability provision in the case of fraud or fraudulent non-disclosure or misrepresentation in China and in some other jurisdictions, it is suggested that an insurer should not be allowed to contest the validity of the contract on the ground of fraudulent non-disclosure or misrepresentation after the two-year contestability period expires; and that for profound fraud, such as the use of an imposter, the incontestability clause should not bar the insurer from contesting the validity of the contract after the two-year contestability period expires. Accordingly, art. 16(3) of the Insurance Law should be amended as follows: “Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract, except in the

will be permitted to take advantage of his own fraud (HIH Casualty and General Insurance v Chase Manhattan Bank [2003] Lloyd’s Rep IR 230). See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 6-031. 264 The ICA, s. 29(2). The insurer must initially prove that he would not have entered into the contract on any term but for misrepresentation or non-disclosure, i.e., that he was induced by the presentation of the risk. This is so even if there is fraud (Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182). If the inducement requirement is satisfied, the insurer has the right of avoidance for fraud, although this is subject to the court’s power to disapply the remedy of avoidance under s. 31 of the ICA. 265  The ICA does not define fraudulent non-disclosure or fraudulent misrepresentation. Accordingly, its meaning is derived from the common law. Non-disclosure of a material fact is fraudulent if the insured knew the fact and deliberately concealed it because they believed the insurer might decline the risk or only accept it on special terms if they disclosed the fact (Dalgety Co. Ltd v Australian Mutual Provident Society [1908] VLR 481 at 499). Misrepresentation of a material fact is fraudulent if the insured made it without actually and honestly believing it was true, or being recklessly indifferent as to whether it was true or not (NTG Victory Australia Ltd v Hudson [2003] WASCA 291 at [5] (Steytler J), [32] (Parker J), citing Sutton, Insurance Law in Australia (3rd edn, LBS 1999) para. 3.138); and with the intention of it being acted on (Dr Gregory Moore v The National Mutual Life Association of Australasia Ltd [2011] NSWSC 416 at [71]). For more, see G. Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis Butterworths 2015) para. 8.25. 266  Section 29(3) of the ICA. 267  For example, in New Jersey. 268  See R. Jerry and D. Richmond, Understanding Insurance Law (5th edn, LexisNexis 2012) p. 769. 269 See Obtartuch v Sect. Mut. Life Ins. Co., 114 F 2d 873 (7th Cir 1940); Strawbridge v N.Y. Life Ins. Co., 504 F Supp 824 (DNJ 1980); Muslin v Columbian Nat’l Life Ins. Co., 3 F Supp 368 (SDNY 1932). 270  Such as Florida, California, etc. 271 See Allstate Life Ins. Co. v Miller, 424 F 3d 1113 (11th Cir 2005); Amex Life Assurance Co. v Superior Court, 14 Cal 4th 1231 [60 Cal Rptr 2d 898, 930 P 2d 1264] (1997). 272  The German Insurance Contract Act 2008, s. 21(3).

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presence of fraud.”273 Here the phrase “except in the presence of fraud” is added. By this amendment, profound fraud (such as the use of an imposter) is excluded from the scope of the application of the incontestability provision. (f) The insured event occurred during the two-year contestability period but the claim is made after expiration of the period Article 16(3) of the Insurance Law provides: “Where the proposer fails to fulfil the obligation of truthful disclosure . . .Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits.” This provision does not make it clear whether or not the insurer shall be liable for an insured event which occurred within the two-year period but where the claim is made after expiration of the period. The ambiguity of the provision has caused lots of disputes. It happens in practice that where the insured event occurred during the contestability period, the insured or beneficiaries deliberately postpone filing a claim until the expiration of the two-year contestability period in order to avoid the insurer’s rescission of the contract on the ground of non-disclosure and secure the protection of incontestability. For example, in Mr Wang v The Life Insurance Company,274 Mr Wang effected a severe disease insurance policy on 7 April 2009. Under the policy, the insurer promised to pay ¥50,000 if the insured was diagnosed with a severe disease (such as cancer, heart attack, etc.). At the time of applying for the insurance contract, the insured gave a negative answer to the question in the proposal form “Have you ever had any disease or received treatments for any disease?” The insured in fact suffered a chronic kidney disease for years but concealed this fact. The insured was diagnosed with uraemia on 25 October 2010, and made a claim one year later (on 10 October 2011), by which time the two-year contestability period had expired. The insurer rescinded the contract and rejected the claim on the ground of intentional misrepresentation. The court held that the insurer was barred from rescinding the contract by the incontestability provision of the Insurance Law and was thus liable for the claim.275

273  Fraud here does not include fraudulent non-disclosure or misrepresentation. It means any act the insured actively seeks to deceive the insurer for the purpose of obtaining the insurance contract which otherwise would not have been obtained, such as the act of employing an imposter to have a medical examination in the place of the sick insured. 274  This case was cited in The Insurance Law Review, vol. 5, 2013, edited by Zhi Hua Song, Law Press China, p. 152. 275  In a similar case, Mr Wei v A Life Insurance Company, Mr Wei effected a life policy on his own life on 6 February 2010. He died of acute and severe hepatitis on 6 August 2011. But his beneficiary postponed making a claim until 11 September 2012 when the two-year contestability period had lapsed. Upon investigation, the insurer found that the insured had the disease of hepatitis (type B) for about 10 years, but intentionally concealed this material fact at the time of the contract. The insurer would not have entered into the contract had it been informed this fact. On this basis, the insurer rescinded the contract and rejected the claim according to art. 16(2) of the Insurance Law, which entitles the insurer to rescind the contract if the insured failed to disclose material facts intentionally or by gross negligence. The beneficiary argued that according to art. 16(3) of the Insurance Law the insurer was barred from rescinding the contract after two years from the time of formation of the contract. The court mediated the dispute. The insurer in the end agreed to pay the insurance benefit (this case was reported by Qian Huo in the China Insurance Newspaper, 31 January 2013 accessed in June 2014).

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In this case, the insured successfully bypassed the two-year contestability period and avoided the insurer’s rescission of the contract. The ambiguity of the law in this respect would certainly encourage the insured to intentionally avoid contestability of the contract by waiting until the two-year contestability period has expired before filing a claim for an insured event which occurred during the two-year contestability period. The law is thus in need of improvement. The approach on this point in the US can be referred to here. In order to avoid this situation, in the US, most incontestability clauses are limited by a provision stating that the contestability period must be completed “during the lifetime of the insured.”276 With this nuance, the insurer is able to contest a claim for insurance benefits after the contestability period has lapsed if the insured dies before the end of that period. The “during the lifetime of the insured” requirement suggests that the insured must live through the contestability period for the contract to become incontestable. If the insured dies immediately prior to the expiration of the contestability period, the two-year contestability period passes and the insurer then announces that it is refusing to pay proceeds because of the insured’s misrepresentation, the incontestability clause does not operate to cause the insurer to lose the misrepresentation defence.277 In some situations, however, the insured’s death does not interrupt the running of the two-year period if the policies do not include the phrase “during the lifetime of the insured” in the incontestability clause. Under this line of authority, the insurer who takes action after expiration of the contestability period to contest coverage in a situation where the insured did not survive through the contestability period is barred by the incontestability clause from denying coverage.278 In order to avoid disputes arising from the ambiguity of art. 16 (3) of the Insurance Law and to prevent the insured from taking advantage of the loophole in the provision, the law should make it clear that the insurer is barred from contesting the contract only for an insured event which occurs after the two-year anniversary of the formation of the contract passes. Accordingly, art. 16(3) of the Insurance Law should be amended as follows: “Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract; where an insured event occurs after such a two-year period, the insurer shall be liable for making indemnity payment or paying insurance benefits.” Here the phrase “after such a twoyear period” is added to define the scope of period during which the insured event occurs. As discussed earlier, the incontestability provision should also be applicable to property insurance contracts, so it seems inappropriate to add the phrase “during the lifetime of the insured” into art. 16(3). Instead, it would be appropriate for the insurers to add this phrase into the contestability clause in life policies. 8.12 Conclusion The statutory law and the SPC Interpretations in relation to the insured’s duty of disclosure and representations are consumer oriented and, to a large extent, balance 276  See accessed in July 2014. 277  See R. Jerry and D. Richmond, Understanding Insurance Law (5th edn, LexisNexis 2012) p. 765. 278 See Bolick v Prudential Ins. Co. of Am., 249 F Supp 735 (DSC 1969); Ramsey v Old Colony Life Ins. Co., 131 NE 108 (Ill 1921); Kocok v Metro. Life Ins. Co., 189 NE 677 (NY 1933).

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the interests of the parties to a contract. However, there are still shortcomings in the law, which are in need of reform. We have identified and discussed the problems, and made suggestions on how to resolve the deficiencies of the law, as summarised below: (1) It is suggested that a new provision relating to the insurer’s duty to inform the insured of the duty of disclosure and the effect of breach of the duty be introduced into art. 16 of the Insurance Law. The proposed provision can be seen at section 8.4.4 of this chapter. (2) The Insurance Law does not provide any statutory rule in relation to an incomplete, irrelevant or unanswered question in the proposal form. It is necessary to introduce a new sub-provision into art. 16 of the Insurance Law to govern the situation. The proposed provision can be seen at section 8.4.7(c) of this chapter. (3) It is suggested that art. 16(1) of the Insurance Law should be reformulated (or a new article should be added) to extend the insured’s duty of disclosure on renewal, variation or reinstatement of the contract. (4) The remedies for grossly negligent breach of the duty of disclosure are problematic, and it is recommended to formulate a new set of remedies for breach of the duty by gross negligence, which can be seen at section 8.10.7 of this chapter. The concept of proportionality as adopted in the Consumer Insurance (Disclosure and Representations) Act 2012 (UK)279 and the Insurance Act 2015 (UK)280 is proposed to be introduced into art. 16 of the Insurance Law to provide a remedy for the proposer’s grossly negligent non-disclosure and misrepresentation in the situation where the insurer would have entered into the insurance contract, but would have charged a higher premium, so that the insurer may reduce proportionately the amount to be paid on a claim. (5) It is suggested that the insurer’s knowledge before concluding the contract should include both actual and constructive knowledge. Accordingly, art. 16(6) of the Insurance Law could be amended by adding the phrase of “ought to know” into it: “Where the insurer knows or ought to know that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits.” (6) For profound fraud, such as the use of an imposter for a medical examination, the incontestability clause should not bar the insurer from contesting the validity of the contract after the two-year contestability period expires. Accordingly, art. 16(3) of the Insurance Law should be amended: “Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract, except in the presence of fraud.”

279  Schedule 1, part 1, para. 7. 280  Schedule 1, para. 6(1).

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Suggestion (6) above is similar to what was proposed by the SPC Interpretations III (Draft for Comments).281 Article 10 of the Draft stated: “Where the proposer failed to perform his duty of disclosure and representation at the time of concluding the insurance contract, the insurer’s right of rescinding the insurance contract exceeds the time limit for exercising the right as provided in art. 16(3) of the Insurance Law, and the insurer requests a cancellation of the insurance contract by reason of the proposer’s fraud in accordance with the stipulation of art. 54 of the Contract Law,282 the People’s Court will uphold such request for cancellation.” So the SPC was of the view that insurer’s right of rescission of the contract by reason of the insured’s fraud at the time of concluding the contract cannot be barred by the twoyear contestability clause. But this article was not included in the final version of Interpretation III. (7) In order to avoid the problem that the insured event occurs within the twoyear period, but the insured or the beneficiary informs the insurer of the occurrence of the insured event after the two-year period so as to avoid the insurer’s rescission of the contract on the ground of non-disclosure and secure the protection of incontestability, the law should expressly prohibit this behaviour by making it clear that the insurer is barred from contesting the contract only for the insured event which occurs after the two-year anniversary of the formation of the contract passes. Accordingly, art. 16(3) of the Insurance Law should be amended: “Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract; where an insured event occurs after such a two-year period, the insurer shall be liable for making indemnity payments or paying insurance benefits.” The SPC has also recognised this problem and proposed a solution to it. Article 8 of the draft version of Interpretation III stated: “Where the insured event occurs within two years from the date of formation of the insurance contract, and the insured, the life insured or the beneficiary fails to inform the insurer of the occurrence of the insured event in a timely manner in accordance with art. 21 of the Insurance Law,283 thereby causing the situation in which when the insurer rescinds the insurance contract according to art. 16(2) of the Insurance Law, two years has passed from the date of conclusion of the contract, the People’s Court will not uphold the insured’s plea by invoking art. 16(3) of the Insurance Law.” To put it simply, if the insured event occurs within the two-year contestability period, but the insured makes a claim after the two-year period, the insurer’s right of rescission of the contract is not barred by the two-year deadline. But this article was not included in the final version of Interpretation III.

281 The Draft of the Third Interpretation by the SPC on Certain Questions Concerning the Application of the Insurance Law of the People’s Republic of China was published on 22 October 2014 for public consultation. 282  Article 54 of the Contract Law provides: “In regard to a contract concluded under circumstances where a party uses fraud or duress or exploits the other party’s distress thereby causing the other party to act contrary to his true intention, the injured party has the right to apply to a People’s Court or arbitral institution for modification or cancellation.” 283  Article 21 of the Insurance Law provides: “Where either the proposer, the insured or the beneficiary knows the occurrence of an insured event, it shall notify the insurer thereof in a timely manner.”

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CHAPTER 9

The insurer’s pre-contractual duty of good faith

9.1 Introduction The duty of good faith is bilateral. The Insurance Law requires both the insured and the insurer to follow the principle of good faith when exercising rights and performing obligations.1 At the time of negotiating an insurance contract, the insured’s duty of good faith is to truthfully inform the insurer of material information about the subject matter of insurance or of the insured.2 The insurer’s duty of good faith is threefold. First, an insurer is required to explain to the insured the contents of the insurance contract. Second, the insurer is obliged to make clear explanation of the clauses which exclude or limit the insurer’s liabilities. Third, the insurer is forbidden to practise bad faith acts as listed in art. 116 of the Insurance Law, such as concealing from the insured material information relevant to the insurance contract. These duties are interrelated and will be discussed in this chapter. The current rules of law relating to the insurer’s duties of explaining the terms of contract and clear explanation of exception clauses are provided in art. 17 of the Insurance Law, and arts 9 to 13 of the Supreme People’s Court of China (SPC) Second Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China (hereinafter, Interpretation II).3 Article 17(1) of the Insurance Law provides: “When standard clauses provided by the insurer are adopted for concluding an insurance contract, the standard clauses provided by the insurer to the proposer shall be attached to the insurance application form, and the insurer shall explain the contents of the contract to the proposer.” This provision places two duties on the insurer: first, to provide the proposer with the standard clauses, and second, to explain the content of the contract to the proposer. Article 17(2) continues: “When concluding an insurance contract, the insurer shall make notes on clauses which exempt the insurer of its liabilities on the application form, the insurance policy, or other certificate that are so conspicuous as to draw the proposer’s attention, and make specific and clear explanations thereof to the proposer orally or in writing; otherwise such clauses shall have no effect.” This

1  The Insurance Law, art. 5. 2  This is considered in Chapter 8, “The insured’s duty of disclosure and representations.” 3 The Supreme People’s Court Second Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China was passed by the Judgment Committee of the Supreme People’s Court on 6 May 2013 and became effective on 8 June 2013.

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paragraph requires the insurer to clearly explain exemption clauses to the proposer at the time of concluding the contract. This chapter considers the insurer’s duty to explain the content of a standard term contract, the duty to make specific and clear explanations of clauses excluding or limiting the insurer’s liability, and the duty not to mislead the insured. 9.2 The insurers’ duty to explain the content of the contracts 9.2.1 The nature and justification of the insurer’s duty The Insurance Law requires an insurer to explain the content of the insurance contract to the insured when concluding an insurance contract. There are a number of reasons for this requirement. First, most commentators take the view that the duty to explain the terms of the contract is required by the good faith principle.4 Otherwise it would be unfair to the insured. Second, information asymmetry requires not only that the insured must disclose material facts to the insurer but also that the insurers must explain the contract terms to the insured.5 Insurance contracts are notoriously complex documents riddled with jargon, and their layout is often muddled to the untrained eye. This can raise difficulties of understanding for ordinary consumers. The insurer knows exactly the meaning of the terms, while the insured knows little or nothing about them. Particularly for some complex terms, it would be difficult for an insured to understand without professional explanation of the meaning of those terms by the insurer. A market survey shows that of the life insurance consumers, 74.8% did not know the exact meanings of the insurance clauses, 19.2% never read the insurance clauses and 47.7% were unable to fully understand the insurance clauses because of the complicated phrasing of the clauses.6 Third, an insurance contract is formed only when the insured’s understanding of the meanings of the terms is consistent with what the insurer intends them to mean.7 The insurer must explain the contract to the insured in order for the insured to understand the terms correctly. On the basis of the consistency of the understandings of the terms by the insured and the insurer, the contract can be concluded. Fourth, an insurance contract is usually in a standard form. Standard form contracts are advantageous in several respects. Considerable time is saved that otherwise would be required to negotiate individual contracts. Judicial interpretation of one contract can serve as a guide for the interpretation of similar kinds of contracts. Risk can be evaluated by the insurer on a more predictable basis. The major disadvantage is that the insurer with superior knowledge and bargaining power may

4 Y. T. Tan and Q. R. Fan, Studies of Insurance Law (Higher Education Press 2003) p. 173; S. Y. Wen, Insurance Law (Legal Press 2003) p. 38. 5 C. M. Dang, Comparative Insurance Law Studies (Intellectual Property Publishing House 2002) p. 72. 6  H. L. Wang, The Obligation of Information Provision in Insurance Contracts (Press of China University of Political Science and Law 2011) p. 169. 7  T. Yi, Regulation of China’s Insurance Market (Social Sciences Literature Publication House 2000) p. 119.

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impose its will on a weaker, less informed insured. Usually, the insurers draft the terms on the basis of two considerations: on the one hand, the insurers need to make the terms of the contract attractive to the potential insureds for marketing purposes; on the other, the insurers need to make the terms well defined for the purpose of management of risk and control of the liability for payment under the policy. Thus the insurers often use complex wording to limit or exclude their liability which an ordinary insured cannot understand easily. The insured is in a weak bargaining position of “take it or leave it,” so for the purpose of protecting insurance consumers, the insurer is required to explain the terms to the insured so that the insured enters into the contract on the basis of a proper understanding of the terms of the contract. These different views are in fact interrelated; they explain the justification for the insurer’s obligation to explain the contents of an insurance contract to the insured before concluding the contract. 9.2.2 The way of performing the duty Article 17(1) of the Insurance Law requires an insurer to explain the content of the contract to the insured at the time of the contract. The precondition for this duty is that the standard form of contract supplied by the insurer is used for the conclusion of the contract. If the terms of the contract are negotiated by the contracting parties, the insurer has no duty to explain the contract to the insured. In practice, a standard form contract is used for all individual insureds, so the insurer must explain the contents to the insured before or at the time of concluding the contract. It must be noted that the insurer is required to explain the contents of the contract to the proposer (the insured) only, not to any other persons, such as the life insured or the beneficiaries. The contents of the contract should include all terms of the contract. The standard insurance clauses must be attached to the insurance application form. The purpose of this requirement is to ascertain that the insurers must supply the standard clauses to the insureds before or at the time of concluding the contract. This procedural requirement would effectively compel the insurer to perform its duty of explanation of the content of the standard clauses. If the standard clauses are supplied to the insured after the conclusion of the contract, the insurer cannot be said to have performed the duty of explanation. The way of performing the duty is not stipulated in art. 17 of the Insurance Law. Simply giving the standard clauses to the insured and requesting him to read the terms for himself cannot be said to be explaining the clauses to the insured. The insurer must go further to actually explain terms to the insured and answer questions raised by him. The insurer must actively perform its duty, not just wait passively to answer questions put to it by the insured. In practice, insurers usually explain the terms of the contract orally or/and in writing, and also supply to the insured an introduction brochure for the insurance product and a summary of the characteristics of the policy. 9.2.3 The consequence of breach of the duty Article 17(1) of the Insurance Law imposes on the insurer the duty of explaining the contents of the contract, but does not provide a remedy for breach of the duty. 289

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According to the principle ubi jus ibi remedium (where there is a right, there must be a remedy), the insured’s right of knowing the terms of the contract is not properly protected. This is one of the deficiencies in the Insurance Law. In the guiding rules on how to deal with insurance disputes published by the High People’s Court (HPC) of Beijing City, it is provided that “if the insurer fails to comply with the duty of explaining the clauses in the insurance contract, the insurer should compensate the insured for the actual loss caused by its breach of the duty.”8 There are a number of different views on the possible remedies to the insured. First, if the insurer’s failure to explain the contents of the contract leads to a fundamental misunderstanding of the contents by the insured, the insured could request an amendment or withdrawal of the contract on the basis of fundamental misunderstanding of the contents of the contract.9 The court, however, does not seem to support this view. In Mr Wu v A Life Insurance Company in Shanghai,10 Mr Wu effected a participating endowment insurance policy on the life of his granddaughter and paid premiums for three years. He then wanted to rescind the contract and request a refund of the premiums paid on the basis of his fundamental misunderstanding of the contents of the contract, but the court refused because of lack of legal basis for such a right of rescission and refunding of the premiums paid. Second, where the insurer’s failure to explain the contents of the contract results in a different understanding of the meaning of a term of the contract, the term is interpreted by the doctrine of contra proferentem.11 In Mr Jiang v The Life Insurance Company Dian Jiang Branch,12 the court found that there was no evidence that the insurer had explained, at the time of the contract, the clause which covers myocardial infarction but not other kinds of heart disease, so it is reasonable that the insured had a different understanding of the meaning of the clause. According to art. 30 of the Insurance Law, where there are two or more interpretations of a term or condition of the contract, the term or condition should be interpreted in favour of the insured or the beneficiary. Third, the insured should be entitled to rescind the contract and request a refund of the premium paid in the situation where the insurer’s failure to explain the contents of the contract gives rise to a disagreement on the contents of the contract and consequently the purpose of the contract cannot be achieved.13 In Mr Guo v The

8 The Guidance of Beijing City High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2004 (hereinafter, the Guidance of Beijing City HPC 2004), art. 4. It must be noted that the guidance enacted by the High People’s Courts is only to guide the lower courts rather than to bind them. These guiding rules have no legal force, but are usually followed by the lower courts. 9  X. M. Xi, Understanding and Application of the Provisions in relation to Insurance Contracts of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 107. 10  This case was decided by the People’s Court, Huangpu District, Shanghai City, Civil Court Judgment (2009) No. 1846, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2010) vol. 2, p. 91. 11  X. M. Xi, Understanding and Application of the Provisions in relation to Insurance Contracts of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 107. 12 This case was decided by the third Intermediate People’s Court, Chongqing City, Civil Court Judgment (2005) No. 408, and is cited in the book Life Insurance Law and Practice by the Department of Legal Affairs of Hong An Standard Life Insurance Company (Law Press China 2012) p. 372. 13 X. M. Xi, Understanding and Application of the Provisions in Relation to Insurance Contracts of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 107.

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Life Insurance Company,14 the insured bought a 10-year-term endowment life policy in August 2005. A clause in the policy stated that at the end of the 10 years, the insurance company would pay ¥15,000 to the insured, and a cash value of ¥15,000. When Mr Guo was to pay the second instalment of the insurance premium in 2006, he made an inquiry as to the payment of insurance benefit and was told by the insurer that if the insured died during the 10-year period, the insurer was liable only to pay the beneficiary ¥15,000, and the cash value was not payable. The insured then wanted to rescind the contract and requested refunding of the premium paid, on the ground that the insurer did not explain to him the fact that although the insurance benefit includes survival payment and cash value, the insured is entitled to receive only one of the two. The court held that the insurer did not explain the clause to the insured at the time of concluding the contract, which caused the insured’s misunderstanding of the insurance benefit, so the insured was allowed to rescind the contract and to receive a refund of the premium paid. It seems that insurers’ failure to comply with the duty of explaining the contents of the policy may affect two aspects: rescission of the contract by insureds or recoverability of a claim under the contract. The views and decisions mentioned above are mostly related to the insured’s rescission of the contract and request for return of premiums paid on the grounds of the insurer’s failure to explain the contents of the contract, while recoverability of a claim under the policy has much to do with the risk covered or risk excluded. Insurers usually set out clauses in the policy which exclude or limit insurers’ liability. These exemption clauses are discussed in the section below. 9.3 The insurer’s duty to clearly explain the exemption clauses As mentioned earlier, insurers are required by art. 17(2) of the Insurance Law to (1) make notes on clauses which exempt the insurer of its liabilities and (2) clearly explain the exemption clauses in the contract; otherwise the exemption clauses are ineffective. This is the unique feature of the Insurance Law in comparison to the laws in other jurisdictions. In judicial practice, about one-third of the insurance cases were concerned with the insurer’s duty of making clear explanation of the exemption clauses,15 thus the rules of law in this regard and their application deserve a special consideration. 9.3.1 What is an exemption clause? In general contract law, one party to a contract may seek to avoid incurring liability for certain breaches of the contract, or may specify that their liability for such a breach will be limited, usually to a certain amount in damages. A clause which seeks to exclude all liability for certain breaches is called an exclusion clause. The

14 This case was decided by the Intermediate People’s Court, Yiyang City, Hunan Province, Civil Court Judgment (2009) No. 53, and is reported in the Annual Report of Typical Insurance Cases (Law Press China, 2010) vol. 2, p. 56. 15  See X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 276.

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term “exemption clause” is commonly used to cover both limitation and exclusion clauses. Such clauses are usually contained in standard form contracts. The meaning of the exemption clause in insurance contracts is somewhat different from that in general contracts. In insurance contracts, insurers’ main obligation is to indemnify the insured when the insured event occurs and causes losses to the insured, or to pay insurance benefit to the beneficiaries in life insurance. The insurers may carefully design the clauses of the contracts to specify what risks are covered and what risks are excluded, and to limit or exclude certain amounts of insurance payment when the insured event occurs. So it can be said that an exclusion or limitation clause in the insurance context is the clause for limiting or excluding the insurer’s obligation for paying insurance moneys, not a clause for limiting or excluding the insurer’s liability for breach of the main obligation. In the case where the insurer has breached its main obligation − unreasonable delay or wrongful repudiation of a valid claim – the insured is entitled to bring an action against the insurer for consequential losses caused by the insurer’s unreasonable delay or wrongful repudiation of a valid claim. This topic is considered in Chapter 15 of this book, “Settlement of claims.” In a broad sense, exemption clauses can include four major types: (1) Clauses which exclude certain risks, in other words, certain risks are not covered by the policy. Thus the insurer is not liable to pay insurance moneys if a loss is caused by a risk which is not covered. For example, in building insurance, the risk of earthquake is usually excluded, thus the insurer is not liable for a loss caused by earthquake. (2) Clauses which exclude the insurer’s liability for making an insurance payment in the event that the occurrence of the insured event is caused by certain specified (excluded) causes. For example, in fire insurance, the risk covered is fire. The insurer is liable for a loss occasioned by fire. However, the insurer’s undertaking to indemnify the insured loss by fire can be qualified by exceptions which expressly provide that the insurer is not to be liable for a loss occasioned by certain specified causes of fire, such as explosion, riot, hostilities, etc. (3) Clauses which exclude the insurer’s liability for paying insurance moneys for certain kinds of loss which are caused by the insured risk. For example, an exclusion clause in the motor vehicle third party liability insurance policy of Ping An Insurance Company states that “the insurer is not liable to pay for any mental distress to the third party.” Here the insured risk is the third party liability – if the third party is injured or killed by the road accident caused by the insured driver, the insurer will pay the third party under the policy. If the third party suffers mental distress as a result of the road accident, the insurer is not liable for paying the third party for that kind of loss. (4) Clauses which limit the insurer’s liability for a loss which is caused by the insured risk or by the insured cause of the risk. In other words, the risk or the cause of the risk is covered but the amount payable under the policy is limited. For example, there is often a limitation clause in a motor vehicle insurance policy to reduce the amount of payment to 80% of the current market value in the case where the motor vehicle is stolen and cannot be 292

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found within 60 days.16 In other words, the risk or the cause of the risk is covered but a certain amount of loss is excluded. In short, type (1) and type (2) exemption clauses refer to the situation where risks (or the cause of the risks) are not covered, while type (3) and type (4) clauses refer to the situation where risks (or the cause of the risks) are covered but certain kinds of loss are excluded (type 3) or the amount of insurance payment is limited (type 4). When an insurer defends a claim by pleading the operation of an exception to the scope of cover (or amount of cover), if it sustains that plea, the effect is to defeat (or reduce the amount of) the claim but it leaves the insurance in force in respect of any other or later loss within the scope of the cover. In summary, an exemption clause in an insurance contract can be defined as a term of the contract which limits or excludes the insurer’s liability under the contract which the insurer would bear, but for the exemption.17 In this chapter, the term “exemption clause” refers to both limitation and exclusion clauses. 9.3.2 The development of the insurer’s duty of clear explanation of exemption clauses In the 1995 and 2002 versions of the Insurance Law, insurers were required to clearly explain exemption clauses. Article 17 of the 1995 version or art. 18 of the 2002 version of the Insurance Law provides: “If there are exclusion clauses provided by the insurer in the insurance contract, then the insurer shall make clear explanation in respect thereof to the proposer at the time of concluding the contract. Where such clauses are not clearly explained, they shall not be effective.” It is the usual practice that insurers place exclusion clauses in the section “exclusions of liability” in insurance policies.18 These clauses must be clearly explained according to the Insurance Law. Some insurers, however, place clauses which limit or exclude insurers’ liability in other sections of policies, which are not labelled as “exclusion clauses.” It is not very clear whether this kind of clause can be treated as an exclusion clause and therefore should be clearly explained according to art. 17 of the 1995 version or art. 18 of 2002 version of the Insurance Law. For example, in most motor vehicle third party liability insurance policies, there is a clause which is placed in the section of “claims handling” (not in the section of “exclusions of liability”) in the policy. This clause states that upon occurrence of the insured event, the insurer shall pay the medical expenses within the limit of the amount specified in the policy in accordance with the state’s basic medical insurance standards.19 If the insured and insurer dispute the amount of insurance payment for medical costs,

16 See clause 16(6) of the PICC motor vehicle insurance policy, accessed in August 2015. 17  Professor Clarke defines exceptions as terms of the insurance contract that reduce the extent of cover which, but for the exception, would be provided; see M. Clark, The Law of Insurance Contracts (6th edn, Informa 2009) para. 19.1A. 18  More accurately, this section should be called “risks not covered,” because the risks which are excluded are listed in this section. The insurers are free from liability if the loss is caused by any risk listed in this section. 19  Clause 36 of the comprehensive commercial motor insurance clauses of the People’s Insurance Company of China, accessed in April 2016.

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the insurer will say that the meaning of this clause is that the insurer is not liable to pay the costs of medicines and medical treatments which are not within the scope of the state’s basic medical insurance standards. This kind of clause is in essence a limitation clause which limits the insurer’s liability only for medical expenses for the injured third party in hospital for certain medicines or certain treatments in accordance with the state’s basic medical insurance standards. Because this clause is placed in the section of “claims” but not in the section of “exclusions of liability” in the policy, it is rather controversial whether or not this clause should be treated as a limitation or exclusion clause and therefore must be clearly explained to the insured. This has caused judicial difficulties in determining whether such a clause is an exclusion clause or not. Because of the difficulty in determining the scope of the exemption clauses within a policy that the insurer does not place in the section for “exclusion of liability,” or such clauses that are not labelled as exemption clauses but in effect limit or exempt the insurer’s liability, the 2009 version of the Insurance Law broadens the scope of the exclusion clauses to all clauses which exempt or limit the insurer of its liabilities. These clauses include not only those in the sections of “exclusions of liability” but also those in all other sections of the policy which limit or exclude the insurer’s liabilities. Then, the next question to be considered is how to determine whether or not a clause is an exemption clause in an insurance contract. 9.3.3 Determination of exemption clauses Exemptions in an insurance policy can be either statutory exemptions or contractual exemptions. It is important to differentiate these two kinds of exemption clauses, as the extent of explanation required is different for these two kinds of exemption clauses. (a) Statutory and regulatory exemptions Statutory and regulatory exemptions refer to those circumstances under which the Insurance Law or regulations clearly stipulate that the insurer is not (or may not be) liable for making insurance payments. It is the usual practice that the insurer incorporates some relevant provisions of the Insurance Law into the insurance policy. As shown below, the Insurance Law provides a number of situations where the insurer can be exempted from its liabilities. (1) Where the insured fails intentionally or by gross negligence to disclose material facts to the insurer when concluding the contract, and the undisclosed facts sufficiently influence the insurer’s decision on whether to underwrite the risk or to increase the premium rate, the insurer may rescind the contract. The insurer’s liability to pay a claim can be excluded in the case of an intentional non-disclosure, or in the case of a grossly negligent non-disclosure where the undisclosed fact has a material impact on the occurrence of the insured event.20

20  The Insurance Law, art. 16.

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(2) Where the insured, the life insured or the beneficiary intentionally causes the occurrence of an insured event, the insurer is entitled to rescind the contract, and is not liable for paying insurance moneys.21 (3) Where the insured, the life insured or the beneficiary provides relevant evidence, information or other proof which is forged or falsified, or fabricates false causes of the insured event, the insurer is not liable for indemnity payments or insurance benefits in respect of the portion which is fraudulently claimed.22 (4) Where the insured has intentionally caused the death, disability or illness of the life insured, the insurer is not liable for payment of insurance benefits.23 (5) Where the life insured commits suicide within two years after the contract is concluded or reinstated, the insurer is not liable for payment of insurance benefits.24 (6) Where the life insured is disabled or killed as a result of intentionally committing a crime or resisting a measure of compulsion taken according to law, the insurer is not liable for payment of insurance benefits.25 (7) Where the insured subject matter is transferred and the level of risk increases materially as a result, if the insured and the transferee fail to notify the insurer of such transfer and the increase of risk, the insurer is not liable for indemnity payments for the loss caused by the increased risk.26 (8) Where the insured loss is caused by a negligent third party, if the insured has obtained indemnity from the third party, the insurer is not liable for the part of the loss for which the insured has already been indemnified by the third party.27 If the insured waives the right of claim against the third party after the occurrence of the insured event, the insurer is not liable for indemnity payments.28 An example of a regulatory exemption clause can be found in the Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance;29 the insurer is not liable for paying insurance money for any losses where the road traffic accident was intentionally caused by the third party victim.30 The insurer is not liable for property losses suffered by the victim where the driver was not qualified for driving or intoxicated by alcohol, where a stolen vehicle was involved in the accident or where the insured intentionally caused the accident to occur.31

21  Ibid, art. 27(2). 22  Ibid, art. 27(3). 23  Ibid, art. 43(1). 24  Ibid, art. 44(1). 25  Ibid, art. 45. 26  Ibid, art. 49(4). 27  Ibid, art. 60(2). 28  Ibid, art. 61(1). 29 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance was adopted at the No. 127 executive meeting of the State Council on 1 March 2006, and came into force as of 1 July 2006. 30  Ibid, art. 21. 31  Ibid, art. 22.

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When the above-mentioned statutory or regulatory exemption provisions are incorporated into the contract, they become contractual clauses; the question to be asked is whether or not the insurers are obliged to clearly explain these statutory exemption clauses to the insured. The SPC provides some rules in respect of treatment of statutory exemption clauses in relation to the insurer’s right of rescission of contract. It is set out in art. 9(2) of the SPC Interpretation II that the clauses concerning the insurer’s right to rescind the contract by reason of the insured’s breach of statutory or contractual duties cannot be treated as the clauses exempting the insurer of its liabilities as provided in art. 17(2) of the Insurance Law. Therefore, insurers are not required to make clear explanations of statutory clauses concerning the insurer’s right to rescind the contract.32 The SPC does not provide a general rule as to the treatment of statutory or regulatory exemption clauses, so it is unclear whether or not other statutory exemption clauses which are not covered by art. 9(2) of the SPC Interpretation II must be clearly explained by the insurer. The HPC of Jiangsu Province provides a guiding rule in this regard. Article 6 of the Guidance provides that where the insured or the beneficiary claims invalidity of an exemption clause which is stipulated by a relevant law on the ground that the insurer has failed to perform its duty of clear explanation of the clause, the People’s Courts will not uphold such a claim.33 This is reasonable and fair, for the validity of a statutory exemption should not be subject to the insurer’s clear explanation.

32  In the Insurance Law, the insurers are entitled to rescind the contract in eight circumstances: (1) Article 16 of the Insurance Law stipulates that where the insured fails intentionally or by gross negligence to disclose material facts to the insurer, when concluding the contract, and the undisclosed facts sufficiently influence the insurer’s decision on whether or not to underwrite the risk or to increase the premium rate, the insurer may rescind the contract. (2) Article 27 of the Insurance Law provides that where no insured event has occurred, and the insured or the beneficiary fraudulently reports that an insured event has occurred and submits a claim for indemnity payment, the insurer may rescind the contract. Where the insured, the life insured or the beneficiary intentionally causes the occurrence of an insured event, the insurer is entitled to rescind the contract. (3) Article 32 of the Insurance Law provides that where the age of the life insured declared by the proposer is untrue, and the actual age of the life insured does not fall within the age limit specified in the contract, the insurer may rescind the contract. (4) Article 37 of the Insurance Law provides that where a life contract lapses, the insurer is entitled to rescind the contract if no agreement for reinstatement of the contract can be reached by the parties within two years from the date of the lapse of the contract. (5) Article 49(3) of the Insurance Law provides that where the insured subject matter is transferred and the level of risk increases significantly as a result, the insurer may increase the premiums in accordance with the contract or rescind the contract within 30 days of receipt of the notice of transference. (6) Article 51(3) of the Insurance Law provides that where the insured fails to fulfil his/her obligation to ensure the safety of the insured subject matter, the insurer is entitled to demand an increase in the premium or to rescind the contract. (7) Article 52(1) of the Insurance law provides that where the risk of the insured subject matter increases significantly, the insured shall notify the insurer of such an increase of risk, and the insurer has the right to increase the premium or rescind the contract. (8) Article 58(1) of the Insurance Law provides that where partial loss occurs to the insured subject matter, the insurer may rescind the contract provided that the insurer gives the insured 15 days’ prior notice. 33 The Guidance of the High People’s Court of Jiangsu Province Concerning Questions of How to Deal with Insurance Disputes 2011.

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(b) Contractual exemptions In contrast to statutory or regulatory exemption clauses, contractual exemption clauses are those which are exemption clauses of the contract other than the statutory exemption clauses, and must be clearly explained by the insurer; otherwise the clauses would be ineffective. The SPC sets forth a rule on the determination of exemption clauses in art. 9(1) of the SPC Interpretation II, which states: “The liability exemption clauses, deductibles, excess, proportion payment and other clauses exempting or reducing the insurer’s liability as set forth in the standard form of contract as provided by the insurer can be determined as the ‘clauses exempting the insurer of its liabilities’ as provided in art. 17(2) of the Insurance Law.” This article lists examples of exemption clauses, but this list is not exhaustive and does not include any other clauses exempting or reducing the insurer’s liability. The SPC has recently published a motor insurance case about exemption clauses.34 In Mr Wu v The Property Insurance Company,35 Mr Wu insured his car for private use (not for commercial use). Clause 12(8) of the motor policy stated that “the insurer is not liable for any loss to the vehicle where the vehicle is used for commercial purposes.” For insurance for third party liability, clause 32 stated that “the insurer will make insurance payments according to the percentage of the liability which the insured driver should assume in an accident.” The policy also set forth deductibles and the proportion of payment. Where the insured vehicle had more than one accident during a one-year period, the deductible would increase by 5% from the second accident. If the insured vehicle was used for commercial purposes and caused losses to the third party, the amount of insurance payment would be calculated using the ratio of the premium paid for private use and the premium (which should have been paid) for commercial use. For the liability of the persons on board the insured vehicle, 20% of the loss would not be paid for each payment. In this case, the insured driver had a road accident with another vehicle. The insured vehicle was damaged and two persons on board the vehicle were injured. The insured claimed, but the insurer turned down the claim for the damage to the vehicle and agreed to pay the loss to the two injured persons using the 20% deductible. The court held that the clauses in the motor policy were clauses “exempting the insurer of its liabilities” as provided in art. 17(2) of the Insurance Law. The insurer failed to provide the insured with a copy of the standard form of the motor insurance contract and failed to make clear explanations of these clauses to the insured when concluding the contract; thus these exemption clauses were not effective, and the insurer was liable for the total loss arising from the accident. (c) Disputable exemption clauses As a general rule, to determine whether or not a clause is an exemption clause, two steps may be followed: first, determine whether or not it is a clause which exempts the insurer’s liability for paying insurance money if the insured event meets certain conditions; second, if there are no such conditions in the clause, the insurer will be 34 The SPC regularly publishes typical cases which can be used as guidance for judicial decisions in similar cases. 35 See accessed in April 2016.

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liable for paying the insurance moneys.36 Using a life policy as an example to explain this general rule, the insurer is liable for paying insurance benefits under a life policy when the life insured dies, but the insurer is not liable for paying the insurance benefit if the life insured commits suicide within two years from the date of conclusion of the contract.37 Here the insured event is the death of the life insured; the condition for excluding the insurer’s liability for insurance payments is the suicide of the life insured within two years of the conclusion of the contract. If this condition is met, the insurer’s liability is exempted. The insurer would have been liable had there been no such condition. For some disputable exemption clauses, this general rule can be used to determine whether or not the clause is an exemption clause. (I) A PROBATION CLAUSE IN A HEALTH INSURANCE POLICY There is usually a probation clause in a health insurance policy. The length of the probation period varies from 30–90 days for short-term health insurance from the date of conclusion of the contracts, to 180 days for long-term health insurance.38 If the insured event occurs during the probation period, the insurer is not liable for payment of medical expenses or death of the life insured. The purpose of a probation clause is to exclude from the scope of the cover any disease which the insured has already suffered before taking out the health insurance, therefore prohibiting the insured from effecting health insurance when he finds himself to have certain diseases. From the insurer’s point of view, a probation period is necessary to manage the risk, and is thus reasonable. But from the insured’s point of view, it is unreasonable that the insurer receives premiums for a one-year health policy but excludes liability for the first 30–90 days when the insured event occurs; and, moreover, not all diseases which are diagnosed in the probation period would be those from which the insured was already suffering before the conclusion of the contract. So it is understandable that disputes may occur as to whether such a probation clause is an exemption clause and therefore in need of clear explanation. In judicial practice, some courts treat a probation clause as an exemption clause. In Hezhong Life insurance Company v Mr Zhongqi Li,39 the court held that the probation clause, which stated, “where the life insured dies of disease within 180 days from the date of the contract becoming effective, the insurer is not liable for paying the insurance proceeds but shall return the premium to the insured,” was an exemption clause, therefore it should have been clearly explained to the insured. In Mr Zhang v The Life Insurance Company,40 Mrs Zhang was diagnosed with ovar-

36  See Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 282. 37  The Insurance Law, art. 44. 38  For example, in the one-year critical illness policy of the Ping An Insurance Company, the probation period is 30 days (see accessed in December 2015). 39  This case was decided by the Intermediate People’s Court, Ping Ding Shan City, Henan Province, Civil Court Judgment (2009) No. 261 (see accessed in December 2015). 40 This case was decided by the Intermediate People’s Court, Qingdao City, Shandong Province, Civil Court Judgment (2012) No. 273, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2013) vol. 5, p. 81.

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ian cancer within the 90-day probation period. The court held that the insurer had explained the probation clause to the insured prior to the conclusion of the contract, thus the clause was valid. Some other courts do not treat a probation clause as an exemption clause. For example, the HPC of Guangdong Province does not treat “the probation period” as a clause which exempts the insurer’s liability.41 Applying the general rule to the case of a probation clause, first, if the insured event (the death of the insured) occurs and meets the condition (the insured dies of disease within the probation period), the insurer is not liable; and second, if there were no such condition, the insurer would have been liable. Thus it can be said that a probation clause should be treated as a clause that exempts the insurer’s liability for paying insurance money. (II) CLAUSES WHICH DEFINE THE SCOPE OF COVER OF CRITICAL ILLNESSES OR WHICH INTERPRET A CERTAIN KIND OF CRITICAL ILLNESS

In critical illness insurance, the risk covered under the policy is critical illness. But different critical illness policies may cover different critical diseases. It is often disputed whether such clauses that define the scope of cover for different kinds of critical illnesses or that interpret certain kinds of critical illness are exemption clauses. The scope of cover varies from one policy to another – one policy may cover 10 kinds of critical illnesses, and another policy may cover 20 kinds. If a clause lists a number of different kinds of critical illnesses which are covered but does not include certain kinds of critical illnesses, some courts treat the clause as an exemption clause. In Chang Cheng Life Insurance Company Ltd Henan Branch v Mrs Shan Wang,42 Mrs Wang was diagnosed with reversible leukoencephalopathy and claimed for critical illness insurance payments. The insurer refused her claim on the ground that reversible leukoencephalopathy was not in the list of 22 different kinds of critical illnesses in the policy. The court held that reversible leukoencephalopathy is structural changes in white matter lesions in brain cells in the central nervous system was the main feature of myelin damage, and brain central nervous damage should be regarded as a critical illness. Although the policy listed 22 kinds of different critical illnesses, it could not cover all other critical illnesses, and the insurer did not explain the exemption clause to the insured, so the insurer was liable for paying the insurance benefit. Most courts treat the interpretation of a critical illness as an exemption clause where the clause interprets a certain kind of critical illness narrowly. In Mr Jin v China Life Insurance Company Ltd Tongxiang Branch,43 there was a clause in the critical illness policy which interpreted heart disease as obstruction of a coronary artery which results in a myocardial infarction (MI) and partial myocardial necrosis. The

41 The Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of Guangdong Province HPC 2011), art. 8. 42 This case was decided by the Intermediate People’s Court, Zheng Zhou City, Henan Province, Civil Court Judgment (2009) No. 786 (see accessed in December 2015). 43 This case was decided by the Intermediate People’s Court, Jia Xing City, Zhejiang Province, Civil Court Judgment (2009) No. 115 (see , accessed in December 2015).

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court held that this clause was an exemption clause as it limited the scope of heart disease only to MI. MI is a kind of heart disease. It cannot be said that MI equals heart disease. The clause was ineffective because the insurer did not clearly explain it to the insured at the time of the contract. In Mr Wang v The Insurance Company,44 there was a clause in the critical illness policy which interpreted stroke as stroke sequelae. The court held that this interpretation limited the scope of the insurer’s liability, so it should have been explained clearly to the insured. However, some courts treat the interpretation of a critical illness in the contract as a clause defining the scope of cover, not as a clause exempting the insurer’s liability. In Mr Liang v The Insurance Company Taizhou Central Branch,45 the disease of systemic lupus erythematosus was covered as a kind of critical illness in the policy, but there was a clause interpreting this disease as being systemic lupus erythematosus with reduced renal function. The insured was diagnosed with the disease of systemic lupus erythematosus, but no reduced renal function was found. He claimed that the clause in the policy was not effective because the insurer did not clearly explain the clause to him at the time of the contract. The insurer rejected his claim because his disease did not meet the interpretation of systemic lupus erythematosus. The court held that the clause interpreting the disease of systemic lupus erythematosus was not an exemption clause but a clause defining the scope of cover, so the insurer was not required to clearly explain the clause. However, in another case with a similar set of facts,46 the court made a different decision. It was held that the insured was diagnosed with systemic lupus erythematosus, so the insured event occurred, and the insurer was liable for paying the insurance money for this critical illness. The clause that interprets the disease of systemic lupus erythematosus as being systemic lupus erythematosus with reduced renal function is an exemption clause which limits the insurer’s liability only to severe cases of systemic lupus erythematosus with reduced renal function. The insurer failed to explain the clause to the insured when the contract was entered into, so the exemption clause was ineffective. 9.3.4 Circumstances under which the insurer’s duty of clear explanation may be excepted or mitigated As mentioned above, the insurer’s duty to make clear explanations of statutory exemption clauses may be excepted or alleviated. In this section, other circumstances under which the insurer’s duty may be excepted or mitigated are considered.

44  This case was cited in the book by X. M. Xi, Understanding and Application of the Provisions in Relation to Insurance Contracts of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 236. 45 This case was decided by the People’s Court, Jiaojiang District, Taizhou City, Zhejiang province, Civil Court Judgment (2012) No. 2246, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2013) vol. 5, p. 79. 46  Mr Nie v The Insurance Company; this case was decided by the Intermediate People’s Court, Huizhou City, Guangdong Province, Civil Court Judgment (2009) No. 168, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2010) vol. 2, p. 66.

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(a) Circumstances as prohibited by laws and regulations A personal accident insurance policy usually includes a clause which states, “the insurer is not liable for paying insurance moneys for death and injuries where the insured drives without a valid driving licence or after being intoxicated by alcohol.”47 A motor insurance policy usually also has a similar clause.48 This kind of insurance clause represents circumstances which are prohibited by laws or regulations. For example, the Road Traffic Safety Law prohibits driving after being intoxicated by alcohol.49 Whether or not this kind of exemption clause must be clearly explained is an issue for argument. Judicial decisions vary on this issue. In Mr Liang v The Insurance Company,50 the insured effected a comprehensive accident policy. He drove a minibus after drinking alcohol and was killed in a road accident. The insurer rejected the claim on the ground that the insured was drunk and drove without a valid driving licence to drive a bus. The court held that the insurer did not explain the exemption clause to the insured at the time of contract, so the clause was invalid. The insurer was liable for paying the beneficiaries the insurance moneys. A different decision was made in Mr Ge v The Insurance Company;51 there, the insured was killed in a road accident. The traffic police found that the insured was intoxicated by alcohol and drove a vehicle without a registration board. The insurer refused the claim under the accident insurance policy by reason of an exemption clause which excluded the insurer’s liability where the insured drives after drinking alcohol. The court held that at the time of concluding the contract, the insurer gave the insured a summary note of the policy which contained the exemption clause. The clause was in plain language and easy to understand. It was also presented in bold words which sufficiently attracted the insured’s notice to this clause. Moreover, driving after drinking alcohol is prohibited by law and the general public is aware of and accepts this rule. The insurer was not required to make further explanation of this exemption clause to the insured. There are three different views on the question of whether or not exemption clauses representing circumstances which are prohibited by laws or regulations must be clearly explained.52 The first view is that driving without a valid licence or after being intoxicated by alcohol is a serious legal offence. It is even a crime. Even if the insurer does not make notes to the exemption clause and does not clearly explain it, the insured cannot claim that the clause is ineffective because of the insurer’s

47 For example, see Ping An Insurance Company personal Accident Insurance Policy, clause 7, accessed in October 2015. 48  See Ping An Insurance Company Motor Insurance Policy (2014 version), clause 8. 49 The Road Traffic Safety Law of the People’s Republic of China was enacted by the NPC on 28 October 2003, and came into force as of 1 May 2004, art. 22. 50  This case was decided by the Intermediate People’s Court, Zhengzhou City, Henan Province, Civil Court Judgment (2009) No. 562, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2010) vol. 2, p. 63. 51 This case was decided by the Intermediate People’s Court, Hangzhou City, Zhejing, Civil Court Judgment (2010) No. 2358, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2011) vol. 3, p. 80. 52  X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 248.

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failure to clearly explain it.53 In contrast to the first view, the second view is that the insurer’s duty of clear explanation for this kind of exemption clause should not be mitigated, because art. 17(2) of the Insurance Law requires the insurer to make clear explanation of all clauses which exempt the insurer’s liability. So the exemption clauses representing circumstances which are prohibited by laws or regulations should be included in the scope of exemption clauses as provided in art. 17(2) and therefore must be clearly explained.54 The third view meets in the middle of the first and the second views, and holds that any offence of laws or regulations which prohibit certain acts should be dealt with by related administrative or criminal punishments, but does not necessarily affect rights and obligations in the civil law of contracts, and cannot directly result in the legal effect of exemption of the insurer’s liability. Therefore, for the contractual exemption clauses in the insurance policies which represent circumstances which are prohibited by laws or regulations, the insurer should still be required to make reference to the clauses to draw the insured’s attention, but the duty of making clear explanations of the clauses may be mitigated. Using driving after drinking alcohol as an example, although all insureds are aware of the meaning of driving after drinking alcohol and the legal consequence of so doing, they may not know the consequence that an insurer will not pay for any loss arising from such an offence. It can be said that total exclusion of the insurer’s duty to explain the exemption clause for the insured’s offence of driving after drinking alcohol is not in accordance with art. 17(2) of the Insurance Law, and is also not helpful for reducing such offences. In view of the relatively more attention the insured may pay to the exemption clause of driving after drinking alcohol than to other kinds of exemption clauses, the insurer’s duty to explain the exemption clause may not be excluded but mitigated. The third view has been adopted by the SPC. Article 10 of the SPC Interpretation II provides that where the insurer takes the circumstances which are prohibited by laws or regulations55 as the cause of exemption in the exemption clauses of the insurance contract and makes notes to such clauses to draw the insured’s attention to the clauses, the insured, the life insured or the beneficiary claims that such clauses are ineffective on the ground that the insurer has not performed the obligation of clear explanation of the clauses, the People’s Courts shall not uphold such claims. In short, the current law position is that insurers are not required to clearly explain such exemption clauses that represent the circumstances prohibited by laws or regulations, but are required to make reference to the clauses. Now that an insurer is required only to make reference to attract the insured’s attention to the contractual exemption clauses which take the circumstances prohibited by laws or regulations (such as not to drive after drinking alcohol) as the cause of exemption, it is important to correctly identify such circumstances as prohibited

53  L. Y. Xu, “The insurer’s duty of clear explanation of exemption clauses” (2010) 23 People’s Justice 47. 54  X. F. Tang and Zhen Liu, “Twenty difficult issues in trials relating to effectiveness of exclusion clauses in insurance contracts” (2010) 15 People’s Justice 33. 55  Here laws and regulations refer to those enacted by the NPC and the State Council; see X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 253.

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by laws or regulations. In order to prevent inappropriately broadening the scope of the circumstances as prohibited by laws and regulations, it is suggested by the SPC that only circumstances as prohibited by the laws enacted by the National People’s Congress or by the regulations enacted by the State Council can fall into the scope of circumstances as provided in art. 10 of the SPC Interpretation II.56 Exemption clauses representing circumstances as prohibited by laws or regulations (such as not to drive after drinking alcohol) are different from the statutory exemption clauses (for instance, the insurer is not liable for paying insurance money where the life insured intentionally causes the insured event to happen). As mentioned earlier, statutory exemption clauses refer to those clauses in insurance policies which represent the circumstances for which the Insurance Law clearly stipulates that the insurer is not liable for making indemnity payments or paying insurance benefits if the insured is in breach of his/her statutory duties. For example, where there is a material increase of risk to the subject matter of insurance during the insurance period, the insured is obliged to notify the insurer of such increase of risk. If the insured fails to do so, the insurer will not be liable for indemnity in the case of the occurrence of an insured event which is caused by the material increase in risk.57 So for statutory exemption clauses, even if the insurer has not clearly explained such clauses, the insurer may still refuse liability by invoking the relevant rules of law directly. (b) The insured has effected the same kind of policy more than once Where the insured has effected the same kind of policy more than once with the same insurer or where the insured wishes to renew the same policy, and the insurer clearly explained the exemption clauses to the insured at the first time of concluding the insurance contract, it is important to consider whether or not the insurer’s duty to clearly explain the exemption clauses would be mitigated or excepted, but there is no clear answer to this question. Three different approaches to this question by courts can be found. First, if the insurer has clearly explained the exemption clauses to the insured at the first time of concluding the insurance contract, it is deemed that the insured knows the content of the exemption clauses, and the insurer should not be required to clearly explain the same exemption clauses in the second contract or at the time of renewal of the policy. The HPC of Guangdong Province takes this approach and provides a guiding rule which states that “where the insured has effected the insurance policy on the same subject matter, for the same risks and with the same insurer for more than one time, and there is evidence that the insurer clearly explained the exemption clauses to the insured at the first time of concluding the insurance contract, the People’s Courts will not uphold the insured’s claim that the exemption clauses are ineffective on the ground that the insurer did not clearly explain the exemption clauses at the time of concluding this contract.”58 This approach is

56 Ibid. 57  The Insurance Law, art. 52(2). 58 The Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of HPC of Guangdong Province 2005), art. 9(3).

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illustrated in the case of Zhou v China Life Insurance Company Ltd Yizheng Branch.59 There, Mr Zhou effected a life policy on his son’s life in 2006 and renewed the policy in 2007, and a one-year medical insurance policy in September 2008. During the insurance period, the life insured visited hospitals several times for treatment of malignant cell tumours. The insurer paid him the medical costs incurred during the period. In September 2009, the medical insurance policy was renewed. The life insured died of the cell tumours in January 2010. The insurer refused to pay the medical cost by reason of an exemption clause in the medical insurance policy which stated that “the insurer is not liable to pay insurance moneys for medical treatments, death or injuries which are caused by disease that was not cured before entering into this contract.” Evidence shows that at the time of making the first insurance payment for medical costs in 2008, the insurer clearly explained the exemption clause to the insured and the insured agreed to be bound by this exemption clause. The court held that the exemption clause was effective and the insurer was not liable for the claim. Where the same insured effected the same kind of policies with the same insurer two or more times, if the insurer can prove that it ever clearly explained the exemption clause to the insured for the first contract, it is deemed that the insurer has performed the duty of clear explanation of the exemption clause for the subsequent contracts. Second, although the insurer clearly explained the exemption clauses to the insured for the first contract, this explanation is valid only for that contract. For any subsequent contract, the insurer is still required to clearly explain the exemption clauses to the same insured. This is the approach taken by the HPC of Fujian Province. It is provided in its Guidance that when the insured effects a policy with one branch of the insurance company, the insurer’s duty to clearly explain the exemption clauses cannot be mitigated or excluded where the same insured previously effected the same kind of contracts with another branch of the insurance company. At the time of renewal of an insurance contract, the insurer’s duty to clearly explain the exemption clauses cannot be mitigated or excluded even if the insured effected the same kind of contract with the insurer in the past.60 Third, the insurer’s duty to clearly explain the exemption clause may be mitigated but cannot be totally excluded. The HPC of Beijing city takes this approach. It provides that “where the insurer effects the same kind of insurance contracts with the same insured for two or more times, the insurer’s duty of clear explanation of the exemption clause can be alleviated but the insurer shall still comply with the duty of clear explanation as stipulated by the Insurance Law.”61 Though the SPC considered this question in the process of preparing the SPC Interpretation II and suggested that if the same insured effects the same kind of policies with the same insurer for two or more times, the exemption clauses are

59 This case was decided by the Intermediate People’s Court, Yangzhou City, Jiangsu Province, Civil Court Judgment (2010) No. 0046 ( accessed in October 2015). 60 The Guidance of Fujian Province High People’s Court (the Second Civil Court) Concerning Questions of How to Deal with Insurance Disputes (hereinafter, the Guidance of Fujian Province HPC), art. 19. 61  The Guidance of Beijing City HPC 2004, art. 3.

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the same and the insurer can show evidence that the exemption clauses have been clearly explained previously, the People’s Courts shall not support the insured claim that the exemption clauses in the current contract are not effective. But, after consultation, the SPC decided not to include this suggestion in Interpretation II.62 (c) The exemption clauses which reiterate that certain risks are not covered In standard form contracts, the insurers often reiterate that certain risks are not covered using exemption clauses. Although these kinds of clauses are labelled as exemption clauses, they are in fact not real exemption clauses. For example, in an accident insurance policy, there is usually a clause which sets forth clearly that the insurer is liable for paying insurance benefits for the insured’s injuries or death caused by accidents only. In the section of “exclusions of liability” of the policy, there is often an exemption clause which reads, “the insurer is not liable for paying insurance benefit where the injuries or death are caused by the insured’s disease.” Disease is not the risk covered. Even if there is no such a clause to reiterate that injuries or death caused by disease are not covered, the insurer is still not liable for any injury or death caused by disease, as the policy is to cover accidents only. For this kind of exemption clause, it would be sufficient for the insurer to make reference to the clause to attract the insured’s attention. The insurer’s duty of making clear explanations of the clauses should be excluded. (d) Other circumstances under which the insurer’s duty may be mitigated or excluded Sometimes an insurance agent may effect a policy as the insured. This can often be found in life insurance. An insurance agent is usually paid by his insurer a basic salary plus commission fees. In order to meet the task of selling a certain number of policies for the sake of a higher commission fee, an insurance agent sometimes effects a policy on his own life. In this situation, the insurance agent should understand the exemption clauses; there is no point in him explaining the exemption clauses to himself. In Mr Xu v Xinhua Life Insurance Company Ltd,63 Mr Xu worked as an insurance agent and bought a life policy with accident cover for himself. There was an exemption clause in the policy which read, “the insurer is not liable for paying insurance benefit for death or injuries where the insured drives a vehicle after being intoxicated by alcohol, or without a valid driving licence, or without a valid road licence for the vehicle.” The insured was killed in a road accident when he drove a motorcycle without a valid driving licence, and the vehicle had no valid road licence. The insurer refused the claim by reason of the exemption clause. The court held that as an agent of the insurer, Mr Xu (the insured) should have known and understood the exemption clauses in the policy. The insurer was deemed to have performed the duty of clear explanation of the exemption clause to him.

62  X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 254. 63 See the People’s Court, Fengtai District, Beijing City, Civil Court Judgment (2010) No. 0046 ( accessed in October 2015).

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9.3.5 The person to whom the insurer should explain According to art. 17 of the Insurance Law, it is to the proposer (the insured), not to the life insured or the beneficiaries, that the insurer should clearly explain the clauses which exempt the insurer’s liability. The HPC of Shandong Province provides: “It is to the proposer that the insurer performs the duty of clear explanation. Where the proposer, the life insured or the beneficiary is not the same person, the People’s Courts shall not uphold the claim of the life insured or the beneficiary that the insurer did not perform the duty of clear explanation to him/her.”64 Since the duty of clear explanation must be performed to the proposer, it must be determined who the proposer is. It is not difficult to determine who the proposer is in traditional insurance transactions, but in electronic transactions of insurance, particularly for the transaction of a self-service insurance card, the question of who is the proposer is not an easy one. For group insurance, art. 17 of the Insurance Law is silent on the question of whether the duty of clear explanation must be performed to the proposer only, or to the individuals in the group covered by the policy. These questions are considered below. (a) In the transaction of a self-service insurance card The so-called “self-service insurance card” is a self-help transaction; the purchaser of the card or the card-holder65 needs to complete the online transaction himself. In this kind of insurance transaction,66 it is important to identify who the proposer is because the explanation of exemption clauses must be made to the proposer. A person who has purchased the card may activate the card on the insurer’s website. Sometimes the purchaser of the card may give it as a gift to a friend or a family member. The person who receives the card may activate that card. The person who activates the card should be the proposer, as he is the person who enters into an insurance contract with the insurer online.67 The policy terms and the exclusion clauses can only be read online by the person who activates the card during the process of activating the card, and in this way the insurer explains the exemption clauses to the proposer. The way of performing the duty of explanation in electronic transactions of insurance business will be considered soon. (b) In group insurance Group insurance is a type of insurance in which a single contract covers an entire group of people. Typically, an employer or an entity such as a labour organisation effects a group insurance contract which covers the employees or members of the entity. In most cases, the cost of group coverage is far less than what the employees would pay for a similar amount of individual protection.

64  The Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of Shandong Province HPC 2011), art. 10. 65  Here the card-holder refers to the person who receives a “self-service insurance card” from the purchaser of the card as a gift. The card-holder has the right to activate the card on the insurer’s website. 66  For more, see Chapter 4, “Formation of an insurance contract” and Z. Jing, “Electronic Transaction of Insurance Business – ‘Self-Service Insurance Card’ in China” [2014] 127 BILAJ 164. 67  The Insurance Law, art. 10.

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Usually, the premium is paid by the employer or the entity; in this situation, the employer or the entity is the proposer or policyholder of the group policy. If the insurer has clearly explained the exemption clauses to the proposer, then the insurer is deemed to have performed the duty of explanation. Sometimes, although the group contract is entered into by the employer or the head of the entity, he is not the person who pays the premium. The persons who pay the premium are the employees or the members of the entity. In this case, the employer or the head of the entity is only a nominal proposer and acts as the agent of the employees or the members of the entity. Whether the insurer is only obliged to clearly explain the exemption clauses to the nominal proposer or to the real proposer (the employees or the members of the entity) should be determined by the relevant law of agency. Generally, although the real proposer pays the premium, he is not the party who enters into the contract with the insurer, so the insurer is not obliged to explain the exemption clause to the real proposer. In China Life Insurance Company Ltd v Chen Jinmei,68 Mr Wang’s employer effected a group accident policy for his 38 employees, and the premium was paid by the employer using part of the salary from each employees. The employer was a nominal proposer and acted as the agent of the real proposer (the employee). An exemption clause in the policy stated that “the insurer is not liable for paying insurance benefit for death or injuries where the insured drives a vehicle after being intoxicated by alcohol, or without a valid driving licence, or without a valid road licence for the vehicle.” Mr Wang drove a vehicle without a valid driving licence and was killed in a road accident. Mr Wang’s wife claimed for insurance payments but was rejected by the insurer because of the exemption clause. The court held that the insurer had the duty to explain clearly the exemption clause to the nominal proposer, but failed to do so. The exemption clause was thus ineffective. There is an exception to this general rule according to art. 402 of the Contract Law 1999, which provides: “where the mandatary concludes a contract with a third party in his own name and within the scope of the authority granted by the mandator and where, at the time the contract is concluded, the third party is aware of the agency relationship between the mandatary and mandator, the contract directly binds the mandator and the third party, unless there is clear evidence that the said contract binds only the mandatary and the third party.” In the context of insurance, if the insurer is aware of the agency relationship between the nominal proposer (the mandatary) and the real proposer (the mandator), the insurance contract should directly bind the insurer and the real proposer. In this case, the insurer should clearly explain the exemption clauses to the real proposer. There is a special case for group accident and health insurance for school students. This kind of insurance used to be treated as a group insurance. In some provinces and cities, this kind of insurance is now prohibited from taking the form of a group insurance, and should take the form of individual insurance for each student. For example, the CIRC Beijing Office published a regulation in 2003 which prohibits

68  See the Intermediate People’s Court, Sanya City, Hainan Province, Civil Court Judgment (2007) No. 8.

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schools from effecting group accident and health insurance for their students.69 The HPC of Jiangsu Province provides: “the insurance of accidents and health of school students is not a group insurance. The insurer is required to clearly explain the exemption clauses to each individual student.”70 (c) In the situation of assignment of insurance policies Insurance policies can be transferred to another person. When the property is sold to another person, the insurance policy can also be assigned to the person who has purchased the property. A life policy can be assigned to another person.71 Article 49 of the Insurance Law provides that where the insured subject matter is transferred, the transferee of the insured subject matter shall assume the rights and obligations of the insured, and the insured or the transferee shall notify the insurer of such transfer of the policy in a timely manner. The assignment of the policies is in fact a change of policyholder without change of subject matter (the property or the life insured) and the insurer. Under these circumstances, is the insurer required to explain the exemption clause to the new policyholder (the transferee)? The Insurance Law does not provide a clear answer to this question. It can be argued that the insurer should be obliged to explain the exemption clauses to the new policyholder. A judicial decision supports this argument. In Mr Ju v The Insurance Company,72 the owner of a car sold the car to Mr Ju, and transferred the motor insurance policy to Mr Ju (the new policyholder) at the same time. The original policyholder, the new policyholder and the insurer agreed to the transfer of the insurance policy. Mr Ju’s wife drove the car and injured a third party. Mr Ju claimed for the medical cost of ¥28,832 for the treatment of the third party’s injury, but the insurer agreed to pay only part of this amount, with the deduction of a certain amount from the total cost on the basis of an exemption clause which stated that the insurer was liable to pay the medical expenses within the limit of the amount specified in the policy in accordance with the state’s basic medical insurance standards. The court held that the insurer did not clearly explain the exemption clause to Mr Ju, thus the clause was ineffective. The insurer was liable for paying the full amount of the medical cost. 9.3.6 The way of performing the duties (a) Insurer’s duty to make reference to the exemption clauses The 1995 and 2002 versions of the Insurance Law required the insurer to clearly explain exemption clauses to the insured but did not oblige the insurer to make reference to the exemption clause so as to attract the insured’s attention to the clauses. The 2009 version of the Insurance Law imposes a new duty on the insurer: to make reference clauses which exempt the insurer of its liabilities on the application form, 69  See the Notice concerning regulation of insurance business on accidents and health insurance for school students, Bao Jian Jing Fa [2003] No. 81. 70 The Memorandum of Jiangsu Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011, art. 7. 71  For more on assignment of a life policy, see Zhen Jing, “Insurable interest in life insurance: A Chinese perspective” (2013) JBL 337. 72  This case was decided by the People’s Court, Xuanwu District, Nanjing City, and was cited in the book One Hundred Selected Insurance Cases, edited by Xian Xie (Law Press China 2012) p. 79.

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the insurance policy or other certificate that are so conspicuous as to draw the proposer’s attention, in addition to making specific and clear explanations of the exemption clauses to the proposer orally or in writing.73 In judicial practice, it was disputed whether the duty of making reference to the exemptions clauses is an independent duty. For example, in the case of the Transport Company v The Insurance Company,74 the insurer did not make reference to the exemption clauses, which stated that the insurer was not liable for losses caused by overloading the vehicle, and if the insured modified the vehicle and the risk was materially increased by the modification, the insured must have notified the insurer of the increase of risk; otherwise the insurer was not liable for the loss caused by the increased risk. The insured signed the declaration at the end of the proposal form which read, “the insurer has clearly explained to me the terms of the contract (including exemption clauses). I have fully understood the terms of the contract.” A road accident occurred due to overloading of the vehicle which was modified by the insured in order to carry more cargo. The insurer refused the claim on the ground that the vehicle was designed for a maximum carrying capacity of 15.3 tons of cargo, but the insured modified the vehicle and carried 52 tons of sand. The insured breached the terms of the contract. The trial court held that the insurer failed to perform the duty of making reference to the exemption clauses, thus the clauses were ineffective. The appeal court reversed the trial court’s decision by holding that the insured signed the declaration, which was proof that the insurer explained the exemption clauses. Thus the insurer was not liable for the loss. The reason for the different decisions of the two courts seems due to the different understanding of whether the duty of making reference to the exemptions clauses is an independent duty. The issue has now been settled by the SPC. Article 11(1) of the SPC Interpretation II provides: “Where the insurer has used words, font, symbol or other conspicuous marks that are sufficient to bring the attention of the insured to the clauses as set forth in the insurance contract to exempt the liability of the insurer on the application form or policy or other insurance certificates when concluding the insurance contract, the court shall determine that the insurer has performed the duty of making reference to the exemption clauses as set forth in para. 2, art. 17 of the Insurance Law.” It is now clear that making reference to the exemption clause is an independent duty and must be performed by the insurer. In practice, two ways are adopted for making reference to the exemption clauses. First, the insurers can use words in bold or in different colours, different fonts, symbols or other conspicuous marks that are sufficient to bring the attention of the insured to the clauses. Second, the insurer can put all exemption clauses together in a separate document and distribute the document to the proposer at the time of the contract. The SPC adopts the first way for the following reasons.75 (1) The purpose of the duty of making conspicuous reference to the exemption clauses is to draw the insureds’ attention to the exemption clauses, thus giving the insureds an opportunity to read

73  The Insurance Law, art. 17. 74 This case was cited in the book Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China, edited by X. M. Xi (People’s Court Press 2014) p. 257. 75  See X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 274.

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and understand the clauses and also make it easier for the insurers to explain the clauses to the insureds. (2) Article 17(2) of the Insurance Law requires the insurers to make notes on clauses which exempt the insurer of its liabilities on the application form, the insurance policy or other certificate that are so conspicuous as to draw the proposer’s attention. The insurers can be deemed to have performed the duty of making notes to the exemption clauses as long as they draw the attention of the insureds to the clauses using different colours or different font size for the words of exemption clauses. (3) It would cost more for the exemption clauses to be printed in a separate document, so adopting this way is not recommended. (4) In judicial practice, most courts support the first way of making reference to the exemption clauses. In addition to making reference, the insurer is also obliged to make specific and clear explanations of the exemption clauses to the insured orally or in writing.76 (b) The way of making clear explanations of the exemption clauses The insurers may perform the duty of clearly explaining exemption clauses either orally or in writing. When an insurer or his agent sells a policy to a proposer, it must actively explain the clauses, not passively wait until being asked by the proposer. To proposers who are unable to read, the insurer cannot explain the exemption clauses in writing, but must explain them orally. The disadvantage of oral explanation is that when a dispute occurs, it is difficult for the insurer to prove that the duty of explanation was performed. If a written form of explanation is used, the insurer is still required to answer the insured’s questions about the exemption clauses, until the insured fully understands them. In addition to the oral or written forms of explanation, insurers can also use other forms of explanation, such as email or online conversation, etc. Article 11(2) of the SPC Interpretation II provides that “where the insurer makes an explanation and statement to the proposer on the concept, the content and the legal consequence of the clauses exempting the liability of the insurer in the insurance contract in writing or orally, which is understandable to a normal person, the court shall determine that the insurer has performed the explicit obligations on explanation as provided for in para. 2, art. 17 of the Insurance Law.” Accordingly, an insurer is deemed to have performed the duty of explanation if it has clearly explained to the proposer the concept, the content and the legal consequences of the exemption clauses prior to the conclusion of the contract. (c) The way of performing the duties for online sales of insurance policies Like other online transactions, online insurance business transactions are a kind of transaction for which the whole procedure of forming an insurance contract is completed through the Internet. The application for insurance by the proposer, the examination of the application and the acceptance by the insurer, the payment of the premium and the issue of the policy are all carried out online. Under this form of transaction, the insurer advertises its insurance products on its website to invite people to make an offer. If a person, after visiting the insurer’s website, is interested in an insurance product, he can make an online application by

76  The Insurance Law, art. 17.

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filling in an e-proposal form following the procedure designed by the insurer and submitting it online.77 If the insurer, upon examining the proposal, agrees to accept the application, it will request the proposer to pay the premium. The insured pays the premium online by providing the insurer with his bank details so that the premium can be transferred from the insured’s account to the insurer’s account. After having received the premium, the insurer will issue an e-policy to the insured.78 The contract is then concluded at the same time. The insurer begins to undertake risks in accordance with the agreements specified in the contract.79 The insurers can perform the duty of explanation through the online procedures by following the requirements as provided in art. 11(1) of the SPC Interpretation II, i.e. using words, fonts, symbols or other conspicuous marks that are sufficient to bring the attention of the insured to the exemption clauses. The insured who applies for insurance online must follow the online instructions to go through the application procedure. In practice, some insurers design the online procedure in such a way that when the insured puts the relevant information into the application form and then clicks the button of “next step,” instead of the appearance of the standard form contract, the webpage of declaration by the insured appears on the screen, which states: “(i) I accept the method of online application and wish to conclude the contract in this way; (ii) I have read the instructions for application online and also the terms of the contract, and understood and agreed with the all terms of the contract, including the exemption clauses.” If the insured clicks the button “agreed,” the next step of the application will appear on the screen. If the insured wishes to read the terms of the contract, he will need to click the button “read the terms of the contract.” It must be pointed out that this is not the right way of performing the duties of making reference to and clear explanations of exemption clauses.80 According to art. 17 of the Insurance law, the insurers must perform the duties actively rather than passively. The insured’s clicking the button “read the terms of contract” is equivalent to the insurer supplying a copy of the standard terms of contract upon being requested by the insured, which is not in agreement with the provision of art. 17 of the Insurance Law. The right way for the insurer to follow is that when the insured puts the relevant information into the application form and then clicks the button “next step,” the webpage with the terms of the contract should appear. After the insured reads the terms of the contract, the webpage of declarations can then appear for the insured to sign. Some other insurers follow this correct method as mentioned above, but do not make reference to the exemption clause by using words, fonts, symbols or other conspicuous marks that are sufficient to bring the attention of the insured to the

77 To avoid potential problems, the insurer should clearly set out the procedure to be followed for a binding insurance contract to come into existence so that customers have clear knowledge that the contract will not be concluded until that procedure is completed. 78  In the e-proposal form, the proposer is required to put his/her email address so that the e-policy can be sent to him/her through email. If no email address is provided, the policy will be sent to the proposer’s home address if required by the proposer. 79  Tian Yin and Zili Ren, Insurance Law Review (Law Press China 2012) p. 272. 80  See X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 296.

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exemption clauses on the webpage, so they cannot be deemed to have performed the duty of making reference to the exemption clauses, thus the clauses are ineffective. (d) The method of performing the duties for telephone sales of insurance policies By examining webpages and the steps of the online application, it is relatively easy to determine whether or not the insurer has performed the duties of making reference to and clear explanations of the exemption clauses in online sales of insurance policies. However, it is relatively difficult to prove that the insurer has complied with the obligation in telephone sales of insurance policies, as the contract is concluded through the telephone and there is no paper copy of the contract before the insurer issues the policy. In Mr Wang v The Life Insurance Company,81 the insured effected an accident insurance policy on the telephone. The agent of the insurer gave his name and telephone numbers to the insured and asked the insured to contact him if the insured did not receive the insurance policy within three weeks, and also asked the insured to read the terms of the contract carefully when he received the policy. The insured said “yes, I will do.” When the policy was delivered by post to the insured, he signed the receipt of the policy on which there was a declaration: “I have received the insurance policy and the receipt of the payment of premium. I have checked the information in the policy and there is no error. I can confirm the validity of the contract. I have read the terms of the contract on the back of the policy. You have already explained and interpreted to me the exemption clauses and I have understood them and agreed to follow them.” One of the exemption clauses stated that the insurer was not liable if the insured drove after drinking alcohol. The insured drove after drinking alcohol and was killed in a road accident. The focus of argument in this case was whether the insurer explained the exemption clause to the insured. The court held that in accordance with the provision in art. 17 of the Insurance Law, the insurer’s performance of the duty of clear explanation must meet three requirements: (1) the insurer has supplied the insured with a copy of the standard terms of the contract; (2) the insured has made reference to the exemption clauses to draw the attention of the insured; and (3) the insurer has clearly explained to the insured the content of the exemption clauses. Evidence showed that (1) a copy of the standard form of contract was given to the insured; and (2) the insurer used bold and larger-sized words for the exemption clauses, so the insurer performed the duty of making reference to the exemption clauses. As to the question of whether the insurer clearly explained the exemption clauses to the insured, the court expressed the view that there is no uniform model for performing the duty. It can be done orally or in writing. The insurer must perform the duty actively, and also answer the insured’s questions about the clauses. The extent of clear explanation can be judged on the basis of the clearness of the languages, public awareness of the relevant concept of the cause of exemption or the ability of the insured to understand the clauses. In the present

81 This case was decided by the People’s Court, Jiang Gan District, Hangzhou City, Zhejiang, Civil Court Judgment (2010) No. 1594, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2011) vol. 3, p. 103.

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case, the exemption was concerned with the concept of drinking and driving. The exemption clause was phrased clearly in plain language. An ordinary person could easily understand the clause. The insured was a manager of a sale department in a company, he was literate and had no trouble in understanding the clause. The insured signed the declaration on the receipt of the policy and confirmed that the insurer explained the exemption clauses. The record of the telephone conversation also showed that the insurer explained to the insured the exemption clause. The court eventually made the judgment that the insurer performed the duty of clear explanation and the exemption clause was effective. The current legal position with regard to the issue of explanation of exemption clauses for online or telephone sales of insurance policies is provided in art. 12 of the SPC Interpretation II, which states: “For insurance contracts concluded through Internet, telephone or other similar ways, where the insurer has made reference to and clearly explained the exemption clauses by webpage, audio or video or other similar ways, the People’s Courts can determine that the insurer has performed his duties.” 9.3.7 Reasonable insured test The Insurance Law requires the insurer to explain the terms of the contract to the insured at the time of the contract where a standard form of contract is used for conclusion of the contract.82 For the exemption clauses in the contract, the extent of the insurer’s explanation must go further so as to meet the requirement of “clear explanation.”83 The question here is to what extent the insurer’s explanation can be regarded as “clear explanation.” The purpose of explanation is to facilitate the insured’s understanding of the terms of contract. Clear explanation of the exemption clauses is to explain, using plain language, the complex exemption clauses so clearly that the insured can easily understand the concept, the content and the legal effect of the clauses. There are two different views in respect of the test of clear explanation. The first is the objective test of a reasonable insured, by which the insurer’s explanation must reach the extent that a reasonable insured can understand the meaning of the exemption clauses. The second is the subjective test of the actual insured, by which the extent of the insurer’s explanation must satisfy the standard that the actual insured can understand the meaning of the exemption clauses.84 The SPC takes the reasonable insured test as an appropriate test for the insurer’s performance of the duty of making clear explanations of the exemption clauses, by providing that where the insurer makes explanation to the insured on the concept, the content and the legal consequence of the clauses exempting the insurer’s liability, which is understandable to a normal person, the court shall determine that the insurer has performed the obligation of clear explanation.85 After the insurer’s explanation, a reasonable person in the circumstances should be expected to understand

82  Insurance Law, art. 17(1). 83  Ibid, art. 17(2). 84  See X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 277. 85  Interpretation II, art. 11(2).

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the meaning of the exemption clauses. At the same time, particular attention should be paid to persons who are illiterate, blind or have a lower ability than a normal insured in understanding the clauses. It is then suggested that a mixed objective (the reasonable insured test) and subjective (the actual insured test) test, but with the objective test as the major test, would be more appropriate, for the following considerations.86 First, it is possible that a moral hazard may occur if the subjective test is used to test the insurer’s performance of the duty of making clear explanations of the exemption clauses. Each individual insured may have different education, knowledge, experience and ability in understanding things. Each insured may have a different understanding of an exemption clause. Even if the insurer clearly explained the exemption clause to the insured, the insured may deny the insurer’s performance of the explanation in order to claim invalidity of the clause, thus inducing a moral hazard. Second, it would be a big burden for the insurer to ensure the actual insured could fully understand the meaning of the exemption clauses. Once a dispute arises, the actual insured could claim that the insurer did not give a clear explanation of the exemption clauses to him. Thus the insurer would fall into a battle he could never win. Third, if the burden on the insurer to make clear explanations is too heavy, the cost of performing the duty would exceed the cost of not complying with the duty, and the insurer would then not be encouraged to perform the duty of clear explanation. This would not be in line with the legitimate purpose of requiring the insurer to make clear explanation of the exemption clauses. Fourth, the heavy burden on the insurers would not be beneficial to the development of the insurance market. Safeguarding insureds’ interests should not be at the cost of increasing the running costs of the insurance products. The higher the threshold for the test of the insurer’s explanation, the more it would cost. The increased costs would eventually be borne by the insureds. Fifth, the reasonable insured test takes a reasonable person in similar circumstances as an objective standard to judge whether or not the insurer’s explanation is sufficiently clear for him to understand. This is relatively easy to operate in practice and can reduce disputes in respect of the effectiveness of the exemption clauses. This reasonable insured test should have regard to the class of persons who would ordinarily be expected to apply for insurance cover of that kind, and who would have similar education, knowledge, experience and ability to understand things. Finally, applying the reasonable insured test should take into account the circumstances of the actual insured. If the actual insured is illiterate, blind, or his understanding ability is lower than the ordinary person, the insurer should make more effort to explain the exemption clause to him. Thus a mixed objective (the reasonable insured) and subjective (the actual insured) test, but with the objective test as the major test, would be more appropriate for making a judgement on whether or not the insurer has performed his duty of clear explanation of the exemption clauses.

86  See X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 277.

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9.3.8 The consequence of failure to perform the duty of clear explanation (a) The consequence The consequence of the insurer’s failure to perform its duty of clear explanation of the exemption clauses is that the exemption clauses shall not be effective.87 More accurately, the phrase “the exemption clauses shall not take effect” means that the exemption clauses are not incorporated into the contract, and therefore not binding on the parties. In judicial practice, courts usually examine three requirements of the duty of explanation in order to determine whether the insurer has performed the duty: (1) the insurer has supplied the insured with a copy of the standard terms of the contract; (2) the insurer has made reference to the exemption clauses in the standard terms of the contract or other insurance documents to draw the attention of the insured; and (3) the insurer has clearly explained to the insured the content of the exemption clauses prior to the conclusion of the contract. If any of the three requirements is not met, the court shall determine that the insurer has failed to perform the duty of explanation, thus the exemption clauses shall not be effective. In Mr EnWu v The Property Insurance Company Beijing Branch,88 the insured bought a new car, but had not yet registered the car with the local traffic administration department. The car was damaged in a road accident. The insurer rejected Mr Wu’s claim for the cost of repairing the car by pleading the defence of an exemption clause in the contract which stated: “the insurer is not liable for indemnifying the insured where the insured vehicle does not have a valid road certificate, a valid registration board, a temporary registration board or a temporary road certificate at the time of the accident.” The court found that the insurer failed to give the insured a copy of the standard terms of the contract at the time of the contract, thus the exemption clause was ineffective. When courts determine whether an insurer has performed the duty of making reference to the exemption clauses in a standard form contract, they examine all clauses exempting the insurer’s liability, no matter where the clauses are placed in the policy, i.e. in the section “exemptions of liability” or in the section “claims handling.” If an exemption clause is placed in the section “claims handling” and the insurer does not make reference to the clause to draw the insured’s attention to the clause, the courts shall find that the insurer has failed to perform the duty of making reference to the clause, thus the exemption clause is ineffective. For instance, in Mrs Hua Yan v The Property Insurance Company Beijing Branch,89 the carrying capacity of the insured vehicle for passengers was five persons. An exemption clause in the section of “exemptions of liability” stated: “the insurer is not liable for the loss where the insured event occurs by the following causes: . . . the insured vehicle is in breach of relevant legal provision in relation to capacity of the vehicle.” The insurer made reference to this clause using bold type. Another exemption clause in the section of “claims handling” read: “if at the time of occurrence of the insured event, the insured vehicle is in breach of relevant

87  The Insurance Law, art. 17(2). 88 This case was cited in the book by J. X. Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 150. 89  Ibid, p. 155.

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legal provision in relation to capacity of the vehicle, but this breach is not the cause of the insured event, the amount of payment will reduce by 10%.” The insurer did not make reference to this clause. When a road accident occurred, the vehicle was carrying six persons (three adults and three children with the ages of 15, 12 and 3). The traffic policy found that overloading of the vehicle was not the cause of the accident. The court held that the insurer failed to make reference to the exemption clause in the section of “claims handling,” so the clause was ineffective. The insurer was liable for the full cost of repairing the vehicle. (b) The relation between art. 17 and art. 19 of the Insurance Law As discussed above, courts examine three requirements of the duty of explanation in order to determine whether the insurer has performed the duty. If the three requirements are met, the court shall determine that the insurer has performed the duty of clear explanation. Even so, whether or not the exemption clauses will be effective is still subject to the test of unfair term provision in art. 19 of the Insurance Law, which provides: “the following terms and conditions in an insurance contract concluded by adopting the standard-form contract provided by the insurer shall be invalid: (i) those that exempt the insurer of the obligations that the insurer should have borne according to law or that aggravate the obligations of the proposer and the insured; and (ii) those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law.” Where the insurer has performed the duty of clear explanation of the exemption clauses, the clauses are then deemed to have been incorporated into the contract. The exemption clauses shall be valid if they are not unfair terms under the test of art. 19 of the Insurance Law. Thus the right sequence for application of art. 17 and art. 19 of the insurance Law is that art. 17 is applied first to establish whether the exemption clauses are part of the contract (they are if explained clearly), then art. 19 is applied to establish whether the exemption clauses are unfair terms. If they are, they will be invalid, even if they have been clearly explained. (c) The insurer’s liability is not excepted even if the exemption clause is clearly explained Even if the insurer has clearly explained the exemption clauses to the insured, whether or not the exemption clauses shall be effective is also subject to construction or interpretation of the clauses. In some cases, the insurers may still be liable because the loss is not caused by the event excluded. For instance, in China Life Insurance Company Ltd Chong Qing Branch v Mr Xiang Hong,90 there was an exemption clause in the contract which stated: “where the insured drives after being intoxicated by alcohol or without a valid driving licence or drives a vehicle without a valid road licence, which causes the death of the insured, the insurer is not liable for paying insurance moneys.” The insured was killed in a road accident while driving a vehicle without a valid road licence. The traffic police found no fault on the part of the insured for the accident. It was held that the condition for the exemption clause to be

90 See the First Intermediate People’s Court, Chong Qing City, Civil Court Judgment (2009) No. 2588.

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applicable is that the breach of the clause has a causal connection to the happening of the insured event. Although the insured drove a vehicle without a valid road licence, there was no causal connection between the road accident and the insured’s driving a vehicle without a valid road licence, so the exemption clause was ineffective even if the insured had explained the clause clearly to the insured before concluding the contract. Consequently, the insured was liable for the insurance payment. 9.3.9 The onus of proof Of insurance cases tried by courts, about one-third were concerned with disputes on the issue of insurers’ duty of clear explanation of exemption clauses.91 When a dispute occurs, the insurer would claim that the duty of clear explanation had been complied with, while the insured may argue that the insurer did not explain the clauses. Whether or not an insurer has performed the duty must be proved with evidence. The SPC places the onus of proof on the insurer. Article 13(1) of the SPC Interpretation II provides that “the insurer shall bear the burden of proof for performance of the duty of clear explanation.” Generally, two forms of proof are often used by insurers or insureds, i.e. written proof and witness testimony. (a) Written proof The main form of proof is written proof. The insurers usually print a declaration at the end of proposal forms and request the insureds to sign the declaration, which states, “the insurer has explained to me the clauses of the contract, and clearly explained the exemption clauses. I have read and understood the terms of the contract and the exemption clauses, and agreed to comply with the terms of the contract.” The insurer uses this declaration as written proof of its performance of the duty of clear explanation. Most courts accepted this kind of proof unless the insured could show evidence to rebut the insurer’s proof. For instance, in Mrs Xue Juan Wang v China Pacific Life Insurance Company Ltd Quzhou Central Branch92 and China Life Insurance Company Ltd Jixi Branch v Mrs Xiuchun Shao,93 the courts found that the insured confirmed by signing the declaration in the proposal form that the insurer had performed the duty of clear explanation of the exemption clauses. However, courts do not accept the written proof by such a signed declaration that states, “I have read the terms of the contract and the exemption clauses and agreed to comply with them.” This kind of declaration can only show that the insured has read the exemption clauses, but cannot prove that the insurer has clearly explained the clauses to the insured.

91  See X. M. Xi, Understanding and Application of the Interpretation of the Insurance Law by the Supreme People’s Court of China (People’s Court Press 2014) p. 276. 92 See the Intermediate People’s Court, Quzhou City, Zhejiang Province, Civil Court Judgment (2007) No. 51 ( accessed in December 2015). 93 See the Intermediate People’s Court, Xuancheng City, Anhui Province, Civil Court Judgment (2007) No. 23 ( accessed in December 2015).

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Some insurers print a notice at the beginning of proposal forms to remind the insured to read carefully the clauses of the contract printed at the back of the proposal form, with particular attention to the exemption clauses; this kind of notice cannot be used as proof of performance of the duty of clear explanation. Some other insurers place a notice on the insurance policy, which may state, “you have a duty to read and check the clauses of the contract, and read and understand the exemption clauses.You are deemed to have agreed with all clauses of the contract if you do not inform us your disagreement within 10 days of receiving this policy.”94 According to art. 17 of the Insurance Law, an insurer is required to perform the duty of clear explanation actively. The insured’s reading of the exemption clauses cannot replace the insurer’s clear explanation of the clauses, so this kind of notice cannot be used as written proof. The HPC of Jiangsu Province sets forth a guiding rule on this point, which states: “where the insurer prints on the insurance policy that ‘the insured has a duty to read and check the insurance clauses, it is deemed that the insured has no disagreement with the clauses if you do not inform the insurer within a certain time limit.’ If the insurer uses this way of requesting the insured to read the clauses within a time limit, the People’s Court shall not uphold the insurer’s claim that he has performed the duty of clear explanation of the exemption clauses.”95 The SPC recognises the insured’s signature on the declaration on the proposal form as valid written proof of the insurer’s performance of the duty of clear explanation. Article 13(2) of the SPC Interpretation II provides: “where the proposer confirms that the insurer has performed the duty of clear explanation as required in para. 2, art. 11 of this Interpretation by means of signature or seal on relevant documents or by any other means, the insurer shall be deemed to have performed such duty, unless there is evidence proving that the insurer has not performed the duty of clear explanation.” It is up to the insured to disprove the insurer’s proof. It is not uncommon for the declaration on the proposal form that “the insurer has clearly explained the exemption clauses to me” to be signed by the insurer’s agent or some other person. This kind of signature should not be taken as the written proof. (b) Witness testimony When the written proof is insufficient, the insurer may turn to the witness testimony of its agent to prove its performance of the duty of clear explanation of the exemption clauses. Although the insured is not obliged to prove the insurer’s performance of the duty, he may sometimes use the witness testimony of the insurer’s agent to disprove the insurer’s proof. (I) THE INSURER’S PROOF BY THE WITNESS TESTIMONY OF ITS AGENT Usually, the courts do not take, by reason of conflict of interest, the witness testimony of the insurer’s agent as proof of the insurer’s performance of the duty of clear explanation. For example, in Mrs Jie Qu v China Pacific Life Insurance Company Ltd

94  For life insurance policies with an insurance period of more than one year, there is usually a clause about a cooling-off period of 10 days in the policy, which means that within 10 days from the date of receiving the insurance policy, the insured is free to cancel the contract and request repayment of the full premium paid without penalty. 95  The Memorandum of the HPC of Jiangsu Province 2011, art. 4.

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Kaifeng Central Branch,96 the trial court made an inquiry to the insurer’s agent, and the agent said that he explained clearly the exemption clause to the insured. The court accepted the agent’s testimony and held that the insurer performed the duty of clear explanation of the exemption clauses. However, the appeal court reversed the trial court’s decision and held that the agent’s testimony could not be used as proof of the insurer’s performance of the duty of clear explanation because of the conflict of interest. (II) THE INSURED’S PROOF BY THE WITNESS TESTIMONY OF THE INSURER’S AGENT In the situation where the insurer’s agents are the relatives or friends of the insureds, the agents sometimes tend to give testimony to support the insureds. The courts may or may not accept the witness testimony of the agents. In Mrs Shuying Liu v Changcheng Life Insurance Company Ltd Henan Province Branch,97 the insurer showed the written proof of the insured’s declaration on the proposal form that “the insurer has clearly explained to me the exemption clauses”; while the insured showed witness testimony of the insurer’s agent who said that he did not explain the exemption clause to the insured at the time of the contract. The court held that the written proof of the declaration was signed by the insured, so it was objective and unchangeable from the moment of signing it, while the witness testimony was subjective and arbitrary according to the agent’s wishes. By the written proof, the insurer was deemed to have performed the duty of clear explanation of the clauses. However, in another similar case decided by the same court on an earlier occasion,98 the court made a different decision. It was held that the insured signed the declaration on the proposal form that the insurer had explained clearly the exemption clauses, but the insurer’s agent said that he did not, so the insurer was deemed to have failed to perform the duty of clear explanation of the clauses. The SPC takes the view that if the insured confirms that the insurer has performed the duty of clear explanation by means of signature or seal on relevant documents or by any other means, the insurer shall be deemed to have performed such duty, unless there is evidence proving that the insurer has not performed the duty of clear explanation.99 So if the insured can show evidence to disprove the insurer’s proof, the court may take the insured’s evidence. Using the witness testimony of the insurer’s agent is one of the ways to disprove the insurer’s claim for performance of the duty of clear explanation of the exemption clauses. (c) Other forms of proof For telephone sales of insurance products, the record of conversation between the insurer and the insured can be used as evidence, so it is important for the insurer to

96  See the Intermediate People’s Court, Kaifeng City, Henan Province, Civil Court Judgment (2009) No. 185 ( accessed in December 2015). 97  See the Intermediate People’s Court, Zhengzhou City, Henan Province, Civil Court Judgment (2010) No. 331 ( accessed in December 2015). 98 See the Intermediate People’s Court, Zhengzhou City, Henan Province, Civil Court Judgment (2003) No. 375 ( accessed in December 2015). 99  Interpretation II 2013, art. 13(2).

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record the conversation for the later use of evidence to prove that he has performed the duty of clear explanation of the exemption clauses. For Internet sales of insurance policies, it can be determined through examination of the webpages and the online application procedure whether the insurer has performed the duty of clear explanation. First, before entering into the contract, the standard form contract must be supplied on online. Second, the exemption clause must be presented in bold, different-coloured or larger-sized words to draw the insured’s attention to the clauses. Third, an audio or video presentation should be used to explain the clauses. Finally, a declaration, which states, “the insurer has clearly explained the exemption clauses to me,” should be signed by the insured by clicking the button “yes.” If the insurer meets these requirements, the insurer can be deemed to have performed the duty of clear explanation of the exemption clauses. 9.4 The insurer’s duty not to mislead the insureds 9.4.1 The insurer’s misleading conduct When insurers explain the contents of the insurance contracts and clearly explain the exemption clauses to the insureds prior to conclusion of the contract, the insurers must not mislead the insureds by concealing or misrepresenting material information relevant to the insurance contract.100 However, misleading conduct in sales of insurance policies can often be observed in China’s insurance market.101 The China Insurance Regulatory Commission (CIRC)102 describes misleading conduct in sales of insurance policies as such conduct by insurers, their agents, brokers or employees in advertising and selling insurance products by way of deception, concealment of material information of the insurance products, or inducing intending insureds to purchase the insurance products using misleading information and explanations about the products, and such conduct which is in violation of relevant provisions of the Insurance Law, the State Council administrative regulations or the CIRC regulations.103 Deception here refers to false and misleading representation, and concealment means intentional non-disclosure of material information.104 Such misconduct prejudices the consumer’s interest, gives rise to distrust of insurers by the general public and seriously affects the development of the insurance industry.

100  The Insurance Law, art. 116. 101  For more, see Zhen Jing, “Misleading conduct by insurers in sales of insurance policies in China” (2016) The Company Lawyer (forthcoming). 102 The China Insurance Regulatory Commission, established on 18 November 1998, is authorised by the State Council to conduct administration, supervision and regulation of the Chinese insurance market, and to ensure that the insurance industry operates stably in compliance with law. 103  Notice of China Insurance Regulation Commission on Issuing “The Guidance on Accountability of Misleading Conduct of Life Insurance Companies in Sales of Policies,” Bao Jian Fa [2012] No. 99, art. 2. 104 The guidance for identifying misleading conduct in sales of life insurance policies, Bao Jian Fa [2012] No. 87, art. 3. In the California Insurance Code, concealment is defined as “Neglect to communicate that which a party knows, and ought to communicate” (CA Ins Code s. 330 (2014)).

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The Insurance Law prohibits insurers from practising misleading conduct105 and also provides regulatory rules for penalising the insurers for misconduct.106 The CIRC has published a series of regulatory measures in order to control the misconduct in sales of insurance policies and protect the interest of insurance consumers.107 Where an insurer commits pre-contractual (or post-contractual) misconduct, the insurer will have imposed a fine, a restriction on the scope of business or even a revocation of business licence.108 However, these remedies for the insurer’s pre-contractual misconduct are inadequate to the aggrieved insured when a loss has occurred, as the Insurance Law does not provide any private right of action to the insured to claim actual damages in the case of the insurer’s pre-contractual misconduct, such as intentional misrepresentation or non-disclosure of material facts to the insured. On the other side of the story, however, where the insured’s intentional or grossly negligent misrepresentation or non-disclosure of material facts has induced the insurer into the contract, the insurer is entitled to rescind the contract and reject claims.109 So the lack of an effective remedy available to the aggrieved insured for the insurer’s misleading conduct is a serious deficiency in the Insurance Law. In this section, we will consider insurers’ pre-contractual misleading conduct and the legal consequences for such misconduct under the Insurance Law, examine a possible private right of action available to the insureds in the case of insurers’ misleading misrepresentation and intentional concealment of material information under the Contract Law 1999,110 and put forward recommendations for effective remedies to the aggrieved insureds where the insurers’ intentional misleading misrepresentation or concealment of material information has induced the insured to enter into the contract. (a) Statutory rules for insurers’ misleading conduct Insurers are refrained by the Insurance Law from conducting fraudulent and misleading acts in the sales of insurance policies. Article 116 of the Insurance Law sets forth instances of the insurer’s pre- and post-contractual misconduct. The types of insurer’s pre-contractual misconduct are listed in art. 116(1) to (4). Some guidelines for determining such misconduct are provided by the CIRC.111 Where an insurer commits pre-contractual misconduct, the insurer will be sanctioned according to arts. 161 and 165 of the Insurance Law.

105  The Insurance Law, arts 116 and 131. 106  Ibid, arts 161 and 165. 107  Notice of China Insurance Regulatory Commission on issues concerning comprehensive control of misleading conduct in sales of life insurance policies, Bao Jian Fa [2012] No. 14. 108  Ibid, art. 161. 109  Ibid, art. 16. For more on the insured’s pre-contract duty of disclosure and remedies for breach of the duty in Chinese law, see Z. Jing, “Insured’s duty of disclosure and test of materiality in marine and non-marine insurance laws in China” (2006) JBL 681; Z. Jing and L. Zhu, “Restrictions on the insurer’s defence of non-disclosure or misrepresentation in Chinese Insurance Law” (2015) 26(2) ILJ 145; Z. Jing and M. Zhong, “Limitations on the insured’s duty of disclosure in Chinese law: a comparative analysis with English, Australian and German laws” (2015) 26(7) ICCLR 224. 110  The Contract Law of the People’s Republic of China was enacted on 15 March 1999. 111 The China Insurance Regulatory Commission, established on 18 November 1998, is authorised by the State Council to conduct administration, supervision and regulation of the Chinese insurance market, and to ensure that the insurance industry operates stably in compliance with law.

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Article 116 of the Insurance Law provides: “An insurance company and its employees shall not commit any of the following acts in the course of conducting business: (1) cheating the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts; (3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) giving or promising premium rebates or other benefits other than those provided for in the contracts to the proposers, the insureds or the beneficiaries.”

Article 131 of the Insurance Law provides a similar provision to art. 116 of the Insurance Law, which concerns the misconduct of insurance agents and insurance brokers.112 The CIRC has formulated some guidelines for determining misleading conduct in sales of life insurance policies, which is in violation of arts 116 and 131 of the Insurance Law (hereinafter, the Guidance).113 These guidelines are considered below. (b) Determination of insurers’ misleading conduct In determining whether an insurer’s pre-contractual behaviour can be identified as misconduct as specified by arts 116 and 131 of the Insurance Law, the following guidelines as specified by the CIRC can be followed: (1) Where life insurance companies, insurance agents or insurance sales staff commit one of the acts listed in arts 5 and 6 of the Guidance, the act can be determined as an act of “cheating the proposers, the insureds or the beneficiaries” as stipulated in arts 116(1) and 131(1) of the Insurance Law.114 Article 5 of the Guidance stipulates that life insurance companies, insurance agencies and insurance sales staff shall not make false propaganda about the insurance products at the sites of business networks, public places and other areas, or by using product introduction meetings, news media, company websites and other media. Article 6 of the Guidance prohibits life insurance companies, insurance agencies and insurance sales staff from committing the following kinds of deception: 112 Article 131 of the Insurance Law provides: “In handling insurance business, insurance agents and insurance brokers and their practitioners are not allowed to conduct any of the following acts in the course of conducting business: (1) cheating the insurers, the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts; (3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) giving or promising any interests other than those provided for in the contracts to the proposers, the insureds or the beneficiaries.” 113 The guidance for identifying misleading conduct in sales of life insurance policies, Bao Jian Fa [2012] No. 87. 114  Notice of China Insurance Regulation Commission on Issuing “The Guidance of identification of misleading conduct in sales of life insurance policies,” Bao Jian Fa [2012] No. 87.

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(A) exaggerating the scope of the insurance or the benefits of insurance products; (B) making false propaganda about relevant laws, regulations or policies in relation to insurance business; (C) advertising or selling insurance products under the pretext of giving gifts to the insureds, but in fact no gifts are given; (D) advertising or selling insurance products on the false grounds that the sales of the insurance products will soon be suspended, but in fact the sales of the same products are not suspended; (E) making false propaganda about the shareholders, business operations or business achievements in the past; (F) advertising or selling insurance products under the pretext of financial products, bank deposits, securities investment fund shares and other financial products; (G) selling insurance products of the particular insurance company in the name of another insurance company or financial institution, or in the name of the salesman of another insurance company or financial institution; (H) other deceptive conduct. (2) Where life insurance companies, insurance agents or insurance sales staff commit one of the acts listed in art. 7 of the Guidance, the act can be determined as an act of “concealing from the proposers material information relevant to the insurance contracts” as stipulated in arts 116(2) and 131(2) of the Insurance Law.115 Article 7 of the Guidance provides that life insurance companies, insurance agencies and insurance sales staff must not conceal the following material information relevant to the insurance contracts: (A) clauses exempting the insurer’s liability; (B) the losses which may be incurred by premature termination of life insurance contracts; (C) the expense-deducting circumstances for universal life insurance and investment-based insurance; (D) the uncertainties about the benefits of new life insurance policies; (E) duration of the life insurance policies, payment period and the consequences of not paying the premium on time; (F) the starting time for the “probation period” in a life insurance policy and the impact on the interests of the insureds;116

115 Ibid. 116  For health insurance policies, there is usually a probation clause in the policies. During the probation period, the insurer is not liable for payment of medical expenses or death of the life insured. The length of the probation period varies from 30 to 90 days from the date of conclusion of the contracts for short-term health insurance, to usually 180 days for long-term health insurance.

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(G) the starting time and duration of the “cooling-off period” in life policies, and the insured’s rights in the “cooling-off period”;117 (H) other material information. (3) Where life insurance companies, insurance agents or insurance sales staff commit any act mentioned in art. 8 of the Guidance, the act can be identified as an act of “preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation” as stipulated in arts 116(3) and 131(3) of the Insurance Law.118 Article 8 of the Guidance provides that life insurance companies, insurance agencies and insurance sales staff must not impede the insureds’ performing the duty of disclosure, and shall not induce, instigate or in other improper ways induce the insureds not to perform the duty of disclosure. (4) Where life insurance companies, insurance agents or insurance sales staff commit one of the acts listed in art. 9 of the Guidance, the sanction for the acts according to law should be based on the specific circumstances of the case and the nature of the offence.119 Article 9 of the Guidance prevents the insurers from engaging in the following misleading conduct in the sales of life insurance policies: (A) promising to pay guaranteed benefits of the insurance products for uncertain benefits of the same products; (B) inducing or instigating the insureds to terminate other insurance contracts for the purpose of purchasing the new insurance products, and damaging the legitimate rights and interests of the insureds, the lives insured or the beneficiaries; (C) making simple comparisons of dividend rate or settlement rate or other ratio indicators with bank deposit interest rates or bond interest rates or other financial product yields; (D) obstructing the insured to accept return visits, or inducing the insureds to refuse return visits or to answer questions untruthfully in return visits; (E) other misleading conduct in the sales of insurance products.

117  For life insurance policies with an insurance period of more than one year, there is usually a clause providing a cooling-off period of 10 days in the policy, which means that within 10 days from the date of receiving the insurance policy, the insured is free to cancel the contract and request repayment of the full premium paid without penalty. 118  Notice of China Insurance Regulation Commission on Issuing “The Guidance of identification of misleading conduct in sales of life insurance policies,” Bao Jian Fa [2012] No. 87. 119 Ibid.

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9.4.2 Legal consequences for insurers’ misleading conduct under the Insurance Law Articles 161 and 165 of the Insurance Law set forth rules for punishing the insurers, their agents, brokers or employees who have committed misconduct as prohibited in arts 116 and 131 of the Insurance Law. By virtue of art. 161 of the Insurance Law, where an insurance company commits any of the acts provided in art. 116 of this Law, the insurance supervision and regulation authority120 shall order it to make corrections and impose a fine of not less than ¥50,000, nor more than ¥300,000; where the circumstances are severe, the insurance supervision and regulation authority may restrict the scope of business, order the company to cease accepting new business or revoke the business licence.121 Similarly, where an insurance agent or an insurance broker commits any of the acts provided in art. 131 of the Insurance Law, the insurance supervision and regulation authority shall order it to make corrections and impose a fine of not less than ¥50,000, nor more than ¥300,000; where the circumstances are severe, the business licence shall be revoked.122 In accordance with arts 161 and 165 of the Insurance Law, the CIRC punishes insurers, insurance agents or brokers that are in breach of arts 116 and 131 of the Insurance Law. For example, the Kunlun Health Insurance Company Ltd deceived proposers in many cases. The CIRC investigated the misconduct of the insurer and found that in 25 sales (of 33 telephone sales), the insurer deceived the proposers by using untrue and misleading information for advertising its insurance products. The CIRC held that the insurer committed acts prohibited by art. 116 of the Insurance Law.123 The insurer was charged a fine of ¥200,000 under art. 161 of the Insurance Law, and the manager of the company was fined ¥20,000 under art. 171 of the Insurance Law.124 While the Insurance Law imposes penalties on the insurers, their agents and brokers for breach of arts 116 and 131 of the Insurance Law in order to deter the insurers from practising misconduct, it does not provide remedies to an aggrieved insured in the case of the insurer’s pre-contractual misconduct; in other words, there is no private right of action for the aggrieved insured to claim compensation for his loss. In the Chinese legal system, special law prevails over general law; for matters the special law does not cover, general law operates. It is therefore necessary to look for solutions in the Contract Law, which is the general law of contracts in China.

120  The CIRC. 121  The Insurance Law, art. 161. 122  Ibid, art. 165. 123  The China Insurance Regulation Commission administrative punishment decision No. 15, 2013 ( accessed in July 2015). 124 Article 171 of the Insurance Law provides: “Where an insurance company, an insurance asset management company, a professional insurance agency or an insurance broker violates the provisions of this Law, the insurance supervision and regulation authority shall, besides punishing the unit according to the provisions of art. 160 to art. 170 of this Law, give warnings to the personnel in charge and other personnel directly liable, and impose a fine of not less than ten thousand renminbi (¥10,000) nor more than one hundred thousand renminbi (¥100,000) concurrently. Where the circumstances are severe, their qualifications for holding a position or practising the profession shall be revoked.”

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9.4.3 Remedies available to the aggrieved insureds under the Contract Law (a) Pre-contractual liability In the Contract Law, the parties must observe the principle of good faith in the exercise of their rights and performance of their duties.125 It is generally agreed that when the parties enter into a negotiation, their relationship is no longer one of strangers, and they owe to each other such duties of care as are deemed applicable under the prevailing standards of conduct in the relevant community. Those duties are imposed by law and generally include those of mutual cooperation, assistance, notice, protection, care and confidentiality.126 The content and scope of those pre-contractual duties may vary, depending on the particular transaction, parties and community concerned. Where a party acts in violation of a pre-contractual duty, causing loss to the other party, the law of pre-contractual liability allows the aggrieved party to claim compensation for the loss.127 The party who has contravened its pre-contractual duties is deemed to have committed a fault or culpa in contrahendo (fault in conclusion of a contract) and shall be liable therefor.128 Pre-contractual liability is recognised by the Contract Law. Article 42 of the Contract Law spells out the general rule on pre-contractual liability, which provides: “A party shall be liable for compensation if he, in the course of concluding the contract, causes damage to the other party in one of the following situations: (1) He negotiates in bad faith under the pretext of concluding a contract; (2) He intentionally conceals a material fact relevant to the conclusion of the contract or gives false information; or (3) He engages in other acts that violate the principle of good faith.”

Article 42(1) and (2) describe two specific instances of culpa in contrahendo, while art. 42(3) is a catch-all provision which is intended to cover any other kind of pre-contractual bad faith acts. According to art. 42 of the Contract Law, to determine whether a party has incurred pre-contractual liability, two questions must be considered. The first question is whether the defaulting party has breached the pre-contractual duty of good faith. It would be difficult to draw an exhaustive list of acts which are in violation of the principles of good faith. The key test of the requirement of good faith is whether the defrauding party’s act falls below what is expected of a reasonable person on the basis of moral, social and commercial standards of conduct prevailing in the community in which the transaction takes place.129 Pre-contractual liability is not limited to liability for an unconcluded or invalid contract. A claim for pre-contractual liability is tenable even though a valid contract has been concluded.130 The second question is whether the injured party has suffered loss as a result of the defaulting

125  The Contract Law 1999, art. 6. The Insurance Law, art. 5. 126  B. Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 213. 127  The Contract Law, art. 42. 128  Ibid, arts 42 and 58. 129  B. Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 214. 130  Article 43 of the Contract Law, by referring to “whether or not the contract is concluded,” makes it clear that the breach of good faith under art. 42 of the Contract Law does not have to cause the failure of conclusion of the contract.

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party’s breach of the pre-contractual duty of good faith. It is generally accepted that recoverable loss should be limited to reasonable reliance, i.e. such reliance that a reasonable and prudent person would place on the conduct of the other party in a way that is foreseeable to the defaulting party. Whether or not the injured party’s reliance is reasonable and foreseeable should depend on the circumstances of the case, including the nature and purpose of the transaction, the usage of the transaction and the relationship of the parties.131 If the defrauding party breaches his pre-contractual duty of good faith and the breach has given rise to damage to the other party, the defendant is liable to compensate the injured party.132 Two kinds of remedies may be available to the injured party. First, where the defrauding party’s misconduct has caused failure of conclusion or effectiveness of the contract, the aggrieved party is entitled to claim for compensation for his reliance on the contract being concluded or effective, which should include actual expenditure incurred in the negotiation and preparation for the performance of the contract and loss of opportunities of alternative contracts with other persons.133 So liability for a void or rescinded contract is in principle limited to the loss suffered by the injured party owing to his reliance on the validity of the contract. The general idea is to put the injured party in the same position that he would have been in had he not concluded the contract.134 By virtue of art. 58 of the Contract Law, “if a contract is void or rescinded, property obtained under that contract shall be returned; where it is impossible or unnecessary to return it, its value shall be made good. The party who was at fault shall compensate the other party for the loss caused thereby; where both parties were at fault each party shall bear his corresponding liability.” Fault here refers to the wilfulness or negligence of the conduct of the party in causing the invalidity of the contract. The party at fault is the one who, at the time the contract is concluded, knows or ought to know the cause of invalidity of the contract.135 Second, where a party has induced the other party to enter into the contract by fraud or intentional concealment of a material fact relevant to the conclusion of the contract or intentional misrepresentation of information, the injured party is entitled to apply to a People’s Court or arbitral institution for modification or rescission of the contract under art. 54 of the Contract Law.136 Although art. 42(2) of the Contract Law specifically sets forth the actionable misconduct of fraudulent misrepresentation or concealment of material information, it does not say that the injured party should be entitled to rescind the contract by reason of the fraudulent

131  B. Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 216. 132  The Contract Law, art. 42. 133  B. Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 215. 134  UNIDROIT Principles 2010, art. 3.2.16 provides: “Irrespective of whether or not the contract has been avoided, the party who knew or ought to have known of the ground for avoidance is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract.” For more, see B. Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 223. 135  UNIDROIT Principles 2010, art. 3.2.16. 136  Article 54 of the Contract Law provides: “in regard to a contract concluded under circumstances where a party uses fraud, duress or exploits the other party’s distress thereby causing the other party to act contrary to his true intention, the injured party has the right to apply to a People’s Court or arbitral institution for modification or rescission.”

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misrepresentation. However, art. 54 of the Contract Law vests in the injured party the right of rescission of the contract by reason of the defendant’s fraud.137 (b) The insurer’s pre-contractual liability In the context of insurance, the insurer’s pre-contractual liability is not provided in the Insurance Law; the most relevant provision to an insurance contract with regard to an insurer’s pre-contractual liability is art. 42(2) of the Contract Law, from which it can be inferred that if an insurer intentionally conceals a material fact relevant to the conclusion of the contract or gives false information about the insurance product, the insurer should be made liable to compensate the insured for his loss due to the insurer’s breach of the pre-contractual duty of disclosure or misrepresentation. It should be noted here that intentional non-disclosure of only “material facts relevant to the conclusion of the contract” would make the defendant liable, while provision of false information is in all cases actionable (i.e. whether the false information is material or not). An insurance contract is different from a sale or other kinds of contract in that under an insurance contract, the insured pays premiums to the insurer in return for insurance payments when the insured risk occurs and causes a loss. The insured’s reliance on and expectation of the insurance contract is that he will be paid by the insurer when the insured event occurs. The remedies of avoidance of the contract and recovery of the premium paid may be adequate redress for the insured where the insured has not suffered any loss when he discovers the insurer’s breach of duty. For example, in Mr Li v The Life Insurance Company,138 the insurer’s agent induced Mr Li to purchase five life policies by giving false information to the insured about the benefits of the life policy (i.e. the insured could get a loan from the insurer of 80% of the premium paid), and also promised to the insured other benefits than those provided for in the policy (i.e. the insured could receive a discount card from the insurer for payment of tolls on three motorways). After Mr Li effected five life policies, he did not receive the discount card. Three years later, he got a loan from the insurer which was less than 50% of the premium he paid. It was held that the insurer’s agent’s fraudulent misstatement of the insured benefits constituted a fraud. The insurance contracts were entered into on the basis of the fraudulent misstatement, so the contracts were voidable at the option of the insured. The insured’s claim for avoidance of the contracts and recovery of the premiums paid was upheld. On the other hand, avoidance of the contract and recovery of the premiums paid are not effective remedies for the insured where the insured event has occurred and he has suffered a loss which is covered by the contract.139 Effective remedies should be available to compensate the insured for his loss due to the insurer’s pre-contractual culpa in contrahendo. If the insurer’s pre-contractual fault results in the invalidity of the insurance, the insurer must be liable for its fault and pay the insurance benefits.

137 Ibid. 138 This case was decided by the People’s Court, City District, Chang Zhi City, Shanxi Province, Civil Court Judgment (2009) No. 445, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2010) vol. 2, p. 201. 139  See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 6-203.

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For example, in Mr Xu v The Life Insurance Company,140 the employer effected a comprehensive accident insurance policy with the insurer on the lives of their employees (including Mr Xu) for the benefit of the employees’ families. The employer paid half of the premium and each life insured paid another half. Mr Xu presented his ID card and other relevant documents to the insurer’s agent. The insurer would pay ¥60,000 for accidental death of the life insured under the policy. The insurer’s agent did not ask the life insured to sign the proposal form but signed for the lives insured without being asked to by the lives insured. Mr Xu was injured by a motor car and died as a result of the accident. His beneficiary claimed for the insurance benefits but was turned down by the insurer on the grounds that the insurance policy was void because Mr Xu did not give his consent to the policy, as he did not sign the proposal form. According to the Insurance Law, a contract with death as the condition for payment of insurance benefits is invalid without the insured’s consent thereto and acceptance of the sum insured in writing.141 It was held that the invalidity of the contract was due to the insurer’s fault, so the insurer was liable for paying the insured amount (¥60,000) as compensation.142 The remedies available to the aggrieved insured in the case of the insurer’s breach of pre-contractual duty of good faith have been discussed for two situations. For the situation where the insurance contract is valid (but voidable) and the insured suffers no loss, the appropriate remedy to the insured is for him to avoid the contract and recover the premium paid. Alternatively, the insured may choose not to avoid the contract but affirm it. For the situation where the insurance contract is invalid, and the insured event has occurred and caused a loss, the insurer is liable to pay the insured’s loss as compensation for his pre-contractual fault. There may be other situations where effective remedies are needed for the aggrieved insured. Where the insurer’s intentional non-disclosure or misrepresentation does not affect the overall validity of the contract but the recoverability of a claim under the contract, the insured should be entitled to payment of the claim as compensation for the insurer’s intentional concealment of material facts or misrepresentation of information in relation to the recoverability of the claim.143 The recoverability of the claim mentioned here may relate to three elements: the coverage of the risk (i.e. whether or not the risk is covered under the policy), the cause of the occurrence of the insured risk (i.e. whether or not the cause of the insured risk is covered) or the extent of the insurer’s liability for the loss caused by the insured risk (i.e. whether or not the loss is fully or partly covered). All these three elements can affect the recoverability of a claim, so the insurer’s intentional non-disclosure

140 This case is reported in the book Insurance Cases by Z. J. Li, published by China Modern Economic Publishing House in 2007, p. 208. 141  The Insurance Law 2002, art. 56; the Insurance Law 2009, art. 34. For more on insurable interests in life insurance in China, see Z. Jing, “Insurable interests in life insurance: A Chinese perspective” (2014) JBJ 337. 142  According to art. 58 of the Contract Law. 143 In Banque Financière de la Cité SA v Westgate Insurance Co., [1990] 1 QB 665 at 772, Slade LJ, speaking for the Court of Appeal, said the duty requires an insurer to disclose all facts known to it which are material to the nature of the risk sought to be covered, or the recoverability of a claim under the policy, which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer.

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or misrepresentation of material facts in respect of these three elements should be actionable and the insured’s claim should be paid. Another situation is that if the insurer prevents the insured from performing his duty to disclose material information, or induces the insured not to disclose material facts at the time of the contract,144 the insurer should not be allowed to use the defence of the insured’s non-disclosure or misrepresentation of the material information to avoid the contract and reject claims. In certain situations, an insurer may not be required by the pre-contractual duty of good faith to disclose to an insured all material information relevant to the conclusion of the contract. For instance, an insurer owes no duty to inform the insured of the current market price of a similar insurance policy, however material or important the information may be to the insured’s decision to enter into the contract. The duty of good faith owed by an insurer should not be extended to convert the insurer into some form of adviser.145 Article 42(2) of the Contract Law covers intentional non-disclosure (concealment) of material facts relevant to the conclusion of the contract or provision of false information, but does not cover negligent non-disclosure or misrepresentation. In other words, if non-disclosure or misrepresentation is negligent, it is then not governed by art. 42(2). Under art. 58 of the Contract Law, the party who was at fault shall compensate the other party for the loss caused thereby. Fault refers to the wilfulness or negligence of the conduct of the party in causing the invalidity of the contract. So the case of negligent non-disclosure or misrepresentation could be covered by art. 58 of the Contract Law. However, art. 58 deals with damages only for void or rescinded contracts. If an insurer’s negligent non-disclosure or misrepresentation does not affect the validity of the insurance policy, but the recoverability of claims under the policy, there are no rules of law to follow for this situation either in the Contract Law or in the Insurance Law. Thus remedies provided by the Contract Law are inadequate for the aggrieved insured in the case of the insurer’s breach of the pre-contractual duty of good faith. A new provision on remedies available to the insureds in this regard should be introduced in the Insurance Law. Before attempting to make any suggestion and recommendation for introducing a new provision in the Insurance Law with respect to remedies available to the insured who has suffered loss due to the insurer’s pre-contractual misleading conduct, it would be helpful and beneficial to take a look at the approaches taken in the US in combating insurers’ pre-contractual misconduct and remedies to the injured insured, as American law has developed effective approaches in handling unfair, deceptive or misleading acts and practices in the business of insurance.146 9.4.4 The insurers’ pre-contractual misleading conduct and remedies in American law In the US, regulation of insurance practices is a matter of state law, with minimal federal intervention. The McCarran-Ferguson Act gives supremacy to state regulation 144  The Insurance Law, arts 116(3) and 131(3). 145  See R. Merkin, Colinvaux’s Law of Insurance (9th edn, Sweet & Maxwell 2010) para. 6-204. 146  For more on the regulation of insurer misconduct in the US, see M. Davies, “Insurer’s pre-contractual disclosure obligations: the position in the United States of America” (2012) 23 ILJ 70.

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of the business of insurance to the extent that the states choose to occupy the regulatory field.147 No Act of Congress shall be construed to invalidate, impair or supersede any law enacted by any state for the purpose of regulating the business of insurance unless such Act specifically relates to the business of insurance.148 As a result, there is a wide variety of practices in controlling insurers’ unfair or deceptive acts or practices in the business of insurance in the 50 states and other US jurisdictions.149 The insurer’s pre-contractual misleading conduct is forbidden by specific statutes relating to insurance practices, or by general consumer protection legislation. In the state of New Mexico, art. 16 (Trade Practices and Fraud) of the Insurance Code prohibits “unfair or deceptive act[s] or practice” by insurers,150 or the publication of “any estimate illustration, circular, statement, sales presentation or comparison” that misrepresents the benefits, advantages, conditions, terms, effects or premium of an insurance policy,151 or “untrue, deceptive or misleading” advertising.152 If an insurer is in violation of these statutory restrictions, it will be given a penalty153 and the aggrieved insured is granted a right to bring an action to recover actual damages caused by the insurer’s violation of the statutory rules.154 In Azar v Prudential Insurance Co. of America,155 the policyholders’ claim was for failure by a life insurer to disclose the additional cost of paying premiums in instalments. The Court of Appeal of New Mexico held that the policyholders could rely on a statutory duty to disclose imposed by the Unfair Insurance Practice Act.156 Similarly, Pennsylvania’s Unfair Insurance Practice Act (PUIPA) prohibits an insurer from engaging in any practice which is unfair or deceptive.157 The PUIPA proscribes many unfair or deceptive acts or practices in the business of insurance at pre- and post-contractual stages. An insurer is prevented from making and publishing any estimate, illustration, circular, statement or sales presentation that misrepresents the benefits, advantages, conditions or terms of any insurance policy,158 and that makes false or misleading statements as to the circumstances relating to the insurance products.159 The insurers shall not make and publish an advertisement, announcement or statement containing any representation or statement with respect to the business of insurance or to any person in the conduct of his insurance business which is untrue, deceptive or misleading.160 The PUIPA also provides administrative penalties and civil penalties for any violation of the provisions of the Act. If the insurer commits any unfair or deceptive acts or practices, the Commissioner 147  15 USC s.1012. 148  15 USC s.1012(b). 149  M. Davies, “Insurer’s pre-contractual disclosure obligations: the position in the United States of America” (2012) 23 ILJ 70, at 70. 150  New Mex Stat, ss. 59A-16-1, 59A-16-3(2014). 151  New Mex Stat, s. 59A-16-4 (2014). 152  New Mex Stat, s. 59A-16-5 (2014). 153  New Mex Stat, s. 59A-16-29 (2014). 154  New Mex Stat, s. 59A-16-30 (2014). 155  68 P 3d 909 (NM App, 2003). 156  For more, see M. Davies, “Insurer’s pre-contractual disclosure obligations: the position in the United States of America” (2012) 23 ILJ 70, at 72. 157  Unfair Insurance Practice Act, Act of 22 July 1974, PL 589, No. 205, ss. 4 and 5. 158  The PUIPA, s. 5(1). 159 Ibid. 160  Ibid, s. 5(2).

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may suspend or revoke the insurer’s licence,161 and may also impose a fine as a civil penalty.162 However, the PUIPA does not provide the aggrieved insured with a private right of action against the defendant insurer. California’s Unfair Insurance Practice Act (CUIPA) proscribes many different kinds of deceptive acts or practices in the business of insurance, including misleading statements about the contents, benefits or advantages of policies, or misleading advertising.163 The Supreme Court of California has held that CUIPA itself does not create a private right of action,164 but CUIPA is used by insureds in conjunction with California’s general Unfair Competition Law165 as the basis for statutory action against insurers. In some other states (such as Colorado, Delaware and Massachusetts), where there is no unfair insurance practice legislation, or where the unfair insurance practice legislation does not confer a private right of action, plaintiffs have turned to their state’s general consumer protection statutes,166 which usually protect consumers against misleading or deceptive conduct and other predatory business behaviour.167 Most state courts have held that the sale of insurance is the sale of a service,168 or property,169 or both,170 and thus is caught by the general consumer protection legislation. In contrast, in those states (such as Georgia and New Hampshire) where the specific legislation relating to unfair insurance practices does not provide a private right of action for the aggrieved insured, an action may not be brought under general consumer protection legislation.171 In summary, American law in relation to the insurer’s pre-contractual misleading conduct varies from state to state. Some states combat insurers’ misconduct by unfair insurance practice legislation which punishes the defendant insurers by penalties, and at the same time may (or may not) confer a private right of action upon the injured insureds to claim actual damages as a result of the insurer’s unfair or deceptive acts or practices. Some other states prohibit insurers’ misconduct by way of consumer protection legislation. So there are many different types of provision

161  Ibid, s. 9. 162  Ibid, s.11. Section 11(1) provides that for each unfair or deceptive act which the insurer knew or reasonably should have known to be in violation of the PUIPA, a penalty of not more than five thousand dollars ($5,000) for each violation but not to exceed an aggregate penalty of fifty thousand dollars ($50,000) in any six-month period shall be imposed on the insurer. Section 11(2) provides that for each unfair or deceptive act which the insurer did not know nor reasonably should have known to be in violation of the PUIPA, a penalty of not more than one thousand dollars ($1,000) for each violation but not to exceed an aggregate penalty of ten thousand dollars ($10,000) in any six-month period shall be imposed on the insurer. 163  Cal Ins Code s. 790.03. 164  Moradi-Shalal v Fireman’s Fund Insurance Co. 759 P 2d 58 (Cal 1988). 165  Cal Bus & Prof Code s. 17200. 166  Dodd v Commercial Union Insurance Co. 365 NE 2d 802 (Mass 1977); Showpiece Home Corp v Assurance Co. of America 38 P 3d 47 (Colo 2001); Grand Ventures Inc v Whaley 622 A 2d 655 (Del Sup 1992). 167  For more, see M. Davies, “Insurer’s pre-contractual disclosure obligations: the position in the United States of America” (2012) 23 ILJ 70, at 74. 168  Wagner v Travelers Property Casualty Co. of America 209 P 3d 1119 at 1129 (Colo App 2008). 169  Showpiece Home Corp v Assurance Co. of America 38 P 3d 47 (Colo 2001). 170  Dodd v Commercial Union Insurance Co. (1977) 365 NE 2d 802 (Mass 1977). 171  Bell v Liberty Mutual Insurance Co. 676 SE 2d 428 at 434 (Ga App 2009); Northeast Georgia Cancer Care LLC v Blue Cross & Blue Shield of Georgia Inc. 766 A 2d 1260 (NH 2001).

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prohibiting insurers from committing unfair and deceptive acts or practices in the business of insurance. 9.4.5 Recommendations for effective remedies The Insurance Law imposes on an insured a statutory duty of truthfully disclosing material facts to the insurer before concluding the contract.172 If the insured failed to comply with the duty of disclosure, the insurer has different remedies depending on the insured’s state of mind and consequences of the breach.173 Only for intentional or grossly negligent non-disclosure or misrepresentation of material facts by the insured is the insurer is entitled to set aside the contract,174 while negligent or innocent non-disclosure or misrepresentation is not actionable. The Insurance Law does impose on an insurer a pre-contractual duty to explain the content of the insurance contract to the insured, but does not provide any remedy for the insurer’s breach of the duty.175 Article 17(2) of the Insurance Law also requires the insurer to make specific and clear explanations of the clauses which exclude the insurer’s liability, and the remedy for the insurer’s failure to comply with the duty is that the exclusion clauses are not effective. There is no provision in the Insurance Law relating to the insurer’s pre-contractual liability. It is suggested that it is necessary to add one provision into the Insurance Law to impose on the insurers the pre-contractual liability and also to set forth a remedy available to the insureds in the case of the insurers’ breach of pre-contractual duty as provided in art. 116(1)–(3) of the Insurance Law. This new provision could be phrased as follows: “An insurer shall be liable for compensation if he, in the course of concluding the contract, causes damage to the insured in one of the following situations:176 (1) Cheating the insured, the life insured or the beneficiary; (2) Concealing from the insured material information relevant to the insurance contract or giving false information about the insurance product; (3) Preventing the insured from fulfilling his obligation of making truthful disclosure of material facts or inducing them not to fulfil such an obligation; Where the insurer’s fraud, intentional or unintentional (negligent or innocent) non-disclosure or misrepresentation of material facts has induced the insured to enter into the contract, (i) the insured may avoid the contract and recover the premium paid before the insured event occurs; (ii) the insured is entitled to claim for insurance payments if the insured event occurs and causes losses; or (iii) if the insurance contract is void due to the insurer’s fault, and the insured event has occurred and caused loss, the insurer is liable to pay the insured’s loss as compensation for his pre-contractual fault. Where the insurer prevents the insured from performing his duty to disclose material facts, or induces the insured not to disclose material facts, the insurer shall not use the defence of the insured’s non-disclosure or misrepresentation to avoid the contract and reject claims.”

172  The Insurance Law, art. 16(1). 173 The Insurance Law, art. 16(4) and (5). For more, see H. Y. Yeo, Z. Yu and J. Chen, “Of remedies and non-disclosure in the insurance law of the People’s Republic of China” [2011] JBL 566. 174  The Insurance Law, art. 16(2). 175  Ibid, art. 17(1). 176  This is in reference to art. 42 of the Contract Law.

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In addition to the remedies proposed above specifically for the insurer’s breach of pre-contractual duties, and in order to provide an aggrieved insured with an effective remedy for all misconduct (pre- and post-contractual) as proscribed in arts 116 and 131 of the Insurance Law, it is suggested that a private right of action be conferred upon the insured as follows: “An insured who has suffered damage as a result of a violation of articles 116 and 131 of the Insurance Law by an insurer or agent or broker is granted a right to bring an action against the defendant to recover actual damages.”177

9.4.6 Summaries The Insurance Law prohibits an insurer from practising misleading conduct in advertising and sales of insurance policies, and also other misconduct as provided in arts 116 and 131 of the Law. The CIRC has provided some guidelines for determining the insurer’s misconduct. When an insurer is in violation of the provisions, the Insurance Law provides administrative and civil penalties to punish the defendant insurer, but does not provide a private right of action to the aggrieved insured who has suffered loss as a result of the insurer’s misconduct. It is suggested that the insured should be entitled to claim damages from the defendant insurer for its misleading conduct. Some effective remedies for the insurer’s breach of the precontractual duty of disclosure and misrepresentation have been proposed with reference to the Contract Law and the approach taken in the New Mexico Insurance Code. It is suggested that these remedies be introduced into the Insurance Law in the future reform of the Law. 9.5 Conclusion This chapter has considered the insurer’s pre-contractual duty of good faith − to explain to the insured the contents of the insurance contract, to make clear explanation of the clauses which exclude or limit the insurer’s liabilities, and not to mislead the insured by misrepresentation or concealment of material information as to the insurance products. The unique feature of the Insurance Law in comparison to the laws in other jurisdictions is that at the time of concluding the contract, an insurer is required to clearly explain the concept, the content and legal effect of the exemption clauses, orally or in writing, to the insured so that a reasonable person in a similar position to the insured could understand the clauses.178 This represents a bold step towards striking the balance in the traditionally one-sided pre-contractual duty of good faith – the insured is obliged to disclose material information to the insurer – and thus must be applauded. However, difficulties in relation to this unique feature have existed and may continue to exist in two aspects: first, how to determine that a clause is an exemption clause (thus is in need of clear explanation); and second, how to prove

177  This is in reference to s. 59A-16-30 of New Mexico’s Insurance Code. 178  Interpretation II, art. 11(2).

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that the insurer has complied with the duty of clear explanation. Further efforts are needed in order to alleviate or mitigate the unwelcome situation that the insurers seem to pay more attention to the collection of evidence for having complied with the duty of clear explanation than to the actual performance of the duty. In the event that an insurer has misled the insured by misrepresentation or concealment of material information relating to the insurance product, the Insurance Law provides no effective remedy to the aggrieved insured. A recommendation for coping with this situation has been proposed.

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CHAPTER 10

Increase of risk during the insurance period

10.1 Introduction Unlike other kinds of commercial business, insurance deals with risks. The risk is transferred from the insured to the insurer. At the pre-contract stage, the insured is required to disclose material information to the insurer about the subject matter and the nature of the risk to be covered, so as to enable the insurer to assess the risk to the best extent and then decide whether or not to accept the risk and, if so, on what terms.1 This topic has been considered in Chapter 8, “The insured’s duty of disclosure and representations.” However, after a contract has been entered into, the insured risk may increase, either due to the insured’s intentional act or by a third party’s act known or unknown to the insured. Whether the insured has the duty of notifying the insurer in the event of an increase of risk during the insurance period is a question of some difficulty.2 Most civil law countries have adopted the concept of increase of risk,3 but the common law world seems not to share the general concept of increase of risk; instead, the doctrine of warranty is commonly employed to protect the insurer against change of risk during the policy.4

1  The insured’s pre-contract duty of disclosure is provided in art. 16 of the Insurance Law 2009. For more, see Chapter 8, “The insured’s duty of disclosure and misrepresentation” and Zhen Jing, “Insured’s Duty of Disclosure and Test of Materiality in Marine and Non-Marine Insurance Laws in China” [2006] JBL 681. 2  See J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) paras 7.16 to 7.17; M. Clarke, “Aggravation of Risk during the Insurance Period” [2003] LMCLQ 109; A. McGee, The Modern Law of Insurance (3rd edn, LexisNexis 2011) pp. 165–82; R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) paras 5-018 to 5-033; K. Nicholson, “Mid-term alteration in the risk – what can be done?” [1991] 4(1) Ins LJ 1; M. Smith, “The effect of subsequent increases of risk on contracts of insurance” [2009] LMCLQ 366. 3  Such as Belgium, China, France, Germany, Greece, Italy, Japan, Norway, Spain, etc. 4  In common law countries, the concept of warranty is used instead of the concept of alteration. As Trine-Lise Wilhelmsen comments in her paper “Duty of disclosure, duty of good faith, alteration of risk and warranties” (CMI Yearbook 2000, pp. 332–411): “Contrary to the civil law countries, the common law countries do not seem to share a general concept of an alteration of risk. There is no general regulation in UK MIA on this problem, and the concept is not contained in the US or South African case law. However, elements that are covered under the concept of alteration of risk in the civil law countries are found in other provisions in the MIA. Three such provisions may here be pointed out. One is that some of the risks that might otherwise be defined as an alteration of risk are provided for under the concept of warranties. Two is that the duty of the good faith as applied to notification under held covered clauses may be compared to the notification requirements for alteration of risk. A third set of provisions that might otherwise be dealt with under the concept of alteration of risk is UK MIA sec. 42–49 concerning ‘The Voyage.’ ” See also B. Soyer, “Continuing duty of utmost good faith in insurance contracts: still alive?” [2003] LMCLQ 39, at 42. He said that “It is quite common in insurance practice for insurers to

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Like most other civil law countries, China has adopted the concept of increase of risk in the Insurance Law.5 However, the rules regarding increase of risk in the Insurance Law are ambiguous, and a lot of disputes have been caused in practice. This chapter considers how the Insurance Law deals with the matter of increase of risk during the insurance period. A number of issues will be discussed: the justification of the requirement for the notification of the increase of risk; the kind of increase of risk which needs to be notified; the remedies available to the insurer if it is notified of an increase in risk; and the consequences for the insured’s failure in performing his duty of notification. 10.2 The justification for the requirement of notification of an increase of risk Notification of increase of risk during the insurance period is a controversial issue. From the insured’s point of view, it could be argued that a contract of insurance is agreed on the basis of the risk as evaluated by the insurer at the time of the conclusion of the contract. Based on the agreement, any loss later caused by a peril insured against is payable with good grace; the downside of any increase in risk (unless it is a change in the subject matter of the insurance) should be borne by the insurer, and allowing the insurer to have remedies for an increase of risk amounts to giving it an opportunity to rethink the contract. It may terminate a contract it would otherwise not be able to in the case of a bad bargain.6 In the English case of Kausar v Eagle Star Insurance Co. Ltd,7 Saville LJ delivered the following statement: “The insurance bargain is one where, in return for the premium, they [the insurers] take upon themselves the risk that an insured peril will operate. In calculating that premium it is for the insurers to assess the chances of insured perils operating; and the fact that they may (in hindsight) have got this assessment wrong does not begin to establish that what has happened falls outside the cover they have agreed to give.” However, insurers may take a different view. They may argue that they assessed the risk according to the information about the potential risk of the subject matter the insured disclosed to them at the time of the contract, and on that basis they issued the policy. They are prepared to bear a risk on the basis of its evaluation at the date of the contract, but if a generic change takes place during the policy period, such that the framework within which the risk was assessed is materially changed, it is then a different risk that should not be covered. From the insurer’s point of view, the insured is expected, during the currency of the policy, to take any reasonable care to avoid or reduce the insured risk, but not to increase it, and at least not to

introduce express contractual provisions on the shape of warranties, conditions or exceptions to the risk, in order to protect themselves against alterations in the risk.” 5  For more, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” [2013] JBL 842. 6  M. Smith, “The Effect of Subsequent Increases of Risk on Contracts of Insurance” [2009] LMCLQ 368. Smith comments: “It might be said that allowing an insurer to escape his obligations by relying upon subsequent changes in circumstances rather undermines the very purpose of insurance, by bringing the protection purchased by the insured to an end in circumstances that the insured may not have anticipated.” 7  [2000] 1 Lloyd’s Rep IR 154 (CA).

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increase the risk by the insured himself intentionally.8 However, the increase of risk may occur during the insurance period. It may be brought about by the insured himself or by a third party known or unknown to the insured. So whether, in the event of an increase of risk, the insured must notify the insurer becomes an important issue. It is submitted that in order to maintain the contractual fairness between the insurer and the insured, notification of increase of risk during the currency of the contract should be given by the insured so that the insurer may have some remedies for the increase of risk. Otherwise, the insurer would bear higher risk but receive a lower premium. An example would be if in car insurance, when the insurance contract was concluded, the car was used for private purpose, but during the currency of the policy, the insured changed the use of the car to business purposes. A car used for business (such as a taxi) is more likely to be involved in a road accident than the same vehicle confined to private use. Thus the insured should notify the insurer and the insurer may charge extra premiums or change the policy terms for the latter purpose. The requirement of notification may reduce the chance for the insured to gain advantage by trickery when he wishes to obtain better coverage while paying a lower premium.9 It is suggested that the legal basis for the requirement of notification of increase of risk is the doctrine of post-contract duty of good faith and the principle of fair dealing.10 However, it would be unfair to put a day-to-day obligation on the insured to notify the insurer of any increase of risk. The insured should be required to notify the insurer only where the increase of risk is material. So it is necessary to define what kind of increase of risk is a material one. Different approaches on the duty of notification of increase of risk are adopted in different jurisdictions. Under English common law, generally there is no postcontract duty of notification of increase of risk.11 As a general rule, subsequent

8  Most insurance policies include a clause to impose some duties on the insured to take reasonable care for the insured property. For example, clause 21 of the Property All Risks Policy of Tai Ping Insurance Company of China states: “the insured should abide by the relevant laws and regulations in respect of fire protection, safety, operation procedures for producing products, protection of labour force, etc. and take reasonable care to avoid or reduce the happening of insured events and to maintain the safety of the subject matter of the insurance.” 9  For example, there may be a case where, when the car insurance is concluded, the insured tells the insurer that the car is for social and domestic use, but the insured has already planned to change to business use some months later after the inception of the policy. If there is no requirement of notification of increase of risk, many people may take advantage to effect a policy by paying lower premiums for a lower risk and then change the use of the subject matter to a higher risk without the needing to pay extra premiums. 10 In Manifest Shipping Co. Ltd v Uni Polaris Shipping Co. Ltd (The Star Sea) [2001] 2 WLR 170, Lord Hobhouse confirmed that “utmost good faith is a principle of fair dealing which does not come to an end when the contract has been made. . . . the content of the obligation to observe good faith has a different application and content in different situations.” Notification of the increase in risk can be said to be one of the insured’s post-contractual duties of good faith. Not to make fraudulent claims could be another post-contractual duty of good faith. See also Baoshi Wang and Fan Yang, Property Insurance Law, Legal Interpretation and Case Studies (Intellectual Property Press 2009) p. 86: “Article 37 of the Insurance Law 2002 imposes on the insured the duty of notification of increase of risk, from the view of jurisprudence, this is a continuing duty of disclosure during the currency of insurance. Therefore, the insured should notify the insurer in the event of an increase of risk.” 11 In Baxendale v Harvey (1859) 4 H & N 445, Sir Federick Pollock CB observed: “The Society having had notice of the risk were not entitled to any notice by reason of the increase in danger. A person who insures may light as many candles as he pleases in his house, though each additional candle increases the danger of setting the house on fire.”

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increases in risk have no effect on the insurer’s obligations.12 On the other hand, a subsequent change in respect of the subject matter of the insurance or in respect of the risk insured may affect the insurer’s obligation. The insurer will not be obliged if the subsequent change serves to bring the claim outside the scope of the insurance.13 In contrast to the English approach, Chinese law expressly adopts the concept of post-contract increase of risk. Article 36 of the Insurance Law 1995 provides: “Where there is an increase of risk to the subject matter of insurance during the term of contract, the insured shall notify the insurer in a timely manner in accordance with the contract and the insurer shall have the right to demand an increase in the premium or terminate the contract.” The article was amended by art. 52 of the Insurance Law 2009 which is now the main provision dealing with the matter of increase of risk in non-life and non-marine insurance.14 It provides: “Where there is a material increase of risk to the subject matter of insurance during the term of a contract,15 the insured shall notify the insurer in a timely manner in accordance with the contract. The insurer can, in accordance with the contract, demand an increase in the premium or terminate the contract. Where the insurer terminates the contract, he will refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date 12 M. Smith, “The Effect of Subsequent Increases of Risk on Contracts of Insurance” [2009] LMCLQ 366. 13  A. McGee, The Modern Law of Insurance (3rd edn, LexisNexis 2011) para. 11.4; R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-022; M. Smith, “The effect of subsequent increases of risk on contracts of insurance” [2009] LMCLQ 366. 14  Article 52 is provided under the heading of “Property Insurance Contract” in the Insurance Law 2009. It seems that the duty of notification of increase of risk is required only in property insurance. As far as life insurance and personal accident insurance are concerned, the Insurance Law is silent on the point of alteration of risk. In practice, however, in some life or accident policies, the duty of notification is required. For instance, in the Personal Accident Insurance Policy of the Ping An Insurance Company of China, clause 13 concerns the change of occupation and employment. It states: “When the life insured changes his occupation or type of work, the policyholder shall inform us of such change in writing within 10 days. If the insured risk shall reduce in the new occupation or type of work, we shall refund some premium upon receiving notification of such change. If the insured risk increases, we will increase the premium. If the new occupation or type of work is excluded from our list of coverage, we shall not be liable from the date of receiving your notification but we shall return part of the premium. If the insured event occurs due to the risk increased but not notified by the policyholder, we shall pay the insurance money calculated using the ratio of premium paid and the premium which should have been paid had the increased risk been notified, or we shall not pay the insurance money if the new occupation or type of work is excluded from the list of coverage.” It is submitted that this is a notification clause which requires the life insured to give notice to the insurer where the risk has increased. As far as marine insurance is concerned, the Chinese Maritime Code 1992 does not adopt the concept of alteration of risk, but the concept of warranties. Article 235 of the Code provides: “The insured shall notify the insurer in writing immediately where the insurer has not complied with the warranties under the contract. The insurer may, upon receipt of the notice, terminate the contract or demand an amendment to the terms and conditions of the insurance coverage or an increase in the premium.” The remedy for breach of warranty in the Code is different from that in English Law. The Maritime Code does not make the policy void automatically in the event of a breach of warranty. Under English law, the breach of a warranty automatically discharges the insurer from liability. The Chinese law is less harsh for breach of warranty. The remedies for breach of warranty in the Maritime Code are very similar to the remedies for increase of risk in non-marine insurance specified in the Insurance Law. 15 The term “material” has been added in the new version of the Insurance Law 2009. In the old versions (1995 and 2002), the insured was required to notify the insurer of “any” change (material or immaterial) of circumstances which increased the risk insured against. It is submitted that the old law imposed a heavy burden on the insured. In the new version the duty of notification arises only where the increase in risk is material. This mitigates, to some extent, the harshness of the old approach.

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of commencement of the insurance liability to the date of termination.” There are three improvements in art. 52 of the Insurance Law 2009 as compared with art. 36 of the 1995 version. First, the 1995 version required the insured to notify the insurer of any increase of risk. This undoubtedly imposes a day-to-day duty on the insured to inform the insurer of even a minor change of the risk during the currency of the policy. The 2009 version mitigates this harshness by introducing the word “material” into the concept of increase of risk. Accordingly, the insured is required to notify the insurer only where the increase of risk is a material one. It is obvious that the two phrases “an increase of risk” and “a material increase of risk” indicate different degrees of increase of risk. Second, the 2009 version adds a condition for the insurer to satisfy in exercising its right to increase the premium or terminate the contract, that is, the insurer can do it in accordance with the contract. Third, the 2009 version requires the insurer, where it terminates the contract, to refund to the insured the premium received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of termination. The consequence for the insured’s failure to perform the duty is provided in the second paragraph of art. 52, which states: “Where the insured fails to perform his obligation of notification specified in the preceding paragraph, the insurer shall not be liable for indemnity in the case of the occurrence of an insured event which is caused by the material increase in risk.” It is obvious that Chinese law imposes a duty on the insured to notify the insurer of a material increase of risk in accordance with the contract. However, this provision is very brief and ambiguous. A number of issues may arise from it. (1) What is a material increase of risk? (2) Is the duty of notification a statutory duty or a contractual duty? (3) The consequence for the insured’s failure of performing the duty of notification is problematic, particularly in respect of the causal connection between the increase of risk and the loss. All these issues are considered below. 10.3 A material increase of risk The Insurance Law requires the insured to notify the insurer of any material increase of risk,16 but does not give a definition or guidance on what is “material increase of risk,” namely, what is the test of materiality. The task at this stage is to formulate a legal definition based on which a test of material increase of risk can be determined. The following case17 may illustrate the meaning of material increase of risk. Mr Li effected a fire insurance policy for his house for private use but later let it to Mr Tian for storage of flammable chemicals. Li did not notify the insurer of the change of use of the property. The chemicals exploded accidently and caused a fire. Li claimed but

16 The term “notification of a material increase of risk” means notification of a material increase in the risk or notification of changes of facts or circumstances which have materially increased the risk. The latter include changes either in the circumstances disclosed to the insurer by the insured at the time the contract was concluded or in the circumstances specified in the insurance policy which have materially increased the risk. 17  Baoshi Wang, The Property Insurance Law – Legal Interpretation and Cases Analysis (Intellectual Property Press 2009) p. 78. The case was cited in this book.

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was turned down by the insurer on the grounds that the storage of chemicals in the house materially increased the risk insured against, but Li did not give notice of this change and the fire was caused by the explosion of the chemicals. Thus the insurer was not liable for the loss. However, sometimes it is difficult for a court to decide whether the risk is increased. In Mr Feng Liao v Ping An Insurance Company Ltd Shenzhen Branch,18 Mr Liao effected a policy to cover the risk of theft and robbery for his car for private use. There was a clause in the policy which required the insured to notify the insurer of any increase of risk, such as the change of use of the car for business purposes. In August 2003, Liao placed an advertisement in a local newspaper in which he looked for a kind of job in which he would use his car for his employment. At the end of August, a man (who called himself Mr Wang) contacted Liao and discussed the matter of employing Liao and his car and also paid a deposit to Liao. On 7 September 2003, “Wang” telephoned Liao, asking him to meet the “Boss” of the company at Shenzhen airport; they could then discuss details about Liao’s employment. Next day, Liao and “Wang” met the “Boss” at the airport and Liao (driving his car) took them to a hotel, where Liao was robbed by “Wang” and the “Boss” and was tied with rope on a bed. His car was driven away by “Wang” and the “Boss.” Liao claimed but was turned down by the insurer, who argued that Liao changed the use of his car from private to business use, which increased the risk of loss. Liao did not notify the insurer of the change and the loss of the car was caused by the risk being increased. The People’s Court of Futian District of Shenzhen City held that the insurer was liable for the loss. Although the insured intended to use the car for his “future employment” and actually used his car to meet the “potential employer,” his “future employment” was only at the stage of negotiation. He did not start using his car for his employment. Thus he could not be said to change the use of his car to business purposes. The insurer appealed. The Intermediate People’s Court of Shenzhen City reversed the judgment of the trial court, holding that (1) the insured’s advertisement and receipt of deposit showed his intention of using his car for business purposes, (2) during the insurance period, the insured used his car to meet a stranger, “Boss,” for business purposes, thus the insured changed the use of the car but did not notify the insurer; and (3) the insurer was not liable for the loss caused by the increase of risk by the change of the use of the car. 10.3.1 The establishment of a test of material increase of risk A clear definition and a test of material increase of risk are necessary in order to reduce disputes. As to the insured’s pre-contract duty of disclosure, the Insurance Law provides that a material fact is a fact which shall sufficiently influence the insurer’s decision on whether or not it will accept the insurance or raise the premium rate.19 The test of materiality of information was thus determined as the prudent insurer decisive influence test.20 With reference to the test of materiality for pre-con18 Ibid. 19  The Insurance Law 2002, art. 17(2); the Insurance Law 2009, art. 16. 20  Z. Jing, “Insured’s Duty of Disclosure and Test of Materiality in Marine and Non-Marine Insurance Laws in China” [2006] JBL 681.

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tract information, the test of material increase of risk during the insurance period should be established as such: the risk is increased to such an extent that the insurer would not have accepted the insurance, or would have accepted the insurance at a higher rate of premium, had it known about the increase of risk at the time the contract was entered into. Accordingly, not all kinds of increase of risk are material but only those which would have caused the insurer to raise the premium or to terminate the contract.21 The burden of proof is on the insurer. To determine whether the insurer would charge a higher premium or terminate the contract for the increase of risk, reference should be taken retrospectively to the insurer’s hypothetical attitude at the time of the contract. Namely, it can increase the premium or terminate the contract in the event of increase of risk if it would have done so had it known the increase of risk at the time of the contract.22 It is suggested that for the test of post-contract “material increase of risk,” the insurer should refer to the actual insurer (not a prudent insurer), because the contract has already been entered into on the terms and conditions in that particular policy offered by that particular insurer. From this point of view, the test should be “the actual insurer decisive influence test.” 10.3.2 English approach on increase of risk (a) The general rule The English common law approach is that an increase in the risk insured occurring after the insurance contract was concluded has no effect on the insurer’s obli­ gations.23 The leading cases of Shaw v Robberds 24 and Pim v Reid 25 demonstrate the point. For example, in Shaw v Robberds, a fire policy was effected in respect of a kiln, and the kiln was said to be used only for drying corn. On one occasion, the insured allowed a friend to dry bark in the kiln gratuitously and this occasioned a fire which brought about the dispute. It was held that the insurer was liable even though drying bark was a more hazardous activity than drying corn. The use of drying bark was a

21  On this issue, a Chinese writer says: “after the conclusion of a property insurance, the insured should notify the insurer of any increased risk if the increased risk would sufficiently influence an insurer’s decision on whether or not he would have supplied the insurance or what premium he would have charged at the time when the contract was concluded.” See Baoshu Wang, Chinese Commercial Law (People’s Court Press 1996) p. 510. 22  Some Chinese writers also have the same view on this point. See Song Shuo, “Determination on material increase of risk to the subject matter of insurance,” accessed in June 2016. 23  See M. Clarke, “An interim discussion paper on alteration of risk” (2003) CMI Yearbook 503; R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-018; M. Smith, “The effect of subsequent increases of risk on contracts of insurance” [2009] LMCLQ 366; B. Soyer, “Continuing duty of utmost good faith in insurance contracts: still alive” [2003] LMCLQ 39. 24  (1837) 6 A & E 75. 25  (1843) 6 Man & G 1. In Pim v Reid the insured changed his trade during the currency of the contract and caused a large amount of highly inflammable material to be brought on to the insured premises. When the policy was effected the mill was being used for the manufacture of paper, but during the currency of the policy the insured started the business of a cleaner and dyer of cotton waste, which involved a use of a more hazardous sort, and a loss occurred. It was held that the non-notification of the alteration of risk to the insurer was not actionable. In the absence of any express condition prohibiting alterations in use, and in the absence of the alteration contravening any description of the subject-matter of the insurance, the change of the trade did not invalidate the policy.

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one-off event and did not change the fact that the normal use was for drying corn. It was held that the case did not fall within the conditions excluding cover, and that the increase in risk caused by the insured’s conduct did not preclude recovery under the insurance. According to the cases, an insured is not under a post-contract duty of notification of increases of risk in the absence of clear policy terms. This common law position has been confirmed by some recent decisions. In Kausar v Eagle Star Insurance Co. Ltd26 it was held that where there was a notification clause in the policy which required notification to the insurers in the event of an increase of risk, that clause was to be construed as doing no more than codifying the common law distinction between increase of risk (which has no adverse effects on the policy) and change of risk (which operates automatically to discharge the insurer on the basis that what was agreed has ceased to exist), and that it applied only to the latter situation. The notification clause should be construed in a manner which does not impose day-today obligations upon the insured.27 (b) Exceptions to the general rule – material increase However, if the increase of risk is material, the duty of notification arises and the insurer may have a remedy for the increase of risk. The issue of what is a material increase of risk arises in both the cases of Hadenfayre v British National Insurance Society Ltd 28 and Ansari v India Assurance Ltd,29 where it was held that there was a material increase of risk which discharged the insurer from liability. However, in respect of the test of materiality of increase of risk, two different approaches were adopted in these cases. In Hadenfayre, Lloyd J held that “If it was a material fact to be disclosed before the contract of insurance, on the ground that it would have influenced the judgment of a prudent insurer in deciding whether to accept the risk and, if so, at what premium, then it seems to me to follow that it must have constituted a material variation after the contract of insurance was concluded.” “Material,” in Lloyd J’s mind, clearly meant “material” in the insurance sense – that is, matters that would influence the judgement of a prudent insurer in fixing the premium or in determining whether to take the risk.30 According to Lloyd J’s statement, the test of material increase of risk should be a prudent insurer mere influence test. With respect, it is inappropriate, for several seasons, to use the prudent insurer mere influence test for pre-contract information as a test for post-contract material increase of risk: first, the prudent insurer mere influence test was very harsh to the insured and was mitigated by the

26  [1997] CLC 129. It was held that a provision which stated, “You must tell us of any change of circumstances which increases the risk of injury or damage and you will not be insured under the policy until we have agreed in writing to accept the increased risk,” was ineffective when, in an insurance of a shop, the insured failed to tell the insurers that threats to damage the shop had been made by the tenants and (unlawful) sub-tenants. The result may be justifiable on the ground that this was not in any event a permanent increase in risk. 27  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-027. 28  [1984] 2 Lloyd’s Rep 393. 29  [2009] Lloyd’s Rep IR 718. 30 M. Smith, “The Effect of Subsequent Increases of Risk on Contracts of Insurance” [2009] LMCLQ 372.

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introduction of the doctrine of inducement;31 second, this approach in effect reintroduces, through the back door, a continuing duty of disclosure of any information which would have influenced the judgement of a prudent insurer in deciding whether to accept the risk and, if so, at what premium,32 and this would impose on the insured an onerous continuing duty of informing the insurer of changing circumstances; and third, if a change of circumstance passed the prudent insurer mere influence test, then the insurer was discharged by the material change – this cannot square with the common law position that a subsequent increase of risk has no effect on the insurer’s obligations unless the increase of risk amounts to a change of nature of the risk. The recent case of Ansari v New India Assurance Ltd has a different view on the meaning of material increase of risk which is now the leading authority in respect of increase of risk. In this case, there was a policy term which stated: “This insurance shall cease to be in force if there is any material alteration to the Premises or Business or any material change in the facts stated in the Proposal Form or other facts supplied to the insurer unless the insurer agrees in writing to continue the insurance.” The proposal form had stated that the premises insured were protected by an automatic sprinkler system, but at some point this had been turned off other than merely for maintenance or repair – it had been disabled. The Court of Appeal held that the disabling of the system amounted to a “material change.” Construing “material” as referring to changes of a kind that take the risk outside that which was in the reasonable contemplation of the parties when the policy was issued, namely “material alteration,” means that the risk had actually altered in nature. Rejecting the argument for the insurer that “material” was to be construed more widely in accordance with its meaning for pre-contract disclosure purposes, the Court of Appeal held that the term “material” did not import the test for the pre-contract duty of utmost good faith, as materiality in that context meant no more than what a prudent underwriter would have been interested in about the changed circumstances, a “relatively undemanding” threshold. Instead, the Court of Appeal felt that the question should be whether the changed circumstances had had a significant bearing on the risk; a test which the Court of Appeal felt was easily satisfied on the facts in this case.33 Accordingly, the insurer could be discharged from liability only where the risk had actually altered in nature. It is submitted that this should be a correct and reasonable test for a material increase of risk under English law. This test of materiality of the post-contract increase of risk is narrower than that for the pre-contract disclosure of material information.

31  Section 18(2) of the MIA states: “Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.” According to this provision, in Container Transport International Inc (CTI) v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476, the test of materiality of non-disclosure was determined as the “prudent insurer mere influence test.” The test of materiality for pre-contractual duty of utmost good faith is too harsh to the insured, and later in Pan Atlantic Co. v Pine Top Insurance Co. Ltd [1994] 2 Lloyd’s Rep 427, the doctrine of inducement was introduced into the rules of utmost good faith. Now the two doctrines must work together before an insurer may avoid a contract on the ground of non-disclosure, namely, before avoiding the contract, the insurer in question must show that the fact of non-disclosure or misrepresentation has induced him to enter into the contract, in addition to satisfying the prudent insurer mere influence test. 32 M. Smith, “ The Effect of Subsequent Increases of Risk on Contracts of Insurance” [2009] LMCLQ 374. 33  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-022.

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In the UK, now rules relating to pre-contract disclosure and representation are provided in the Consumer Insurance (Disclosure and Representation) Act 2012 and the Insurance Act 2015. In both Acts, the doctrine of inducement has been adopted. For consumer insurance, s. 4(1) of the 2012 Act provides: “An insurer has a remedy against a consumer for a misrepresentation made by the consumer before a consumer insurance contract was entered into or varied only if . . . (b) the insurer shows that without the misrepresentation, that insurer would not have entered into the contract (or agreed to the variation) at all, or would have done so only on different terms.” Similarly, for non-consumer insurance, s.8 of the 2015 Act provides that “(1) The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer (a) would not have entered into the contract of insurance at all, or (b) would have done so only on different terms.” These two sections in the two Acts indicate that before the insurer may reject a claim, it must prove that it was induced to enter into the contract by the insured’s non-disclsoure or misrepresentation. This is a much higher threshold compared with the prudent insurer mere influence test of materiality for pre-contract non-disclosure or misrepresentation in the previous law. It is suggested that the inducement approach should also be imported to determine whether a post-contract increase of risk is a material one. That means an increase of risk is material if the insurer could prove that it would not have entered into the contract or would have done so only on different terms had it known the increase of risk at the time of the contract. In other words, “material” here refers to changes of a kind that take the risk outside that which was in the reasonable contemplation of the parties when the policy was issued. Accordingly, the test for pre-contract non-disclosure or misrepresentation and the test for post-contract increase of risk would be the same. The insurer here is the actual insurer. The insurer does not have to show that the changes of facts or circumstances which have materially increased the risk would have influenced other insurers in the market. In summary, the common characteristics of a material increase are (1) the nature of the risk has changed, and (2) the increased risk falls outside what was contemplated by the insurer at the time of the contract. Accordingly, the test for a material increase of risk is that the increase of risk is material if, had it been disclosed at the time of contract, the insurer would have rejected the insurance or raised the premium. 10.4 The way of performing the duty of notification For pre-contract disclosure, the Insurance Law adopts the way of inquiring disclosure (not voluntary disclosure).34 The proposer is only obliged to disclose the information asked in questions by the insurer in the proposal form, and the insurer may not avoid a policy on the ground that the proposer did not disclose something material which is beyond the questions raised in the proposal form.35 Similarly, it is suggested that instead of requesting the insured to notify the insurer of any material increase of risk, the insurer should be required to provide a list of facts or

34  The Insurance Law 2009, art. 16(1). 35  Zhen Jing, “Insured Duty of Disclosure and Test of Materiality in Marine and Non-Marine Insurance Laws in China” [2006] JBL 688.

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circumstances in the policy which are likely to increase the risk of loss, thereby giving some assistance to the insured in fulfilling his notification obligation. The insured should only be obliged to notify the insurer of of those changes in the list which have materially increased the risk. The argument for this suggestion is that the test of material increase of risk expects the insured to know what the insurer regards as material and then report to the insurer. While some insureds may know that the increase of risk is material, some others may not. The failure of some insureds to report to the insurer a material increase of risk is sometimes because of the insured’s inability to recognise the materiality of the increase. Thus it is necessary for the insurer to provide a list of facts or circumstances in the policy which are likely to increase the risk of loss. For example, a notification clause in a private motor insurance policy would state: “You must tell us if any of the following details change during the insurance period: (1) you modify your car; (2) you add another driver to your policy or amend the driving restriction; (3) you change the use of your car (e.g. change from private to business use); and (4) you change the address where you normally keep your car.”36 The insured should only be required to notify the insurer of those changes in this list. It is also suggested that the insurer should warn the insured in the proposal form as to the requirement of notification of increase of risk during the currency of the contract and the consequences of a failure to do so. In Chapter 9, we considered the insurer’s duty of explaining the contents of the contract to the proposer before concluding the contract, and an insurer must explain to the insured the meaning of a notification clause in the contract and the consequence for non-compliance with the duty of notification of an increase of risk. Article 52 of the Insurance Law does not provide a time limit within which notification must be made. The insured is only required to notify the insurer “in a timely manner.” The Insurance Act (Taiwan) stipulates that if the increase in risk is caused by an act of the insured, and the risk is increased to the extent that the premium should be increased or the contract terminated, the proposer or the insured shall serve prior notice to the insurer. If the increase in risk is not caused by an act of the proposer or the insured, the proposer or the insured shall notify the insurer within 10 days of becoming aware of the increase in risk.37 It is suggested that a time limit of 10 days is reasonable and should be added into art. 52, so as to reduce dispute about the term “in a timely manner.” 10.5 Is the duty of notification a statutory duty or a contractual duty? The Insurance Law requires the insured to report to the insurer a material increase of risk “in accordance with the contract.”38 The phrase “in accordance with the contract” raises a question, that is, whether the duty of notification is a statutory duty or contractual duty. If it is a statutory duty, the insured must perform the duty even in the absence of a contractual provision. If it is a contractual duty, the insured needs

36  This clause is modified from a clause in the Directline Car Insurance Policy. 37  The Insurance Act (Taiwan), art. 59. 38  The Insurance Law 2009, art. 52.

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to perform his duty only where there is such a clause in the contract which requires him to notify. It is unclear whether the insured is required to notify the insurer of an increase of risk regardless of the absence or presence of any notification clause in the contract. The ambiguity gives rise to arguments. Some scholars argue that the duty is a statutory one, because it is imposed by the law.39 They suggest that no matter whether there is a notification clause in the policy, the insured has the duty to notify the insurer of increase of risk. The term “in accordance with the contract” means that the insured should notify the insurer in the way specified in the contract. The term refers only to the manner (oral or written) and time limit of the notification.40 Some others have a different view, insisting that the duty of notification is a contractual duty because the law requires the insured to notify the insurer in accordance with the contract.41 If there is a notification clause in the policy, the insured should do so according to the clause. If there is no such clause, the insured is not obliged to notify. It is submitted that the second view is more convincing; the insured only needs to perform the duty of notification where there is a clause in the policy requiring him to do so. This view can be supported by the following reasons: first, if it is a statutory duty, the law does not need to mention the term in accordance with the contract. Even if, as some writers argue, the term refers only to the manner and time limit of notification, there must be a clause in the policy to require the insured to perform the duty of notification and at the same time to specify the manner and the time limit of the notification. Second, the insurance contract is a standard form contract which is drafted by the insurer. If the insurer wishes to be notified of an increase of risk, it should make such requirement in a clause. Third, an ordinary insured is not expected to be familiar with the complicated law, so it is hard for him to know that a statutory duty is imposed on him to notify the insurer of an increase of risk. If he is not required by a policy term, he should not be expected to perform the duty.42 So it is submitted that the duty is a contractual one. In China, most property insurance43 policies have a clause of notification of increase of risk.44 The clause is basically drafted following art. 52 of the Insurance Law. As an example, a typical notification clause in the Property All Risk Insurance Clauses of Tai Ping Insurance Company of China states:

39  Baoshi Wang, The Property Insurance Law – Legal Interpretation and Case Studies (Intellectual Property Press 2009) p. 65. See also Jianxun Liu, Insurance Law – Cases and Analysis (Law Press 2007) p. 80. 40 Song Shuo, “Determination of the meaning of material increase of risk of the insured subject matter” published online, see accessed in June 2016. 41  See Jianxun Liu, The Insurance Law – Decisions and Analyses on New types of Complicated Cases (Law Press 2007) p. 80; see also Xian Xie, A Hundred Selected Insurance Cases (Law Press 2012) p. 140. 42  Jianxun Liu, The Insurance Law – Decisions and Analyses on New Types of Complicated Cases (Law Press 2007) pp. 76–83. 43  In China, non-marine insurance is basically divided into property and life insurance. According to art. 95 of the Insurance Law 2009, property insurance includes property damage insurance, liability insurance, credit insurance and guaranty insurance, etc. 44  For example, the Basic Property Insurance Policy of Ping An Insurance Company, Comprehensive Property Insurance Policy of Ping An Insurance Company has clauses relating to increase of risk. Many policies of other insurance companies in China also have similar clauses, such as those of the People’s Insurance Company of China, Huatai Insurance Company of China and Tai Ping Insurance Company of China and so on.

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“During the period of the insurance contract, where changes of occupation, use, address of the subject matter of insurance or changes of other facts or circumstances specified in the contract may materially increase the risk and sufficiently influence the insurer’s decision on whether he will continue to insure the risk or raise the premium, the insured shall notify the insurer in writing in a timely manner. The insurer shall have the right to demand an increase in the premium or terminate the contract. Where the insured fails to perform his obligation of notification specified here, the insurer shall not be liable for indemnity in the case of the occurrence of an event insured against which is caused by the material increase in risk.”45

10.6 Other factors activating the duty of notification In determining whether the duty of notification of an increase of risk is activated, in addition to the two major factors discussed above (namely the increase of risk must be material and there must be a notification clause in the policy), other factors should also be considered. (1) The increase of risk is brought about by the insured himself. (2) The increase of risk is caused by a third party, but the insured is aware of it. (3) The increase of risk is permanent or habitual (change of nature of risk). These matters are not mentioned by the Insurance law, but they are important and need to be considered here. 10.6 1 Increase of risk is brought about by the insured In most situations, the increase of risk is brought about by the insured himself. For example, as was discussed earlier,46 Mr Li effected a fire policy on his house for private use. Later he let the house to another person for the use of storing flammable chemicals. The insured risk was obviously materially increased and the increase was brought about by the insured himself; he must notify the insurer of the increase. In some other jurisdictions, the insured is required by law to serve notice to the insurer either in the case of an increase of risk caused by the insured himself or prior to the increase of risk. For example, Norwegian law provides that if the insured has intentionally caused or agreed to an alteration of the risk, the insurer is free from liability, provided that the insured would not have accepted the insurance if it had known that the alteration would take place at the time of the contract.47 In Belgian law the duty to notify applies only if the insured is responsible for the increase of risk.48 The Insurance Act (Taiwan) requires the insured to serve prior notice to the insurer if the material increase in risk is caused by the insured.49 It is clear that where the increase of risk is brought about by the insured himself, the duty of notification is triggered.

45  There are very similar clauses in other insurance policies, such as clause 23 of the Comprehensive Property Insurance Policy of the People’s Insurance Company of China. 46  Baoshi Wang, The Property Insurance Law – Legal Interpretation and Case Analysis (Intellectual Property Press 2009) p. 78. The case was cited in the book. 47  The Norwegian Marine Insurance Plan 1996, s. 3-9. 48  Belgium Law 1874, art. 9. 49  The Insurance Act (Taiwan), art. 59.

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10.6 2 Insured must have knowledge of the increase of risk If the insured is not aware of the increase of risk, he cannot notify the insurer about it and cannot be said to have breached his duty of notification. For example, consider if the insured effected a fire policy for his terrace house. Unknown to him, his next-door neighbour’s dwelling house was changed to be used for storing fireworks. This undoubtedly increases the risk of fire. However, it would be unfair to ask the insured to notify the insurer of the increase, because he himself did not know the increase. Norwegian law expressly provides that if the assured becomes aware that an alteration of the risk will take place or has taken place, he shall notify the insurer.50 This implies that if the insured is not aware of the increase of risk, he has no duty to notify the insurer. Here the insured’s knowledge refers to actual knowledge. Article 4:202 of the Principles of European Insurance Contract Law 2009 (PEICL) refers to both actual and constructive knowledge, and provides: “If a clause concerning aggravation of the risk insured requires notification of an aggravation, notification shall be given by the policyholder, the insured or the beneficiary, as appropriate, provided that the person obliged to give notice was or should have been aware of the existence of the insurance cover and of the aggravation of the risk.” 10.6.3 The increase of risk is permanent or habitual Whether the increase of risk must be permanent or habitual is another point for determining the insured’s duty of notification of increase of risk. Chinese insurance law is silent on this point. Under English law, a mere temporary or one-off increase of risk does not affect the insurer’s liability, because it does not change the nature of the risk.51 The lack of a provision in Chinese law causes disputes in practice. For example, in Mr Li Xian v PICC Property Insurance Company, Dong Guan Branch,52 Mr Li insured his car for private use. One day during the currency of the policy, Li carried four men and asked for ¥25 from them. The car was hijacked by the men. Li claimed but was refused by the insurer, who argued that Li changed the use of the car from a private to a business purpose, and the risk was obviously increased, but he did not notify the insurer of such change. In the policy, clause 15 stated: “In the insurance period, if the insured vehicle is modified or the use of it is changed for business, which results in an increase of risk, the insured should notify the insurer in writing. Otherwise, the insurer is not liable where the loss is caused by the increase of risk.” The court held that the use of the vehicle to take a few passengers was a one-off event, and did not change the fact that the normal use was for private purposes, as there was no evidence that the use of the car was changed permanently for business. However, the court made the decision by mediation.53 On the one hand, the court admitted that taking the passengers for money amounted

50  The Norwegian Marine Insurance Plan 1996, s. 3-11. 51  Shaw v Robberds (1837) 6 A & E 75. 52 The website of Dong Guan Middle People’s Court, Guang Dong Province. Dong Guan People’s Court (trial court) civil cases report No. 1874 (2006). Dong Guan Middle People’s Court (appeal court) civil cases final judgment report No. 558 (2006). 53  The People’s Court of China has the function of mediation. See arts 85–91 of the Civil Procedure Law of China 1991.

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to a kind of business but the risk was only temporarily increased, so the insured was partially responsible for the loss of the car. On the other, the court held that the insurer was also partially responsible because it did not explain the notification clause to the insured at the time of the contract. Thus the insurer was responsible to pay half of the insured amount. The insurer appealed and argued that the trial court misinterpreted the meaning of the term “business use” in the policy, which was defined in clause 17 as “without getting permission from the Traffic and Transport Administration Department, the use of the vehicle by the insured or any other person who is allowed to drive by the insured for taking passengers or transport of goods for making money is deemed as for ‘business use.’ ” The emphasis of clause 17 was on the use of the vehicle for money and did not refer only to permanent change of use for business. In addition, no matter whether the car was used occasionally or permanently for business, the risk increased, and thus the insured should have notified the insurer of such increase of risk according to clauses 15 and 17 in the policy and art. 37 of the Insurance Law 2002.54 The appeal court reversed the decision of the trial court, and made the judgment for the insurer. The major question in this case was whether the increase of risk should refer only to the permanent and habitual change of use or to any temporary change. Several points from this case should be considered here: (1) is the insured required to notify the insurer for such a one-off event, and how does the insured serve such a notice? (2) Assuming that the insured did not ask for money, but just gave a free lift to the hitchhikers, what would the consequence be if the car was hijacked by the men? And (3) if while the insured was giving a free lift to the hitchhikers, the car was involved in a road accident which was caused by the fault of another driver, does the insurer have the right to refuse the claim? It is submitted that for the first point, the duty of notification is not triggered, because the increase of risk is not a change in nature – the car is still mainly used for private purposes.55 If the insured is required to telephone the insurer to ask whether he is allowed to give a lift to the hitchhikers, it is practically inconvenient and unworkable. This case is very similar to the English case of Shaw v Robberds, but the decisions were different. Taking English law as a reference, temporary change of use of the insured subject matter should not be deemed to be a change of nature of the risk. As to the second point, the insurer’s argument was that the insured used the car for business as he received money from the hitchhikers. This implied that the insurer would have been liable if the insured had not asked for money. Whether or not the insured asked for money would not change the fact that the car was hijacked, which was a planned crime, and the men would not change their minds regardless of being asked for money or not, thus the insurer should not be allowed to be free from its liability. In Shaw v Robberds, if the insured had allowed a friend to dry bark in the kiln but asked for money for the use, it would be very unlikely that the insurer would be free from liability because the use of drying bark was only a one-off event. The last point is that while the insured was giving a free lift to the hitchhikers, the 54  The Insurance Law 2002 was operating then. 55  Some scholars argue that if the car is used to take passengers for making money without a business licence, no matter if it is occasional or habitual, it is an unlawful activity and may discharge the insurer from liability.

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car was involved in a road accident due to the fault of other driver, and according to art. 52 of the Insurance Law, the insurer has no right to refuse the claim because there is no causal connection between the increase of risk and the loss. The causal connection approach will be discussed further shortly. In the event that the use of the subject matter has been changed in a way which results in material increase of risk, but the insured fails to notify the insurer of such change, the insurer is released from its liability. In Mr Zong v The Insurance Company,56 Mr Zong insured his car for private use, but he let his car to an other person for a rent of ¥160 per day, and did not notify the insurer of such change of the use of the vehicle. When the car was damaged in a road accident while being driven by the person who rented the car, the insurer refused to pay the loss by reason of the insured’s failure in notifying about the increase of risk. The court made the judgment for the insurer. 10.7 Remedies for the increase of risk Where there is a material increase of risk, the insured must notify the insurer and the insurer is entitled to have some remedies. The Chinese approach is that the insurer has the right to demand an increase of the premium or terminate the contract in accordance with the contract.57 Whether the insurer should increase the premium or terminate the contract depends on its hypothetical attitude at the time of the contract. If it would have rejected the risk had it known the increase of risk at the time of the contract, then it should be entitled to terminate the contract in the event of the increase. If it would have raised the premium, it should be entitled to increase the premium. Where the insurer terminates the contract, it should return the premium to the insured after deducting the amount between the time of commencement and the time of termination of the contract.58 If the insurer accepts the increase of risk, the increase will cause no problems for the coverage of future claims, but the insurer may be entitled to an additional premium.59 Certainly, the increase of the premium should be reasonable; if it is unreasonable, the insured is entitled to reject it and terminate the contract.60 However, in China, in practice, the insurer rarely exercises its right of termination of the contract under these circumstances.61 That is because the insurer wants

56  This case was decided by the People’s Court, Xin Pu District, Lianyungang City, Jiangsu Province, Civil Court Judgment (2012) No. 2434, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2013) vol. 5, p. 524. 57  The Insurance Law 2009, art. 52. 58 Ibid. 59  This is also the approach of German law: s. 25(1) of the German Insurance Contract Act 2008. 60 That is the approach of German Insurance Contract Act 2008, s. 25(2) of which states: “If the insurance premium increases by more than 10 per cent in consequence of an aggravation of the risk insured or the insurer excludes insurance cover for the aggravated risk, the policyholder may terminate the contract without prior notice within one month of receipt of the communication from the insurer. The insurer must inform the policyholder of this right in this communication.” See also the Taiwan Insurance Act 2010, art. 60. 61  Personal discussion with Mrs Xiaoling Zhang (the deputy general manager of Ping An Insurance Company of China, Qingdao Branch) on 21 September 2012.

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to keep customers; it prefers to continue the contract by raising premiums rather than terminating the contract. Nowadays, numerous types of coverage are offered by insurers – insurance covers almost everything. Moreover, from the insured’s point of view, once the policy is terminated, the insured must take steps to find alternative cover; it is very difficult for him to effect a policy with other insurers in this situation in a short period of time. There is a lacuna in both law and practice in China, that is, who should be liable for the loss which occurred between the notification and the insurer’s decision on either raising the premium or terminating the contract. It is submitted that in this situation, the insurer should be liable for the loss. Before the insurer makes a decision after being notified an increase of risk, the contract should be treated as not affected by the increase. If the insurer wishes to reduce such sort of liability, it should, upon receiving the notification from the insured, make its decision without delay. Article 52 of the Insurance Law does not specify a period of time within which the insurer must make its decision. But the time limit is provided in art. 49 of the Insurance Law in the event of an increase of risk upon assignment of the subject matter of insurance. Where the subject matter of insurance is assigned, the Insurance Law requires the insured or the assignee to notify the insurer of such assignment in a timely manner. If the degree of the risk of the subject matter of insurance materially increases upon assignment, the insurer should have the right to demand an increase of the premium or terminate the contract within 30 days of receiving the notification of such assignment.62 It is suggested that the insurer should make its decision within 30 days after receiving the notification of increase of risk. The right of termination or increase of premium should lapse if it is not exercised within 30 days. Having considered the remedies available to the insurer when the insured has notified the insurer in the event of a material increase of risk, we will then consider what the insurer can do where the insured fails to perform his duty of notification of increase of risk. 10.8 Consequences for breach of the duty of notification by the insured 10.8.1 The Chinese approach As mentioned above, the insured rarely informs the insurer of the increase of risk; the fact of the increase of risk is usually discovered by the insurer when it investigates the insured event at the time of handling claims.63 No reported cases have so far been found on disputes about termination of the contract or increase of the premium after the insurer has been notified in the event of an increase of risk. Several reasons can be suggested. (1) The law and policy terms on the insured’s duty of notification are not very clear – the insured hardly knows what kind of increase he must disclose to the insurer. (2) In some situations, it is impracticable for the

62  The Insurance Law 2009, art. 49. 63 The author discussed this issue on 28 October 2012 on the phone with Mrs Pin Yin, the manager of the Underwriting Department of the Qingdao Branch of Tai Ping Insurance Company of China. She said that she had never received any notification of the increase of risk from any insured. They usually discover the increase of risk at the stage of handling claims.

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insured to notify the insurer of the increase of risk before or immediately after the risk has increased. (3) The insured does not notify the insurer deliberately or recklessly, hoping that the insurer won’t discover the fact of increase of risk. And (4) even if the insured informs the insurer of the increase of risk, disputes can rarely arise on this matter because upon receiving the notification, the insurer is entitled to terminate the contract or increase the premium, and the insured usually accepts the insurer’s decision.64 Here we will consider rules of law dealing with the consequences for breaching the duty of notification. By virtue of art. 52 of the Insurance Law, where the insured fails to perform the duty of notification of increase of risk, the insurer shall not be liable for indemnity in the case of the occurrence of an event insured against which is caused by the material increase in risk. The burden of proof is on the insurer, who must show evidence that the loss is caused by the material increase of risk. If the loss is not caused by the increase of risk, the insurer is still liable.65 A causal connection needs to be established between the loss and the increased risk for the insurer to refuse the claim. At first glance, the law seems fair, but there are two major problems with it. (1) In some situations, the risk has materially increased but the loss is not caused by the increased risk; the insurer is liable for the loss because there is no causal connection between the increase of risk and the loss. Thus the insurer may receive a low premium but bear a high risk which was not contemplated at the time of the contract. For example, in a hypothetical case, John pays ¥200 premium for the insured amount of ¥4,000 of his car for private use. Later he changes the use of his car to business purposes, but does not notify the insurer. The insurer would have increased premium by an extra ¥20 had he been notified by John. The car is damaged in a road accident while John carried passengers for money, and the insurer can then refuse John’s claim for the loss because there is a causal connection between the loss and the increase of risk. If the car is stolen at night while it is parked in front of his garage, the insurer should be liable for the loss, as no causal connection can be established between the loss and the increase of risk. In this situation, the insurer receives ¥200 premium and pays ¥4,000 for the loss. Had John performed his duty of notification, the insurer would have received ¥220 premium and paid ¥4,000 for the loss.66 Is this justifiable? This idea has caused and will continue to cause disputes. The insurer may argue that the use of the car has been changed from private to business use,67 thus the nature of risk has changed, so that the risk is not what was contemplated at the time of the 64  Personal discussion with Mrs Xiao Ling Zhang, the deputy general manager of Ping An Insurance Company, Qingdao Branch, and with Mrs Ping Yin, the manager of the Department of Underwriting, the Pacific Insurance Company, Qingdao Branch. 65 Some other jurisdictions have adopted this approach, such as (Draft) Principles of European Insurance Contract Law (art. 4:202) and the German Insurance Contract Act 2008 (s. 26). 66  From the insured’s point of view, he faces the risk of not being paid if the loss is caused by the increase of risk. So it would be wise for him to give notification to the insurer. By paying £20 more he can be sure of getting an insurance payment even if the loss is caused by the increase of risk. 67  In fact, in China a policy of motor insurance for private use is different from a policy for business use.

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contract, and thus he should not be liable for the loss.68 However, the insured may argue that the loss is not caused by the increased risk, and the insurer should be liable according to the Insurance Law.69 Sometimes, it is difficult to show a causal connection between the increase of risk and the loss. For instance, in Plastic Product Manufacturer Co. v Insurance Co.,70 the insured effected a comprehensive property policy in 2006. In the policy there was a clause in respect of notification of increase of risk.71 A fire occurred in a workshop and caused a loss of ¥1,700,000. The workshop was a warehouse when the insurance contract was concluded, but part of the warehouse was later changed to be used as a workshop. But the insured did not notify the insurer of the change of use. Specialists from the fire brigade investigated the cause of the fire and found that there was evidence of burning in an electric wire in the workshop, but the cause of the fire was uncertain. The insurer denied liability, arguing that the insured changed the use of the warehouse which resulted in an increase of risk but failed to notify. The insured argued that the insurer did not explain the clause to him, so it should be invalid.72 The court held that (1) the insured changed the use of the warehouse, and the insured risk for the use as a workshop was higher than as a warehouse. The insured breached the contract by failing to notify the insurer of the change of use. (2) However, according to art. 37 of the Insurance Law 2002,73 the insurer was not allowed to discharge its liability for the loss, because it was unable to show that the loss was caused by the increase of risk. (3) Both parties were at fault, so they should share the loss.74 The insurer was responsible for 70% of the loss and the insured for 30%, in accordance with the principles of good faith and fair dealing. (2) Under the Insurance Law, the consequence for an insured’s non-performance of the post-contract duty of notification of increase of risk does not depend on the degree of the insured’s fault. It is irrelevant whether or not the insured’s non-performance is intentional, negligent or innocent, the consequence for the breach is the same, that is, the insurer can refuse the claim

68  In an English case of Murray v Scottish Automobile (1929 SLT 114), a car insured for private use was used as a taxi. It was damaged by fire while parked overnight in a garage. The Court of Session held that the insurer was not liable to pay the claim. Lord Sands stated that the time the car was parked in the garage “must be attributed to one use or the other.” It was best seen as ancillary to the use to which the car has been put during the day. On this logic, the car was still being used as a taxi when parked overnight, and the insurer was not liable to pay the claim. 69  See the Insurance Law 2009, art. 52(2). 70  Xie Xian, A Hundred Insurance Cases (Law Press 2012) p.143. 71  Which stated: “In the period of insurance coverage, the insured should notify the insurer in writing of any change of name or address of the insured, the change of use of the subject matter, the increase of risk or assignment of the subject matter. The insured should get approval of the insurer prior to any such change. The insurer is entitled to refuse payment if the insured fails to perform such duty.” 72 The Insurance Law 2009 requires the insurer to explain policy terms, particularly the exclusion clauses, to the insured before the contract is entered into. Otherwise, the exclusion terms will be ineffective. Article 17 provides: “Where an insurance contract contains terms and conditions concerning exclusion of the liability of an insurer, the insurer shall warn the insured in the proposal form or other insurance documents to notice such terms and conditions and shall clearly explain orally or in writing such terms and conditions to the proposer at the time of concluding the contract. Where such terms and conditions are not clearly explained, they shall not be effective.” 73  The Insurance Law 2002 was operating then. 74  The Chinese Contract Law 1999, art. 42.

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if a causal connection can be established between the increase of risk and the loss. It is obviously unfair and unjustifiable to treat the innocent nonperformance in the same way as the intentional one. Under the Insurance Law, the consequences for breaching post-contract duty of notification of increase of risk75 are different from those for breach of pre-contract duty of disclosure.76 The consequence for breach of pre-contract duty of disclosure depends on the degree of the insured’s fault: for intentional nondisclosure, the insurer is free from liabilities for any loss that occurred before contract termination whether or not the loss is caused by the non-disclosure of facts;77 for grossly negligent non-disclosure, the insurer is liable for pre-termination losses unless the insured’s non-disclosure “has a material impact on the occurrence of an insured event.”78 As to the insurer’s right to rescind the contract because of pre-contract non-disclosure, the current law stipulates that the insurer shall have the right to rescind the contract where the non-disclosure is intentional or by gross negligence, and the facts undisclosed sufficiently influence the insurer’s decision on whether it will accept the insurance or raise the premium rate.79 Here it is implied that for an innocent or merely negligent non-disclosure, the insurer is not entitled to rescind the contract even if the facts undisclosed sufficiently influence the insurer’s decision on whether it will accept the insurance or raise the premium rate; logically, the insurer should be liable for any loss even if the non-disclosure has a material impact on the occurrence of the insured event. After the comparison of the consequences for breach of the precontract duty of disclosure with those for breach of the post-contract duty of notification, it can be seen that the law is more protective of the insured for the innocent or merely negligent breach of the pre-contract duty of disclosure than for breach of the post-contract duty of notification. It is suggested that an innocent or merely negligent post-contract non-notification should be treated differently than an intentional or grossly negligent non-notification. Having considered the shortcomings of the rule in Chinese law in respect of the consequences of breach of the post-contract duty of notification of increase of risk, it is necessary to look for possible solutions to these problems. It is for this purpose that the approaches adopted in some other jurisdictions are considered here.

75  The Insurance Law 2009, art. 16, 76  For more on the insured’s pre-contractual duty of disclosure and remedies for breach of such duty, see Z. Jing, “Insured’s duty of disclosure and test of materiality in marine and non-marine insurance laws in China” [2006] JBL 681; H. Y. Yeo, “Of remedies and non-disclosure in the insurance law of the People’s Republic of China” [2011] JBL 556. 77  The Insurance Law 2009, art. 16(4). 78  Ibid, art. 16(5). 79  Ibid, art. 16(2).

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10.8.2 Approaches in other jurisdictions (a) English Law In English law, the common law tolerance of post-contract increases of risk is normally modified by contractual provisions against increase of risk such as warranties.80 For example, for fire insurance on premises, the insured may warrant that particular substances (such as flammable chemicals) will not be brought on to the premises. The insured was required to strictly comply with the warranty which, if breached, would result in automatic discharge of the insurer’s liability for loss even though the breach was unconnected with the loss. The Law Commissions recognised the harshness of the law of warranty and their effort in the reform of the law has led to the enactment of the new Insurance Act 2015. Under the Insurance Act 2015, any rule of law that breach of a warranty (express or implied) in a contract of insurance results in the discharge of the insurer’s liability under the contract is abolished.81 An insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied.82 It is argued that the new rule can only solve one problem, this is, a breach of warranty can be remedied, but it does not solve the problems of strict compliance, automatic and immediate suspension of the cover, and no need for causal connection between the breach and the loss.83 (b) New Zealand law The requirement of a causal connection test can be found in New Zealand and Australian law. In New Zealand, by virtue of s. 11 of the Insurance Law Reform Act 1977, where there are exclusion terms in a policy which meet two tests – (1) the terms must exclude or limit the liability of the insurer on the happening of certain events or the existence of certain circumstances and (2) the reason for the terms is because, in the view of the insurer, the circumstances or events are likely to increase the risk of such loss occurring – the insured shall not be disentitled from being indemnified by the insurer by reason only of such exclusion terms in the policy if the insured proves that the loss was not caused or contributed to by the happening of such events or the existence of such circumstances. The purpose of s. 11 is to prevent exclusion being used to exclude insurer’s liability where the circumstances, and so the increase in risk, exist but the loss is not attributable to that increase. In 1998, the New Zealand Law Reform Commission reviewed the way s. 11 operates in practice.84 They expressed concern that the courts had interpreted the section to impose liability on insurers even if the policyholder was in blatant breach of a term delimiting the risk.85 They proposed

80  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-021. Professor Merkin provides a list of different types of express provision, such as warranties, clauses of notification of increase of risk, and clauses of suspension or delimitation of risk. 81  The Insurance Act 2015, s. 10(1). 82  Ibid, s. 10(2). 83  Zhen Jing, “Warranties and Doctrine of Alteration of Risk during the Insurance Period: A critical evaluation of the UK Law Commissions’ proposals for reform of the law of warranties” (2014) ILJ 183. 84  New Zealand Law Commission, Some Problems of Insurance Law (1998) No. 46, ch. 1. 85  New Zealand Insurance Co. Ltd v Harris [1990] 1 NZLR 10. In this case, s. 11 was interpreted in a way that prevents insurers from declining liability to indemnify for losses to equipment during commercial use when the cover by its terms is confined to private use.

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that a causal connection test should not apply to a provision which (a) defines the age, identity, qualifications or experience of a driver of a vehicle, a pilot of an aircraft or an operator of a chattel; (b) defines the geographical area in which a loss must occur if the insurer is to be liable to indemnify the insured; or (c) excludes loss that occurs while a vehicle, aircraft or other chattel is being used for commercial purposes other than those permitted by the contract of insurance.86 (c) Australian law The Australian approach appears more generous to policyholders. Section 54(2) of the Insurance Contract Act 1984 (ICA) provides that where the insured’s act after the contract was entered into could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim. This, however, is subject to two rights of the insured: (1) where the insured proves that no part of the loss giving rise to the claim was caused by his act, the insurer may not refuse to pay the claim by reason only of the act;87 and (2) where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.88 The onus of proof is on the insured to show the lack of causal connection. Where the act or omission is not capable of causing or contributing to a loss, s. 54(1) allows the insurer to reduce its liability “by the amount that fairly represents the extent to which . . . its interests were prejudiced.” Section 54(6)(b) of the ICA provides that an act or omission of the insured includes one that has the effect of altering the state or condition of the subject matter of the contract or of allowing the state or condition of that subject matter to alter. (d) German law In German law, the insured may not aggravate the risk insured or permit its aggravation by a third party without the consent of the insurer during the currency of the policy.89 Where the insured realises that he has breached the duty, that fact must be disclosed to the insurer without delay, as must any unintentional breach of which he becomes aware.90 How an insurer may respond to a breach of the duty not to aggravate the risk or to notify the insurer of such aggravation depends on the insured’s degree of fault. The insurer is not liable for losses occurring after an intentional breach of the duty by the insured. Where the insured has been grossly negligent, the insurer may reduce the amount to be paid on a claim commensurate to the insured’s fault. However, in either case there must be a causal connection between the aggravation of risk and the loss. In other words, the insurer is still liable if the aggravation had not caused or contributed to the loss claimed.91

86  New Zealand Law Commission, Some Problems of Insurance Law (1998) No. 46, ch. 1, p. 29. 87  The ICA, s. 54(3). 88 The ICA, s. 54(4). Section 54 of the ICA provides relief for non-compliance with contractual requirements of an insurance policy, where the non-compliance did not cause or contribute to the loss. If the non-compliance did contribute, however, the section gives insurers the ability to reduce the payout to the extent that their interests were adversely affected. 89  The German Insurance Contract Act 2008, s. 23(1). 90  Ibid, s. 23(2). 91  Ibid, s. 26.

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10.9 Recommendations Through the comparison of different rules of law in these jurisdictions in respect of consequences for breaching the insured’s duty of notification of increase of risk, it is recommended that some approaches in other jurisdictions could be introduced into Chinese law so as to overcome the shortcomings of the Chinese approach relating to the causal connection test. Accordingly, the following recommendation is proposed: The consequence for the insured’s non-performance of the post-contract duty of notification should depend on the degree of the insured’s fault: (1) For an intentional92 breach of the duty by the insured, the insurer should not be liable for any loss occurring after the increase of risk. (2) For a grossly negligent93 breach of the duty by the insured: (a) the insurer should not be liable for any loss occurring after the increase of risk, where the insurer can show a causal connection between the increase of risk and the loss; (b) where there is no causal connection between the increase of risk and the loss, (i) where the insurer would have increased the premium had he been notified by the insured of the material increase of risk, the insurer should be allowed to reduce its liability by the amount that fairly represents the extent to which his interests were prejudiced by the insured’s non-notification. In other words, the insurer may reduce the amount to be paid proportionately to the ratio of premium he received and the premium he should have received;94 (ii) where the insurer would have terminated the contract had he been notified by the insured of the material increase of risk, the insurer should not be liable for any loss occurring after the increase of risk. (3) For an innocent95 or merely negligent96 breach of the duty of notification by the insured, the insurer should be liable for any loss, no matter whether or not the loss is caused by the increase of risk.

92  The non-notification is intentional if the insured knew that the risk insured against has been materially increased or the change of facts or circumstances has materially increased the risk, but he did not notify the insurer. 93 The non-notification is grossly negligent if the insured did not care whether or not the change of facts or circumstances has materially increased the risk. 94  For example, in the hypothetical case mentioned above, if the car was stolen at night while it was parked in front of his garage, the current Chinese law does not allow the insurer to be released from the liability for the loss, as no causal connection can be established between the increase of risk and the loss. The insurer had to pay John ¥4,000 for the loss. The insurer would have increased the premium by an extra ¥20 had John notified him of the increase of risk (changing the use of his car from private to business use). By the rule recommended, the insurer should be allowed to reduce its liability by the amount that fairly represents the extent to which his interests were prejudiced. Instead of paying John ¥4,000 for the loss, the insurer should be liable to pay ¥3,636 (¥4000 × ¥200 ÷ ¥220 = ¥3636) for the loss which is proportionate to the ratio of the premium he received (¥200) and that he should have received (¥220). 95  The non-notification is innocent if the insured honestly does not know that the risk insured against has been materially increased or the change of facts or circumstances has materially increased the risk. 96  The non-notification is merely negligent if it is not intentional, grossly negligent or innocent.

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10.10 Conclusion The Insurance Law requires the insured to notify the insurer of a material increase of risk, but does not define what a material increase of risk is. This has caused disputes. It is suggested that a definition of the material increase of risk should be provided in the law, such as: “the risk is increased to such an extent that the insurer would not have accepted the insurance, or would have accepted it at a higher rate of premium if he had known about the increase of risk at the time the contract was entered into.” Based on this definition, the test of materiality of a non-notified increase of risk is established as the “actual insurer decisive influence test.” To activate the duty of notification of increase of risk, in addition to meeting the test of materiality, other factors must be considered: (1) the insured is aware of the increase of risk; (2) the increase is permanent or habitual; and (3) the increase of the risk was not contemplated at the time the contract was entered into. The Insurance Law does not provide a time limit within which notification must be made. It is suggested that a time limit of 10 days after the insured has known of the increase of risk is reasonable and should be added into the law. The duty of notification of increase of risk is a contractual one – in the absence of a notification clause in the policy, the insured is not obliged. If the insurer wishes to be notified of the increase of risk, it should provide, in the policy, a list of facts or circumstances which are likely to increase the risk of loss, thereby giving some assistance to the insured in fulfilling his notification obligation. The insured should only be obliged to notify the insurer of changes to items in the list which have materially increased the risk. The insurer should also warn the insured in the proposal form as to the requirement of notification of increase of risk and the consequences of a failure to do so, and explain the meaning of the notification clause to the proposer before concluding the contract. To remedy increase of risk, the Insurance Law enables the insurer either to increase the premium or to terminate the contract upon being notified of a material increase of risk. There is a lacuna in both law and practice in China, that is, who should be liable for the loss if it occurred between the notification and the insurer’s decision on either raising the premium or terminating the contract. It is submitted that in this situation, the insurer should be liable for the loss. The Insurance Law does not specify a period of time within which the insurer must make its decision. It is suggested that 30 days after receiving the notification would be appropriate. The Insurance Law in respect of the insured’s failure to perform the duty of notification requires a causal connection between the increase of risk and the loss. The insurer is not liable for the loss which is caused by the material increase of risk. This causal connection approach has two major problems. (1) In some situations, the risk has materially increased but the loss is not caused by the increased risk; the insurer is liable for the loss. Thus the insurer may receive a low premium but bear a high risk which was not contemplated at the time of the contract. (2) It is irrelevant whether or not the insured’s non-notification is intentional, negligent or innocent – the consequence for the breach is the same. It is unfair to treat the innocent non-notification in the same way as the intentional one. It is thus suggested that the approach should be reformed as proposed in the recommendation so as to overcome the problems with the causal connection approach. 360

CHAPTER 11

Double insurance and contribution

11.1 Introduction Double insurance arises where a proposer enters into insurance contracts with two or more insurers in respect of the same insured subject matter, the same insurable interest, the same insured event and for the same period of time, while the total sums insured exceed the insurable value of the subject matter.1 The Insurance Law allows a proposer to effect two or more policies. Nothing can prevent a person from effecting such multiple policies.2 This is like English law, under which an insured can take out as many insurance policies with many insurers as he pleases which, to some extent, cover the same interest, in the same subject matter, in respect of the same risk for the benefits of the same person.3 In practice, however, double insurance rarely happens in China; only a few cases have been reported on double insurance. This is unlike the situation in the UK where it is not uncommon for the same property to be insured under different policies.4 On the one hand double insurance is perfectly lawful; on the other, the insured is not allowed to make a profit from over-insurance by double insurance. It is well established that the basis of insurance is that of indemnification for pecuniary losses incurred; this would preclude profit making by an insured through over-insurance by double insurance. Equally, by the indemnity principle, when there is over-insurance by double insurance, each insurer must bear its share of any loss by way of a “contribution” proportionate to the amount for which it is liable under the contract. The insurers concerned are bound to contribute rateably to the loss. If one insurer has paid more than its proportion of the loss, it is entitled to maintain an action for contribution against the other insurer or insurers.5 Fairness also has to be observed

1  The Insurance Law, art. 56(4). 2 Ibid. 3  Albion Insurance Co. v Government Insurance Office of New South Wales (1969) 121 CLR 342. See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-074; John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-001; F. D. Rose, Marine Insurance: Law and Practice (2nd edn, Informa 2012) para. 28.1. 4  John Lowry and Philip Rawlings, Insurance Law: Cases and Materials (Oxford 2004) p. 628. 5  The Insurance Law 2009, art. 56(2); the Maritime Code of China, art. 225; the MIA (UK), s. 80(1) and (2).

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among the insurers. Each insurer should not have to contribute more than its proportion of the loss. In this chapter, we will consider the concept of double insurance and the elements which give rise to double insurance; discuss the scope of the application of double insurance and the consequences of effecting multiple policies in terms of the rights and obligations of the insured; examine the doctrine of contribution in double insurance with analysis of the rateable proportion clause and other clauses in policies; and finally make recommendations for the improvement of Chinese law regarding double insurance. 11.2 Chinese laws relating to double insurance The main provision concerning double insurance for non-marine insurance is art. 56 of the Insurance Law. It provides: “(1) In the event of double insurance, the proposer shall notify all the insurers concerned of the relevant information with respect to such double insurance. (2) The total sums of indemnity payments made by all insurers concerned in double insurance shall not exceed the insured value. Unless specified otherwise in the contract, the insurers concerned shall be liable for indemnity payment in proportion to their respective sum insured and the total amount of the sum insured. (3) The proposer of double insurance may, with respect to the portion of the total amount of the sum insured which exceeds the insured value, request each insurer to return the premiums pro rata. (4) Double insurance refers to the insurance where a proposer enters into insurance contracts with two or more insurers in respect of the same insured subject matter, the same insurable interest and the same insured event, while the total sums insured exceed the insurable value of the subject matter.” This provision has four important aspects: first, the proposer’s duty of notification of double insurance to each insurer concerned; second, the duty of contribution of each insurer to pay the insurance money corresponding to its rateable proportion of the amount insured and the total sums of the double insurance; third, the matters of return of premiums in double insurance; fourth, the definition of double insurance. All these aspects will be discussed throughout the chapter. China’s Maritime Code has a similar article about double insurance in marine insurance. Article 225 of the Code provides: “Where the insured contracts with several insurers for the same subject matter insured and against the same risk, and the insured amount of the said subject matter insured thereby exceeds the insured value, then, unless otherwise agreed in the contract, the insured may demand indemnification from any of the insurers and the aggregate amount to be indemnified shall not exceed the loss value of the subject matter insured. The liability of each insurer shall be in proportion to that which the amount he insured bears to the total of the amount insured by all insurers. Any insurer who has paid an indemnification in an amount greater than that for which he is liable shall have the right of recourse against those who have not paid their indemnification in the amounts for which they are liable.” The contents of these two articles in the Insurance Law and the Maritime Code will be examined throughout the chapter. 362

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11.3 Two types of double insurance – broad sense and narrow sense double insurance It is said that double insurance can be divided into two types: one is broad sense double insurance and the other is narrow sense double insurance.6 The distinction between “broad sense double insurance” and “narrow sense double insurance” can be seen in the following two definitions: Double insurance refers to the insurance where a proposer enters into separate insurance contracts with two or more insurers in respect of the same subject matter of insurance, the same insurable interest and the same insured event.7

This definition was provided by art. 40(3) of the Insurance Law 1995, and the same definition was given in art. 41(3) of the 2002 version of the Insurance Law. When the Insurance Law was amended again in 2009, a sentence was added to the new version of the Insurance Law in respect of the definition of double insurance. Article 56(4) of the 2009 Insurance Law provides: Double insurance refers to the insurance where a proposer enters into separate insurance contracts with two or more insurers in respect of the same subject matter of insurance, the same insurable interest and the same insured event, while the total sums of insurance exceed the insurable value of the subject matter.8

From the above two provisions it is clear that the essential distinction between these two types (broad and narrow) of double insurance is whether the total sums of the several insurances exceed the insurable value of the subject matter. Under broad sense double insurance, double insurance arises where there are two or more insurances effected on the same subject matter of insurance, in the same insurable interest, for the same person and against the same risk; it is irrelevant whether or not the total sums of the insurances exceed the insured value.9 Thus, where a property is insured under two policies, even if the aggregate of the sums insured does not exceed the insurable value of the property, it is still called “double insurance.” Such a double insurance carries no special legal consequences. If, for example, a house with an insurable value of ¥600,000 is covered by two insurers under two similar fire policies, with each policy covering ¥300,000, and the house is destroyed by fire and suffers a total loss of ¥600,000, the insured may recover from each insurer ¥300,000. Contribution between the insurers does not arise in this situation.10 Under narrow sense double insurance, the total amount of the insurances must exceed the insurable value of the subject matter.11 The 2009 version of the Insur-

6  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 362; Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 423. 7  Article 40(3) of the Insurance Law 1995 and art. 41(3) of the Insurance Law 2002. 8  Emphasis added; this is the sentence that is added into the new version of the Insurance Law 2009. 9 The Insurance Law 1995 art. 40(3) and the Insurance Law 2002 art. 41(3). Other countries and regions have adopted broad sense double insurance, such as in the Italian Civil Code art. 1910, the Macao Commercial Code art. 1002(1), and the Taiwan Insurance Act art. 35. 10  See a good example given by Professor Rose: F. D. Rose, Marine Insurance: Law and Practice (2nd edn, Informa 2012) para. 28.14. 11  The Insurance Law, art. 56(4); the MIA s. 32(1).

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ance Law adopts the concept of narrow sense double insurance.12 Taking the above scenario as an example, where the insured value of the house is ¥600,000, which is insured with one insurer for ¥500,000 and with another insurer for ¥300,000, there is certainly double insurance. If a total loss occurs, the insured cannot recover from the two insurers for ¥500,000 + ¥300,000 = ¥800,000. The two insurers must share the loss proportionately. Contribution between them will then arise. As mentioned earlier, double insurance and contribution have two purposes: to prevent the unjust enrichment of the insured by obtaining double payments from two or more insurers concerned which exceed the amount of the actual loss, and to share the risk by the co-insurers. Under broad sense double insurance, if the total sums insured do not exceed the insurable value of the subject matter, there would be no possibility for the insured to be unjustly enriched; if the loss occurs, he is compelled to claim the appropriate proportion from each insurer and there will be no need for contribution between the insurers. Thus both purposes of double insurance would obviously become meaningless. The other type of double insurance is narrow sense double insurance, under which, in addition to the above-mentioned elements which constitute the double insurance, another important element is that the total insured amount under two or more insurance policies must exceed the insurable value of the subject matter. Now most jurisdictions adopt the concept of narrow sense double insurance.13 In China, before the enactment of the 2009 version of the Insurance Law, double insurance in the previous versions of the Insurance Law referred to broad sense double insurance.14 The 2009 Insurance Law adopts narrow sense double insurance. By virtue of art. 56(4) of the 2009 version, there is double insurance where the total sums of two or more insurance policies exceed the insurable value of the subject matter, in addition to other elements of double insurance. The Maritime Code 1992 also adopts narrow sense double insurance for marine insurance. Article 225 of the Code provides: “Where the insured contracts with several insurers for the same subject matter insured and against the same risk, and the insured amount of the said subject matter insured thereby exceeds the insured value, then, unless otherwise agreed in the contract, the insured may demand indemnification from any of the insurers and the aggregate amount to be indemnified shall not exceed the loss value of the subject matter insured....” This is also the approach of English law: “Where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over-insured by double insurance.”15 These provisions indicate that one of the most important elements of double insurance is that in each case, the insured must be “over-insured by double insurance.” Over-insurance by double insurance occurs when the aggregate of all the insurance is more than the total value of the insured’s interest.

12  The Insurance Law, art. 56(4). 13  The Insurance Law, and other countries’ laws, such as English law, German law, Japanese law and French law, all adopt narrow sense double insurance. 14  Article 40 of the 1995 version and art. 41 of the 2002 version of the Insurance Law. 15  The MIA, s. 32(1).

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11.4 Elements of double insurance As mentioned above, narrow sense double insurance includes five elements, namely, two or more policies cover the same subject matter, for the same interest, against the same risk for the benefit of the same person and the policies yield an indemnity in excess of the value of the subject matter. To constitute double insurance, all these elements must be satisfied. 11.4.1 The same subject matter of insurance One of the essential elements of double insurance on property is that the several insurances must cover the same property.16 It is not entirely clear whether it is necessary that the insurances should be on the identical property or whether it is sufficient if another policy does in effect cover a substantial part of the property already insured. It is submitted that there is double insurance where item A is insured by one insurer and items A and B are insured for a single undivided premium by another insurer, and also where goods are covered by a floating policy and part of the goods so covered are also insured specifically.17 11.4.2 The same interest on the subject matter of insurance This element of double insurance requires that the several policies must insure the same interest.18 No double insurance would arise if the policies covered different interests. This is likely to be the case where there are several persons with an insurable interest in the subject matter, with each person wanting to ensure that his interest is fully covered. Where these different persons have different interests in the same property, and each insures his own interest on his own behalf, there is no double insurance and contribution does not arise, even though the aggregate amount of the two insurances exceeds the total value of the property. This is because the principle of indemnity does not prevent different persons with an insurable interest from insuring the same property and each recovering the amount of their loss.19 According to art. 1 of the SPC Interpretation (II) 2013, different persons can effect different policies on the same subject matter for their own interests.20 It stipulates that in property insurance, where different insureds effect different policies on the same subject matter for their own benefit, after the occurrence of insurance loss, the insureds claim for indemnity in the scope of their insurable interest and under their own policies, the court shall uphold their claims.

16  The Insurance Law, art. 56(4). 17  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-003. 18 The Insurance Law, art. 56(4). This is also a very important element of double insurance under English Law; see the MIA, s. 32(1). 19  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Application of the Provision (China Legal Publication House 2010) p. 366; this is also the English approach. See Union Marine Insurance Co. Ltd v Martin (1866) 35 LJCP 181; Lonsale v Thompson Ltd v Black Arrow Group Plc [1993] Ch 36. John Lowry and Philip Rawlings, Insurance Law: Cases and Materials (Oxford 2004) p. 268. 20  Interpretation (II) 2013, art. 1.

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The same interest in the subject matter does not mean the same subject matter of insurance. The insurable interest is distinguished from the subject matter of insurance.21 For example, a car is an insured subject matter but several insurable interests may stem from the car, such as the ownership, the right of management of the car and the operation of the car, etc.22 All these relationships may give rise to an insurable interest. If the persons who have different interests in the car take out different policies on the car for their own benefit, there is no double insurance. Similarly, where the cargo owner effects a policy with insurer A for his goods under a marine cargo insurance, and the carrier also takes out insurance with another insurer on the goods for his liability for the goods when the goods are carried by his vessel, there is no double insurance – although both policies cover the same goods, but the coverage is for different interests in the goods and for different people’s benefit.23 Many other situations may also fall into this category, such as the owner and the bailee of goods, the owner and mortgagee of a property, or the landlord and his tenant of a house.24 In fact, where two or more persons with different interests in the subject matter take out different insurances on the same subject matter for their own benefit, the doctrine of subrogation but not double insurance may arise.25 11.4.3 The same risk Another essential element of double insurance is that two or more policies must insure the same risk.26 For example, if the insured effects two fire policies with different insurers for a same building, double insurance arises. By contrast, if the insured effects different policies with different insurers for different risks on the same subject matter, there is no double insurance. For example, if the insured effects a fire 21 Article 56(4) of the Insurance Law mentions the elements of double insurance: “including the same insured subject matter, same insurable interest and same risk.” It is said that: “It is not sufficient for the policies to relate to the same risk and the same property; they must also cover the same interest since it is not the subject matter of the insurance as such which is covered by the policy but the assured’s interest in that subject matter.” See MacGillivray on Insurance Law, (12th edn, Sweet & Maxwell 2012) para. 24-008. 22  Zhan Hao, Insurance Law – Interpretations of Principles and Comments on Leading Cases (China Legal Publication House 2007) p. 88. 23  Hao Zhan, New Insurance Law, Interpretation of Practice Highlights and Case Analysis (Law Press China 2009) p. 115. 24  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contracts – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 366; MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-008. For example, in the English case of Andrews v Patriotic Assurance Co. The Insurance Law, art. 56(4) mentions the same insured event; the MIA s.32(1) mentions the same adventure – they all refer to the same risk. A landlord and tenant insured a certain residential property independently. The lease contained a covenant to repair but no covenant to insure, and each party insured without specifying his interest. After a fire had occurred, the tenant recovered the full loss from his insurers, and subsequently became bankrupt without having reinstated the premises. The landlord then sued his insurers who contended that they were only liable for a pro rata contribution under the clause in their policy. It was held that the landlord and tenant had each insured only his own interest in the premises and that as the landlord could obtain no direct benefit from the tenant’s insurance there was, therefore, no double insurance and the landlord was entitled to recover the whole loss from his insurers, whose only recourse would be against the tenant in respect of his covenant to repair. See also North British and Mercantile Insurance Co. v London, Liverpool and Globe Insurance Co. (1877) 5 Ch D 569. 25  Matters of subrogation are discussed in Chapter 17, “Subrogation.” 26 The Insurance Law, art. 56(4) mentions the same insured event; the MIA s.32(1) mentions the same adventure – they all refer to the same risk.

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policy for his house with insurer A and effects a flood policy with insurer B for the same house, this does not create double insurance. Similarly, if a person effects a policy for the physical damage of his car with insurer A, and effects another policy with insurer B for motor vehicle third party liability, and one more with insurer C for compulsory vehicle liability insurance, these different policies do not give rise to double insurance because they cover different risks.27 Under English law, there is no double insurance unless at least a substantial part of the same risk is covered by both insurances, and the fact that two insurances might under certain circumstances overlap so as to insure the same property against the same risk for a brief period does not constitute a double insurance within the meaning of a clause requiring notice of double insurance to be given.28 11.4.4 The same period of time under the different policies The Insurance Law does not mention that to constitute double insurance the different insurances must be operating in the same period. It is suggested that the meaning of double insurance indicates that the same period should be an essential element of double insurance. However, the period of cover in the different policies is not necessary exactly the same. It is sufficient that there may be an overlap period in the policies.29 For instance, an insured took out fire insurance for his house for one year between 1 May 2010 and 30 April 2011 with insurer A. Two months later, he effected another fire policy with insurer B for the same house for one year between 1 July 2010 and 30 June 2011. Obviously there was an overlap of the two policies between 1 July 2010 and 30 April 2011. The overlap period gives rise to double insurance if other elements are also met. If the subject matter of insurance suffers loss during the overlap period, both insurers should contribute to the loss.30 The overlap period is determined when the loss occurs.31 11.4.5 The meaning of same insured For this aspect the issue is whether the “same insured” refers to the same person who is covered by two or more insurances, or the same person who effects two or more policies by himself. According to art. 56(4) of the Insurance Law, “double

27  Baoqing Lin, Insurance – Principles and Cases (Qinghua University Press 2006) p. 170; see also Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 366. 28  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-004. 29  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 437; Yuxian Liang, Examples of Insurance Law Commentary (Renmin University Press 2004) p. 55. 30  See Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 366 for another example: where the insured effects a car insurance with insurer A and the duration is 1 December 2009 to 1 December 2010. The insured took out another car insurance with insurer B on 31 December 2009 for one year. It is obvious that there was an overlap period, so double insurance arose. 31  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 437; Yuhua Zhou, Comments on Insurance Law (China Procuratorial Press 2008) p. 96.

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insurance refers to the insurance where a proposer enters into insurance contracts with two or more insurers”;32 here the law emphasises the person (the proposer) who makes two or more policies by himself. However, in practice it is often the case that two or more policies are effected by different persons but for the same person’s benefit. For insurance, double insurance exists where a driver is covered by his own car policy and is also insured by a policy effected by another person in which he is a named driver.33 So double insurance is not necessarily taken out by the same person, but it is important that the same person is covered by several policies. In this sense, art. 56(4) does not make the point very clearly. The English definition of double insurance seems more appropriate. By virtue of s. 32(1) of the MIA (1906), “Where two or more policies are effected by or on behalf of the assured 34 on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over-insured by double insurance.” The same insured does not mean that all the policies must be effected by the same insured himself; it is sufficient if the policies are effected for the benefit or interest of the same insured. Drake Insurance Plc v Provident Insurance Plc35 illustrates the point. Where driver K was covered by her own car insurance policy effected by herself with insurer D and by also her husband’s policy entered into with insurer P in which K was a named driver, so K was covered by two car policies. It was held that there was double insurance, and the issue of contribution arose. Some insurance law authorities express the following views: “double insurance means that two or more insurers must have insured the same assured in respect of the same risk on the same interest in the same subject matter”;36 “although the liability need not arise from the same type of policy. It is essential that each policy must indemnify the same assured in respect of the same loss”;37 and “there can be no double insurance unless at or before the time of the loss the same person has become entitled to the benefit of the whole or part of the insurances, either directly as the insured or indirectly by being in a position to claim the insurance money from the several insurers.”38 It is clear that the English law and the authorities emphasise the point that the person whose benefit or interest is covered by the policies must be the same person, but not that the policies must be effected by the same person. On the other hand, if two similar policies cover two persons, although on the same subject matter, no double insurance exists. In a Chinese case,39 Mr Qiu bought a second-hand car, and the insurance policy for the car was not assigned from the seller to him with the purchase of the car. Qiu effected a new policy for the car with his insurer on 19 January 2007 for one year (19 January 2007 to 18 January 2008). 32  The Insurance Law, art. 56(4). 33  English cases: Drake Insurance Plc v Provident Insurance Plc [2004] Lloyd’s Rep IR 277; Legal and General Assurance Society Ltd v Drake Insurance Co. Ltd [1992] QB 887; [1992] 2 WLR 157. 34  Emphasis added. 35  Drake Insurance Plc v Provident Insurance Plc [2004] Lloyd’s Rep IR 277. 36  R. Merkin, Colinvaux’s Law of Insurance, (10th edn, Sweet & Maxwell 2014) para. 11–079. 37  Malcolm A. Clarke, The Law of Insurance Contracts (6th edn, Informa 2009) para. 28–9. 38  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24–016. There are several English cases on this point: O’Kane v Jones, The Martin [2004] 1 Lloyd’s Rep 389 at [166]–[176]; North British Mercantile Insurance Co. v London, Liverpool and Globe Insurance Co. (1877) 5 Ch D 569. 39 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 323.

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However, the seller neither cancelled the insurance policy effected by him on the car (for the period from 31 August 2006 to 30 August 2007), nor assigned the car policy to Qiu, and thus the car appeared to be covered by two policies during an overlap period (19 January 2007 to 30 August 2007). The car was damaged on 20 January 2007. Mr Qiu claimed against his insurer for ¥50,784 for the cost of the repair of the car. While examining the claim, Qiu’s insurer discovered that another insurance policy covered the same car (effected by the former owner of the car) with another insurer, so Qiu’s insurer argued that there was double insurance and agreed to pay 50% of the loss only. The court held that there was no double insurance, on two grounds: first, two policies did not cover the same person although they covered the same car; second, upon the assignment of the car, the former owner had lost his insurable interest in the car, so he could not recover. The only person who suffered loss was Qiu, whose insurer should pay the whole loss. Qiu had no right to claim under the seller’s policy because that policy was not assigned to him. However, there would be double insurance if, upon the purchase of the car, the previous policy of the car were assigned to the buyer through completing the procedure specified by the law,40 and the buyer also effected a new policy with another insurer on the same car before the previous policy expired – there is an overlap period of coverage between the two policies and they cover the same person, the buyer. Contribution would arise between the two insurers.41 11.4.6 Total sums insured exceed the insurable value of the subject matter As mentioned above, there are two types of double insurance; one is broad sense double insurance under which double insurance arises where two or more insurers cover the same subject matter, for the same risk, for the same person, for the same interest, during the same or an overlapping period, but it is irrelevant whether the entire insured amount under the two policies exceeds the insurable value of the subject matter. By contrast, under narrow sense double insurance, there would be no double insurance if the total sums of the two policies did not exceed the insurable interest of the subject matter even if other conditions were satisfied. The current Insurance Law adopts narrow sense double insurance, so the element that the total sums of the multiple insurances must exceed the insurable value is an essential element of double insurance. 11.5 The scope of the application of double insurance As mentioned above, double insurance and contribution, like subrogation, is the corollary of the underlying principle of indemnity, so it applies to indemnity insurance

40  According to the Insurance Law, “Where the insured subject matter is assigned, the assignee of the insured subject matter shall enjoy the rights and assume the obligations of the insured . . . The insured or the assignee shall notify the insurer thereof in time”: the Insurance Law 1995 art. 33; the Insurance Law, art. 49. 41  China Property Insurance Jiaozuo Branch v PICC Property Insurance Wuhai Branch (2008); this case was cited by Zibin Miao in “Judicial recognition of double insurance,” which is available on the website accessed in April 2016.

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only. In the Insurance Law, the provision of double insurance (art. 56) is placed in the section of “Property Insurance.”42 It is generally accepted there is no double insurance in life insurance.43 However, there are arguments as to whether double insurance and the doctrine of contribution apply to personal accident insurance, medical treatment insurance or liability insurance.44 11.5.1 Personal accident insurance and medical treatment insurance There is a lack of express provisions in law on the issue of whether double insurance and contribution apply to personal accident and medical treatment insurance, but scholars have different views on this issue. Most scholars have the view that double insurance and contribution apply to property insurance only45 and not to personal insurance.46 Others argue that although double insurance does not apply to life insurance, it applies to personal accident and medical treatment insurance.47 In the absence of any express provision, it could be inferred from art. 46 of the Insurance Law that double insurance and contribution do not apply to personal insurance. Article 46 prevents an insurer from exercising subrogation rights against a wrongdoer third party who causes the insured to die, become disabled or ill. It provides: “Where an insured event, such as death, disability, or illness, etc. occurs in respect of the insured as a result of a third party’s act, the insurer shall, after paying insurance benefits to the insured or the beneficiary, have no right of subrogation against the third party, and the insured or the beneficiary remains entitled to claim compensation from the third party.” All the events such as death, disability or illness of the insured mentioned in this article are caused by a third party rather than by a natural disease. These may fall into the category of “personal accident and medical treatment insurance,” where subrogation is not permitted. As both subrogation and double insurance are derived from the principle of indemnity, it could be inferred that double insurance and contribution do not apply to personal accident and medical insurance. In judicial practice, courts adopt the approach that double insurance and contribution do not apply to personal accident and medical insurance, and this can be shown in the case of Sien Li v PICC Life Insurance Co. Ltd.48 A mother (the claimant)

42  Articles 48–66 of the Insurance Law are covered under the heading of “Property Insurance.” 43  In the Insurance Law, the provision about double insurance and the doctrine of contribution is provided under the heading of “Property Insurance” but not under the heading of “Personal Insurance.” This indicates that double insurance and contribution apply to indemnity insurance only and do not apply to life insurance. It is also the approach of English law. John Lowry and Philip Rawlings, Insurance Law: Cases and Materials (Oxford 2004) p. 628. 44  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) pp. 444–47. 45  Property insurance under the Insurance Law has a broad meaning, including property damage insurance, liability insurance, credit insurance and guarantee insurance (by art. 95 of the Insurance Law). Double insurance also applies to marine insurance (see art. 225 of the Maritime Code). 46 Wensun Shi, Insurance Law (Sanmin Press 1994) p. 222; See also Biao Dong, Analysis of Insurance Cases (Social Sciences Academic Press 2011) p. 268. There are also scholars who have the view that double insurance is applicable to both property and personal insurance. See Chaoguo Jian, Basic Theory of Insurance Law (Rui Xing Publishing Co. Ltd 1999) p. 184. 47  Xunfa Lin, Double Insurance (Qinghua University Press 2005) p. 194. 48  Biao Dong, Analysis of Insurance Cases (Social Sciences Academic Press 2011) p. 268.

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effected a child safety insurance for her daughter with additional personal accident and medical insurance cover on 7 May 2003 for one year with the PICC Life Insurance Company. A few days later the mother effected another similar policy with Tai Kang Insurance Company. The insured girl was injured in a traffic accident on 7 January 2004, and incurred expenses for medical treatment. The Tai Kang Insurance Company paid the expenses to the insured. The mother of the girl then claimed against PICC Life for the same expenses. PICC Life rejected the claim and argued that because the insured had been indemnified by the other insurance company, Tai Kang Insurance Company, she could not recover double payment because medical treatment insurance is one of the indemnity insurances. The insured sued. The key issue was whether medical insurance falls into the category of indemnity insurance and therefore double insurance and contribution apply to it. The court held that according to the Insurance Law, personal accident and medical treatment insurance fall into the category of personal insurance,49 so the insured could claim against both insurers. In Ke Zunxiang v China Life Insurance Co. Keshen Branch,50 the insured had medical treatment in hospital and claimed against China Life Insurance Co. under the policy for medical expenses. The insurer argued that the insured was also covered by Social Insurance, so there was double insurance and therefore the insurance company could only pay the amount after deducting the amount which had been paid under Social Insurance. The court held that double insurance and contribution do not apply to personal accident and medical insurance, and the insurer should pay the full amount covered by the medical treatment policy unless the policy explicitly specified that the insurer would only pay the part of the medical expenses after deducting the expenses covered by Social Insurance. 11.5.2 Double insurance in liability insurance A liability insurance contract is a contract by which the insurer undertakes to indemnify the insured in the event of his incurring legal liability to a third party. Liability insurance is a kind of indemnity insurance under Insurance Law. However, there are arguments on the issue whether or not double insurance and contribution apply to liability insurance. As examined above, under narrow sense double insurance, one of the essential elements of double insurance is that the total amount of two or more insurances exceeds the insurable value of the subject matter. However, in liability insurance there is no insurable value of the subject matter – the insured’s liability. The parties can only reach an agreement on the maximum amount the insurer will pay for the insured’s liability to a third party. Thus, unlike property insurance, in liability insurance before the occurrence of the insured event, it is impossible to pre-judge

49 The Insurance Law 1995 art. 91; the Insurance Law 2002 art. 92 and the Insurance Law 2009 art. 95. It is provided that: “The scope of business of an insurance company shall be as follows: (i) Personal insurance includes life insurance, health insurance and accident and injury insurance. (ii) Property insurance business, including property loss or damage insurance, liability insurance, credit insurance and surety bond, etc.; and (iii) other insurance-related business approved by the insurance supervision and administration authority of the State Council.” 50  Selected cases of the People’s Courts [2005] vol. 2.

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whether the total amount of two or more insurances may exceed the insurable value (in fact there is no insurable value in liability insurance). The insured’s actual liability to a third party can only be determined after the occurrence of the insured event. Therefore if there are two or more similar policies covering the insured’s liability, it can only be determined whether the total sums specified in several policies exceed the amount for which the insured is liable to the third party. Based on this feature of liability insurance, some commentators argue that double insurance and contribution are not applicable to liability insurance.51 However, some others have the view that double insurance applies to all indemnity insurance, including liability insurance.52 Nevertheless, in China double insurance and contribution are applied to liability insurance in practice. A liability insurance contract usually contains a clause in respect of double insurance and contribution. In the Employer Liability Insurance Policy of the Ping An Insurance Company, clause 26 states that “where the insured event occurs, if the loss can also be indemnified under another insurance policy which provides the same cover as this policy does for the loss, we shall be liable for indemnity payment in proportion to the sum insured under this policy and the total amount of the sum insured under this policy and under other policies. We shall not be liable to advance insurance payment for the portion which shall be borne by other insurers. Where due to the insured’s non-disclosure, we have paid an amount of indemnity more than we should have paid, we are entitled to recoup the portion overpaid from the insured.” A similar clause can be seen in the Public Liability Insurance Policy of the PICC, which provides that “where we are liable for indemnity payment for loss, damage, expenses or liability under this policy, if there is another insurance covering the same loss, damage, expenses or liability, no matter whether the other insurance was effected by the insured or another person on behalf of the insured and whether the insured has been paid under the other insurance policy, we shall be liable for indemnity payment for our proportional share under this policy, and shall not advance payment for the portion which shall be borne by other insurers. At the time of making a claim for insurance payment, the insured shall truthfully provide us with information in respect of other insurance covering the same risks. If due to the insured’s non-disclosure, we have paid an amount of indemnity more than we should have paid, we are entitled to recoup the portion overpaid from the insured.”

Under English law, double insurance and the doctrine of contribution apply to liability insurance.53 In Albion Insurance Co. v Government Insurance Office of New South Wales,54 it was held that contribution applies to all types of indemnity insurance,55 including liability insurance. However, in the UK, there are also some issues on double insurance in liability insurance. It seems that the application of double insurance and contribution in liability insurance is not exactly the same as that in 51  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 444. 52 Ibid. 53  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-001. 54  (1969) 121 CLR 342. 55  Ibid, at 345.

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property insurance. In Commercial Union Assurance Co. v Hayden,56 it was settled that the independent liability approach is the legal basis in liability insurance because in liability insurance premiums are not calculated pro rata according to the sum insured, and the bulk of claims in liability insurance fall within low limits.57 In this case, Cairns LJ stated: “Each limit of liability and each premium may be taken to be fixed without knowledge of the limit under any other policy . . . it is difficult to suppose that when a limit of £10,000 was fixed by the defendant, it could have been intended that if there happened to be another policy with a limit of £100,000, the defendant should be liable for only one-eleventh of the claim, however small. The independent liability basis is much more realistic in its results.”58 11.5.3 No double insurance in compulsory motor vehicle liability insurance In China, the compulsory motor vehicle traffic accident liability insurance is governed by the Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance (hereinafter, the Regulation).59 The Regulation does not provide any rules in relation to double insurance. However, the Insurance Association of China (IAC)60 has formulated some guiding rules in respect of double insurance in the Practical Procedures in Underwriting and Claim-Handling for Compulsory Traffic Accident Liability Insurance for Motor Vehicles for the members to follow.61 These rules are indorsed by the China Insurance Regulatory Commission (CIRC).62 First, at the time of concluding the contract, the insurer is obliged to inform the insured that he needs to purchase only one compulsory motor policy for each vehicle, and

56  [1977] QB 804. 57  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) p. 368. 58  Per Cairns LJ [1977] QB at 815–16. See F. D. Rose, Marine Insurance: Law and Practice (2nd edn, Informa 2012) para. 28.12. Professor Rose explains by giving the following example: “Where there is double insurance as regards liabilities, it may be unnecessary to make explicit the gloss that there must be ‘over-insurance’ by double insurance. It seems that there is no double insurance as regards liabilities unless the policies cover the same layer of liabilities – for example, if two policies cover the first £10,000 of any liability incurred by the assured. Where that is the case, however, there is necessarily over-insurance. The assured is over insured, as regards the first £10,000 of his liability by £10,000; on suffering £10,000 loss, he would be entitled to an aggregate of £20,000. The legal consequences described above should then necessarily follow. The assured cannot be permitted to recover from the several insurers an aggregate amount exceeding the £10,000 which each has respectively agreed to insure. Recovery from one will therefore reduce pro tanto (to that extent) the liability of the other; the assured should in principle be entitled to recover premiums overpaid in proportion to the amount of the over-insurance; and any insurer who discharges more than his proper share of the common liability of £10,000 should have right of contribution against the other.” 59 The Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance was adopted at the No. 127 executive meeting of the State Council on 1 March 2006, came into force as of 1 July 2006, and was amended in December 2012; art. 2 of the Regulation. 60  For more information on the IAC, see Chapter 2 of this book. 61 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa [2006] No. 8. This Practical Procedures was updated and republished in 2009, Zhong Bao Xie Fa [2009] No. 216. See

accessed in April 2016. 62  The Reply by the Department of Property Insurance, the CIRC to the IAC’s Report of “Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance,” Chan Xian Bu Han [2006] No. 78. See accessed in April 2016.

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the insured will only recover from one policy even if he has effected more than one policy for the same vehicle.63 Second, a reminder is usually printed at the beginning of the contract of compulsory motor insurance that “only one compulsory motor policy is needed for each vehicle, please do not effect more than one policy.”64 Third, in the event that the insured has effected more than one policy, only the one with the earliest starting time of the insurance period is effective, and other policies are not effective;65 and fourth, the insured has the right to rescind the contracts other than the earliest one effected, and the insurer shall refund the full premium to the insured for the rescinded contracts.66 In short, the doctrine of double insurance is not applicable to compulsory motor vehicle insurance in China. In the absence of statutory rules prohibiting double insurance in compulsory motor vehicle insurance, all these IAC guiding rules are followed by insurers and insureds, and even by courts. In judicial practice, as there are in essence no statutory or regulatory rules in respect of double insurance in compulsory motor vehicle liability insurance, the People’s Courts have recognised the IAC’s guiding rules in this regard. In Mr Wang v The Insurance Company,67 Mr Wang effected a compulsory policy for his motorcycle with the insurer for the period from 10 February 2009 to 9 February 2010 and another compulsory policy for the same vehicle with another insurer for the period from 14 January 2010 to 13 January 2011. On 29 January 2010, Mr Wang had a motorcycle accident and injured Mr Fan on his tricycle. The traffic police found that Wang and Fan had equal responsibility for the accident. It was held that the insurer which effected the first policy was liable for paying insurance money for Fan’s injury and the insurer effecting the second policy was not liable. In the event that the insured effected one compulsory motor insurance policy with insurer A first, and the second policy with insurer B for the same vehicle, and both the two insurers paid for the same loss caused by the same accident involving the insured vehicle, then insurer B is entitled to recoup from the insured the insurance money paid to him. In Mr Du v The Insurance Company,68 Mr Du effected a compulsory motor policy with insurer A for the period from 26 June 2008 to 25 June 2009, and effected another policy for the same vehicle with insurer B for the period from 24 June 2009 to 23 June 2010. He had a road accident on 25 June 2009 in which

63 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 1, Practical procedure in underwriting, section 1(1)(4), Zhong Bao Xie Fa [2009] No. 216. See accessed in April 2016. 64  For example, see the Compulsory Motor Vehicle Traffic Accidents Insurance Policy of the PICC on the website of the PICC accessed in March 2016. 65 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 2 practical procedure in claims, s. 5(4)(6), Zhong Bao Xie Fa [2009] No. 216. 66 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 1, Practical procedure in underwriting, s. 5(2)(6), Zhong Bao Xie Fa [2009] No. 216. 67 This case was decided by the People’s Court, Shuangliu County, Sichuan Province, Civil Court Judgment (2010) No. 2742, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2011) vol. 3, p. 383. 68 This case was decided by the People’s Court, Yaobei District, Baicheng City, Jilin Province, Civil Court Judgment (2010) No. 297, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2011) vol. 3, p. 393.

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a pedestrian was killed. Both the insurers paid the insured the same amount of ¥117,583 for his liability to the third party victim under the policy. After having paid the insured, insurer B requested Mr Du to refund the insurance money, but this was rejected by Du. The court upheld insurer B’s request and also ordered insurer B to refund the full premium of ¥400 to Du. 11.6 The insured’s duty to notify the insurers where there is double insurance One of the purposes for setting up rules of double insurance and contribution is to prevent the insured from obtaining double payment from over-insurance by double insurance. In some cases the insured takes out double insurance intentionally with the purpose of gaining unjust enrichment. The Insurance Law requires the insured to notify each insurer where there is double insurance. Article 56(1) of the Law provides: “In the event of double insurance, the proposer shall notify all the insurers concerned of the relevant information with respect to the double insurance.”69 It is a legal duty for the proposer to notify each insurer in the event of double insurance. However, several issues arise from this provision. First, the law does not provide when the notice of double insurance should be given; second, what information should be provided by the proposer to each insurer; third, what remedies would be available if the insured fails to perform the duty of notification. In order to make the provision clearer, these three issues should be addressed in the Insurance Law. Some other jurisdictions’ approaches on these issues may be considered at this juncture. 11.6.1 When the notification should be served to each insurer The Insurance Law does not mention when the insured must notify the insurers about the double insurance. In some insurance policies, insurers require the insured to provide them the information in respect of other insurances covering the same risk at the time of loss. In PICC Home Insurance, clause 29 states that when the insured event occurs, if double insurance exists, the insurer shall be liable for indemnity payments in proportion corresponding to the sum insured under the policy and the total sums insured under all insurance policies. By this clause it is implied that the insured must notify the insurers at the time of loss if there is double insurance in order that the insurers may share the insured loss.70 In England, there is no statutory requirement for the insured to notify each insurer about double insurance. However, in many insurance policies (e.g. fire and other property policies) it is a policy condition for the insured to give such a notice to each insurer concerned in the event of double insurance. Most fire and other non-marine indemnity policies contain one or other or both of the following conditions:71 (1)

69  Article 225 of the Maritime Code does not mention the duty of notification of double insurance. 70  In the UK, such a clause also appears in some policies. A common form of rateable proportion clauses in non-marine policies provides: “If at the time of any claim . . . there shall be any other insurance covering the same risk or any part thereof the Company shall not be liable for more than its rateable proportion thereof.” See MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-020. 71  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-002.

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requiring the insured to disclose other insurances upon the same property subsisting at the time the policy is issued or coming into existence thereafter;72 and (2) providing that in the event of other insurances subsisting at the time of the loss, the insurer shall only be bound to pay to the insured its proper proportion of the loss. If both of these clauses are contained in the policies, the insured must notify the insurers at the time of contract or thereafter and at the time of loss. So the time point when the notification should be given is a matter of construction of the policies rather than a matter of law. 11.6.2 Remedies for non-notification The Insurance Law does not provide remedies for non-compliance with the duty of notification of existence of double insurance, and remedies in other jurisdictions’ laws may be taken as reference here. Under the Insurance Act 2010 (Taiwan), in the event of double insurance, a proposer shall, unless otherwise stipulated, notify each insurer of the names of the other insurers and the amounts insured thereby.73 If a proposer wilfully fails to make the notification, or obtains double insurance with the intention to acquire undue profit, the contract shall be void.74 Where double insurance has been obtained in good faith and the total insured amount exceeds the value of the subject matter insured, each insurer, unless otherwise stipulated, is liable only to provide a share of the indemnification for the total value of the subject matter insured pro rata to the amount it has insured. However, the total indemnification may not exceed the value of the subject matter insured.75 These articles provide different remedies for deliberate non-notification and for negligent or innocent non-notification of double insurance. These remedies seem reasonable and fair. It is suggested that these remedies could be introduced into the Insurance Law.76 In England, some fire and property insurance policies require the insured to give notice of double insurance during the currency of the policy; this requirement is usually a policy condition. Generally the sanction for non-disclosure of double insurance will be forfeiture or repudiation of the policy.77 11.6.3 Contents of notification of double insurance What should be notified to each insurer concerned? It is unclear in the Insurance Law. The law only provides that the proposer shall inform each insurer of the “relevant information of double insurance.”78 This provision is vague and ambiguous 72  However, a mere accidental overlap between policies does not bring such a condition into operation. In Australian Agricultural Co. v Sunders (1875) LR 10 CP 668, it was held that a mere accidental overlap would not have required notification, though presumably if the loss had taken place during the overlap, there would have been double insurance. See J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) p. 372. 73  Insurance Act (Taiwan), art. 36. 74  Ibid, art. 37. 75  Ibid, art. 38. 76  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 437. 77  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 18.4.2. 78  The Insurance Law, art. 46(1).

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in respect of “relevant information.” The Insurance Act 2010 (Taiwan) requires the insured in the event of double insurance to notify each insurer of the names of the other insurers and the amounts insured thereby.79 Some scholars suggest that the content of notification of double insurance should include the following: insurer’s name and address, insured subject matter, insured value, premium, insured amount, scope of insurer’s liability, insurance period, method of payment of insurance money, etc.80 These suggestions could be taken into account for improving Insurance Law in this respect. 11.7 The doctrine of contribution in double insurance As examined above, double insurance is perfectly lawful – a person may insure with as many insurers as he pleases and up to the full amount of his interest with each one. However, he is prohibited from recovering from different insurers a payment for the loss which exceeds the amount of his actual loss. Double insurance and contribution are closely linked. Where a loss occurs which is covered by two or more insurances, all the insurers should share the loss; the doctrine of contribution is then applied in the event of over-insurance by double insurance. Each insurer is liable to contribute to the loss in proportion corresponding to the sum insured under its policy and the total sums insured under the all insurances.81 If one insurer has paid more than his proper proportion of the loss, he is entitled to claim a contribution from the other insurer or insurers. Fairness has also to be observed among the insurers. Each insurer should not have to contribute more than his proportion of the loss. Different methods are used for contribution to loss in different countries. Under the Insurance Law, “the total sums of indemnity payments made by all insurers concerned in double insurance shall not exceed the insured value. Unless specified otherwise in the contract, the insurers concerned shall be liable for indemnity payments in proportion to their respective sum insured and the total amount of the sum insured.”82 The doctrine of contribution in double insurance is adopted in judicial practice in China. In Mr Liu v Property Insurance Co.,83 Mr Liu effected a household insurance policy plus additional theft insurance in February 2004 with insurer A for one year, and the insured amount was ¥20,000. In April 2004, Liu’s employer took out household insurance plus additional theft insurance with insurer B on behalf of all its employees for one year and the amount of insurance was also ¥20,000. The policies did not include rateable proportion clauses or “escape” clauses. In July, some property worth ¥20,000 in Liu’s house was stolen. Liu claimed against both insurer A and insurer B. However, both insurers rejected the claim and tried to shirk

79 The Taiwan Insurance Act, art. 36 provides: “Where there is double insurance, a proposer shall, unless otherwise stipulated, notify each insurer of the names of the other insurers and the amounts insured thereby.” 80  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 367. 81  The Insurance Law, art. 56(2). 82 Ibid. 83  Haichun Yu and Chunyan Fu, New Insurance Law and Cases Review (Foreign Economic and Trade University Press 2009) p. 242.

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liability, and each of them wanted to cast the loss onto the other on the ground that the risk was also insured by another insurer, and the other insurer should be liable. The insured sued the two insurers. The court held that the insured subject matter was covered by two policies of different insurers for the same risk, there was double insurance, and so contribution arose – each insurer was bound to pay a half of the loss (¥10,000). Under English law, the position and rights of insurers as regards contribution between themselves is set out in s. 80 of the MIA: (1) where the assured is over-insured by double insurance, each insurer is bound, as between itself and the other insurers, to contribute rateably to the loss in proportion to the amount for which it is liable under its contract; (2) if any insurer pays more than its proportion of the loss, it is entitled to maintain an action for contribution against the other insurers, and is entitled to the same remedies as a surety who has paid more than his proportion of the debt. At common law, the right of contribution is an equitable right, and the right to contribution was not defeated by the failure of the insured to notify the co-insurer of a potential claim, even though such failure constituted a breach of a condition under the policy.84 11.8 The insured’s right to claim in double insurance Where there is double insurance, the principle of contribution applies as between the different insurers. There are several ways for the insurers to contribute. The most popular methods for contribution between the insurers are “pro rata liability contribution” and “joint liability contribution.”85

84  Legal and General Assurance Society Ltd v Drake Insurance Co. Ltd [1992] 1 All ER 283, CA. Two insurance companies (LG & DI) insured the same driver under standard private car policies. Both policies provided that immediate written notice had to be given of an event which might give rise to a claim, observance of which was a condition precedent to liability, and that if there was “any other insurance covering the same loss” when the claim arose, the insurers would not pay or contribute more than their rateable proportion (a rateable proportion clause). When the insured driver injured a pedestrian, the insured claimed against LG only: LG, having ascertained that a policy covering the same loss had been issued by DI, nevertheless paid the full amount of the insured’s claim and thereafter sought to recover a 50% contribution from DI. However, DI refused to contribute, on the basis that they had a good defence to any claim under their policy, as the driver had been in breach of a condition precedent in not having given notice of claim within the stipulated period, and the first insurer made the full payment for the loss voluntarily. It was held by the Court of Appeal on one hand that the right to contribution was not defeated by the failure of the insured to notify the co-insurer of a potential claim, albeit such failure constituted a breach of a condition under the policy. The right of contribution is an equitable right, the plaintiffs were held to have had a right to contribution in equity against the defendant for half the amount for which the claim was settled. See also Drake Insurance Plc v Provident Insurance Plc [2004] Lloyd’s Rep IR 277. 85  There are other contribution methods such as “limit of liability contribution” and “average liability contribution.” See Haichun Yu and Chunyan Fu, New Insurance Law and Cases Review (University of International Business and Economics Press 2009) p. 249. See also Qirong Fan, “Modern Integration on Doctrine of Contribution in Double Insurance – Comments on Article 56(2) & (4) of the Insurance Law” (2012) 6 Journal of Legal Research 56–66. In this article, Professor Fan summarises the different approaches in different jurisdictions relating to the doctrine of contribution in double insurance. See accessed in April 2016.

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11.8.1 Pro rata liability contribution Article 56(2) of the Insurance Law adopts the pro rata liability contribution approach; that means where there is double insurance, the insurers concerned shall be liable for indemnity payments in proportion to their respective sums insured and the total amount of the sum insured.86 Some insurance policies incorporate a clause which reflects this contribution method. The clause is called a “rateable proportion clause,” which may state that in the event of other insurances subsisting at the time of loss, the insurer shall only be bound to pay to the insured its proper proportion of the loss.87 In the Employer Liability Insurance Policy of the Ping An Insurance Company, clause 26 states that “where the insured event occurs, if the loss can also be indemnified under another insurance policy which provides the same cover as this policy does for the loss, we shall be liable for indemnity payments in proportion to the sum insured under this policy and the total amount of the sum insured under this policy and under other policies. We shall not be liable to advance insurance payment for the portion which shall be borne by other insurers. Where due to the insured’s non-disclosure, we have paid an amount of indemnity more than we should have paid, we are entitled to recoup the portion overpaid from the insured.” This clause means that if there is double insurance at the time of claim, and each policy has a rateable proportion clause, the insured can only recover from each of the co-insurers the proportion for which each insurer is liable to the insured. No insurer has a responsibility to pay more than its proportion. The clause looks fair to each insurer, but an unjust consequence might happen to the insured who faces the risk of not being fully indemnified if one or more of the insurers becomes bankrupt.88 In fact, sometimes an insured takes out double insurance not with the intention of making a profit, but with the expectation that in the event of one or more of his insurers becoming insolvent, he may recover the whole loss from other insurers. If the rateable proportion clause prohibits him from recovering the entire loss, that would be unfair to him.89 This problem can be resolved by the approach in the Switzerland Insurance Contract Act.90 “Where any insurer becomes insolvent, other insurers concerned shall pay the proportional share which should be borne by the insolvent insurer.”91 Thus

86  Some other jurisdictions have adopted this approach as well. For example, the Switzerland Insurance Contract Act and the Taiwan Insurance Act. 87  See PICC Property Insurance Policy; Ping An Property All Risks Policy; Huatai Property Insurance Policy and so on. 88  Insurance Contract Law – Case Commentary, written by China Ping An Insurance Co. Ltd, Legal and Compliance Dept (Qinghua University Press 2006) p. 341. 89 The rateable proportion clause causes arguments from judges and academics. In Drake Insurance Co. v Provident Insurance Plc [2004] QB 601, an issue was raised by Rix LJ on the “rateable proportion clause.” He commented: “It is a matter of concern that an insurer who takes a premium to cover 100% of a risk may only be liable for 50% of a loss, on the basis that the insured can obtain the other half elsewhere, in circumstances where the insured finds that he cannot contractually do so.” As Professor Birds comments: “This indicates that future decisions may take a very robust view on these standard terms.” See Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) p. 364. 90  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 426. 91  The Switzerland Insurance Contract Act, arts 53–70.

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double insurance may protect an insured in the event where any one or more of his insurers becomes insolvent.92 The Macao Commercial Code also has a similar provision: “An insurer that has made payment has a right of contribution from the others, in proportion to the amounts insured; in case of bankruptcy of one of them, or of nullity, or lack of legal effect of one of the contracts, its share shall be distributed among the others.”93 In order to protect the insured’s interest, this approach could be introduced into the Insurance Law. Double insurance and contribution, like subrogation, is one of the doctrines derived from the underlying principle of indemnity, aiming at preventing the insured who effects two or more policies from recovering payment more than the loss he suffered. However, if the insured is prohibited from recovering full indemnity in double insurance, for example, in the event that one of the insurers becomes insolvent, the indemnity principle would be undermined in this sense. Under English law, the insured may, in the absence of a pro rata contribution clause, select any one or more insurers and recover from it or them the total amount of the loss. But in no event is he entitled to recover more than his loss, because each contract is a contract of indemnity only.94 11.8.2 Joint liability contribution Joint liability contribution95 is another method of contribution in double insurance between insurers, which means that where there is double insurance, when the loss occurs, the insured may claim against any of the insurers concerned for the whole loss he suffers. The insurer who pays the whole loss has the right of contribution from other relevant insurers. Many jurisdictions adopt this contribution method in double insurance.96 The Maritime Code adopts the joint and several payment mode.97 According to art. 225 of the Code, in the event of double insurance, where the insured amount of the subject matter insured exceeds the insurable value, unless otherwise agreed in the contract, the insured may demand indemnification from any of the insurers and the aggregate amount to be indemnified shall not exceed the loss. The liability of each insurer shall be in proportion to the amount he insured in the total amounts insured by all insurers. Any insurer who has paid an indemnification in an amount greater than that for which it is liable shall have the right of recourse against other co-insurers. This contribution method is also adopted by the Principles of European Insurance Contract Law,98 art. 8:104 of which provides: (1) if the same interest is separately

92  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 426. 93  The Macao Commercial Code, art. 1002(4). 94  The MIA s. 32(2); MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 24-001. 95  Joint liability contribution is also known as joint and several liability contribution. 96 The Maritime Code 1992, art. 225; the MIA (UK) s. 32(2); the German Insurance Contract Act 2008 s. 78(1); Principles of European Insurance Contract Law (hereinafter, PEICL), art. 8:104. 97  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contract – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 370. 98  PEICL, art. 8:104 “Multiple Insurance.”

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insured by more than one insurer, the insured shall be entitled to claim against any one or more of those insurers to the extent necessary to indemnify losses actually suffered by the insured; (2) the insurer against which a claim is brought shall pay up to the sum insured under its policy, together with the mitigation costs, if any, without prejudice to its rights to contribution from any other insurer; and (3) as between insurers, the rights and obligations referred to in para. 2 shall be in proportion to the amounts for which they are separately liable to the insured. Joint liability contribution is also the approach of English law. MIA 1906 s. 32(2) provides: “Where the assured is over-insured by double insurance – (a) The assured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may think fit, provided that he is not entitled to receive any sum in excess of the indemnity allowed by this Act.” Under common law, in the event of double insurance, the insured has a free choice of the manner in which he makes up his indemnity, so that, subject to the indemnity cap, the insured is permitted to pursue the insurers in such order and for such proportions of his loss as he thinks fit.99 Where several insurers have a common liability to the insured for the same loss, an insurer who discharges an excessive share of the burden of the several insurers’ common liability to the insured has a right of contribution against the other(s), to the extent that it has borne an excessive share of the several insurers’ common liability.100 This approach aims to protect the insured – he is entitled to claim against any insurer for the entire loss he has suffered. However, it may aggravate the insurer’s burden who pays the insured first and claims contribution from other insurers concerned. In some situations the insurer may lose the right of contribution. Under English law, where a policy contains a rateable proportion clause, the insurer is not entitled to contribution from the other insurer(s), if it pays out more than it is liable to pay under its policy, since contribution only arises out of a legal obligation to pay. The authority is Legal and General Assurance Society Ltd v Drake Insurance Co. Ltd.101 In this case, two insurance companies (LG & DI) insured the same driver under standard private car policies. Both policies included a rateable proportion clause, stating, “if there was ‘any other insurance covering the same loss’ when the claim arose, the insurers would not pay or contribute more than their rateable proportion.” When the insured driver injured a pedestrian, the insured claimed against LG only. LG paid the full amount to the insured and then sought to recover a 50% contribution from DI. DI successfully rejected LG’s claim on the ground that LG made the full payment for the loss voluntarily although there was a rateable proportion clause in the policy.102

 99 R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-075; F. D. Rose, Marine Insurance: Law and Practice (2nd edn, Informa 2012) para. 28.7. This approach is illustrated by several old and recent cases: Newby v Reed (1762) 1 Wm B1 416; Bousfield v Barnes (1815) 4 Camp 228; Bruce v Jones (1863) 1 H & C 769; Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243. 100 The MIA s. 80(1) and (2); F. D. Rose, Marine Insurance: Law and Practice (2nd edn, Informa 2012) para. 28.8. 101  [1992] 1 All ER 283, CA. 102  See also Drake Insurance Plc v Provident Insurance Plc [2004] Lloyd’s Rep IR 277.

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11.9 Rateable proportion clauses and other relevant clauses A rateable proportion clause or other different clauses relating to double insurance and contribution are often incorporated into policies. These clauses in different policies may interact and make the application of the doctrine of contribution in double insurance more complicated. As examined above, a rateable proportion clause is a contract clause to the effect that in the event of the existence of a number of concurrent insurances, the insurer is to bear only its own proportion of the loss.103 Rateable proportion clauses are commonly used in indemnity insurance policies by insurers in most countries. Therefore, rateable proportion contribution between insurers in double insurance is commonly adopted nowadays in most countries.104 In China, many indemnity insurance policies include a rateable proportion clause, stating: “Should any loss, damage, expenses or liability recoverable under this policy be also covered by any other insurance, the Company shall only be liable to pay or contribute his proportion of the claim irrespective of whether the other insurance is arranged by the insured or others on his behalf, or whether any indemnification is obtainable under such other insurance.”105 In the UK, a common form of rateable proportion clause can be found in non-marine policies: “If at the time of any claim . . . there shall be any other insurance covering the same risk or any part thereof the Company shall not be liable for more than its rateable proportion thereof.”106 This clause means that if there is double insurance, at the time of claim, the insured can only recover from each of the co-insurers the amount proportionately for which each insurer is liable to the insured as between itself and other co-insurers.107 Other types of clauses relating to double insurance have been found in English insurance policies which have not appeared in Chinese insurance policies, such as “escape clauses” or “exclusion of liability clauses.” These clauses make situations more complicated. Under English law, whether contribution between insurers arises or how to contribute depends on the construction of these clauses in insurance policies by the court. Difficult questions may arise where there are two policies which give double insurance, one has a rateable clause and the other does not, or one has a rateable clause and the other contains a clause exempting the insurer from all liability if the insured is entitled to be indemnified under another policy. A recent English case illustrates the situation. In National Farmers Union Mutual Insurance Society Ltd v HSBC Insurance (UK) Ltd,108 a property was sold and was insured by two fire policies. The sellers of the subject property were insured by HSBC Insurance (UK) Ltd, and the buyers by the claimant, NFU. In between exchange and completion,

103  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-088. 104  Qirong Fan, “Modern integration on the doctrine of contribution in double insurance” [2012] 6 Commercial Law, available at accessed in April 2016. 105  See, for example: clause 7 of Property Insurance and Property All Risks Insurance of Ping An Insurance Co. of China; art. 7 of Public Liability Insurance of Ping An Insurance Co. of China; art. 7 of Property All Risks of Hua Tai Insurance Co.; and art. 7 of Property Insurance and Property All Risk Insurance of PICC. 106  MacGillivray on Insurance Law (12 edn, Sweet & Maxwell 2012) para. 24-020. 107  Drake Insurance Co. v Provident Insurance Plc [2004] QB 601. 108  [2010] EWHC 773 (Comm), [2011] Lloyd’s Rep 1r 86.

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the building was damaged by a fire while it was at the risk of the buyers. The HSBC insurance extended the benefit of cover to the buyers until completion, but not if the building was “insured under any other insurance.” The NFU policy contained a rateable proportion clause. After loss, the buyers were indemnified by NFU, and NFU claimed a contribution from HSBC on the basis that the case was one of double insurance. HSBC rejected this based on the exclusion of liability clause. NFU argued that the provision in the HSBC policy was referring only to situations where the building was “fully” insured under another policy, which was not the case because of the rateable proportion clause in the NFU policy. Upon the construction of the clauses, the court held that the rateable proportion clause was subordinate to the clause giving the indemnity, and the rateable proportion clause was not triggered because there was no other insurance cover as a result of the exclusion in the HSBC policy. Accordingly, the only cover in place at the relevant time was that provided by NFU, so there was no double insurance and no entitlement to a contribution from HSBC.109 This is the most recent position of English common law regarding the relationship between a rateable proportion clause and an exclusion of liability clause in different policies in the event of double insurance. 11.10 Return of premiums In double insurance the insured may, with respect to the portion of the total amount of the sum insured which exceeds the insured value, request each insurer to return the premiums pro rata.110 That means, in cases of over-insurance by double insurance, the insured is entitled to claim a rateable return of his premium from each insurer. That is because the insurers bear only their proportional liability; for the part the insurer is not liable, the insured should be entitled to claim back the premium correspondingly,111 for the failure of the consideration of the insurer on that part. It is not clear from the Insurance Law whether the insured in a double insurance situation is entitled to claim part of the premium if the loss has never occurred, and if yes, when he is entitled to claim the return of the proportion of the premium, especially where the starting dates and the expiry dates of the policies are different in double insurance.112 It is submitted that, at least in theory, the insured should be allowed to claim the return of the rateable proportion premium corresponding to the extent of over-insurance by double insurance, because the insurers did not bear risk for over-insurance, and therefore did not provide consideration for it. What is also unclear is that where loss occurs in double insurance, and the insured has been paid by the different insurers proportionately, is he entitled to claim the rateable

109 As Professor Birds explains: “an exclusion of liability in one policy in the event of there being other insurance will override a rateable proportion clause in the other policy, so that there is no double insurance.” See Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 18.4.1. 110  The Insurance Law art. 56(3); the MIA s. 84(3)(f). 111  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 429. 112  For example, if one fire policy was effected on 26 January 2010 for one year and the other was from 22 March 2010 for one year, is the insured entitled to claim the return of the rateable proportion premium at the time when the first or the second policy expires?

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proportion premium from each insurer representing the proportion for which each insurer is not liable? And it is not clear whether an insured is entitled to get back the rateable proportion premium on any policy where the double insurance is effected knowingly by the insured. Matters of return of premiums in double insurance are complex. As Professor Merkin said, “One question which is of some complexity is whether the assured is entitled to claim a rateable return of his premium from each insurer, in a manner representing the amount by which he is over-insured by double insurance.”113 Under English law, according to s. 84(3)(f) of the MIA, the premium in double insurance is returnable: “Where the assured has over-insured by double insurance, a proportionate part of the several premiums is returnable to the insured: Provided that, if the policies are effected at different times, and any earlier policy has at any time borne the entire risk, or if a claim has been paid on the policy in respect of the full sum insured thereby, no premium is returnable in respect of that policy, and when the double insurance is effected knowingly by the assured no premium is returnable.”114 The justification for granting the insured leave to request the return of the proportionate part of the premium paid is explained by Professor Rose: “An insured may be entitled to recover a proportionate part of any premium overpaid to the several insurers. An insurer is paid premiums on the assumption that he bears the full risk contemplated. To the extent that several insurers have a common liability for particular losses, however, the risk borne by each insurer is proportionately reduced. An insured cannot recover more than one full indemnity for those losses from the several insurers; and the existence of rights of contribution as between the several insurers means, in theory at least, that the ultimate burden of liability borne by each insurer is proportionately reduced. An insured is prima facie entitled to a proportionate return of the premiums paid to that extent.”115 Under the German Insurance Act 2008, s. 78(3) provides: “If the policyholder has taken out multiple insurance with the intention of thereby gaining an illegal pecuniary benefit, each contract made with that intention shall be void; the insurer shall be entitled to the insurance premium up until such time as he learned of the circumstances establishing the nullity.”116

113  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-077. 114  By virtue of this provision, in cases of over-insurance by double insurance, the assured is entitled to the return of a proportion of the premium corresponding to the extent of the over-insurance except in three situations. First, where the contracts creating the over-insurance are concluded at different times and the entire risk has been carried at any time by one or more earlier contracts, no return of premium can be claimed on such earlier contracts because of that assumption of risk. Liability for the return of premium falls solely on the later insurers. See Fisk v Masterman (1841) 8 M & W 165. Second, no return of premium can be claimed on any policy that has paid a claim in respect of the full sum insured. Although the insurer can then claim contribution in respect of the over-insurance, the insurer runs the risk that such claim for contribution may not be satisfied, for example by reason of insolvency of other insurers. Third, in order to discourage over-insurance, no return of premium can be claimed on any policy where the double insurance is effected knowingly by the assured. This may happen where the assured is concerned about the reliability of existing insurance, perhaps because of the financial position of the insurer or because the insurer or the broker has threatened to cancel the insurance. 115  F. D. Rose, Marine Insurance: Law and Practice (2nd edn, Informa 2012) para. 28.9. 116  German Insurance Contract Act 2008, s. 78 “Liability in the case of multiple insurance.”

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11.11 Conclusion Double insurance and contribution have been discussed as compared with the laws in other jurisdictions. There are a number of shortcomings in art. 56 of the Insurance Law. Improvement is needed on several matters in the area of double insurance and contribution in the Insurance Law. (1) The provision relating to the insured’s duty of notification of double insurance is ambiguous. Article 56(1) of the Insurance Law requires the insured to notify the individual insurer where the subject matter is also covered by another insurance. But the article does not provide the time point when the insured must perform the duty. In addition, the article does not make it clear what the remedy would be for the insured’s failure to serve notice to the insurers. It could be suggested that the approach in the Insurance Act 2010 (Taiwan) in respect of the remedies can be referred to for improving art. 56 of the Insurance Law. According to art. 37 of the Taiwan Insurance Act, there are different remedies for the insured’s failure to notify each insurer in double insurance, depending on whether the double insurance is made intentionally by the insured or unintentionally. If the insured intentionally takes out double insurance with the purpose of making a profit therefrom and does not give notice to each insurer of the double insurance deliberately, the contracts shall be void.117 This means the insured cannot recover from any insurer. While by virtue of art. 38 of the Taiwan Insurance Act, if the insured takes out double insurance without being aware of the existence of the other insurance, and the insured amount of the two policies exceeds the insured value of the subject matter of insurance, unless there it is specified otherwise, each insurer shall be liable for the proportion specified in its policy, and the total payment by different insurers shall not exceed the insured value of the subject matter.118 (2) The time point when the notification of double insurance should be given by the insured to the insurers is not clear. It is suggested that the notice should be given at the time of loss.119 (3) The Insurance Law omits an important element of double insurance, that is, the two insurances must cover the same period of time, and at least an overlap period. This requirement does not mean the duration of the two insurance policies must be exactly the same; there is double insurance if a part of the insurance period of one policy overlaps a part of the insurance period in another policy.

117 The Insurance Act 2010 (Taiwan), art. 37. A similar provision can be found in the Macao Commercial Code, art. 1002(2), wherein it is stated: “If the insured, in bad faith, fails to give such notice, none of the insurers shall be obliged to pay compensation.” 118  The Insurance Act 2010 (Taiwan), art. 38. 119  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 436.

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CHAPTER 12

Causation

12.1 Introduction An insurance contract usually sets out a list of risks (events) covered and a list of risks excluded. The insurer is liable only for the loss which is caused by an insured event (or events) under the insurance policy. Subject to contrary terms in the policy, the cause, whether an event covered or an event excluded, is the so-called proximate cause, “the dominant or effective or operative cause.”1 For a claim for insurance payment for any loss to be valid and successful, it must be established that the loss is caused by an insured event. It may not be particularly difficult to establish the insurer’s liability for a loss in the situation where the loss is caused by a single or multiple events which are all covered or all excluded; it is, however, hard to establish the insurer’s liability, or the extent of its liability, for a loss where the loss is brought about by a series of events operating together, some of which are covered and some are not covered or excluded. Thus, to identify the event(s) among others which give rise to the loss becomes crucial. The principle of proximate cause is applied to facilitate the determination of the cause of the loss. It is said that the proximate cause is found by the application of common sense.2 But, more recently, Lord Hoffmann expressed the view that the “notion of causation should not be overcomplicated,” neither “should it be oversimplified.”3 Nevertheless, over the years, many rules with regard to causation of loss have been developed to facilitate the determination of insurers’ liability. The principle of causation originated in English common law in the 17th century4 and was codified in the Marine Insurance Act 1906.5 This principle has been adopted by many other jurisdictions in their insurance laws.6 In China, however, no specific provisions regarding the principle of proximate cause can be found either in the Insurance Law or in the Maritime Code, although there are some provisions

1  M. Clarke, The Law of Insurance Contracts (6th edn, Informa 2009) para. 25-1. 2  Wayne Tank and Pump Co. Ltd v Employer’s Liability Assurance Corp Ltd [1973] 2 Lloyd’s Rep 237, at 240. 3  Empress Car Co. (Abertillery) v National Rivers Authority [1999] 2 AC 22, at 29. 4  It was said that the law of causation in English law can be traced back to 1630. For more detailed discussion see Meixian Song, Causation in Insurance Contract Law (Informa 2014) p. 2. 5  The MIA, s. 55. 6  For example: New Zealand Marine Insurance Act 1908, s. 55; Australian Marine Insurance Act 1909, s. 61.

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in laws reflecting the nature of the principle of causation.7 However, in judicial and industrial practice, the principle proximate cause is commonly applied by Chinese courts and insurers in determining whether a loss is caused by an insured event in order to establish the insurer’s liability.8 The rules of proximate cause developed in English common law are often referred to by Chinese courts when trying insurance cases relating to causation of an insurance loss. In this chapter, the principle of causation and its application in China are considered from the perspectives of statutory provisions, the judicial interpretations by the Supreme People’s Court of China (SPC), the guidelines for trying insurance cases formulated by the High People’s Courts (HPC) in some provinces, and the terms of insurance contracts. Before considering the application of proximate cause in China, it is necessary to give a brief account of the nature and the evolution of the principle in English Law. 12.2 The nature of the principle of proximate cause Every type of insurance contract provides scope for coverage against losses caused by specified perils and also stipulates exclusion of certain perils in the policies. The insurer is liable only for a loss caused by the insured peril(s). Consequently, to determine whether a particular loss is covered, two questions have to be answered. First, what is the peril which has caused the loss? Second, is the peril which has caused the loss covered by the policy? The insurer’s liability can be determined based on the answers to the above two questions. To answer the questions, the principle of proximate cause must be used. Both English statutory law and case law have adopted the doctrine of proximate cause in determining the causation of loss. The principle is codified in the Marine Insurance Law 1906, s. 55(1) of which provides: “unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against.” Accordingly, the insured can recover from the insurer only those losses which are proximately caused by an event covered by the insurance policy. It is relatively simple to state the doctrine of proximate cause, but in practice, ascertaining the proximate cause of a loss in any particular case may be a matter of some difficulty.9 In certain situations, a loss may be caused by two or more perils – the causative facts combine and operate like links in a chain or even knots in a net. Every knot may have a contributory effect on different scales to the occurrence of loss.10 Rules of the doctrine of proximate cause have been developed by English common law and are very helpful in identifying an effective cause in a chain of

  7 The Insurance Law was enacted in 1995 and amended three times since then, and the Maritime Code of the PRC was enacted in 1992, but neither of them has adopted the principle of proximate cause.  8 Linqing Wang, The Insurance Law & Its Judicial Application – Studies on the Hot Issues Since the Enactment of the New Insurance Law (Law Press China 2013) p. 93.  9 R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-034. 10  Meixian Song, Causation in Insurance Contract Law (London: Informa Law 2014) p. 59; see also Jianxun Liu, Insurance Law – Typical Cases & Trial Thinking (Law Press China 2012) p. 121.

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events or among other concurrent causes. These rules are also applied by Chinese courts in judicial practice.11 In England, the evolution and the development of the principle of proximate cause experienced two stages in which two different tests of proximity of a cause were adopted – namely, proximity in terms of time and proximity in terms of efficiency. Before 1918, the proximate cause was the last cause in terms of time in the chain of events which occurred successively in causing the loss. Many cases illustrate this position.12 The meaning of the principle of proximate cause was radically changed by the landmark decision of Leyland Shipping Co. v Norwich Union Fire Insurance Society Ltd (1918),13 in which a new test of proximity of loss was established by the House of Lords, that is, the proximate cause does not mean the last cause, but the effective or dominant or real cause. This decision marked the end of the earlier rule that looked to the last cause in point of the time. 12.3 The application of proximate cause in China At this juncture, the application of the doctrine of proximate cause in China will be examined from the perspectives of the statutory provisions, judicial interpretations and judicial practice. 12.3.1 Statutory provisions regarding causation in the Insurance Law In China, the principle of proximate cause has not been incorporated expressly into the Insurance Law.14 However, some of the provisions of the Insurance Law and the Maritime Code reflect the elements of the principle of proximate cause. Article 2 of the Insurance Law and art. 216 of the Maritime Code give the definition of an insurance contract; both articles specify that the insurer shall be liable to indemnify the insured for loss of or damage to the subject matter caused by15 the insured event(s).

11  However, working out what is the proximate cause in any situation is strictly a question of fact, so the rules decided by English cases cannot be binding but are merely illustrations. 12  Hamilton, Fraser & Co. v Pandorf & Co. (1887) LR 12 App Cas 518; Ionides v The Universal Marine Insurance Company (1863) 14 CB (NS) 259; Taylor v Dunbar (1868–69) LR 4 CP 206. In Raman Chitty and Anor v Chuah Eu Kay and Ors ([1897] 4 SSLR 53), the plaintiffs insured the vessel with the defendants against absolute total loss due to sinking. The vessel collided with another vessel and sank almost immediately. The judge held that the proximate cause of the loss was the sinking (peril insured), not the collision (peril excluded). This was absolutely the case that the loss was caused by two successive connected events – the first event led inevitably to the second event, and the first event should be the proximate cause – but the decision was to the contrary. This case demonstrated the approach before 1918, when the doctrine of the proximate cause was described as the latest cause in the point of time. The law was changed by the Leyland case (1918). Although generally, before 1918, the proximate cause in successive causes was determined according to the test of last cause in time order, it was not always true. The case Reischer v Borwick, ([1894] 2 QB 548), however, seemed to refute this test. A ship was covered against collision with any object, but there was no mention of the peril of the sea in the policy. When the ship was sailing, she struck a “floating snag” and was holed and began to sink. A temporary step was made to plug the gaps, but the ship sank while being towed to the dock for repairs because the plug was forced out by the water. It was held that the proximate cause was the collision, not the sinking. 13  [1918] AC 350. 14 The doctrine of proximate cause was neither mentioned in the different versions of the Chinese Insurance Law 1995, 2002 and 2009, nor in the Maritime Code (chapter 12) 1992. 15  Emphasis added.

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Although the word “proximate” is not found, the articles indicate that the principle of causation is recognised by Chinese law. In addition, art. 22 of the Insurance Law and art. 251 of the Maritime Code require the insured and the beneficiary to provide the insurer with relevant evidence and information for ascertaining the nature, the cause and the extent of the insured event.16 These provisions indicate that the insured or beneficiary is required to submit evidence or documents in order for the insurer to ascertain the cause(s) of the loss and determine its liability. These provisions to a certain extent reflect the nature of the principle of proximate cause even though the exact words “proximate cause” are omitted. The provisions regarding causation are also incorporated into insurance policies as contract clauses.17 Other provisions of the Insurance Law and the Maritime Code may show the fact that the doctrine of causation is in the laws.18 Article 23 of the Insurance Law provides that “After having received the claim, . . . where the claim is covered19 the insurer shall within 10 days make the payment of the insurance money.” Article 24 says, “where the claim is not covered20 the insurer shall give a rejection notice to the insured or the beneficiary within 3 days.” These provisions imply the application of the principle of causation, because whether the claim is covered or not covered or excluded depends on what perils have caused the loss, and the insurer is only liable for loss caused by perils insured against. This should be determined by the rules of causation or the principle of proximate cause. 12.3.2 Provisions about proximate cause in SPC Interpretations and HPC guidelines In judicial interpretations of the SPC on the Insurance Law, and in guidelines of the HPC, the nature and elements of the doctrine of proximate cause are reflected. (a) The SPC Interpretation The SPC’s Interpretation on Certain Issues Concerning the Trial of Insurance Disputes (Draft for Comments) 2003 proposed a provision relating to the principle of proximate cause in dealing with insurance disputes: “The insurer’s claim that its liability shall be limited to the loss proximately caused by the insured perils should be upheld by the court. Proximate cause refers to the dominant and effective cause.”21 This proposal, had it been incorporated into the Insurance Law, would 16  Article 22 of the Insurance Law provides: “After the occurrence of an insured event, the proposer, the insured or the beneficiary, in making claims to the insurer for indemnity payments or insurance benefits, shall, to the best of their knowledge and ability, provide the insurer with relevant evidence and information for ascertaining the nature and the cause of the insured event and the extent of loss.” Article 251 of the Maritime Code provides: “After the occurrence of a peril insured against and before the payment of indemnity, the insurer may demand the insured to submit evidence and materials related to the ascertainment of the nature of the peril and the extent of the loss.” 17  See clause 33 of Household Property Insurance Clauses of Ping An Insurance Company of China. 18  Such as arts. 2, 23 and 24 of the Insurance Law and arts. 216, 237, 238, 239, 242, 243 and 252 of the Maritime Code. These articles use the words “caused by” or “resulted from,” which reflect the meaning of causation or causal link between insured event and the loss. These articles expressly stipulate that the insurer is only responsible for the loss caused by or resulting from the insured events and is not liable for the loss caused by or resulting from the excluded events. 19  Emphasis added. 20  Emphasis added. 21  Article 19 of the SPC Interpretation (Draft for Comments) 2003.

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have filled the gap of the statutory law in respect of the principle of proximate cause. Unfortunately, when the Insurance Law was amended in 2009 this proposal was not adopted by the 2009 version of the Insurance Law. It was said that the reasons for the non-incorporation of the principle of proximate cause into the Insurance Law were the complications arising from the principle of proximate cause and the potential incompatibility attributed to the legal transplantation of the doctrine of proximate cause – which is a creature of the common law precedents – into the written law system.22 After the enactment of the 2009 version of the Insurance Law, the SPC has so far published two drafts for comments on Interpretations on Certain Issues for the Application of the Insurance Law,23 and three formal Interpretations on Certain Issues Concerning the Application of the Insurance Law.24 In the Interpretation II (Draft for Comments) 2012, the SPC again raised the point of causation in art. 22, where it is stated: “Where the loss is caused by multiple events, including insured perils and non-insured perils, in the case where the causal connection between the loss and the insured perils is difficult to determine, the People’s Courts shall determine the insurer’s liability according to the proportion or the extent of the insured perils to the cause of loss.” But this proposal was not adopted in the SPC Interpretation II 2013. Once again, the SPC Interpretation III (Draft for Comments) 2014 proposed introducing the proportionality concept into the principle of causation. Article 45 of the Draft states: “Where the loss of the insured subject matter is caused by an insured event and an excluded event, if the insured or the beneficiary requests the insurer to pay the insurance money according to the proportion between the loss caused by an insured event and the loss caused by an excluded event, the People’s Court shall uphold such a claim.” This proposal was eventually adopted by the SPC in its Interpretation III 2015. Article 25 of Interpretation III provides: “Where the insured claims for the insurance money, if it is difficult to determine whether the loss is caused by an insured event, a noninsured or an excluded event, the court shall support the claim for the amount of payment determined in accordance with the corresponding proportion of the loss caused by the insured event.” Some scholars call such a determination of causation “proportional causation.”25 The SPC Interpretation III represents the current legal position in China in respect of proximate cause and the approach of apportionment of the loss. These provisions in the SPC Interpretations indicate the intention of the SPC to apply the principle of causation in judicial practice for determining the insurer’s liability in insurance cases. The SPC has introduced the proportionality concept to the principle of causation. However, the proportion may vary depending on the facts of the case; it is not easy to determine the corresponding proportions between the insured event, non-insured event and excluded event in a complicated situation. It 22  Beiping Chu, “Current Issues and Developments in Chinese Insurance Law” in J. Hjalmarsson and D. J. Huang (eds), Insurance Law in China (Informa 2015) p. 101. 23 The SPC Interpretations on Certain Issues for the Application of the Insurance Law II (Draft for Comments) 2012 and the SPC Interpretations on Certain Issues for the Application of the Insurance Law III (Draft for Comments) 2014. 24  The SPC Interpretations I 2009; SPC Interpretations II 2013; and SPC Interpretations III 2015. 25  Beiping Chu, “Current Issues and Developments in Chinese Insurance Law” in J. Hjalmarsson and D. J. Huang (eds), Insurance Law in China (Informa 2015) p. 101.

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would be helpful and necessary for the SPC to work out some guiding rules on how to determine the proportions. (b) The HPC guidelines for the application of proximate cause in insurance cases Several HPC guidelines on how to deal with insurance disputes include provisions about proximate cause. For example, in the Guidance of the High People’s Court of Shandong Province Concerning Questions of How to Deal with Insurance Disputes 2011, art. 14 provides: “Where a loss is caused by several perils, if the insurer rejects the claim on the ground that the loss is not covered by the policy, he shall determine whether or not he is liable for the loss by determining whether the cause which played a leading or dominating role resulting in the accident falls into the scope of perils covered in the insurance policy.” This article is obviously the application of the principle of proximate cause. The HPC of Fujian Province also gives a similar provision. In the Guidance of the High People’s Court (the Second Civil Court) of Fujian Province Concerning Questions of How to Deal with Insurance Disputes 2014, art. 3 provides a definition of the principle of proximate cause: “Proximate cause refers to the direct, effective and decisive cause which causes the loss or damage of the insured subject matter, but does not refer to the cause which is proximate in terms of time or space. If the proximate cause is an insured event, the insurer shall be liable for payment of insurance money; if the proximate cause is an excluded event or an event not covered by the policy, the insurer shall not be liable for payment.” This is probably the only provision which properly defines proximate cause in China. In the Guidance of the High People’s Court of Guangdong Province Concerning Questions of How to Deal with Insurance Disputes 2011, art. 17 provides: “Where the insured loss is caused by several events, among which there are insured events and non-insured events, if the insured requires the insurer to pay the corresponding loss according to the proportion or the extent of the insured event to the total loss, the court shall uphold the claim.” Some commentators have the view that where there are two or more events causing the insured loss, and some of them are insured events and others are non-insured or excluded events, the proximate cause or the effect of each cause could be determined by common sense. If the insured event and the excluded event are interdependent and operating together in causing the loss, the insurer should not be liable. While if the two events are independent, and each of the events operating alone is capable of causing the loss, the insurer is liable for the loss caused by the insured event only if there is a possibility to identify the loss caused by the insured peril from loss caused by other perils.26 In the absence of statutory rules on proximate cause, the SPC interpretation III and the HPC guidelines play an important role in determining the insurer’s liability.

26  Hongtao Sun, “The Common Sense Judgement for Proximate Cause in Insurance Law” [2006] 7 Seek (Qiusuo) 121–23.

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12.3.3 The application of the doctrine of proximate cause in judicial practice in China Although there is no express adoption of the principle of proximate cause in statutory laws, the principle is commonly applied in judicial practice in China.27 The rules of proximate cause developed by English common law are often referred to by Chinese courts to determine the insurer’s liability when dealing with insurance cases. If the loss arises from a single cause, it is easy for the insurer to decide its liability – it is liable if the loss is caused by the risk covered; otherwise it is not.28 However, a loss is more often than not precipitated by a combination of causes. Perils insured against, for instance, may initially appear to have caused a loss, but there are generally other causes which could oust or prevail over the insured peril, as the proximate cause of loss. It has been said that a cause rarely operates by itself to occasion a loss. There is almost invariably an array of contributing factors and influences working behind the scenes, and this led to metaphors such as links in a chain being used to describe the successive events leading to the loss. Where the insured loss is caused by two or more events, if all the events are insured events, it is not important to determine which event is the proximate cause as the insurer is liable to pay no matter which one is the proximate cause. However, if the events include an insured event, a non-insured event and an excluded event, to determine the proximate cause is necessary as the insurer is only liable for loss proximately caused by the insured event. (a) “Inevitability” test in a chain of events The “inevitability” test is also known as the “inevitable consequence” test in a chain of events.29 Where the loss arises from two or more perils which occur successively and the chain of causation is never broken, namely the second peril is the inevitable consequence of the first peril, then the first peril is the proximate cause of the loss. If an event insured against leads inevitably to an excepted event and then loss happens, the proximate cause is the insured event, and this rule applies vice versa. This rule was established by the landmark English case of Leyland shipping Co. Ltd v Norwich Union Fire Insurance Society Ltd.30 During the First World War, a ship was insured against loss from perils of the sea, with an exception in respect of loss due to hostilities. The ship, while on a voyage from South America to Le Havre, was torpedoed by a German submarine. The torpedo struck her well forward and she began to settle down by the head. She was towed to Le Havre and was taken alongside a quay in the outer harbour. A gale sprang up, causing her to bump against the quay, and the harbour authorities, fearing that she would sink and block the quay, ordered her to move just outside the harbour. She was taking the ground at each ebb tide and floating again with the flood, when two days later she finally sank and became a total loss. The court held that the torpedoing was the proximate cause of

27  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on the Hot Issues on the New Insurance Law (Law Press China 2013) p. 93; Lingqing Wang, Analysis of One Hundred Cases Relating to the New Insurance Law (People’s Court Press 2009) p. 89. See also Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 348. 28  Ballantyne v MacKinnon [1896] 2 QB 455, CA. 29  Meixian Song, Causation in Insurance Contract Law (Informa 2014) p. 13. 30  [1918] AC 350.

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loss. Though her final loss was due to a storm, the torpedo gave the death blow; her final sinking seemed inevitable at the very beginning of the torpedoing because her bow was seriously damaged, and the loss looked like an ordinary course led naturally to by the torpedo. The point is that the original cause predominates and is regarded as the real cause of the loss unless it was merely facilitating a subsequent cause that totally changed matters.31 The “inevitability” test is followed by later cases such as P. Samuel v Dumas.32 The application of this test was affirmed by the recent case of Atlasnavios-Navegação Lda v Navigators Insurance Co. Ltd and Others (The “B Atlantic”).33 A vessel, owned by the claimant, was detained by Venezuelan authorities following the discovery that drugs had been attached to the vessel’s hull. The identity of the individuals who attached the drugs (in an attempt to smuggle them to Europe) has never been discovered, but it was common knowledge that the vessel’s owner did not know anything about the drugs and had no involvement in any attempted drug trafficking. Flaux J was required to determine whether the owners of the vessel B Atlantic could claim against the defendant insurer under a war risks policy for the constructive total loss of the vessel by reason of her detention in Venezuela for more than six months, following the discovery by the authorities of bags of cocaine attached to her hull. Whether the claimants were entitled to recover for constructive total loss depended on what caused the detention. The policy covered the detention of a vessel as a result of “malicious act of a third party” (which here was the attaching of the drugs to the hull), but excluded the detention of a vessel caused by “infringement of customs regulations.” The court was required to consider and rule on some fundamental questions about proximate cause, the meaning of “acting maliciously” and “from a political motive” in the context of a war risks policy, and whether the “infringement of customs regulations” exclusion was subject to any implied restrictions and whether the insurer was entitled to rely on exclusions relating to loss arising by reason of “infringement of any customs regulations” and to loss arising from “failure to provide security.” Flaux J held that the constructive total loss claim succeeded on the basis that there was cover under the policy for malicious acts and that, as a matter of construction, the infringement of customs regulation exclusion relied on by the insurers was subject to an implied limitation in respect of infringements brought about by malicious acts of third parties, and therefore did not apply to the claim in question. The chain of causation was not broken between the malicious act and the detention of the

31  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) p. 267; see also Malcolm Clarke, “Insurance: the proximate cause in English law” (1981) 40(2) Cambridge LJ 284 for his comments about the “inevitable consequence” test. Professor Clarke contends that “the loss of the kind covered must be inevitable, but the extent of the loss need only be such as would have been within reasonable contemplation or not unlikely to occur.” 32  P. Samuel v Dumas [1924] AC 431. A Greek man purchased a British ship. Insurance was taken out by the owner, including the perils of the sea, but excluding the scuttling of the ship. When the ship was sailing on the sea, it was scuttled by the master and crew with the connivance of the owner. Scuttling (peril excepted) was immediately followed by the incursion of seawater (peril insured against). It was held that the proximate cause was the act of scuttling; it was for the purpose of letting in seawater that the holes were made, and that all the followed was the inevitable consequence of the scuttling. 33  QBD (Comm Ct) (Flaux J) [2014] EWHC 4133 (Comm) – 8 December 2014.

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vessel. The proximate cause in this case was “malicious act of a third party,” which was an insured event. The “inevitability” test is also applied by Chinese courts in trying insurance cases in respect of successive events. In Wetting of Cigarettes,34 the insured, a wine and cigarette company, took out “enterprise property insurance” which covered the peril of flood but clearly excluded the peril of damp. After a heavy storm, a flood flowed into the company’s warehouse where there were many boxes of cigarettes being stored. With the flood, the bottom of the cigarette boxes were soaked, and the cigarettes in the top of the boxes were not soaked, but dampened. In order to avoid the expansion of the loss, the company sold off the damp cigarettes at a lower price. The insured claimed against the insurer for the loss. The insurer agreed to pay the loss of the soaked cigarettes, but there were different opinions among the staff of the insurance company on the claim for the damp part of the loss. Some staff argued that the loss of the damp cigarettes was excluded by the policy, as only the flood was the peril insured against. So they persisted in denying the liability. The majority of the staff of the insurance company, however, had the view that the damp loss was the inevitable consequence of the flood, and the flood was the proximate cause. So they agreed that the insurer should be liable for all the loss, including the damp loss. The insured therefore recovered all losses. This case was settled following the rule that where the loss arises from two or more causes which are successive and the chain of causation is never broken, and the second peril is the inevitable consequence of the first peril, then the first peril is the proximate cause of the loss.35 If, however, the second event is no more than the probable result, rather than the inevitable consequence of the first event, then the second event is the proximate cause. This rule will be considered shortly. (b) The application of the “inevitability” test in the cases of accident insurance Ascertaining a proximate cause in personal accident insurance is more complicated, as most accident policies exclude losses caused by natural disease. In practice it is very often that an insured loss is caused by a combination of accident injury and disease, and sometimes it is impossible to determine which event causes the other one. For instance, if the insured under an accident policy is injured in an accident which leads to his death from brain haemorrhage, the courts may have inconsistent judgments for such a case. As Professor Merkin comments, “Isolating the proximate cause of the loss is at its most contentious in this type of case.”36 It has generally been held by English courts that an accident which has prompted death from natural causes is the proximate cause of the loss and that the natural causes do not break the chain of causation.37

34  This case was cited in the book by Chang Gong Zheng and Fei Qing Xu, The Analysis of the Insurance Cases (Wuhan University Press 1989). 35  This rule was first established in Leyland shipping Co. Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350. 36  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-039. 37  Mardorf v Accident Insurance Company [1903] 1 KB 584; Re Etheringron and Lancashire andYorkshire Accident Insurance Co. [1909] 1 KB 591.

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In Mardorf v Accident Insurance Company,38 a person insured himself with the defendants under a policy whereby the defendants agreed to pay him a certain sum in case he should be injured by accidental violence and if the injury should be the “direct and sole cause” of his death, while there was an exception for death caused by an intervening cause. The insured scratched his leg with his thumb nail while he was removing his socks. His leg became inflamed, and seven days later erysipelas had set in, and this was followed by septicaemia three days later; he finally died from septic pneumonia in four more days. The court held that the accident event was the proximate cause, though he died from disease. The chain of causation had never been broken since the beginning when he had scratched his leg. The erysipelas, septicaemia and septic pneumonia were not “intervening causes” but the different inevitable stages in the development of the disease which he died from. A great number of Chinese accident cases have been decided by this rule. In one case,39 an electrician was insured under personal accident insurance with an exception of indemnity for loss caused by natural disease. He fell from a high place when he was working and his back was seriously injured (peril insured). The injury led to back disease (peril excepted) which brought about the death of the insured. It was held that the insurer should be liable for the death because the accident injury was the proximate cause that directly led to the back disease which the insured died from. In the case of Mr Fan v Pacific Ocean Life Insurance Co.,40 Mr Fan effected a family accident insurance policy on himself, his wife and his mother. His mother fell down from the top of the stairs to the bottom and was seriously injured. She was sent to hospital and died four hours later. The medical record showed that the insured was injured in the accident of falling down from the stairs, and the symptoms of dizziness, nausea, vomiting, brain haemorrhage and coma appeared before she died. The court held that the chain of causation had never been broken between the accident and the death of the insured. The symptoms of dizziness, nausea, vomiting, brain haemorrhage and coma were not “intervening causes” but the different inevitable stages in the development of the disease which the insured died from. The accident event was the proximate cause, so the insurer was liable. In Mr Jianjun Chen v China Life Insurance Co.,41 Mr Chen’s father was the life insured under an accident insurance. Mr Chen was the beneficiary. The life insured fell over on the way to a bank in the afternoon 22 August 1999, and his head was injured. He drank some wine when he had dinner in the evening. Three hours after the dinner, he felt a headache and collapsed to the floor. He was sent to the hospital and stayed there for five days for treatment. He was picked up and taken home on 27 August. However, he died three days later after he had returned home. According to the hospital diagnosis, the life insured’s falling down led to the brain haemorrhage but the drinking of alcohol accelerated the brain haemorrhage. The court held that the accident was the proximate cause; the drinking of wine merely accelerated the brain haemorrhage, and finally led to the death of the insured. The external 38  [1903] 1 KB 584. 39  Huichang Cheng, The Introduction of Insurance Law (North-West University Press 1994) p. 123. 40  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 30. 41  Ibid, p. 33.

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intervention event did not break the chain of causation between the accident and the death. The insurer was therefore liable. Conversely, if the insured has a pre-existing natural weakness or chronic disease, which has led to him suffering an accident, the accident has normally been held to be the proximate cause of the insured’s death.42 It is generally held that the accident is a new cause and breaks the chain of causation. The leading English case for this position is Lawrence v Accidental Insurance Co., Ltd.43 A man insured against death in case of personal injury caused by accidental means, but excluding death from injury caused by fits. The insured suffered a fit while standing on a railway station platform, fell on to the track and was killed by a passing train. The court held that the proximate cause of the death was the accident (peril insured) and not the fit (exception). The falling on to the track is not the inevitable consequence of the fit. If a man has a fit and falls on a station platform, injury is inevitable but death may be avoidable. In this case the first event was only the facilitation of the second one, so the second event was the proximate cause. The case of Winspear v Accident Insurance Association44 was decided based on the same rule. However, it is difficult to understand in this way. The policy, which included the same wording as that in the Lawrence case, also required that accidental injury be the “direct and sole cause” of death. While crossing a stream, the insured had a fit, fell into the water and drowned. It was held that the death was caused proximately by the drowning rather than the fit. This decision is, however, not free from criticism. There must be some argument on it. It is easy to say that it is the only and the inevitable result to fall into the water if a man suffers a fit while he is crossing a stream. For such a person the drowning is inevitable. It is hard to say that the drowning is no more than the probable result of the fit. One may ask, what would be the other probable result of the fit? In this sense it could be argued that the proximate cause should be the fit and not the drowning. For this decision perhaps, as Professor Birds comments, “the best explanation is the generosity of the English judges who decided this case.”45 The decision of a Chinese case was made following the same rule.46 A man was insured under a personal accident policy with an exception in respect of death due to natural disease. The man was found dead in a hotel toilet with a wound on his forehead and the reason was not clearly known. The investigation showed that the insured had had an episode of hypertension three years before the conclusion of the contract. But at the time when he took out the insurance he had recovered completely and was able to work normally. Upon his death, his wife made a claim for insurance money, but it was refused by the insurer on the ground that his death arose from disease. Two years later, the claim was lodged again, and the insurer reviewed the case again. Three different views were proposed on the key issue of what was the proximate cause in this case.

42  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-039. 43  Lawrence v Accidental Insurance Co., Ltd [1881] 7 QBD 216. 44  Winspear v Accident Insurance Association [1880] 6 QBD 42. 45  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) p. 268. 46  The case was cited in the article by Yunliang Zhou, “The decision of this case is correct” (1994) 4 Insurance Studies 63.

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(a) The disease of hypertension was the proximate cause which led to the death of the insured, and which was excluded by the policy. If he had not had hypertension, he would not have fallen down and have died in a toilet. The falling down of the insured was a result of the relapse of his disease. (b) The disease and the wound were both important and real causes, and it was difficult to decide which one was the proximate cause. In such a situation, the decision should be made in favour of the claimant. (c) The wound after falling down was no more than a probable result of the hypertension (assuming the man had the hypertension at the time of the accident), but not an inevitable consequence. The other probable result would be that the insured just fell down but was not wounded. The wound should be thought of as a separate and independent event which happened to be interposed between the first event and the loss, in which case the second event is the proximate cause. In addition, the reason for the falling down was unclear – it may have been caused by an accident (even a person who has no hypertension might fall down by accident). However, the rule cannot be applied in the situation in which the chain of causation between the pre-existing disease and the loss is not broken by an intervening accident event. In Mr Xiang v Life Insurance Co.,47 Mr Xiang effected a personal accident insurance which covered injury, disablement or death caused by accident, with an exception in respect of injury, disablement or death caused by natural disease. One day the insured fell over and hurt his left foot. The following day, his leg became seriously inflamed and swollen. The medical record showed that the insured was suffering from type 2 diabetes (and may have been for many years),48 and his left foot had trauma and acute gangrene. As a result, one-third of his left leg was amputated. He sued the insurer for payment under the policy and claimed that the amputation was caused by accidental injury. The insurer invited a medical specialist to carry out forensic identification, and the report showed that the amputation was the result of the peripheral vascular gangrene of the foot, caused by diabetes. The claim was rejected by the insurer on the ground that the proximate cause was the diabetes rather than the accident infection. The latter did not break the chain of causation between the foot gangrene (caused by diabetes) and the amputation, but merely accelerated the deterioration of the foot’s acute gangrene and necessitated an earlier amputation. Foot gangrene is one of the symptoms of diabetic complications and may ultimately lead to amputation. The court upheld the ground of the insurer’s rejection. It is true that if the insured had not suffered from diabetes, it is extremely unlikely that the accident would have led to the amputation.

47  Liyan Li, Guidance on Insurance Law and Analysis of Difficult Insurance Cases (National Defence Industry Press 2007) p. 37; see also Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 31. 48  It was unclear whether the insured was aware of his disease, and whether he made disclosure of it to the insurer at the time of contract.

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(c) One event induces another event to occur Where there are two or more events that occur successively, and the first event is merely providing no more than an occasion for the occurrence of the subsequent event,49 the subsequent event is the real cause which results in the loss and therefore is the proximate cause. Thus if the peril insured against has merely given occasion for the operation of an independent excluded peril, the insurer will not be liable for the loss.50 A number of English decisions illustrate this rule. The typical example is Marsden v City & County Insurance.51 A shopkeeper insured his plate-glass against “loss or damage arising from any cause except fire, breakage during removal, alteration, or repair of premises.” A fire broke out on premises adjoining those of the insured and slightly damaged the rear of his shop, but did not approach that part where the plate-glass was. When the insured was removing his property to a place of safety, a mob, attracted by the fire, broke the plate-glass. It was held that the proximate cause of the damage was the lawless act of the mob, a new independent cause (peril covered) and not the fire (excepted peril), and thus the insured recovered. The fire, in fact, merely facilitated the happening of the riot of the mob which directly caused the loss of the plate-glass. Another example is Winicofsky v Army and Navy Insurance,52 which gave a similar decision. The goods were stolen from a building during an air raid, the proximate cause was the theft, and the air raid merely facilitated the theft to happen. In Fooks v Smith, the insured took out a policy for his goods against marine risks and also a Lloyd’s policy against war risks, including restraint of princes.53 The goods were requisitioned and sold by the Austrian government. The insured claimed for constructive total loss due to the restraint of princes, and alternatively, for actual total loss as a result of seizure by the Austrian government. It was held that it was the seizure and not the restraint that was the proximate cause of the loss. This is a very well settled rule and it seems no arguments have arisen. This rule has been adopted in judicial practice in China. A shop was insured under the Enterprise Property Insurance which covered loss caused, inter alia, by fire, but does not include the peril of theft.54 A fire broke out in a neighbour’s building. In order to prevent the spread of the fire, the staff of the shop gave assistance to extinguish the fire. Taking “advantage,” a mob broke into the shop and stole some business supplies worth ¥20,000. It was held that the theft rather than the fire was

49 John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 20-003. See also the following cases: De Vaux Salvador (1836) 4 Ad & El 420; Pink v Fleming (1890) 25 QBD 396; Field Steamship Co. v Burr [1899] 1 QB 579; Williams & Co. v Canton Insurance Office Ltd [1901] AC 462; Mordy v Jones (1825) 4 B & C 394; Scottish Marine v Turner (1853) 1 Macq 334; Philpott v Swann (1861) 11 CB (NS) 270; Fooks v Smith [1924] 2 KB 508; Adelaide Steamship Co. v R (1924) 93 LJKB 871. 50 John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 20-003; De Vaux v Salvador (1836) 4 Ad & E 420; Pink v Fleming (1890) 25 QBD 396; Field Steamship Co. v Burr (1899) 1 QB 579; Williams & Co. v Canton Insurance Office Ltd [1901] AC 462; Mordy v Jones (1825) 4 B & C 394; Scottish Marine v Turner (1853) 1 Macq 334; Fooks v Smith [1924] 2 KB 508; Adelaide Steamship Co. v R (1924) 93 LJKB 871. 51  Marsden v City & County Insurance [1865] LRICP 232. 52  Winicofsky v Army & Navy Insurance [1919] 35 TLR 283. 53  [1924] 2 KB 508. 54 Yongsheng Zhou, Insurance and Law (Shandong People’s Press 1992) p. 408; the case was cited in this book.

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the proximate cause of the loss – the fire merely facilitated the illegal act of theft. So the insurer was not liable for the loss. In another case,55 the insured took out household property insurance, which, inter alia, covered loss caused by fire, with an exception in respect of “damage to or loss of the electrical equipment or other equipment due to their own overuse or escape of electricity or overheating.” The pipe of the central heating in the insured house burst (exception) and some clothes in the house were soaked by the escaped water from the burst pipe. When the insured was drying the wet clothes on the stove, a fire was caused (a peril covered). The property in the house was destroyed by the fire. It was held that the fire was an independent new cause and was the proximate cause of the loss of the property. The burst of the heating pipe merely triggered the subsequent event of drying the clothes that led to the fire. The decision can be justified on the ground that the fire superseded the prior cause to such an extent that it constituted a totally fresh cause.56 Another interesting Chinese case falls into this category.57 Mrs Jiang effected a life policy on his husband and designated herself as the beneficiary. An exclusion clause in the policy stated that “The insurer shall not be liable if the life insured’s injury or death is caused by his illegal conduct, crime, resisting arrest, deliberate self-injury, alcoholism, or fighting with others.” The life insured lent ¥2,000 to his friend who wanted to use the money for the purpose of gambling. Some months later, the life insured claimed for the repayment of the money against the debtor who had borrowed the money from the life insured for gambling. A quarrel between them happened when the debtor rejected repaying the money. The life insured was hit on head by the debtor with a steel pipe, and was seriously injured and died as a result. The life insured’s wife (the beneficiary) sued the insurer for insurance money under the policy upon the death of the life insured, but was rejected by the insurer on the ground that the life insured’s conduct of lending money to the debtor for gambling was illegal, which was excluded by the policy. The court held that although the lending of the gambling money by the life insured to the debtor had the element of gambling, the insured himself was not involved in the gambling. In addition, there was no natural and necessary connection between the insured’s claim for the debt and the debtor’s action in beating him. The debtor’s act of hitting the head of the life insured leading to the death of the life insured was the direct and real cause of the loss. The “illegal conduct” excluded by the policy referred to the illegal conduct

55  Ibid, p. 409. 56 The rule can also be illustrated by a hypothetical example. The policy covers fire risk for the car but excludes the risk of theft of the car. The car was stolen and then set on fire by the thief. There are two different views on whether the theft of the car was the proximate cause. One view is that the theft is the proximate cause, as the fire would not occur without the theft. The other view is that the fire is the proximate cause because it is not the necessary consequence of the theft. The theft is merely an event which facilitated the occurrence of the second event, the fire (insured peril), which is a new cause of the loss of the car. Therefore the insurer is liable. It is submitted that the second view is more convincing. Another issue to be considered in this case is that whether the insurer is liable depends also on whether the fire set by the thief is deliberately included in the policy. According to the car insurance policy, fire refers to fire, both by natural occurrences and others’ arson. Accordingly, the insurer is liable for the loss of the car caused by the thief’s arson. See Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 104. 57  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 26.

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of the life insured himself. There was no direct causal link between the lending of the gambling money and the death of the life insured – the proximate cause was the hit on the head, an accident, which was an insured event. The insurer was therefore liable. (d) Two concurrent proximate causes It often happens that the insured’s loss arises from two or more causes, which occur almost concurrently and they are equal or nearly equal in their efficiency in bringing about a loss. Under these circumstances, the court will strive to identify the proximate cause.58 If, however, it is not possible to identify which of the two causes is the proximate cause, they will be regarded as concurrent proximate causes.59 Each of them is a proximate cause in the sense that the loss would not have happened if only one of the causes had been operative but for the other.60 If one is a peril covered and the other a peril excepted, the English court held that the exception must prevail.61 If both concurrent proximate causes are insured perils, or if one of them is an insured peril and the other is an uninsured peril, the insurer is liable.62 Some of the rules developed by English courts concerning concurrent proximate causes are also applied by Chinese courts. However, there are arguments about them. (I) TWO CONCURRENT PROXIMATE CAUSES – ONE IS INSURED AND THE OTHER IS EXCLUDED

Where there are two concurrent proximate causes, one of them is an insured event and the other is an excluded event, they are interdependent and interactional, and they operate together in bringing about the loss, the insurer is not liable.63 The leading case for this situation is Wayne Tank v Employer’s Liability Assurance Corporation.64 The plaintiffs designed and installed equipment for storing and conveying liquid wax in a factory making plasticine. The plaintiffs effected a public liability policy of insurance with the defendants, which indemnified the assured for “damages consequent upon . . . damage to property as a result of accidents.” The policy excluded the defendant insurers from liability consequent upon “damage caused by the nature or condition of any goods.” The installation was switched on and left unattended overnight, before it had been tested, with the result that it caught fire and destroyed the factory. The plaintiffs, having paid the factory owners £150,000 in damages, sought to recover their losses under their policy of insurance. The fire arose from two causes, which were both proximate causes. One cause was the defective nature of the equipment used (exception), and the other was the fact that one of the insured’s employees negligently and without supervision during installation switched on the equipment and left it to warm up overnight unattended,

58  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 5-051. 59  Ibid. As to the discussion for the definition of “concurrent causes,” see also Meixian Song, Causation in Insurance Contract Law (Informa Law 2014) p. 59. 60  For detailed discussion on the “but for” test, see Meixian Song, Causation in Insurance Contract Law (Informa Law 2014) p.13. 61  Wayne Tank v Employer’s Liability Assurance Corporation [1974] 1 QB 66. 62  Lloyd Instruments Ltd v Northern Star Insurance Co. Ltd, “Miss Jay Jay” [1987] 1 Lloyd’s Rep 32. 63  That is the decision in Wayne Tank v Employer’s Liability Assurance Corporation [1974] 1 QB 66. 64  Wayne Tank v Employer’s Liability Assurance Corporation [1974] 1 QB 66.

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which finally brought about a fire (peril covered). So there were two concurrent causes, one covered and the other excepted. These two causes, on the one hand, were independent in that one did not lead to the other, and on the other hand, were interdependent because neither would have led to the fire but for the other. In this situation, the Court of Appeal held the exception must prevail. This is because exceptions in contracts, including insurance contracts, define the extent of the obligations assumed. As Lord Denning put it, “Seeing that they have stipulated for freedom, the only way of giving effect to it is by exempting them altogether. If the exception does not operate when is proximate, it is deprived of contractual effect.”65 It is submitted, with respect, that the decision in Wayne Tank seems unfair to the insured whose claim for recovery is rejected altogether where the loss was resulted by two interdependent concurrent causes of insured peril and excluded peril. It cannot be understood that where the insured cause and the excepted cause are equally strong in causing a loss, the excepted cause prevails over the insured cause. As Professor Birds comments, it is perhaps unfortunate that the court did not consider the possibility in such a case of apportionment of the loss.66 The Wayne Tank decision might be challenged in the future. The English court’s decision is harsher than that of the courts in California for the same type of concurrent proximate causes. Where there are two or more concurrent proximate causes in a liability insurance, if one of which is insured event, the Californian court would hold that the insurer is liable regardless of the fact that the other causes are excluded.67 Some Chinese academics have the view that where the loss is caused by two proximate causes, one of which is insured and the other is excluded, the court should award the amount of payment to the claimant proportionately if the loss is apportionable. If it is not apportionable, the judgment should be made in the court’s discretion based the principle of fairness.68 This would be an ideal solution for this type of causation. The SPC has the same view in its Interpretations III 2015.69 It is generally the judicial and industry practice in China that for such a type of concurrent proximate causes, Chinese courts and insurers persist in the view that the insured should recover partly. For example, in one case,70 the shipowner effected a “Hull Insurance” policy for his fishing ships which covered, inter alia, “negligence of the master, crew, pilots or ship repairs,” but excluded “loss or damage caused by unseaworthiness of the insured ship.” The engine of the ship was suddenly damaged while she was fishing. There were two causes: (1) the engine’s lubricating oil had gone bad, which led to a breakage in the machinery; and (2) the negligence of the master and crew who had not found out that the bad oil needed changing before sailing. It was held that the two causes were both proximate causes – one is a peril insured (negligence) and the

65  Ibid, p. 67, per Lord Denning MR. 66  John Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) p. 270. 67  State Farm Mutual Auto Ins. Co. v Partridge (1973) 10 Cal 3d 94. 68 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 33. 69  Interpretation (III), art. 25. 70 The case was cited in the article, “The loss is caused by negligence of the master and the crew or as a result of the unseaworthiness of the vessel” included in the book written by Wenfu Hu, The Guidance Book for Settling Insurance Claims (China Procuratorial Press 1993).

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other excepted (unseaworthy ship), and the insurer should be liable for the partial loss caused by the insured event. But in this case, the loss was not apportionable, so the court decided that the claim should be settled by way of mediation. Nevertheless, some Chinese courts do make judgments following the Wayne Tank rule and have held that where there are two events existent when the insured loss occurs, and among them, one is an excluded event, the insurer is not liable for the loss. In Mrs Juan Gao v China Life Insurance Dongying Branch,71 Mr Wang effected a life insurance on himself for 45 years and appointed his wife as the beneficiary. An exception clause in the policy stated “The insurer shall not be liable for the insured’s death, serious disablement or major disease which is caused by driving a vehicle after drinking alcohol, without a valid driving licence or without vehicle registration” The life insured was killed in a traffic accident with another vehicle. The local traffic police reported that the driver of the other vehicle had major responsibility for the accident. The wife of the life insured claimed against the insurer, but was rejected by the insurer on the ground that the life insured was driving the car after drinking alcohol and without a valid driving licence, which was excluded by the policy, although the other driver was most at fault. The court held that the loss was caused by two causes – the life insured’s driving of the car after drinking alcohol and the other driver’s negligent driving. Where there are two or more causes, one of which is an excluded cause, the insurer may be discharged from liability. So the court upheld the insurer’s rejection. Some commentators disagree with this decision and suggest that it would be fair if the payment could be made according to the corresponding proportion on the basis of the degree of each party’s fault in the accident.72 (II) TWO CONCURRENT PROXIMATE CAUSES – ONE IS INSURED AND THE OTHER IS UNINSURED

In the case where there are two concurrent proximate causes, one is an insured peril and the other is not covered but not expressly excluded by the policy, the judgment of English courts in such a case is contrary to the Wayne Tank decision, namely, the insurer is liable for the loss. The leading modern authority is Lloyd Instruments Ltd v Northern Star Insurance Co., Ltd (Miss Jay Jay).73 The yacht Miss Jay Jay was covered by the defendants against “external accidental means,” but any loss by reason of unseaworthiness of the vessel resulting from faulty design was not covered. The damage was caused by the frequent and violent impacts of an adverse sea on a badly designed vessel when she was crossing the Channel; the adverse sea was a peril insured against but the bad design of the hull was not. The Court of Appeal held that the damage had been caused by a combination of adverse weather and defective design. Both were concurrent and effective causes of the loss; one was covered and the other was not covered by the policy, and the insured could recover on the basis that the defendants did not exclude unseaworthiness or design defects which contributed to a loss without being the sole cause – the plaintiffs’ claim fell within

71  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 28. 72 Ibid. 73  Lloyd Instruments Ltd v Northern Star Insurance Co., Ltd (“The Jay Jay”) [1987] 1 Lloyd’s Rep 32, CA.

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what the policy provided, that what happened in the sea conditions was a proximate cause of the loss.74 The Chinese courts adopt a different approach. The SPC provides some rules for trying cases concerning concurrent proximate causes. According to SPC Interpretation II (Draft for Comments) 2012, “Where the loss is caused by multiple events, including insured perils and uninsured perils, the People’s Courts can determine the insurer’s liability according to the proportion or the extent of the insured perils to the cause of loss.”75 This rule is different from the English approach established in the Miss Jay Jay case. The SPC has introduced the proportionality concept to deal with concurrent proximate causes where one is insured and the other is uninsured. The same rule was adopted in the SPC Interpretation III 2015 for dealing with another type of concurrent proximate cause, where one is insured and the other is excepted.76 It is submitted that the apportionment approach on concurrent proximate causes is more reasonable to both parties. (e) The application of the “but for” test The “but for” test is a usual method of ascertaining factual causation especially in tort law, known as a test of necessity. In the insurance context, the “but for” test is often used to identify the proximate cause in multiple perils of a loss. On applying the “but for” test, the proximate cause is deemed to be the peril without which the loss would not have happened.77 The following Chinese case was decided by applying the “but for” test. In the case of Energy Co. & Transport Co. v China Property Insurance Co., 2005,78 an Energy Co. and a Transport Co. entered into a one-year construction contract on 25 October 2004 to build a bridge. In the contract, the Energy Co. was required to complete most of the work of building the bridge piers by 1 March 2005 when the impoundment by the hydropower station would begin. On 8 March 2005, the Energy Co. and the Transport Co. effected a construction all-risks insurance policy with the defendant for one year between 12 March 2005 and 11 March 2006 to cover loss of or damage to the bridge as a result of earthquake, tsunami, floods, storms or heavy rain. The contract agrees that the insurer would pay 75–80% of any loss of or damage to the bridge caused by the above-mentioned perils. At the end of March 2005, the hydropower station began to impound water. On 8 April 2005 74  Lawton LJ elaborated on the law where, under a time policy, there were two proximate causes of loss: an included cause of loss (adverse weather) and a cause of loss which was not covered by the policy but not expressly excluded by the policy (unseaworthiness); “on the facts, as the judge found, the unseaworthiness due to design defects was not the sole cause of the loss. It now seems to be settled law, at least as far as this court is concerned, that, if there are two concurrent and effective causes of a marine loss, and one comes within the terms of the policy and the other does not, the insurers must pay.” The decision of Miss Jay Jay was made following Lord Penzance’s dictum in the case of Dudgeon v Pembroke (1876–77) LR 2 App Cas 284. It is said: “Any loss caused immediately by the perils of the sea is within the policy, though it would not have occurred but for the concurrent action of some other cause which is not within it.” 75  The SPC Interpretation II (Draft for Comments) 2012, art. 22. 76  The SPC Interpretation III 2015, art. 25. 77 See Meixian Song, Causation in Insurance Contract Law (Informa Law 2014) p. 13. For more detailed discussion on the “but for” test, see Meixian Song, chapter 3. 78  This case was cited in Hao Zhan et al., Insurance Law – Interpretations of Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 58.

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heavy rain occurred. The piers of the bridge were washed away. The insured claimed against the insurer for the loss which was argued to be caused by the heavy rain. The insurer rejected the claim and argued that the loss was caused by the impoundment. It is obvious that the two events of impoundment and heavy rain were existing concurrently and caused the loss, the key issue being which of these two events was the proximate cause for this loss. The court held that the heavy rain was the proximate cause, which was the risk covered by the policy. The impoundment was a planned event, which would not cause floods and wash away the piers “but for” the heavy rain. When the insurance contract was concluded, the insurer was aware of the plan that the impoundment would take place shortly and it was an expected event and was taken into account by both parties. The risk of heavy rain covered by the policy referred to the risk with the consideration of the fact of the impoundment. In this case, the court used the “but for” test to determine the proximate cause and made the judgment for the insured. As can be seen from the cases mentioned above, in China different decisions have been made on cases with similar facts. This means that to isolate a proximate cause from other causes is not an easy task. The rules established by courts are merely guidance and not binding. To determine a proximate cause depends on the matter of facts specific to each individual case. In addition to following the above rules as guidance, to a large extent, courts make judgments by exercising common sense to determine the proximate cause.79 (f) Independent causes In certain circumstances, two or more events occur one after another to cause different loss or damage to the insured subject matter; they are independent and separate causes, but each of them is a proximate cause in causing the different loss or damage. Whether the insurer is liable depends on which event is covered under the policy. The insurer is liable only for the extent of the loss which is caused by the insured peril.80 The following two cases illustrate this circumstance. In Min Ye v Property Insurance Beijing Branch,81 Min Ye insured her car with the defendant. The car was damaged in a rollover accident when she was driving the car, which was towed to a garage for repair. After the repair, Min Ye drove the car back to Beijing. On the way the car suddenly stopped working properly. Upon inspection, a hole was found in the engine of the car. It needed to be repaired again. The insured paid the costs for the two repairs, and claimed against the insurer. The insurer agreed to pay the cost for the first repair that was caused by the road accident which was the risk insured against, but rejected the claim for the cost for the second repair

79  See also Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 348; Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 98. 80  Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 351; Hongtao Sun, “To determine the proximate cause in insurance law on the basis of common sense” [2006] 7 Seek (Qiusuo); Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 28. 81  Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 121.

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and argued that the second event (the hole in the engine) was not an inevitable consequence of the first event, it was an independent new cause which was caused by the negligence in repairing the car by the first garage and it was excluded from the policy. The court upheld the insurer’s argument. Another example can also illustrate this type of causation of loss.82 An insured car was damaged by fire as a result of spontaneous combustion. Shortly afterwards, the car was further damaged by heavy hail. The policy covered loss caused by an accident of heavy hail but excluded loss as a result of spontaneous combustion. The ultimate damage of the car was the consequence of the two perils, one was covered and the other excluded, and they were independent – one cannot cause the other and each one may cause damage to the car; it was held that the spontaneous combustion and the hail caused different degrees of damage to the car, and the insurer was liable only for the loss caused by the insured event, the heavy hail.83 12.4 Further development of the traditional rules of the doctrine of proximate cause by Chinese courts – proportionate payment As can be seen from the above examination, in certain circumstances where two or more events, including an insured event, uninsured event or excluded event, cause the loss, Chinese courts tend to make judgments considering the possibility of apportionment of the loss. This approach has not been adopted by English courts, where the rules of proximate cause have been established and developed. It is submitted that the apportionment approach is fairer for both the insured and the insurer. It could be suggested that the apportionment approach should be used in the following cases: (1) Two concurrent proximate causes: insured cause and excluded cause, or insured cause and uninsured cause, such as the scenarios shown by Wayne Tank and Miss Jay Jay. Under English law, in Wayne Tank (one is an insured event and one is excluded) the insurer was held not liable. In Miss Jay Jay (one is an insured event and one is uninsured), the court held that the insurer was liable. According to the proportionate payment approach, the insurer should pay half in both cases. Some Chinese cases illustrating this approach have been discussed above.84 (2) Successive causes: accident – disease – death. In Shanghai Nursing Home v Dubang Property Insurance Co. Ltd,85 the insured was an elderly person, and was living in a nursing home. The nursing home effected a group policy for the elderly people. The policy covered injury or death of the

82  Qingbao Wu, The Explanations of Difficult Issues in Civil and Commercial Cases by Authorities and Judges of the Supreme People’s Court (China Legal Publishing House 2011) p. 351. 83 Ibid. 84  Mrs Juan Gao v China Life Insurance Dongying Branch, in Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 28; a case on hull insurance (the case was cited in the article, “The loss is caused by negligence of the master and the crew or as a result of the unseaworthiness of the vessel” included in the book written by Wenfu Hu, The Guidance Book for Settling Insurance Claims (1993)). 85  Meng Chen et al., “The application of the proximate cause in insurance liability” (2011) 10 People’s Judiciary, accessed 16 April 2016.

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insureds caused by an accident but excluded natural disease. Mr Hu, one of the insureds, experienced an accidental fall which caused a fracture in his left leg. During the period of treatment in hospital, a lung infection was caused which developed into pneumonia from which the life insured died. There were arguments on the causation of the death of the insured. The claimant claimed that the leg fracture led to the pneumonia and Hu’s death as a result. The insurer argued that pneumonia was the real cause of the death (peril excluded). The court faced the task of determining whether the chain of causation was broken by the intervening event. The facts of this case are similar to the English case of Mardorf v Accident Insurance Company.86 The insurer should be liable if the decision were made following Mardorf. The Chinese court87 analysed the case in question and held that it could not be said that pneumonia is an inevitable and necessary consequence of the leg fracture, especially given the advanced medical treatment available today, and a fracture is rarely likely to cause pneumonia.88 However, it could not say that there was no causal link at all between the leg fracture and the pneumonia and the death. An investigation shows that a 30% risk of pneumonia could be caused by fracture (especially for elderly people). So the court made the judgment that the insurer was liable for 30% of the loss. 12.5 The exception (or limitation) on the application of the doctrine of proximate cause In some situations the application of the rules of proximate cause may be excluded or limited. This can be seen in the following circumstances. 12.5.1 Effect of express wording in the policy The application of the doctrine of proximate cause can be excluded by using some special words in the policy, such as “directly or indirectly caused by.” Such wording in the policy has a prevailing effect in determining the insurer’s liability. Whether or not the insurer is liable for a loss depends on whether or not the loss is “directly or indirectly” caused by a specified event regardless of whether or not this event is a proximate cause. The special words prevail over the proximate cause. Thus where an event by which the loss is “directly or indirectly” caused is an excluded event, the insurer is not liable for the loss. For example, in Coxe v Employer’s Liability Assurance Corporation Ltd,89 an army officer was covered by a personal accident insurance policy. An exception stated that the policy did not apply if death was “directly or indirectly caused by, arising from, or traceable to . . . war.” One day during the First World War, when he was walking alongside a railway line for the purpose of visiting guards and sentries, he was killed

86  Mardorf v Accident Insurance Company [1903] 1 KB 584. 87  Shanghai Pudong New District People’s Court tried this case (2009): Pudong Civil Division (2), No. 5838. 88 The probability that a scratch might cause pneumonia must have been higher in the early 20th century when Mardorf v Accident Insurance Company was decided, due to poor medical conditions. 89  Coxe v Employer’s Liability assurance Corporation [1916] 114 LT 1190.

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by a passing train. It was obvious that the proximate cause for his death was that he was run over by a train, but the rule was excluded by the express wording in the policy. The insurers successfully denied liability on the ground that the insured’s death was indirectly caused by war, which was an exception. In the case of Mr Fang v The Insurance Company,90 the insured lorry was damaged in a road accident. The use of the lorry for the business of carrying goods had to be suspended for 63 days while the lorry was being repaired in a garage. The insured suffered a loss of income of about ¥18,000. The insured claimed for the income loss but was rejected by the insurer on the ground that there was a clause in the policy to the effect that the insurer was not liable for any loss caused indirectly by the road accident and the income loss was indirect loss, thus was not covered under the policy. The court made the judgment for the insurer. 12.5.2 The court’s discretion As mentioned earlier, the rules of proximate cause established by courts are not binding but only guiding rules. In some situations it is really difficult to isolate a proximate cause from several events. Where it is impossible to ascertain an absolute proximate cause from the others, or where to use a general rule of proximate cause would lead to an unfair decision, the court may decide a case using its discretion but not following the general rules of proximate cause.91 For example, where a loss is caused by two causes, one is an insured cause and the other excluded, and they have equal or nearly equal effect in bringing about the loss, the Chinese court makes judgment at its discretion to grant the payment proportionately or through mediation. In this situation, the application of the rules of proximate cause is limited.92 12.5.3 Where the doctrine of proximate cause is wrongly used by the court The following Chinese case illustrates the situation. In Guilan Han v Ping An Life Insurance Co.,93 Mrs Wang, the insured, effected a life insurance on her own life. She designated her husband and their son as the beneficiaries. In the policy, clause 2 defined the nature of the policy: “accidental death insurance means where the insured is injured in an accident which leads to the death of the insured within 180

90 This case was decided by the People’s Court, Jia County, Henan Province, Civil Court Judgment (2011) No. 92, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2012) vol. 4, p. 508. 91  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 98. 92  For example, under a hull insurance, where a loss was caused by the negligence of the master in navigating the ship (peril insured against) and the bad ship machine lubricating oil (unseaworthy ship excluded peril), both of them played an effective role in causing the loss, and the court held that the two causes were both proximate causes – one is a peril insured (negligence) and the other excepted (unseaworthy ship), and the insurer should be liable for the partial loss caused by the covered event. (The case was cited in an article of “The loss is caused by negligence of the master and the crew or as a result of the unseaworthiness of the vessel” included in the book written by Wenfu Hu, The Guidance Book for Settling Insurance Claims (1993)).The insurer should not be liable if the decision was made by sticking to the rule of proximate cause established by Wayne Tank. 93  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 24.

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days after the accident.” Clause 14 of the policy explained the term “accident” as “an external, sudden, unintended and non-disease-caused event.” In March 2009, the insured fell over and died later in hospital. The Local Public Safety Agency signed a certificate which said that the life insured died from the accident. The beneficiaries claimed against the insurer for the insurance proceeds. The insurer rejected the claim and argued that the insured had suffered from hypertension94 for eight years before the accident,95 and the hospital record showed that the insured died from a brain haemorrhage, so the death was caused by disease which was excluded by the policy. The court decided that the insurer should be liable for the loss for the following reasons: (1) according to the SPC’s Provisions on Civil Proceedings Evidence,96 the Public Safety Agency’s certificate prevails over the hospital’s medical record;97 and (2) upon the analysis of the evidence and information provided by the beneficiaries, it seems that after the insured fell down her health deteriorated rapidly and then she died, so it could be inferred that the accident directly resulted in the death of the insured. With respect, the court’s first reason for the judgment is not convincing. The Public Safety Agency’s certificate was merely an accident report which can only be used to prove the accident. It cannot be said that such a certificate prevails over the insured’s medical record for the purpose of ascertaining the proximate cause. The second reason of the judgment is also not sound, as it was not clear in this case which event caused the other, namely whether the falling down caused the brain haemorrhage or the brain haemorrhage resulted in the falling down. If it was the former situation, the accident was the proximate cause, and the insurer must be liable. If it was the latter, the proximate cause was the disease which was an excluded event under the policy.98 12.6 Burden of proof for proximate cause In any civil or commercial claim case, burden of proof is an important issue. In China, due to the lack of express provisions relating to proximate cause in the Insurance Law, logically, it is not surprising that there is no special provision on the issue of burden of proof for proximate cause of loss. Nevertheless, from the existing provisions of the Insurance Law and other legislation, the general rule of burden of proof may be found.

94  It is said that the life insured’s blood pressure was 200/100mmHg when she was treated in hospital after the accident. 95  It was shown by her medical history record. 96  Articles 77(1) and (4) of the SPC’s Provisions on Civil Proceeding Evidence, 2001. 97 The Local Public Safety Agent’s certificate showed that the life insured’s death was caused by the accident. 98  This is also the opinion of the Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 26.

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By virtue of the Law of Litigation of the People’s Republic of China, “The party who raises allegations has the responsibility to provide evidence.”99 This means who claims is who proves.100 Article 22 of the Insurance Law provides: “After the occurrence of the insured event, the proposer, the insured or the beneficiary, in making claims to the insurer for indemnity payments or insurance benefits, shall provide the insurer with evidence and information which are relevant in ascertaining the nature, cause and extent of loss of the insured event, and which he is able to provide.”101 Clearly, from these provisions the burden of proof for causal connection between the loss and the insured event initially falls on the claimant who claims for insurance money to prove that the loss is caused by an insured event(s) by providing the insurer with evidence and/or information.102 If the loss falls under the coverage of the insurance policy, the insurer shall, upon reaching an agreement of payment with the claimant, pay the money within a specified time.103 If the loss is not covered by the policy, the insurer may reject the claim and must notify the claimant within a specified time and explain the reasons for the rejection of the claim.104 That means that the burden of proof now shifts to the insurer, who must give counter-proof to support its rejection that the loss is not caused by the insured event and that it is therefore not liable for the loss.105 Due to the lack of statutory provisions and SPC guidance on the burden of proof for proximate cause, courts’ decisions on this dispute are varied. This was illustrated by the case of The Rattan Industry Co. v PICC Fujian Zhangzhou Branch.106 The key issue in this complicated case was who had responsibility to provide proof of the proximate cause of loss. In June 1999, the plaintiff (the insured) took out a comprehensive insurance for its buildings and machinery and equipment of the company which covered, inter alia, loss of or damage to the insured subject matter caused by earthquake. In September 1999, a serious earthquake occurred in Taiwan107 and spread to some cities along the coast of Fujian.108 After the earthquake, it was discovered that some

99  The Law of Litigation of the People’s Republic of China, 1991, art. 64. 100  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 92. 101  In the Maritime Code, there is a similar provision for marine insurance, as art. 251 provides: “after the occurrence of a peril insured against and before the payment of indemnity, the insurer may demand the insured to submit evidence and materials related to the ascertainment of the nature of the peril and the extent of the loss.” 102 The insurer may ask the insured or beneficiary to provide more evidence or information if it considers that the relevant evidence or information is insufficient. See art. 22(2) of the Insurance Law. 103  According to art. 23 and art. 24 of the Insurance Law, if the loss falls within the coverage of the insurance policy, the insurer shall, upon reaching the agreement of payment with the claimant, pay the money within 10 days. 104  Articles 23 and 24 of the Insurance Law also provide that “If the loss is not covered by the policy the insurer may reject the claim and must notify the claimant within 3 days after the decision being made and specify the reasons for the rejection of the claim.” 105 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 33; see also Hao Zhan et al., Insurance Law – Interpretations of Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 508. 106  Hao Zhan et al., Insurance Law – Interpretations of Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 508. 107  In September 1999, the earthquake (7.6 level) took place in Taiwan. 108  Fujian is a province in South China. Fujian and Taiwan are separated by the Taiwan Strait.

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cracks had appeared on the walls of the buildings of the insured company and some walls had tilted. The buildings were identified as dangerous buildings, and the local government ordered the company to demolish the buildings and rebuild. The insured claimed against the insurer and argued that the damage to the buildings was caused by the earthquake (peril covered). The insurer rejected the claim and argued that the cracks and the tilt of the walls were the result of inherent defects of the buildings (peril excluded). The case was tried and retried by three levels of courts in Fujian province – the primary Court of Longhai County, the Intermediate Court of Zhangzhou City and the High Court of Fujian Province. The courts made different judgments on the issue of burden of proof of proximate cause. The lower court held that the burden of proof was on the insurer who argued that the loss was caused by the inherent defective buildings but not caused by the earthquake; the Intermediate Court held that there were two causes which contributed to the damage of the buildings (the earthquake and the inherent defects of the buildings), and the burden of proof was on the claimant who argued that the damage to the buildings was caused by the earthquake; on appeal, the High Court of Fujian Province, upon investigation, held that the damage was the result of both the earthquake and the inherent defects of the buildings. They were both proximate causes. The cracks existed before the earthquake and the earthquake aggravated the cracks. The insured provided evidence that there was a causal connection between the damage and the earthquake, but could not prove that the earthquake was the sole cause of the loss. Thus the insurer’s payment could be made on a proportionate basis. It is submitted that the High Court of Fujian Province imposed a heavy burden of proof on the insured to prove that the earthquake was the sole cause of loss. As some scholars commented,109 when the insured claimed under the policy, it was sufficient for him to provide primary evidence to prove that there was a valid insurance contract, the subject matter was damaged, the earthquake occurred and there was a causal link between the loss and the earthquake. It was not the insured’s duty to prove that the earthquake was the sole cause of loss.110 If the insurer argued that there were other causes for the loss, it needed to prove it. Under English law, the initial burden of proof is generally on the insured.111 The burden to prove that the loss was caused by a peril insured against is on the insured.112 It is not necessary for him to prove precisely how the casualty occurred, but he must show that the proximate cause falls within the perils insured against. Many English cases illustrate the approach that the insured will discharge his burden under an

109  Hao Zhan et al., Insurance Law – Interpretations of Principles and Comments on Leading Cases (China Legal Publishing House 2007) p. 512. 110  According to art. 9 of SPC Several Provisions on Civil Evidence (2001), the parties do not need to provide evidence for the following facts: (I) well-known facts; (II) the laws of nature and theorems; (III) the facts which can be inferred according to legal provisions or known facts and rules of thumb of everyday life. 111  John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 20-006. 112  Austin v Drewe (1815) 4 Camp 360; Everett v London Assurance Co. (1865) 19 CB (NS) 126; Marsden v City and County Assurance Co. (1865) LR 1 CP 232.

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all-risks policy if he can show that the loss occurred accidently.113 Once the insured has proved that the loss was caused by the peril insured against, the burden shifts to the insurer, and it is for the insurer to bring itself within any exception in the policy on which it relies.114 In order for an insured to recover for a loss, it is not sufficient for him to prove that the loss falls within the cover provided as a matter of construction or definition.115 He must also show that the loss was proximately caused by an insured peril. 12.7 Recommendations for incorporating the doctrine of proximate cause in Chinese law The principle of proximate cause plays a vital role in determining the liability of the insurer where a loss is caused by insured perils as well as excluded perils. It could be said that it is a major loophole that this doctrine is not incorporated in the Chinese Insurance Law so far. It is therefore suggested that the principle be incorporated into the Insurance Law for non-marine insurance and the Maritime Code for marine insurance. In addition, the SPC can provide rules for the implementation of the doctrine of proximate cause through publishing judicial interpretations. Some scholars have also recommended that the China Insurance Regulatory Commission (CIRC) should guide the insurance companies to add a clause in respect of proximate cause doctrine in their standard form contracts.116 12.8 Conclusion To determine the causation of loss is an important task for the insurers to perform in handling claims and for the courts in trying insurance disputes. The Insurance Law does not contain any provisions regarding the principle of proximate cause. The SPC Interpretation III 2015 has provided an apportionment approach for the situation where it is difficult to determine whether the loss is caused by an insured event, an uninsured event or an excluded event. Some HPCs have published guiding rules for determining proximate cause. In the future amendment of the Insurance Law, it is necessary to introduce a provision about proximate cause into the Law. It is also necessary for the SPC to provide more rules for the insurers and the courts to follow in determining proximate cause.

113  Austin v Drewe (1815) 4 Camp 360; Everett v London Assurance Co. (1865) 19 CB (NS) 126; Marsden v City and County Assurance Co. (1865) LR 1 CP 232. See also John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 20-006. 114 Ibid. 115  Clark [1981] CLJ 284; Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) chapter 13, “Construction and causation: Risks covered and risks excepted,” pp. 231–71. 116  Linqing Wang, The Insurance Law & Its Judicial Application – Studies on Hot Issues of the New Insurance Law (Law Press China 2013) p. 102.

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CHAPTER 13

Risk prevention and loss mitigation

13.1 Introduction In addition to the function of indemnifying the insured for losses caused by an insured event, insurance also plays a positive role for risk prevention and loss mitigation. If positive measures are taken to protect the insured subject matters, risks and losses to them may be avoided or reduced, and both the insured and the insurer can then benefit from those measures.1 By effecting an insurance contract, an insured may transfer the risks of his property to an insurer; the property is, however, still used, controlled or managed by the insured. The property may then face two kinds of risks: accidental risks and moral hazards. It is possible that an insured may intentionally bring about the insured event,2 or not take active steps to maintain the safety of the insured subject matter or to avert or minimise the loss after occurrence of the insured peril, as the insured might imagine that since an insurance policy is in place, any loss of or damage to the property would be recovered from the insurer. The consequence of the insured’s inaction in respect of the insured subject matter, or his laissez-faire attitude to the loss is likely to increase the probability of occurrence of the insured event or to aggravate the loss. This will undoubtedly increase the insurers’ burden of indemnifying the losses, and as a result, also increase the insurer’s running costs and the insured’s cost of purchasing the insurance policies – eventually this increases losses to society as a whole. For the purpose of risk prevention and loss mitigation, the Insurance Law imposes on insureds duties of maintaining the safety of the insured subject matter3 and mitigating the loss upon occurrence of the insured event.4 An insurance policy usually contains terms on these duties. This chapter will discuss the statutory rules and contractual requirements with regard to the insured’s duties of risk prevention and loss mitigation, and the consequences of failure in complying with these rules of law and contractual agreements.

1  The insured may benefit from the measures of loss prevention because although he may be paid the insurance money if he suffers the insured loss, sometimes money cannot solve all problems, for instance, the insurance money can indemnify the insured financially, but cannot restore the subject matter physically. From the insurer’s perspective, if the probability of occurrence of insured loss is reduced, the payment of the insured loss may be reduced accordingly. 2  This topic is discussed in Chapter 16, “Fraudulent claims.” 3  The Insurance Law, art. 51. 4  Ibid, art. 57.

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13.2 Risk prevention 13.2.1 A statutory and contractual duty to maintain the safety of the insured subject matter The statutory rules relating to the insured’s duty of risk prevention are provided in art. 51 of the Insurance Law, which states: “(1) The insured shall comply with related provisions of the state with respect to fire protection, safety, production operations and labour protection, etc. and ensure the safety of the insured subject matter. (2) The insurer may inspect the safety conditions of the insured subject matter in accordance with the contract and give written recommendations to the proposer and the insured for eliminating risky elements and latent problems. (3) Where the proposer or the insured fails to fulfil his/her duties to ensure the safety of the insured subject matter in accordance with the agreement, the insurer shall have the right to demand an increase of the premium or to rescind the contract. (4) The insurer, with the insured’s consent, may take preventive safety measures to protect the insured subject matter.”

Insurance contracts usually contain clauses which expressly stipulate the insured’s duty to protect the insured subject matter. The clauses very often rephrase art. 51 of the Insurance Law. For instance, clause 19 of the Household Property Insurance Policy of Ping An Property Insurance Company5 states that “(i) The insured shall comply with related provisions of the state with respect to fire prevention, safety etc., take reasonable precautions to try to avoid or reduce the occurrence of an insured event, and protect the safety of the insured subject matter. (ii) The insurer may inspect the insured’s compliance with the preceding agreement and give written recommendations to the proposer and the insured for eliminating risky elements and latent problems, and the proposer and the insured should seriously put the recommendations into practice. The preceding inspection does not constitute any promise of the insurer to the insured. (iii) Where the proposer or the insured fails to fulfil his/her duties to ensure the safety of the insured subject matter, the insurer shall have the right to demand an increase of the premium or to rescind the contract.”

The Insurance Law requires the insured to comply with related provisions of the state with respect to fire prevention,6 safety,7 production operations8 and labour protection,9 etc., and ensure the safety of the insured subject matter. In principle, not only insureds but also uninsured persons must follow related provisions of the state

5  See the website of Ping An Insurance Company, accessed in January 2016. 6  Such as the Fire Protection Law of the People’s Republic of China, which was adopted at the 2nd Meeting of the Standing Committee of the Ninth National People’s Congress on 29 April 29 1998 and promulgated by Order No. 4 of the President of the People’s Republic of China on 29 April 1998, and amended 18 October 2008. 7  Such as the Food Safety Law of the People’s Republic of China, which was adopted at the National People’s Congress Standing Committee on 28 February 28, and took effect on 1 June 2009. 8  Such as the Production Safety Law of the People’s Republic of China, which was adopted at the 28th meeting of the Standing Committee of the Ninth People’s Congress on 29 June 2002, and was hereby promulgated for implementation as of 1 November 2002. 9  Such as the Work Safety Law of the People’s Republic of China, which was adopted at the 28th Meeting of the Standing Committee of the Ninth National People’s Congress on 29 June 2002 and promulgated by Order No. 70 of the President of the People’s Republic of China on 29 June 2002, and became effective as of 1 November 2002.

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with respect to fire protection, safety, production operations and labour protection, etc. So this provision can be regarded as an advocacy rule. For certain kinds of insurance, the insurers usually set out detailed obligations in the insurance contract for the insureds to comply with. The insured must follow these contractual obligations in discharging the statutory duty of protecting the safety of the insured subject matter pursuant to art. 51(1) of the Insurance Law. Thus the insured’s detailed obligations with regard to risk prevention and protection of the insured subject matter should be based on the contractual agreements.10 For example, art. 8 of the Road Traffic Safety Law of China11 provides: “The state applies a system of registration to motor vehicles. A motor vehicle is not allowed to run on the road until it has been registered by the traffic administrative department of the public security organ.” In the context of road traffic safety, this is a statutory provision for every owner of a motor vehicle to follow. However, in the context of insurance, if the insurer modifies this statutory provision and incorporates it into an insurance contract, such as “the insurer is not liable for paying indemnity if the insured vehicle is not registered by the traffic administrative department of the public security organ,” it becomes a contractual term with a remedy for breach of it. If the insurance policy does not include this term, in the case of an unregistered vehicle, the insurer cannot claim a remedy for the insured’s non-compliance with the statutory duty of maintaining the safety of the insured subject matter in accordance with art. 51(1) of the Insurance Law. Article 51(1) of the Insurance Law does not intend to impose on the insured the duty to maintain the insured subject matter and keep it absolutely safe. In fact, it would be unrealistic and impracticable to require the insured to keep the insured subject matter absolutely safe. The test to determine whether the insured has performed the duty of maintaining the safety of the insured subject matter should be a reasonable insured test, i.e. what a reasonable insured would do in maintaining the safety of the insured subject matter in similar circumstances. As long as the insured takes reasonable care of the insured subject matter as a reasonable insured would do, the insured should be deemed to have discharged his duty. It would be unfair for the insurer to take a harsh attitude and demand that the insured keep the insured property in an absolutely safe condition. For example, art. 21 of the Road Traffic Safety Law of China provides: “A driver shall, before driving a motor vehicle on the road, carefully examine the safety and technical performance of the motor vehicle; and shall not drive a motor vehicle with hidden safety perils, for example, the safety facilities are incomplete or the components do not meet the technical standards, and so on.” In reality, most drivers do not possess technical knowledge of the vehicle – their judgement as to the safety of the vehicle largely depends on the testing of the vehicle by a qualified professional motor testing unit. As long as the insured vehicle is regularly tested according to the relevant regulations and has passed the test, even if a safety apparatus (such as brakes) fails and causes an accident, the insured should

10  Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 292. 11 The Road Traffic Safety Law of the People’s Republic of China was adopted at the 5th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on 28 October 2003, and became effective on 1 May 2004.

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not be taken as failing in maintaining the safety of the vehicle. In contrast, where the vehicle has failed the test, but the insured still drives it on the road, the insured can then be deemed as failing to maintain the safety of the vehicle. For example, in Mr He v The Property Insurance Company,12 a clause in the motor insurance policy stated that “the insured and the covered drivers shall maintain the vehicle in a safe status. The vehicle must not be overloaded, and must be kept in a roadworthy state . . . If the insured has failed to do so, the insurer is entitled to refuse to pay insurance money, or to rescind the contract from the date of written notice to the insured. Where the insurer has made an indemnity payment, the insurer has the right to request refunding of such payment.” The insured had a road accident and killed a man crossing the road on a bicycle. The traffic police found that both parties were at fault in the accident and the brakes on the vehicle were defective. The insurer refused the claim on the grounds that the insured failed to maintain the safety of the vehicle, as the brakes were defective. The court expressed the view that the judgement whether the insured has performed the duty of maintaining the safety of the vehicle should not be based only on the traffic police’s report of the deficiency of the brakes. The vehicle was regularly tested (and passed the tests) and serviced following the relative regulations, as any other reasonable insured would do, thus the insured should be deemed to have complied with the duty of maintaining the safety of the vehicle. The scope of the insured’s duty should not be limitlessly expanded. 13.2.2 The insurer’s right to inspect the safety status of the insured subject matter Pursuant to art. 51(2) of the Insurance Law, the insurer may inspect the safety conditions of the insured subject matter in accordance with the contract and give written recommendations to the insured for eliminating risky elements and latent problems. Usually, an insurer has more knowledge and experience in risk prevention, and is more able to find and eliminate risky elements and latent problems of the insured subject matter, thus the Insurance Law entitles the insurer to inspect the safety status of the insured subject matter and give written recommendations as to avoiding potential safety problems. This would benefit both the insured and the insurer. Inspection of the insured subject matter may cause inconvenience to the insured, or sometimes may affect the privacy and/or trade secrets of the insured. Thus the insurer may need to get the consent of the insured prior to the inspection of the insured subject matter, and also needs to carry out the inspection in the manner agreed in the contract. The expenses incurred by the insurer should be borne by the insurer itself. Although the Insurance Law does not expressly provide that the insured must follow the insurer’s recommendation for risk prevention, it implies that the insured must do so if the recommendation is reasonable. In practice, insurance contracts usually contain a clause which expressly requires the insured to follow the insurer’s

12  This case was cited in the book by Haiyu Bai, Introduction to Insurance Law: Cases and Analysis (Law Press China 2013) p. 91.

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recommendation. For example, in the Household Property Insurance Policy of Ping An Property Insurance Company,13 clause 19 stipulates that “(ii) The insurer may inspect the insured’s compliance with the preceding agreement and give written recommendations to the insured for eliminating risky elements and latent problems; the insured should take the recommendations seriously and put them into practice.” Some other jurisdictions provide statutory rules which require the insured to put the insurer’s recommendations into practice. For example, art. 97 of the Insurance Act 2015 (Taiwan) stipulates: “An insurer has the right to inspect the subject matter insured at any time. If the insurer discovers that all or part of it is in abnormal condition, the insurer has the right to suggest that the proposer or the insured should repair it before further use. If the proposer or the insured refuses the suggestion, the insurer may terminate the insurance contract or relevant parts of it by written notice.” 13.2.3 The insurer’s right to take preventive measures to protect the safety of the insured subject matter By virtue of art. 51(4) of the Insurance Law, the insurer may take preventive safety measures to protect the insured subject matter with the insured’s consent. If the insurer has found a potential problem after inspection of the insured subject matter, the insurer can also take steps to protect the insured subject matter so as to reduce the probability of occurrence of the insured event. For example, the insurer may install new safety equipment, or modernise existing equipment in the insured property, or change the position of the insured subject matter, etc. Whatever steps the insurer intends to take for risk prevention of the insured subject matter, the insurer must get the insured’s consent to the measures to be taken. 13.2.4 Consequences for the insured’s failure to comply with the duty (a) The repudiation of the insurer’s liability As discussed earlier, insurance contracts usually contain terms which exclude the insurer’s liability if the insured has failed to protect the insured subject matter. For example, in motor insurance contracts, the insurer is released from its liability for damage to the insured vehicle where the insured drives the vehicle after being intoxicated by alcohol.14 In accident insurance contracts, the insurer is not liable for injury or disability of the insured or medical costs where the insured is engaged in high risk activities, such as diving, parachuting, mountain climbing, wrestling, horse racing, motor racing, etc.15 It is suggested that two factors should be taken into account when determining whether the insurer can exclude its liability in the case of the

13  See the website of Ping An Insurance Company, accessed in January 2016. 14  The Motor Vehicle Comprehensive Commercial Insurance Policy of the PICC, clause 8. 15  Ping An Insurance Company, Short-Term Accident Insurance Clause, 2012 version, clause 5(12).

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insured’s breach of the contractual term in relation to the duty of protecting the insured subject matter.16 First, there must be a causal connection between the insured’s failure in complying with the duty and the occurrence of the insured event. In Chongqing Wanzhou Rural Credit Co-operatives v China Pacific Property Insurance Company Ltd,17 clause 33 in the insurance contract stated that the insured and the covered drivers shall maintain the safety of the vehicle, have the vehicle serviced and tested regularly according to relevant regulations, and keep the vehicle roadworthy; and that where the insured has failed in performing this duty, the insurer is entitled to refuse to pay an indemnity, or rescind the contract with written notice, and need not return the premium paid, and may request a refund of the insurance payment. A covered driver had a road accident and killed a pedestrian crossing a zebra crossing. The accident report by the traffic police showed that the rear brakes of the vehicle were defective; the driver drove a vehicle which had a safety deficiency and did not stop at the zebra crossing; and the driver was fully responsible for the accident. The court held that the insured failed to comply with the duty as provided in clause 33 of the insurance contract, and the insured’s failure had a direct connection with the occurrence of the accident, so the insurer was not liable for paying for the loss of the accident. Where there is no causal link between the insured’s failure in complying with the duty of keeping the safety of the insured subject matter and the occurrence of the insured event, the insurer should not be released from its liability. For example, consider if an insured lets a person who does not have a valid driving licence drive the insured vehicle, and the driver parks the vehicle in a car park where the vehicle is hit and damaged by another vehicle. In these circumstances, although the insured was at fault in letting an unqualified person drive the vehicle, this fault has no causal connection with the damage to the vehicle, and thus the insurer should not be allowed to exclude its liability for the damage on the grounds of the insured’s failure to comply with the duty of maintaining the safety of the vehicle. Second, once the causal connection is established, it may be necessary to take into account the insured’s state of mind. If the insured intentionally breached the obligation, the insurer should be allowed to refuse its liability for making an insurance payment for the damage to or the loss of the subject matter. In the case of grossly negligent non-observance of the obligation, the insurer should be entitled to reduce any benefits payable commensurate with the severity of the insured’s fault.18 In the case of a merely negligent or innocent non-compliance with the duty, the insurer should not be released from its liability. (b) The insurer’s right to increase the premium or rescind the contract The Insurance Law entitles the insurer to demand an increase of the premium or rescission of the contract in the event of the insured’s failure in complying with

16  Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 341. 17 This case was decided by the Second Intermediate People’s Court, Chongqing City, Civil Court Judgment (2006) No. 547, accessed in January 2016. 18  This is with reference to the German Insurance Contract Act 2008, s. 28(2).

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the duty of maintaining the safety of the insured subject matter in accordance with the agreement.19 A number of questions may arise from this provision. Under what circumstances can an insurer increase the premium? Under what circumstances is an insurer allowed to rescind the contract? When can an insurer exercise its right of rescission, before or after the occurrence of an insured event? The Insurance Law does not give clear answers to these questions. The major shortcoming of this provision is that the insurer’s right of rescission is not restricted, and the circumstances under which the insurer is entitled to exercise its right of rescission are not specified. From the literal meaning of art. 51(3), as long as the insured has failed to comply with the duty in accordance with the agreement, the insurer is entitled to raise the premium or rescind the contract. However, this may not reflect the real intention of this provision. Thus the following issues are in need of consideration. (I) Before the occurrence of the insured event. Where the insured fails to discharge his duty of maintaining the safety of the insured subject matter, the probability of occurrence of the insured event may increase. In this situation, the insurer should be entitled to demand an increase of the premium. This must be done with the insured’s agreement. If the insured does not agree with the increase of the premium, the insurer may not increase the premium but may rescind the contract. The insurer may also give written recommendations to the insured for eliminating risky elements and latent problems about the insured subject matter pursuant to art. 51(2) of the Insurance Law; if the insured does not follow the recommendations, the insurer may directly rescind the contract without demanding an increase of the premium. The insurer must prove that the increase of the premium or rescission of the contract is reasonable. If the insured’s failure to maintain the safety of the insured subject matter does not significantly increase the risk of the insured event,20 the insurer should not be entitled to raise the premium or rescind the contract. (II) After the occurrence of the insured event. In the event that the insured event has occurred and caused loss to the insured subject matter, as discussed earlier, if there was a causal connection between the insured’s failure in complying with the duty to maintain the safety of the subject matter and the occurrence of the insured event, and the insured’s failure was intentional or by gross negligence, the insurer may refuse to pay the indemnity for the loss, and may also have the right to rescind the contract. If there was no causal connection between the insured’s failure in complying with the duty and the occurrence of the insured event, and the insured’s failure was merely negligent or innocent, the insurer should be liable for the loss and should not be allowed to rescind the contract. (III) Insurer’s waiver of its right. In making judgments on whether the insurer can exercise its right of rescission after the insured event happens, some

19  The Insurance Law, art. 51(3). 20 As to the topic of increase of risk during the insurance period, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) JBL 842.

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courts take the view that if the insurer knew that the insured did not comply with the duty of maintaining the safety of the insured subject matter, and the insurer did not give, within a certain period of time (say a month), a recommendation to the insured for him to eliminate risky elements and latent problems with the insured subject matter, the insurer can be deemed to have waived its right to rescind the contract. The insurer should then be prevented from pleading the defence of the insured’s non-compliance with the duty of maintaining the safety of the insured subject matter in order to rescind the contract after the occurrence of the insured peril.21 13.3 Loss mitigation 13.3.1 A statutory and contractual duty to mitigate losses In the general law of contracts, the party suffering from the other party’s breach is obliged to mitigate his loss, and any loss that could have been so avoided is not within the scope of damages.22 The doctrine of mitigation is built on the principle of good faith whereby the aggrieved party should not unreasonably allow the aggravation of its loss and increase the defaulting party’s liability. It also serves to reduce unnecessary losses and minimise waste of resources. The doctrine of mitigation is recognised in the Chinese Contract Law 1999, art. 119(1) of which provides: “After a party breaches the contract, the other party shall take appropriate measures to prevent any increase in the loss; if the appropriate measures fail to be taken, thereby causing an increase in the loss, no compensation may be claimed in respect of the increased loss.” This provision imposes a duty of mitigation on the aggrieved party. In essence, the duty of mitigation is a duty for a person to handle his/her own affairs in good faith insofar as it may affect the interests of another.23 In the insurance context, the insured’s duty to mitigate loss after occurrence of the insured event is a well-recognised doctrine in property insurance. The duty of mitigation is imposed on the insured by legislation and contractual agreement on the basis of three major considerations.24 First, when an insured event occurs, it is beneficial to and for the interests of both the insurer and the insured for the insured to take active steps to prevent the insured peril from causing further damage to the property or to minimise the loss. This can avoid the waste of resources for society as a whole. Second, the insured has a better knowledge of the insured subject matter and its environment – if the insured takes steps to mitigate, aggravation of the loss can, to some extent, be avoided or minimised. And third, an insurance contract is a contract of good faith. The parties must stick to the principle of good faith when

21  Hao Zhan, Insurance Law: Analysis of Principles and Cases (China Legal Publishing House 2007) p. 363. 22  The Contract Law 1999, art. 119. 23  Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002) p. 439. 24  Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 377.

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exercising rights and performing obligations.25 The requirement to mitigate losses reflects the principle of good faith. The statutory law imposing the duty of mitigation on the insured is the provision in art. 57(1) of the Insurance Law, which provides: “Following the occurrence of an insured event, the insured is obliged to take necessary measures to prevent or mitigate loss or damage.” Many insurance policies contain provisions which expressly require the insured to mitigate loss. Such provisions usually require the insured to either take affirmative action to mitigate its damages or otherwise protect the property from further damage upon the occurrence of an insured loss. For instance, in the Household Property Insurance Policy of Ping An Property Insurance Company,26 clause 22(1) stipulates that “upon occurrence of the insured event, the insured must take necessary and reasonable measures to prevent or mitigate losses.” In the Motor Vehicle Comprehensive Commercial Insurance Policy of the People’s Insurance Company of China,27 clause 13 states “At the time when the insured event occurs, the insured or the covered drivers shall take reasonable and necessary steps to rescue and protect the insured subject matter in order to prevent or reduce losses.” Since the Insurance Law and insurance contracts impose on the insured a duty to take reasonable steps to avert or minimise his loss, an important point to be considered is how to determine the reasonableness of the steps taken by an insured. 13.3.2 Reasonableness of mitigation measures The duty to mitigate requires the insured not only to take necessary and reasonable steps to mitigate his loss, but also to avoid taking unreasonable steps that might increase his loss. The insured’s conduct in the mitigation of the damage is judged on the basis of reasonableness. The test is what a reasonable person would have done under the same or similar circumstances. Assume that an insured is cooking in the kitchen and spills some oil on the oven, and then a fire starts. The insured quickly turns off the electric power and then covers the flame with a fire blanket, and/or puts out the flame by a fire extinguisher. This can be deemed as a reasonable and necessary step to prevent loss. Any reasonable person is expected to do this. However, if the insured fails to do anything and just lets the fire go out of control, this should be taken as unreasonable. Thus the reasonableness of a mitigating measure should be judged by the facts and circumstances under which the mitigation step is taken. 13.3.3 Consequences of failure to comply with the duty of mitigation The Insurance Law does not provide any rule with regard to legal consequences for not taking mitigation steps. Obviously this is a deficiency of the Law. In order to

25  The Insurance Law, art. 5. 26  See the website of Ping An Insurance Company, accessed in January 2016. 27  See the website for the policy, accessed in January 2015.

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work out an appropriate approach for the insured’s non-compliance with the duty, it would be helpful to look at approaches in other jurisdictions, and at the contractual approach in insurance policies in China. Generally, there are two different approaches to the legal consequences where the insured has failed to mitigate the loss after the occurrence of the insured event, and as a result, the loss has increased. First, not taking steps to mitigate will preclude an insured from claiming an insured loss to the extent it results from not taking those steps. Common law jurisdictions usually take this kind of approach.28 Some civil jurisdictions also take this approach. For example, in Taiwan, after occurrence of the insured event, if assessment shows that loss was increased due to failure of the insured to take reasonable measures to protect the subject matter insured, the insurer is not liable for indemnifying such increased loss.29 Second, not taking steps to mitigate will not preclude an insured from claiming an insured loss. The Insurance Law only obliges the insured to take reasonable steps to mitigate the loss, but does not mention the consequences for failure in doing so. In practice, however, insurers usually stipulate in insurance contracts that the insurer is not liable for the increased loss if the insured failed to take reasonable steps to mitigate the loss following the occurrence of the insured event. For example, in the Household Property Insurance Policy of Ping An Property Insurance Company,30 clause 22(1) stipulates that “upon occurrence of the insured event, the insured must take necessary and reasonable measures to prevent or mitigate loss; otherwise, the insurer is not liable for paying insurance money for the increased loss as a result of the insured’s failure to take mitigation steps.” By virtue of policy terms, an insured’s failure to mitigate loss will not result in a complete bar to recovery of the insured loss. Rather, it concerns the amount of insurance money an insured can recover under the policy. The amount recoverable by the insured is generally to be reduced by the amount of losses which could have been avoided by the insured’s reasonable efforts to mitigate. The issue of how much an insured’s recovery should be reduced due to the insured’s failure to mitigate is a question of fact. To determine whether the insured must bear the adverse legal consequence of failure to mitigate, three issues must be considered.31 First, it must be determined that the insured has in fact failed to take mitigation steps. Second, the insured must be at fault for his failure. This means that the insured knows or ought to know that if he fails to mitigate, the insured loss will increase, but he simply takes a laissez-faire attitude, even if he has the ability and means to mitigate the loss. And third, there must be a causal link between the insured’s failure to act and the increased loss. In other words, the increased loss is caused by the insured’s failure to take mitigation steps. In a motor insurance case,32 although the insured failed to reduce aggravation 28  Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) p. 476. 29  This is the approach adopted in the Insurance Act 2015 (Taiwan), art. 97. 30  See the website of Ping An Insurance Company, accessed in January 2016. 31  Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China, 2012) p. 304. 32 This case was cited in the book, Typical Cases and Adjudgment Considerations of Insurance Law by Jianxun Liu (Law Press China 2012) p. 297.

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of the insured loss, the court found that the insured was not at fault in his failure to take steps to reduce the aggravation of the loss, so the insurer had to pay the loss. The facts of the case were that the insured drove his car on a motorway, and the road was full of small stones because of road work. Some small stones accidently hit the engine oil filter and caused leakage of engine oil. The driver did not notice the oil leakage. The engine was damaged before the driver noticed the red light of the engine oil indicator on the dashboard. The insurer refused the insured’s claim on the ground that the damage of the engine was not caused by hitting or crashing (the risk covered) into another object, but by the insured’s failure in repairing the leakage of the engine oil. The court held that the damage to the engine was not the insured’s fault in failing to take steps to repair the leakage, but was caused by the hitting of the stone which started the chain reaction and eventually led to the damage to the engine. So the insurer was liable for the loss. The Insurance Law requires the insured to take necessary and reasonable steps to mitigate loss; the purpose of this legislation is not only to prevent loss, but also to impose a moral duty on the insured to rescue the property, namely, the insured should not sit back idly and not care about increase of loss. Compliance with the duty of mitigation does not mean that the insured’s act or effort to mitigate has to give an effective outcome, i.e. the loss is actually reduced. As long as the insured acts as a reasonable person following the happening of the insured peril, and does not intentionally fail to take active steps to mitigate loss, even if the extent of loss is not reduced, the insured should not bear the adverse consequences.33 An insured’s negligent failure to mitigate should not affect his coverage under the policy, as the insurance policy is in place specifically to protect the insured against the effects of his own negligence. Where the insurer uses the defence of the insured’s failure to mitigate loss in order to reduce the amount of insurance payments, the burden of proof, however, must be on the insurer, who must show what further loss could have been avoided had the insured taken reasonable steps to mitigate the loss. It is suggested that art. 57(1) of the Insurance Law be amended to include a provision as to the consequence for the insured’s non-compliance with the duty of mitigation. The provision could be phrased as: “After the occurrence of an insured event, where the loss has been increased due to the insured’s failure in taking reasonable measures to mitigate the loss, and where there is a causal link between the insured’s failure to act and the increased loss, the insurer is not liable for indemnifying such increased loss.”34 It is also suggested that in the following circumstances, an insured should not be taken as failing to mitigate loss: (1) the insured does not know the insured event has occurred; (2) he is unable to foresee the possibility of increase of loss; (3) he

33  In Germany, according to s. 62(2) of the German Insurance Contract Act 2008, where the contract provides that the insurer is not obligated to effect payment in the event of the non-observance of an incidental obligation on the part of the policyholder, he shall be released from the liability if the policyholder intentionally breached the obligation. In the case of grossly negligent non-observance of the obligation, the insurer shall be entitled to reduce any benefits payable commensurate with the severity of the policyholder’s fault; the burden of proof that there was no gross negligence shall be on the policyholder. 34  This refers to the approach in art. 97 of the Insurance Act 2015 (Taiwan).

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has acted following the insurer’s instruction to mitigate the loss; and (4) he is either financially or physically unable to take any mitigation step. 13.3.4 Necessary and reasonable expenses incurred by the insured Where the insured takes reasonable steps to mitigate the loss flowing from the occurrence of the insured event, he should be entitled to recover from the insurer for loss resulting from, and expenses incurred in, taking those steps. In order to encourage an insured to perform the duty of mitigation, the Insurance Law obliges the insurer to pay for the mitigation expenses sustained by the insured. Article 57(2) of the Insurance Law provides: “The insurer shall bear the necessary and reasonable expenses incurred by the insured for preventing or mitigating loss of or damage to the insured subject matter after occurrence of the insured event; the amount of such expenses borne by the insurer shall be calculated separately from the indemnity for the loss of or damage to the insured subject matter and the maximum amount shall not exceed the sum insured.” The article clearly specifies that the insurer must bear the reasonable mitigation costs, the costs must be paid on top of the indemnity payment for the loss of the insured subject matter, and the maximum cost to be paid is capped at the sum insured. It must be pointed out that the mitigation cost is calculated separately, and is not considered to be a loss caused by the insured event under the policy. This means that the amount of mitigation expenses plus the amount recoverable in respect of the loss of the property itself can sometimes exceed the sum insured under the policy.35 To determine the amount which the insurer should be liable to pay for the expenses incurred to the insured for mitigating loss, certain circumstances must be taken into account. First, the mitigating measures taken by the insured should be necessary and reasonable. An insured may not be a professional institution for risk prevention and loss mitigation – it would be sufficient for him to act as a reasonable person in response to the occurrence of the insured event. Second, the expenses for mitigating steps must be necessary and reasonable. The question as to what is reasonable is a matter of fact in the circumstances. It is unreasonable for an insured to knowingly spend more money mitigating a loss than the anticipated maximum quantum of the loss. The insured must reasonably believe that mitigation was necessary, owing to the perceived imminent danger of loss to the insured subject matter, but can only recover if the expense was properly incurred and the loss would have been caused by a risk insured against. Third, the effect or the outcome of mitigation is not a precondition for the insurer to pay the costs of mitigation; in other words, what is needed is for the insured to do something actively for the purpose of avoiding or mitigating loss or further loss upon the occurrence of an insured event. And finally, in view 35 This is in contrast to the English position on this point, under which the amount of mitigation expenses, when added to the amount recoverable in respect of the loss of the property itself, must not exceed the sum specified in the policy. The insured cannot recover any sum in respect of expenses incurred by the insured in mitigation of the loss where the effect of so doing would be to make the total sum payable on account of the insured risk greater than the amount specified in the policy, and thus to extend the liability of the insurers beyond that which they have undertaken, unless, as is sometimes the case, the policy contains a stipulation to that effect (Thompson v Montreal Insurance Co. (1850) 6 UCR 319).

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of the different nature of the insurance payment for the loss caused by the insured event and reasonable expenses incurred by the insured for preventing or mitigating loss of or damage to the insured subject matter, the amount of such expenses borne by the insurer should be calculated separately from the indemnity for the loss of or damage to the insured subject matter, and the maximum amount shall not exceed the sum insured. Mitigation costs may refer to two kinds: first, the kind of loss to the insured subject matter which is caused by taking necessary measures to rescue insured property, or prevent or reduce further loss occurring. For example, a factory effected a comprehensive property insurance policy. A fire broke out in one of its workshops. In order to prevent the fire from spreading to other buildings, the insured demolished a few small buildings (which were also insured properties) surrounding the workshop on fire. The loss of these small buildings should be taken as reasonable costs and thus be paid as mitigation expenses by the insurer. The second kind is the kind of costs incurred in rescuing or protecting the insured subject matter, such as costs of labour, costs of equipment for putting out a fire, etc. In practice, the amount of expenditure for mitigation operations is worked out usually according to the sum insured of the subject matter and the actual value of the insured subject matter at the time when the insured event occurred. In the case where the sum insured of the subject matter is more than or equals the actual value of the subject matter at the time of occurrence of the insured event, the necessary and reasonable expenses sustained by the insured in taking mitigation steps are calculated separately from the indemnity for the loss of or damage to the insured subject matter. The maximum amount of mitigation expenses shall not exceed the actual value of the insured subject matter.36 In the case where the sum insured of the subject matter is less than the actual value of the subject matter at the time of occurrence of the insured event,37 the necessary and reasonable expenses sustained by the insured in taking mitigation steps are calculated according to the ratio of the sum insured of the subject matter and the actual value of the insured subject matter separately from the indemnity for the loss of or damage to the insured subject matter. The maximum amount of mitigation expenses shall not exceed the sum insured.38 In the situation where the insured has rescued some insured property and some uninsured property, the expenditure incurred for the whole rescue operation may be apportioned by the insurer and the insured. The Insurance Law is silent on this issue, but many insurance contracts contain a clause for apportionment of mitigation costs. In the Household Property Insurance Policy of Ping An Property Insurance Company,39 clause 27(3) stipulates that “where there are uninsured properties among all properties rescued, the expenditure incurred for the rescue operation shall be apportioned according to the ratio of the actual value of the rescued insured 36  See the Household Property Insurance Policy of Ping An Property Insurance Company, clause 27(1). 37  This is for under-insurance cases. 38  See the Household Property Insurance Policy of Ping An Property Insurance Company, clause 27(2). 39  See the Household Property Insurance Policy of Ping An Property Insurance Company, clause 27(3), accessed in January 2016.

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properties to the total value of all rescued properties.” A similar clause can also be found in the Comprehensive Commercial Motor Vehicle Insurance Policy of the PICC.40 Apportionment of mitigation costs can be explained by the case of Putian City Taisheng Paper Company Ltd v China Ping An Insurance Company Ltd Putian Branch,41 where the insured warehouse with a variety of different kinds of paper was flooded. The insured took steps to rescue the paper and spent ¥29,900 in labour fees and for hiring forklifts to move the paper to a higher position in order to reduce water damage to the paper. The total weight of the insured papers was 4,200 tons, while the total weight of paper in stock was 4,208.885 tons. The insurer’s share of mitigation expenses was then calculated according to the ratio of the insured paper (4,200 tons) and the total paper in stock (4,208.885 tons) which equalled ¥29,900 × (4200 ÷ 4208.885) = ¥29,836.88. 13.3.5 Expenses sustained as a result of taking steps to avoid or mitigate an imminent insured event As discussed above, the Insurance Law obliges the insured to take necessary measures to prevent or mitigate loss or damage at the time when an insured event has occurred, and obliges the insurer to bear the necessary and reasonable expenses incurred by the insured for preventing or mitigating loss of or damage to the insured subject matter.42 However, the Law does not provide any rule to answer the question whether an insured is obliged to take reasonable steps to save the insured subject matter from an imminent insured event, and if the insured does so, whether he is entitled to recover the cost sustained as result of taking such steps. In the case of the Xingwang Food Company v The Property Insurance Company,43 the Food Company was located in a town on the lower reaches of the Yangtze River. On 29 July 2012, the local government sent off an urgent flood warning to the local residents that it was forecast that the water level of the river would reach or exceed the historical level on 1 August. The government requested all residents to remove their property out of the area in order to avoid being flooded. On 2 August, the Insurance Company sent a notice to all its insureds, requesting them to remove their property from the area. If any insured did not follow the request, the Insurance Company would rescind the contracts and would not pay losses which occurred prior to rescission of the contracts. On the same day, staff from the Insurance Company came to the Food Company to inspect and register goods and materials which must be moved out of the warehouses to a safe place. The Food Company immediately hired vehicles to carry all these goods and materials to a safe place. In the end, the town was not flooded. Later, the Food Company made a claim for the expenses (¥110,000) sustained in removing the goods and materials to the safe place, but was 40 See the website for the policy, clause 19(3), accessed in January 2016. 41 This case was decided by the Intermediate People’s Court, Putian City, Fujiang Province, Civil Court Judgment (2000) No. 41, accessed in January 2016. 42  The Insurance Law, art. 57. 43 This case was cited in the book by Yulong Dai and Guoqiang Chen, Top Lawyers Show You How to Win Insurance Dispute Cases (China Economic Publishing House 2014) p. 133.

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turned down by the Insurance Company on the ground that the costs for removing the goods and materials did not fall into the scope of the loss caused by the insured risks. The notice requesting removal of the property from the forecast flood area was the insurer exercising its right to protect the insured property. And it was also the Food Company’s duty to protect the property from being flooded. So the insurer was not liable for paying the expenses incurred for removing the property. Because there was no law to follow, in the end, the two parties reached an agreement by mediation of the court that the insurer would bear the larger share of the total expenses (¥70,000) and the insured itself would bear the rest of the expenses (¥40,000). In this case, the insured followed the requirement of the insurer to remove the goods and materials to a safe place to avoid loss by imminent flooding, and the mitigating steps taken by the insured were to a large extent for the benefit of the insurer. If the goods and materials were flooded, the insurer would have to make payment for the loss caused by the flood. Thus the expenses sustained by the insured for avoiding loss were reasonable and necessary, and should be paid by the insurer. It is suggested that the insurer should be liable for paying the costs incurred by the insured as a result of taking mitigation steps to avoid an imminent insured event. The Insurance Law should include a rule on this point. This case is similar to an American case, White v Republic Fire Insurance Co.,44 which concerned a claim for damaged goods based on the moving of goods out of a warehouse (which ultimately was not destroyed) onto the street where the goods in fact were damaged, and the State of Maine said: “the imminence of the peril must be apparent, and such as would prompt a prudent uninsured person to remove the goods; it must be such as to inspire a conviction that to refrain from removing the goods would be the violation of a manifest moral duty.”45 It must be mentioned that in the case of the Xingwang Food Company v The Property Insurance Company, the insured event (flooding) was imminently to occur. If the insured event is not imminent but merely possible, it would be certain that an insured cannot recover the expenses sustained in taking steps to mitigate in anticipation of an insured event. An insured should be aware of the distinction between money spent in advance to avert a loss that has become reasonably foreseeable and a loss that is entirely fortuitous. One might assume that an insured would be entitled to recover any costs spent in avoiding a loss from the insurer that would otherwise occur and be paid as a claim by the insurer. Common sense would agree, but insurers are reluctant to pay the mitigation costs in such a situation and courts have not so far firmly supported the insured’s claim for pre-loss mitigation costs, because any duty to mitigate arises after a loss, not before it. This is clearly stipulated in the Insurance Law46 and also in insurance contracts. Nevertheless, insureds would be well advised to demand the insurer expressly include a clause for such recovery in their policies, as the absence of such a clause means that recovery may not be allowed.

44  (1869) 57 Maine Reports 91, at 95. 45  Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis 2015) p. 456. 46  Article 57.

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13.3.6 Uninsured loss sustained as a result of taking steps to avoid or mitigate the insured loss It is possible that mitigation acts can give rise to loss of property. The property can be insured property, or uninsured property. It is unclear whether or not an insurer is liable for paying for the uninsured loss of property sustained as a result of taking mitigating steps to avoid or mitigate the loss of the property covered under the insurance contract, as there is no provision in the Insurance Law to deal with this situation. It is unlikely that an insurer would pay for the loss of uninsured property which is caused by the mitigation operation, unless there is a term in the contract to the contrary. In the case of Mr Wang v The Property Insurance Company,47 Mr Wang insured only part of his household contents, such as TV and VCD, for the insured amount of ¥3,000. A fire occurred in his house. He only rescued the TV and VCD but not other uninsured household items because there was no time for him to do so during the fire. The fire resulted in total loss of the household contents, worth ¥4,500. Mr Wang claimed for the loss but was refused by the insurer. He argued that if he had not rescued the insured objects (the TV and the VCD) but other uninsured items, the insurer would have had to pay for the loss of the insured subject matter. The insurer argued that the insured subject matter suffered no loss, and the loss of other property was not recoverable under the policy. In the present case, if Mr Wang had spent valuable time to take other uninsured items out of the house, the TV and VCD machines would have been destroyed by fire, and consequently, the insurer would have been liable to pay ¥3,000 to Mr Wang. It can be suggested that the insurer should be liable to pay Mr Wang the equivalent amount to the loss of the insured subject matter (i.e. ¥3,000) in this case. 13.3.7 Uninsured personal injury suffered as a result of taking steps to avoid or mitigate the insured loss The duty to mitigate requires the insured not only to take necessary and reasonable steps to avert or minimise the loss, but also to avoid taking unreasonable steps that might give rise to other loss. If an insured takes mitigation steps with a possible risk of hurting himself in the process, the steps taken cannot be regarded as reasonable. Thus the insured cannot recover for an uninsured personal injury in taking these steps. The duty does not oblige the insured to sacrifice his own safety to mitigate the loss. If the insured hurts himself in the process of mitigating the loss, the insurer is unlikely to pay for the medical costs incurred by the insured. This can be seen in the following two cases. In Mr Zhang v The Property Insurance Company,48 Mr Zhang effected a fire policy to cover his house and household contents. A fire broke out. His right hand

47 This case was cited in the book by Yulong Dai and Guoqiang Chen, Top Lawyers Show You How to Win Insurance Dispute Cases (China Economic Publishing House 2014) p. 140. 48  This case was decided by the People’s Court, Laizhou City Shandong Province, Civil Court Judgment (2011) No. 421, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2012) vol. 4, p. 656.

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was injured in the process of putting out the fire and he incurred medical costs of ¥200,000 for treatment of his hand. In the contract, there were clauses relating to mitigation expenses which stated that after occurrence of the insured event the insurer shall compensate the insured, in accordance with the agreement in the contract, for the necessary and reasonable expenses incurred by the insured for preventing or mitigating loss of or damage to the insured subject matter, and that the insurer shall not pay other indirect loss, or any loss or expense which was beyond the scope of the coverage under the policy. The insurer turned down the insured’s claim for the medical costs and argued that the insurer was liable for reasonable expenses for mitigating steps, such as cost of labour and materials for putting out the fire. The medical cost was an indirect cost and was not covered under the policy. The direct loss due to the fire was ¥80,000, but the medical costs were much higher than the actual loss due to the fire. The insured’s act was not mitigating the loss but increasing the loss, so it would be unfair for the insurer to pay for the medical costs. The court held that the medical expense incurred to the insured was not covered under the policy, so the insurer was not liable for such a loss. In another case, Mr Wang v The Property Insurance Company,49 Mr Wang drove a truck on a mountain road. A landslide occurred, resulting in the truck sliding down the road. Fortunately Wang was not injured. When the truck temporarily stopped sliding down, he tried to stop the vehicle further sliding using a jack, in order to avoid the loss of the vehicle. While he worked on the jack, the vehicle suddenly began sliding again. His backbone was broken by the vehicle. The court held that mitigation costs did not include costs for personal injury suffered in the process of taking mitigation steps. According to the Insurance Law, mitigation costs must be those costs which are necessary and reasonable for preventing or mitigating loss of or damage to the insured subject matter. Although Mr Wang’s injury happened in the mitigating process, personal injury was, however, not an inevitable outcome of taking mitigating steps. It was an accident in the mitigation process which was not covered under the insurance policy, so the insurer was not liable to pay the medical costs for the treatment of the personal injury. 13.4 Conclusion The Insurance Law imposes two kinds of duties on the insured: one is to maintain the safety of the insured subject matter;50 and the other is to mitigate losses upon occurrence of the insured event.51 In one special circumstance, i.e. an insured event is to occur imminently, there appears to be no clear-cut division of the two duties. The implication of this unclear division of the two duties is the uncertainty as to the expenses incurred by the insured in his effort to take steps to prevent losses which may happen imminently. In the face of an imminent insured peril, as was seen in the

49  This case was cited in the book by Junyan Zhang, Insurance Law: Guidance on Difficult Points (China Legal Publishing House 2007) p.150. 50  The Insurance Law, art. 51. 51  Ibid, art. 57.

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case of the Xingwang Food Company v The Property Insurance Company,52 the insured must take steps to move the goods and materials to a safe place so as to avoid damage by an imminent flood. If the insured’s effort is taken as performing his duty to maintain the safety of the insured subject matter in accordance with art. 51(1) of the Insurance Law, the expenses sustained by the insured should not be recoverable from the insurer, as art. 51 of the Insurance Law does not oblige the insurer to bear such expenses; while if the insured’s effort is treated as discharging his obligation to prevent or mitigate losses, the expenses incurred by the insured should be borne by the insurer in accordance with art. 57(2) of the Insurance Law. It is suggested that insurers should bear the costs incurred by the insured in his efforts in taking steps to avoid or mitigate losses which would be caused by an imminent risk that is most likely to happen, even if the risk does not occur eventually. There are a number of deficiencies of the Insurance Law in relation to the insured’s duties of risk prevention and loss mitigation. First, art. 51(3) of the Insurance Law entitles the insurer to demand an increase of the premium or rescission of the contract in the event of the insured’s failure in complying with the duty of maintaining the safety of the insured subject matter. However, the insurer’s right of rescission is not restricted and the circumstances in which the insurer is entitled to exercise its right of rescission are not specified. Second, art. 57 of the Law does not provide a remedy if the insured has failed to comply with the duty of taking reasonable steps to avoid or mitigate losses. These deficiencies have been critically discussed and suggestions on how to improve the relevant provisions have been put forward.

52 This case was cited in the book by Yulong Dai and Guoqiang Chen, Top Lawyers Show You How to Win Insurance Dispute Cases (China Economic Publishing House 2014) p. 133.

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The making of a claim

14.1 Introduction The ultimate purpose of an insured in purchasing an insurance policy is to obtain insurance payments when the insured event occurs and causes losses. In order to receive proceeds under the policy in the event of a loss, the first step for the insured to take is to make a claim with the insurer for the loss. This must be carried out in accordance with the requirements imposed on the insured by the Insurance Law and by the insurance contract. There are two major duties on the insured relating to the making of a claim, i.e. the duty of notifying the insurers of the happening of an insured event, and the duty of furnishing them with evidence and information about the losses. This chapter considers these duties and other related issues. 14.2 The insured’s duty to notify the insurer of the happening of the insured event The duty of giving notice of loss is imposed on the proposer, the insured or the beneficiary by art. 21 of the Insurance Law, which provides: “Where the proposer, the insured or the beneficiary knows of the occurrence of an insured event, it shall notify the insurer thereof in a timely manner.” When an insured event occurs, it is the duty of the insured to give notice to the insurers of the happening of any loss for which he may intend to claim in order that the insurer may be placed in a position to take such measures as it may deem appropriate and necessary to investigate the circumstances of the loss before information becomes stale or disappears. Furthermore, once the insurer is informed of the happening of the insured event, it may take, or instruct the insured to take, reasonable steps to avoid further loss and protect its interests.1 There may be other advantages to requiring prompt notice of loss. Early discovery of information might assist the insurer in dealing with fraudulent claims,2 a benefit to the whole population of insureds. Also, notice requirements play a role in the rate-setting process: to the extent notice requirements are enforced, insurers can

1  This topic is dealt with in Chapter 13, “Risk prevention and loss mitigation.” 2  This topic is dealt with in Chapter 16, “Fraudulent claims.”

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assume that old events will not result in payment claims, and this tends to reduce the level of reserves that the insurer must maintain to meet future claims.3 14.2.1 The performer of the duty According to art. 21 of the Insurance Law, the performer of the duty is the proposer, the insured or the beneficiary. As long as any one of them has informed the insurer of the happening of the insured event, it can be deemed that the duty has been discharged. In practice, if the agent of the proposer, the insured or the beneficiary acts on behalf of them to notify the insurer, it can also be taken that the duty has been performed. The precondition for the insured to give notice is that the proposer, the insured or the beneficiary knows of the happening of the insured event. The Insurance Law does not mention whether the proposer, the insured or the beneficiary must notify the insurer in the case where they ought to have known the occurrence of the insured event. However, in art. 26 of the Insurance Law, the limitation period for filing a lawsuit starts to run from the date when the insured or the beneficiary knows or ought to know of the occurrence of an insured event. There the constructive knowledge of the insured event is relevant. By analogy, it is reasonable to suggest that art. 21 of the Insurance Law with respect to the word “know” should be interpreted in a broad way so as to include the words “ought to know.” If, in the circumstances, the insured ought to know of the happening of the insured event, the insured should be deemed to know it, unless he has evidence to rebut this assumption. 14.2.2 Time limits The notice should be given in a timely manner, i.e. within a reasonable period of time, since if it is delayed beyond a reasonable time, the insurer may well be prejudiced by the disappearance of the evidence of the accident, and by the greater difficulties of ascertaining the true facts relating to the loss. Where the insurance contract prescribes a time limit, the insured should give notice within the prescribed time. For instance, the proposer or the named driver must notify the insurer within 48 hours after the occurrence of the insured event in a motor policy.4 The proposer or the beneficiary must give notice within 10 days from the time of becoming aware of the happening of the insured event in a short-term comprehensive accident insurance policy.5 To determine whether the insured has acted in a timely manner, the Insurance Law appears to take an objective test, that is, if the notice is given within such a period of time that it does not result in any difficulty for the insurer to ascertain the nature, cause and extent of the loss, it can be said that the insured has acted in a timely manner. A reasonable period of time may vary with different types of

3 See R. H. Jerry and D. R. Richmond, Understanding Insurance Law (5th edn, LexisNexis 2012) p. 572. 4  See the Motor Vehicle Comprehensive Commercial Insurance Policy of the PICC, clause 13. 5  See the Short-Term Comprehensive Accident Insurance Policy of the Ping An Insurance Company of China, clause 12.

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insurance; for a motor policy the time limit must be shorter, while for a liability policy the time limit would be much longer, as the insured’s liability to a third party is often determined after the insured’s conduct which gives rise to liability. In judicial practice, sometimes courts pay more attention to the consequences than to the time limit. In the event that the insured delayed giving notice of the happening of an insured event, but the delay did not affect the determination of the loss, the insurer was not allowed to repudiate its liability for the claim. For example, in Mr Guo v The Property Insurance Company Beijing Branch,6 the insured notified the insurer of the occurrence of the insured event about two years after the event, but the delay did not at all affect the insurer’s determination of the nature, cause and extent of the loss, so the insurer was held to be liable for the loss. Mr Guo had a road accident and injured a person on a tricycle. The court ordered the insured to pay the injured person the amount of ¥57,737 as compensation. Having paid the amount to the person, Mr Guo claimed for insurance payments under a third party liability policy. The insurer refused the claim for a number of reasons, one of which was that the accident occurred in August 2008 but the insured did not notify the insurer of such accident until April 2010 when the insured made the claim. The evidence furnished by the insured was sufficient to prove that the accident fell within the scope of coverage and the amount of loss was properly determined, so the insurer was not permitted to refuse its liability for the loss. It can be said that in the case of a significant delay in giving notice, as long as the delay does not exceed the two-year limitation period (for property insurance) for filing a lawsuit,7 and the nature, cause and extent of the loss can be proved, the insurer’s liability for the loss cannot be repudiated. On the other hand, even if the insured gives notice promptly, if he cannot prove the nature, cause and extent of the loss, the insurer is still not liable for the loss. So the key issue is the proof of loss, which will be considered soon. 14.2.3 The form of the notice There is no stipulation as to the form of the notice in the Insurance Law, so it seems that in the absence of an express condition to the contrary in the insurance contract, the notice of the happening of the insured event can be given either orally or in writing by telephone, email, letter or any other form.8 14.2.4 The effect of non-compliance The consequence for non-compliance with the duty of giving notice to the insurer in a timely manner is stipulated in art. 21 of the Insurance Law, which provides: “Where notice is not sent in a timely manner intentionally or due to gross negligence, and as a result, the nature, cause and extent of loss of the insured event are hard to ascertain, the insurer shall not be liable for making indemnity payments or

6  See Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 317. 7  The Insurance Law, art. 26. 8  See Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 146.

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paying insurance benefits in respect of the portion that cannot be ascertained, but with the exception that the insurer has known in time or should have known in time the occurrence of the insured event through other channels.” A number of points arising from this article need to be considered here. First, only where the breach of the duty is intentional or by gross negligence, is it possible for the insurer to discharge his liability (or part of his liability) for paying insurance money. For the simple negligent or innocent non-compliance with the duty, the insurer is still liable for insurance payment for the loss, even if the nonperformance of the duty gives rise to prejudice to the insurer in its effort to ascertain the nature, cause and extent of loss of the insured event. In Mr Jiang v China Pacific Insurance Company Shanghai Branch,9 the insured’s car was stolen, but the insured notified the insurer 50 days after the theft. It was held that the insured’s failure to give notice in a timely manner was either intentional or by gross negligence, which resulted in difficulty for the police and the insurer in investigating the theft, thus the nature and the loss could not be determined. Consequently, the insurer was not liable for the loss. Second, where the insured has failed to notify the insurer in a timely manner intentionally or by gross negligence, the insurer is still liable for insurance payments for the loss if the insured’s failure in notifying the insurer does not affect the insurer’s determination of the nature, cause and extent of loss of the insured event; but if the insured’s failure in notifying the insurer affects the insurer’s determination of the nature, cause and extent of loss of the insured event to such an extent that a portion of the loss cannot be ascertained due to the insured’s failure in notifying the insurer, the insurer is not liable for insurance payments for that portion of the loss. In a motor case,10 the insured effected a motor policy with insurer A for a vehicle (H130) and another policy with insurer B for another vehicle (H165). When vehicle H165 reversed, it caused damage to vehicle H130. On the same day of the accident, the insured notified insurer B of the accident. Insurer B inspected the damaged vehicle H130 and determined the loss to vehicle H130 to be ¥8,000. Insurer B refused to pay the loss (¥8,000 yuan) under the compulsory third party liability policy because these two vehicles were owned by the same insured. The insured then contacted insurer A and claimed for the loss under the comprehensive policy. Insurer A refused the claim on the ground that the insured breached the contractual term, which required the insured to give notice of the accident with 48 hours after occurrence of the insured event. The insurer was not liable for the loss if the insured delayed in giving notice and the delay resulted in difficulty in ascertaining the nature, cause and the extent of the loss. The court found that although the insured delayed in giving notice to insurer A, the delay did not affect determination of the loss, as insurer B clearly ascertained the cause of the accident and the amount of the loss. Thus insurer A was held to be liable for paying the amount of ¥8,000. Third, there is an exception to the duty of giving notice, that is, the insurer has known or should have known in time the occurrence of the insured event through 9 This case was cited in the book by Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 149. 10  This case was reported in China Insurance Newspaper on 9 October 2013 (see accessed in February 2016).

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other channels. In this situation, the insurer should take active steps to ascertain the nature, cause and extent of loss caused by the insured event, and not just wait for the insured’s notice; even if the insured has failed to notify the insurer intentionally or by gross negligence, the insurer is still liable for insurance payments for the loss. It is, however, the insured’s onus to prove that the insurer has known or ought to have known in time the occurrence of the insured event via other channels. As mentioned earlier, insurance contracts usually contain such an express term that the insured must give notice of the happening of the insured event within a specified time; otherwise, the insurer is entitled to repudiate the liability for the loss. Whether or not the insurer can invoke the term to defend a claim in the event of the insured’s non-compliance with the term is arguable. It may be said that since the insurer expressly requires the insured to give notice within a prescribed time limit, the insured must comply with the term; otherwise he should accept the adverse consequences. It can also be argued that this term should be invalid according to art. 19 of the Insurance Law,11 by which a contract term is invalid if it aggravates the obligations of the insured, or denies the insured the rights he should have been entitled to according to law. In some provinces, the High People’s Courts (the HPC) have published guiding rules for dealing with insurance disputes.12 For example, art. 13 of the Guidance of the HPC of Shandong Province 2011 provides that “After the happening of the insured event, where the insurer refuses its liability for the loss by reason only of the insured’s non-compliance with the duty of giving notice to the insurer in a timely manner, the People’s Courts shall not uphold such a refusal.” Similarly, art. 16 of the Guidance of the HPC of Guangdong Province 2011 stipulates that “In the event that the proposer or the insured has not complied with a contractual duty, if he can prove that his non-compliance did not increase the insured risk nor affect the claim examination and settlement, the People’s Courts shall not uphold the insurer’s refusal of liability in respect of the claim by reason of the insured’s non-compliance with the duty, unless otherwise agreed in the insurance contract.” Whether or not a court treats such an express term in the policy as a valid one largely depends on the facts of the case. For example, in Mr Zhou v China Dadi Property Insurance Company Songyuan Branch,13 there was a clause in the policy which stated that after the insured peril occurs the insured shall inform the insurer of the accident immediately, and maintain the site of the accident for the insurer to inspect; the insurer can refuse a claim for loss if the site of accident is not maintained. The insured vehicle was damaged by collision with another vehicle at 00:30am in the

11  Article 19 of the Insurance Law provides: “The following terms and conditions in an insurance contract concluded by adopting the standard clauses provided by the insurer shall be invalid: (i) those that exempt the insurer of the obligations that the insurer should have borne according to law or that aggravate the obligations of the proposer and the insured; and (ii) those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law.” 12  For example, the Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of the HPC of Guangdong Province 2011); and the Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of the HPC of Shandong Province 2011). 13 This case was decided by the Intermediate People’s Court, Songyuan City, Civil Court Judgment (2009) No. 367 (see accessed in February 2016).

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early morning of 18 May 2007. The insured informed the insurer of the accident at 10:44am on 18 May. When the insured came to inspect the accident, the original scene of the accident no longer existed. The insurer refused the claim for payment of the cost of repairing the vehicle on the ground that the site of the accident was not maintained for inspection. The trial court held that the insured did not maintain the site of the accident, so he was in breach of the contract, and that the insured did not supply reasonable and sufficient evidence to show why the accident occurred in the early morning but was reported 10 hours later and why the site of the accident was not maintained. The insurer’s refusal of the claim was upheld by the court. The insured appealed. The appeal court found that the insurer could not be contacted in the early morning, so Mr Zhou reported to the traffic police first, and the traffic police allowed the vehicle to be removed in order not to cause traffic congestion. The report of the accident by the police described the site of the accident. The fact of the accident was clear, so the insurer did not have right to refuse the claim. In this case, the insured complied with the duty of giving notice as provided in art. 21 of the Insurance Law, so the contractual term which imposed on the insured the duty of giving notice of the accident immediately and maintaining the site of the accident for inspection and allowing the insurer to refuse payment of the loss in the event of a breach of the term was an invalid one, and thus should not be enforceable. In practice, many insureds give insurers prompt notice of the happening of an insured event, but often fail to give notice of the accident to the relevant administrative departments which are responsible for providing an official letter of evidence of the accident to the insured;14 as a result, the nature, cause and extent of the loss cannot be determined. For example, a motor vehicle policy often contains a term which requires the insured to give notice of the occurrence of the insured peril to the insurer and to the traffic police within 48 hours after the happening of the insured peril. Upon a road accident happening, if the insured has given notice to the insurer on the first day of the accident but notified the traffic police on the second day, by then it is difficult to determine whether the driver was intoxicated with alcohol or whether the unqualified driver was substituted. The Insurance Law does not cover the circumstance where the insured has complied with the term of the policy to give notice to the insurer, but failed to give prompt notice to the relevant administrative departments, such as the traffic police. The purpose of giving prompt notice to the traffic police is to facilitate their investigation of the nature, cause and extent of the loss. If the insured’s failure in giving such notice to the traffic police does not affect their investigation, the insurer should be liable for paying the loss; if the insured’s failure results in difficulty in their investigation and determination of the loss, the insurer should not be liable for paying the portion of the loss which cannot be determined. Although the Insurance Law does not include a provision requiring the insured to give prompt notice of the happening of an insured peril to

14  In the Second Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China, art. 18 provides: “Where an administrative department have made, in accordance with relevant law, a report for traffic accident or fire accident, etc., the People’s Court should, according to relevant law, examine and confirm its probative force, except where there is evidence to the contrary.”

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the relevant administrative departments, it is advisable for the insured to do so.15 It is a burden on the insured to prove the loss; if the insured fails to notify the traffic police in a timely manner, consequently, the extent of the loss cannot be ascertained. The insured is thus unable to show evidence of the loss, and he then must accept the adverse effect of his own failure in promptly giving notice to the traffic police upon occurrence of a traffic accident. 14.3 The insured’s duty to provide evidence and information relating to the claim Article 22(1) of the Insurance Law provides: “After the occurrence of the insured event, the proposer, the insured or the beneficiary, in making claims to the insurer for indemnity payments or insurance benefits, shall provide the insurer with evidence and information which are relevant in ascertaining the nature, cause and extent of loss of the insured event, and which he is able to provide.” 14.3.1 The scope of the duty The persons who have the right to make a claim under a policy are the insured or the beneficiary. Sometimes the agent of the insured or the beneficiary may make claims on behalf of the insured or beneficiary. In recent years, professional insurance claim firms have been established to provide services for insurance claims or consultation on matters of claims.16 Whoever is to make the claim, he must supply the insurer with evidence and information in relation to the claim in accordance with art. 22(1) of the Insurance Law. What the insured needs to provide is the relevant evidence and information to be used for determining whether the risk or the cause of the risk is covered under the policy, and also for ascertaining the extent of the loss. The evidence and information to be furnished should be those that the insured is able to furnish, that is, those within his knowledge or within his ability to obtain in the normal process of handling the matters upon the happening of an insured event. Where it is shown that from the information in his possession, power or control, the insured could have furnished evidence or information fuller and more complete than that in fact furnished, he has not discharged his duty. On the other hand, the insured must be regarded as having discharged his duty when he has furnished the best evidence and information which, in the circumstances, he is able to furnish, however imperfect they may be in fact. To determine the scope of the evidence and information the insured is able to provide, the following should be taken into account: the insured’s ability, the relative

15  See Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 148. 16 The first insurance claim firm was established in April 2004 in Zhengzhou City, Henan Province. After it, many firms came into existence. Initially the firms helped the insureds to make claims. In recent years, some firms even buy claims from the insureds at a price lower than the amount to be claimed and then make claims directly against the insurers (see accessed in January 2015).

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difficulty of acquiring the evidence or information, and the relative expense for the insured or for the insurer to obtain the evidence. For certain evidence, the costs for the insured to obtain such evidence may be larger than for the insurer to do so. Then it would be more appropriate for the insurer to obtain the evidence, as the costs incurred by the insured or by the insurer in investigating and ascertaining the nature and the cause of the insured event and the extent of the loss will be borne by the insurer.17 In practice, usually the insurers supply a claim form, which the insured is required to fill in. The details of information asked for by the insurers vary according to the nature and type of the insurance. When submitting the claim form, the insured must at the same time submit the relevant evidence and information in relation to the claim. Insurance policies usually contain a list of the documents to be submitted when making a claim. For example, in the Household Property Insurance Policy of the Ping An Insurance Company of China,18 clause 23 lists the documents to be submitted when making a claim for insurance payments, including: (1) the original copy of the insurance policy; (2) the claim form completed by the insured or his agent; (3) the list of the items of property which are lost or damaged, and the list of costs incurred by the insured in taking steps to mitigate the loss; (4) invoices or receipts (or other evidence) to prove the loss of items of property; and (5) other relevant evidence and information for ascertaining the nature, cause and extent of the losses. The evidence and information to be submitted vary according to the types of the insurance claims. For instance, in the Short-Term Comprehensive Accident Insurance Policy of the Ping An Insurance Company of China,19 clause 13 sets out the lists of documents to be submitted for different types of insurance claim, such as accidental death, disability and medical treatments. Although the documents required vary for different types of claim, there is always a catch-all provision for all types of claim, i.e. “the insured shall hand in any other relevant evidence and information for ascertaining the nature, cause and extent of the losses in addition to those specifically listed.” In property insurance, as a general rule, the insured must give full particulars of the loss, i.e. the list of items and the costs of buying such items, which should be the best particulars the insured can reasonably give, and which must be sufficient to enable the insurer to ascertain the extent of the loss. In life insurance, in particular for a claim for death payment, a death certificate must be provided. One point worth a brief account is the declaration of death. Before the publication of the Third Interpretation of the Supreme People’s Court

17  Article 64 of the Insurance Law provides: “The necessary and reasonable expenses incurred by the insurer or the insured for investigation and ascertaining the nature and cause of the insured event and the extent of loss or damage to the insured subject matter shall be borne by the insurer.” This article is placed in the section on Property Insurance, so it is certain that it is applicable to property insurance. It is not clear whether it is also applicable to life insurance. There is no particular reason why it cannot be applied to life insurance. 18  See the website of Ping An Insurance Company, accessed in January 2016. 19  See the website of Ping An Insurance Company, accessed in January 2016.

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on Certain Issues Concerning the Application of the Insurance Law 2015 (Interpretation III),20 it was the situation that the insurer was not liable for paying insurance benefits where the date of the declaration of the death of the life insured was not within the insurance period. For instance, in Mr Wu v The Life Insurance Company,21 the insured effected a life insurance on his own life for five years from the date of 20 December 2003 for the benefit of his father. The insured was missing on 12 December 2004 and could not be found. His wife applied to the court for a declaration of death of the life insured on 16 December 2008, and the court made the declaration of the his death on 14 January 2010. His father claimed for the death payment but was refused by the insurer on the ground that the death was outside the five-year insurance period. The court held that the insurer was not liable because the date of declaration of the life insured’s death was deemed to be the date of the life insured’s death, which was not within the insurance period.22 This situation has, since 1 December 2015, been changed by art. 24 of Interpretation III, which provides “where the date of declaration of the life insured’s death was beyond the insurance period, if there is evidence to show that the date of the disappearance of the life insured was within the insurance period, the People’s Court shall uphold the relevant person’s claim for death payment under the insurance policy.” If the above case were to be decided by following art. 24 of Interpretation III, the insurer would have been liable for the death payment, as the date of the life insured’s disappearance was within the insurance period. In liability insurance, it is generally the case that the agreement for settlement (including the amount of compensation) by the insured and the third party must be supplied. Where the insured’s liability to a third party is decided by litigation or arbitration, the letter of decision by the court or arbitration institution must be submitted.23 14.3.2 The consequences of non-compliance Article 22 of the Insurance Law does not specify the consequences of the insured’s failure in providing insurers with evidence and information which are relevant in ascertaining the nature, cause and extent of loss. In practice, some insurance contracts contain a clause to the effect that the insurer may rescind the contract or refuse to pay the insurance money if the insured fails to provide evidence and information relevant to the claim in the manner specified in the contract. For example, in Mr Luo v The Property Insurance Company,24 a clause in the motor vehicle policy 20  It was published on 25 November 2015 and came into force on 1 December 2015. 21  This case was decided by the People’s Court, Yuexiu District, Guangzhou City, Guangdong Province, Civil Court Judgment (2010) No. 1929, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2011) vol. 3, p. 123. 22  According to art. 36 of the Stipulations of the Supreme People’s Court of China on Certain Issues Concerning the Application of the Civil Principles of the People’s Republic of China, where a person is declared dead, the date of declaration by a court is the date of death of the person. 23  For example, see the Employer’s Liability Policy of the Ping An Insurance Company of China, clause 23 ( accessed in February 2016). 24  This case was cited in the book by Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010)p. 155.

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stated that “the insured must provide insurers with relevant documents which are necessary in ascertaining the cause, the nature, the liability, and extent of the loss, within 10 days after the traffic administrative department has settled the case of the accident; otherwise the insurer is entitled to refuse to pay the claim, or demand a refund of the insurance payment for the claim.” The accident settlement report was issued on 8 November 2002, but the insured provided this report together with other relevant documents to the insurer on 23 October 2003. The trial court upheld the insurer’s refusal of the claim by reason of the breach of the contractual clause, as the insured significantly delayed in supplying the relevant documents to the insurer. The appeal court reversed the trial court’s decision, holding that the clause in the policy was invalid as it violated a mandatory provision of the law according to art. 52(5) of the Contract Law.25 Here the mandatory provision of the law means art. 23(1) of the 2002 version of Insurance Law, which was exactly the same as art. 22(1) of the current Insurance Law. The purpose of requiring the insured to provide the insurer with relevant evidence and information in respect of the claim is to facilitate or enable the insurer to ascertain the extent of the loss promptly and correctly. In the case mentioned above, although the insured did not supply the relevant claim documents within 10 days after the settlement of the accident case by the traffic police, this did not affect the insurer’s determination of the loss, so the insurer should not be allowed to refuse to pay the claim. The clause in the policy excluded the insurer’s liability and denied the insured’s right, so it should be invalid.26 The effect of the insured’s failure in giving notice to the insurer of the occurrence of the insured event in a timely manner is, as provided in art. 21 of the Insurance Law, that the insurer is not liable for the portion of loss that cannot be ascertained. It is suggested that the consequence of the insured’s failure in providing the insurer with relevant evidence and documents should be similar, that is, the insurer should not be liable for the portion of the loss which cannot be ascertained due to the insured’s failure in furnishing the relevant documents in respect of the claim. Meanwhile, the insurer should be liable for the portion of the loss which can be ascertained by the evidence and documents available to the insurer. For example, in a motor vehicle case,27 the insured’s vehicle was damaged in a road accident. The insured telephoned the traffic police and the insurer after the accident. The police found that the insured was fully responsible for the accident. The local branch of the insurance company came to the site to investigate and determine the loss. The damage to the third party’s vehicle was determined to be ¥1,000. The insured did not allow the local branch to inspect his vehicle and determine the loss, but wanted his vehicle to be repaired at the place where his insurance company was located. His insurer told him that his vehicle must be inspected in order to determine the loss before the insured sent it off to the garage for repair. The insured refused to inform the insurer of the place where his vehicle was parked,

25  The Contract Law 1999, art. 52(5) provides: “A contract is void in one of the following situations: . . . (5) where it violates mandatory provisions of laws or administrative regulations.” 26  The Insurance Law, art. 19. 27 This case was cited in the book edited by Xian Xie, A Hundred Insurance Cases (Law Press China 2012) p. 337.

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so the insurer was unable to determine the loss. The insured alleged that the loss determined by an appraiser was ¥113,610, and claimed for the loss. The insurer paid ¥1,000 for the loss to the third party, but refused to pay for the loss on the insured’s own vehicle on the ground that the insured did not allow the insurer to inspect the vehicle, so the insurer did not accept the estimated amount (¥113,610 yuan) by the appraiser. The court ordered the insured to provide the vehicle for the court to inspect and determine the loss, but the insured failed to do so, and also failed to provide an invoice for repairing the vehicle or any other evidence to prove the loss. In the end, the court could not determine the real loss on the insured’s own vehicle. Consequently, the insured claim for the amount of loss on his vehicle was not upheld by the court. In practice, some insurance policies contain clauses with respect to the consequence of the insured’s non-compliance with the duty of providing evidence and information. For instance, in the Household Property Insurance Policy of Ping An Property Insurance Company,28 clause 23(5) stipulates that “where the insured has failed to perform the duty of providing claim documents as specified in the preceding paragraphs, and as a result, the insurer cannot ascertain the extent of the loss, the insurer shall not be liable for making indemnity payments in respect of the portion that cannot be ascertained.” It is submitted that this clause is fair and reasonable. 14.3.3 The insurer may require additional evidence In the case where the evidence and information supplied by the insured in relation to the claim are insufficient, the insurer has the right to request the insured to supply additional evidence. This is provided in art. 22(2) of the Insurance Law: “Where the insurer, based on the terms of the insurance contract, considers the relevant evidence or information incomplete, the insurer shall, in a timely manner, advise the proposer, the insured or the beneficiary, once and for all, to provide additional evidence or information.” This article entitles the insurer to request additional evidence or information but places a number of limitations on the insurer’s exercise of the right. First, the insurer’s exercising the right to request further evidence will be done in accordance with the terms of the contract. The insurer is not allowed to request additional evidence and information which it is beyond the insured’s capacity to obtain. Only where the evidence and information submitted by the insured with the claim form are insufficient to ascertain the nature, cause and extent of the loss, is the insurer allowed to request additional evidence and information. Second, in the 1995 and 2002 versions of the Insurance Law, the manner in which the insurer may request the insured to furnish additional evidence was not specified. In order to avoid the insurer’s delay in making such request, the 2009 version requires the insurer to make such request in a timely manner and once and for all. This means that all the additional documents and information requested must be included in one comprehensive list – the insurer should not be allowed to request such evidence and information on a piecemeal basis. Here the time limit is not

28  See the website of Ping An Insurance Company, accessed in January 2016.

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defined so as to meet the requirement of “in a timely manner.” However, the insurer is required, according to art. 23 of the Insurance Law 2009, to examine a complicated claim within 30 days of receiving the claim; if the claim is a simple one, the time taken for the insurer to examine the claim must be shorter. So it is reasonable to suggest that where the insurer finds the evidence and information supplied by the insured are insufficient to assess the claim, the insurer should request the insured to supply additional documents within a few days (say 5–10 days) after receiving the claim documents so as to meet the requirement of “in a timely manner.” Third, art. 22(2) of the Insurance Law does not specify the consequences if the insurer does not comply with the term “in a timely manner and once and for all.” The purpose of art. 22(2) is to increase the efficiency of claim-handling and to avoid delay in determining the claim by repeatedly requesting additional documents. If the insurer is in breach of the term, requesting additional documents repeatedly, the insurer should be made liable for the costs incurred to the insured, such as telephone fees, travelling costs, etc. In fact, according to art. 64 of the Insurance Law, costs incurred by the insured in investigating and ascertaining the nature and the cause of the insured event and the extent of the loss will be borne by the insurer. For some truly complicated cases, it may be possible that while the insurer examines the evidence and information supplied, some new situations arise, and further information relating to the new situations may be needed in determining the claim. This may justify the case for the insurer to request further information more than once. 14.3.4 The burden of proof Article 22 of the Insurance Law requires the insured to provide the insurer with relevant evidence and information in respect of the insured event and the loss, which may facilitate and enable the insurer to ascertain the nature and the cause of the insured event and extent of the loss. If the relevant evidence and information are sufficient for the insurer to determine the loss, then the insurer may not require any further proof of loss, but should proceed with the claim and eventually settle the claim in accordance with the contract. If the insured is not satisfied with the claim, he may resort to arbitration or litigation. To win a case, the insured must provide proof to support his claim. Then the question arises of on whom the burden of proof lies. In considering this question, we must distinguish: proof of loss, and proof that the loss falls within an exception, for the burden varies accordingly. This is considered below. (a) Proof of loss According to art. 64 of the Civil Procedure Law,29 and art. 2 of Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures,30 it is the duty of a party to an action to provide evidence in support of his allegations. If the party

29  The Civil Procedure Law of the People’s Republic of China was adopted at the 4th Session of the Seventh National People’s Congress on 9 April 1991, promulgated by Order No. 44 of the President of the People’s Republic of China on 9 April 1991, and became effective on the same day as promulgation. 30  Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures were passed at the 1201st meeting of the Judicial Committee of the Supreme People’s Court on 6 December 2001, and were promulgated for implementation as of 1 April 2002.

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cannot produce evidence or the evidence produced cannot support the facts on which his own allegation is based, the party shall bear the unfavourable consequences.31Accordingly, the burden of proving that the loss was caused by the insured event lies on the insured; and unless he discharges the burden, the claim may fail. He need not, however, conclusively prove the cause of the loss; it is sufficient if he can establish a prima facie case of loss by the insured event. Once he has done this, the burden of proof is discharged; he is not, as a general rule, bound to go further and prove that the loss is not covered by an exception. When the insured has proved a prima facie case of loss under the policy, the burden of proof shifts to the insurer, who must then prove that the loss falls within an exception. If the insurer fails to produce such evidence, it has not discharged the burden of proof, and the insured accordingly succeeds in his claim. (b) Proof that the loss falls within an exception It is for the insurer to prove, in the event of the subject matter of insurance being damaged or destroyed, that it is relieved from liability under its contract by the operation of an exception. As discussed in Chapter 9, “the Insurer’s pre-contractual duty of good faith,” where the insurer attempts to avoid liability for a claim by invoking an exception clause, in addition to proving that the risk or the cause of the risk falls within an exception, the insurer must prove that it clearly explained the exception clause to the insured prior to the conclusion of the contract; otherwise the exception clause is invalid.32 If, however, the insurers discharge the burden of proof laid on them, the burden shifts back to the insured and he must prove either that his claim falls within an exception to that exception, or that, in the circumstances, the exception has no application, e.g. by reason of the insurers’ failure in clearly explaining the exception clause to the insured at the time of the contract, or that, if the exception does apply, it does not apply to the whole of the loss. (c) Allocation of burden of proof by courts In the situation where there are no explicit statutory provisions and it is not possible to define who shall be responsible for producing evidence according to Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures 2001 or other judicial interpretations, the People’s Court may allocate the burden of proof according to the principle of fairness and the principle of honesty,33 and taking into account factors such as the ability of the insured or the insurer to produce evidence.34 For example, it is generally the case that the insured should provide the original copy of the insurance policy when making a claim, but if the insured cannot find the policy due to

31 Article 2 of Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures provides: “The parties concerned shall be responsible for producing evidence to prove the facts on which their own allegations are based or the facts on which the allegations of the other party are refuted. Where any party cannot produce evidence or the evidence produced cannot support the facts on which the allegations are based, the party concerned who bears the burden of proof shall bear any unfavourable consequences.” 32  The Insurance Law, art. 17. 33  Ibid, art. 5. 34  Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures, art. 7.

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misplacement, the court will order the insurer to provide a copy of the policy. If the insurer refuses to do so, the insurer should assume the unfavourable consequences.35 14.4 Practical procedures for making a claim When an insured event occurs and gives rise to losses, the insured will make a claim for an insurance payment under the policy. Usually, insurers set out the procedures for the insured to follow in making a claim on the website of the insurance company. Let’s take the PICC’s procedures as an example to show what steps the insured should follow in making a claim.36 First, the insured must notify the insurer of the occurrence of the insured event by telephone on 95518, or by email or any other way.37 The claim-handling department will ask the insured about the circumstances of the happening of the insured event, assist in arranging mitigation measures to avoid further loss or to rescue injured persons, advise the insured to call the police or hospital in the case of an emergency, and also inform the insured of the next step for him to take. Second, the insured must take necessary and reasonable steps to mitigate the loss and avoid further loss, and also to protect the original scene of the site of the accident. At the same time, the insurer may send employees or ask appraisers to come to the site to inspect the insured subject matter and the circumstances under which the insured event occurred, to investigate the nature and cause of the insured event and the extent of the loss, and also give the insured a copy of the notice of how to make a claim. Third, the insured will fill in a claim form with or without the assistance of the insurer or its agent, and provide the insurer with the documents and materials in relation to the claim which are listed in the insurance policy and in the notice of how to make a claim. The insurer will check the claim form and the documents after receiving them, and may request the insured to supply additional evidence or information about the claim if the insurer finds the documents which have been submitted are insufficient. After receiving the claim and the relevant documents, the insurer will determine the claim and pay the insurance money under the policy in the manner specified in arts 23, 24 and 25 of the Insurance Law, which will be considered in Chapter 15, “Settlement of claims.” 14.5 The limitation period A limitation period is the period of time within which an insured or beneficiary can bring a lawsuit against the insurer, if the insurer does not process the insured’s claim in a manner satisfactory to the insured or the beneficiary. The limitation period

35  In Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures, art. 75 stipulates: “There is evidence to show that one party holds the evidence but refuses to provide the evidence without good reason, if the other party claims that the content of the evidence is against the evidence holder, it can be presumed that the claim is valid.” 36  See the website of the People’s Insurance Company of China for the claim service at accessed in February 2016. 37 Ibid.

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starts running from the moment the insured knows or ought to know of the facts giving rise to his claim. In art. 26 of the 1995 version and art. 27 of the 2002 version of the Insurance Law, it was provided: “(1) The right of the insured or the beneficiary to claim insurance moneys from the insurer under insurance other than life insurance shall be extinguished if it is not exercised within two years from the date on which the insured or the beneficiary became aware of the occurrence of the event insured against. (2) The right of the insured or the beneficiary to claim insurance moneys from the insurer under life insurance shall be extinguished if it is not exercised within five years from the date on which the insured or the beneficiary became aware of the occurrence of the event insured against.” The article prevents the insured from making a claim after two years (for non-life insurance) or five years (for life insurance) from the date when the insured became aware of the occurrence of the insured event. So the two- and five-year periods can be regarded as limitation periods for making a claim. The China Insurance Regulatory Commission (CIRC) interpreted the limitation period for making a claim as provided in art. 26 of the Insurance Law 1995 as equivalent to the limitation period for filing a lawsuit. In replying to the inquiry made by China Pacific Insurance Company about the limitation period as provided in art. 26 of the Insurance Law 1995, the CIRC expressed the view that “The limitation period for making a claim as stipulated in art. 26 of the Insurance Law 1995 is a kind of limitation period for a right to extinguish. In other civil and commercial laws in our country, a similar question is generally defined as the limitation period for filing a lawsuit (a kind of limitation period for a right to extinguish), so in judicial practice, the limitation period for making a claim is often treated as a limitation period for filing a lawsuit. To say the least, even if it is not considered as a limitation period for filing a lawsuit, as a kind of limitation period for a right to extinguish, it is a mandatory provision of the law, the parties shall not exclude its application or modify it by an agreement.”38

The 2009 version of the Insurance Law makes it clear that the two- or five-year period refers to the limitation period for filing a lawsuit. Article 26 of the Law provides: “(1) For insureds and beneficiaries of the insurance contracts other than life insurance, the period of prescription for filing a lawsuit in relation to claims for indemnity payment or insurance benefits is two years, starting to run from the date when the insured or the beneficiary knows or ought to know of the occurrence of an insured event. (2) For insureds and beneficiaries of life insurance, the period of prescription for filing a lawsuit in relation to claims for indemnity payment or insurance benefits is five years, starting to run from the date when the insured or the beneficiary knows or ought to know of the occurrence of an insured event.”

According to art. 26, the limitation period is two years for indemnity policies and five years for life policies, starting to run from the date when the insured or the beneficiary knows or ought to know about the occurrence of the insured event. After expiration of two years (or five years for life insurance), the insured is barred from suing the insurer.

38 The CIRC’s Reply to the Questions Concerning the Understanding of the Limitation Period for Claims in the Insurance Law, Bao Jian Fu [2000] No. 304 (see accessed in February 2016).

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In comparing the 1995 and 2009 versions of the Insurance Law in respect of the limitation period, although it is clear in the 2009 version that the two- or five-year period refers to the limitation period for filing a lawsuit, the insured must make a claim well before the expiration of the limitation period, because if the insured makes a claim at a time close to the end of the limitation period but the insurer rejects the claim after the limitation period, then the insured is barred from filing a lawsuit against the insurer’s refusal of the claim, no matter how unfair or unreasonable the refusal may be. Thus it is advisable that an insured should make a claim well before the expiration of the limitation period. In practice, insurance policies usually contain a clause which specifies the limitation period. For example, in the Household Property Insurance Policy of the Ping An Insurance Company of China, clause 33 states that “the period of prescription for the insured to file a lawsuit in relation to a claim for indemnity payment is two years, running from the date when the insured knows or ought to know of the occurrence of the insured event.” It must be pointed out that art. 26 of the Insurance Law is a compulsory provision; insurers are not permitted to contract out of the statutory limitation periods. In China Industry and Commercial Bank Guangzhou City Dade Lu Branch v Hua An Property Insurance Company Guangdong Branch,39 a clause in the contract stated that the insured must make a claim within six months from the date of the occurrence of the insured event; otherwise, the insured was deemed to have waived his right to make the claim. The court held that the clause was invalid, because it was in contrast to the two-year limitation period for the insured to make a claim as provided in art. 27 of the Insurance Law 2002. The insurer was not allowed to change the statutory limitation period by contractual terms. The CIRC also expressed the same view that the limitation period is a mandatory provision of the law; the parties shall not exclude its application or modify it by an agreement.40 Where insurance contracts contain a term with a time limit for making a claim, the time limit should not be treated as the limitation period, but only a contractual obligation. If the insured is in breach of the obligation, i.e. making a claim after the time limit, the insured’s liability for the breach should be determined by the actual consequence of the breach, and it does not necessarily lead to the loss of the right to make the claim or a waiver of the right.41 For liability insurance, the starting time for the limitation period to run is the time when the insured knows or ought to know that his liability to a third party has been confirmed.42 For example, in Mr Xue v The Insurance Company,43 Mr Xue drove his taxi and hit Mr Wen and his son on a bicycle on 3 October 2007, resulting

39 This case was decided by the Intermediate People’s Court, Guangzhou City, Guangdong Province, Civil Court Judgment (2006) No. 89 ( accessed in February 2016). 40 The CIRC’s Reply to the Questions Concerning the Understanding of Limitation Period for Claims in the Insurance Law, Bao Jian Fu [2000] No. 304 (see accessed in February 2016). 41 Ibid. 42  The Guidance of HPC of Guangdong Province, art. 18. 43 This case was decided by the Intermediate People’s Court, Taiyuan City, Shanxi Province, Civil Court Judgment (2010) No. 668, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2011) vol. 3, p. 610.

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in Mr Wen’s minor injury and his son’s serious injury. The traffic police found that Mr Xue and Mr Wen should take equal responsibility for the accident. The court made the judgment, on 20 February 2009, that the insurer should pay Mr Wen ¥8,247 and Mr Wen’s son ¥111,752, and Mr Xue should pay Mr Wen’s son ¥92,917. The insurer paid the amounts to Mr Wen and Mr Wen’s son. After that, Mr Xue sued the insurer for the amount of ¥92,917 under the third party liability policy on 16 January 2010. The trial court made the judgment for the insured. The insurer then appealed, arguing that according to the Insurance Law, the limitation period for non-life insurance is two years, running from the date when the insured knows or ought to the occurrence of the insured event. From the date of the occurrence of the road accident to the date when the insured filed a lawsuit, more than two years had passed. The limitation period expired. Mr Xue argued that the civil liability for the road accident was not decided until the court’s judgment on 20 February 2009. Only on that day was the insured’s liability determined. So from 20 February 2009 to 16 January 2010, the two-year limitation period had not expired. The appeal court held that (1) the occurrence of the road accident was not equivalent to the occurrence of the insured event under the liability insurance; (2) the insured event was the insured’s liability to the third party, and only when the insured’s liability to compensate the third party was determined, was the insured event said to have occurred; the insured’s liability was confirmed on 20 February 2009, the insured’s suit for the amount of ¥92,917 was made on 16 January 2010, and it did not exceed the two-year limitation period; and (3) the insurer was liable for paying the insured the amount of ¥92,917. The High Court of Guangdong Province takes the same view in stipulating that “the limitation period for liability insurance starts to run from the date when the insured knows or ought to know that his liability has been confirmed, unless otherwise provided in the contract.”44 The CIRC also takes this approach in stating that for liability insurance, the insured event is the third party’s request of the insured to bear legal liability. The date of the occurrence of the insured event is the date when the third party requests the insured to bear the legal responsibility.45 For the insurer’s right to exercise subrogation, the limitation period starts to run from the date when the insurer acquired rights of subrogation.46 This point is discussed in Chapter 17, “Subrogation.” 14.6 Conclusion This chapter presents an overall picture of making a claim under the Insurance Law and under an insurance policy, with a particular focus on the discussion of the insured’s duties in making a claim, i.e. the duty to notify the insurers of the happening of an insured event, and the duty to furnish them with evidence and information about the losses. The relevant issues, such as the burden of proof, limitation period

44  The Guidance of the HPC of the Guangdong Province 2011, art. 18. 45  The CIRC’s Reply to the Questions Concerning Limitation Period for Claims, Bao Jian Fu [1999] No. 256 (see accessed in February 2016). 46 The Second Interpretation of the Supreme People’s Court on Certain issues Concerning the Application of the Insurance Law of the People’s Republic of China, art. 16.

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for filing a lawsuit in relation to a claim, and practical procedures for making a claim have also been discussed. A major deficiency in art. 22 of the Insurance Law is that no consequences are provided for the insured’s failure to provide insurers with evidence and information which are relevant in ascertaining the nature, cause and extent of loss. In practice, some insurance policies specify the consequences of the insured’s non-compliance with the duty to provide the insurer with evidence and information such as that where the insured has failed to comply with the duty to provide claim materials as requested, and as a result, the insurer cannot ascertain the extent of the loss, the insurer shall not be liable for making indemnity payments in respect of the portion that cannot be ascertained. It is suggested that art. 22 of the Insurance Law be amended to include a provision to the effect as mentioned above.

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CHAPTER 15

Settlement of claims

15.1 Introduction In Chapter 14, we discussed the conditions and procedures for making a claim. Once the insured has submitted a claim, together with relevant evidence and documents, to the insurers, the insurers must then deal with the claim in the manner required by the Insurance Law and the insurance contract. An insurance contract is a contract whereby the insured pays a premium to the insurer in return for the insurer’s promise to pay the insured where the event insured against occurs. Thus the insured would reasonably expect that his claim for insurance payments should be handled and paid by the insurer promptly and fairly. The Insurance Law characterises an insurer’s primary obligation as a duty to pay valid claims in a timely manner, and also sets out time limits for the insurer to meet in order to fulfil the requirement of paying claims “in a timely manner.” In contrast, English law characterises an insurer’s primary obligation as a duty to “hold the insured harmless” against the insured event and there are no damages for late payment of insurance claims. This chapter considers the relevant rules in relation to claim examination and settlement as provided in arts 23, 24 and 25 of the Insurance Law, and examines the insurer’s primary obligation of paying valid claims in a timely manner and the consequences for non-compliance with the obligation.1 A brief discussion is also given on the English law and the Law Commissions’ recommendations for reform of the law in respect of the nature of the insurer’s obligation and the remedies available to the insured, and also the new rules in the Enterprise Act 2016 (UK). 15.2 The insurer’s duty to pay valid claims in a timely manner Article 2 of the Insurance Law provides: “For the purposes of this law, the term ‘insurance’ shall refer to a commercial insurance act whereby a proposer pays a premium to an insurer in accordance with a contract while the insurer2 assumes liability for payment of insurance moneys for property losses as a result of the occurrence

1  See Zhen Jing, “The Insurer’s Primary Obligation to Pay Valid Claims in a Timely Manner” [2015] JBL 37. 2  Article 10 of the Insurance Law provides: “The term ‘insurer’ shall refer to an insurance company that concludes an insurance contract with a proposer and assumes liability for payment of insurance moneys.”

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of an event specified in the contract, or when the insured dies, becomes injured or disabled, falls ill or reaches the age or time limit as specified in the contract.” It is clear that an insurer’s primary obligation is to pay the insured for his loss suffered, namely, to pay the insurance money where the insured event occurs and causes losses to the insured. The Insurance Law requires an insurer not only to pay valid claims but also to perform this obligation in a timely manner, and sets out time limits for assessing a claim,3 for rejecting the claim,4 for paying the claim5 and for making preliminary payment.6 It is appropriate here to consider these time limits in detail. 15.2.1 Making a decision on a claim within 30 days Article 23(1) of the Insurance Law provides: “The insurer shall, after receipt of a claim for indemnity or insurance benefits from the insured or the beneficiary, determine the matter in a timely manner; if the claim is complicated, the insurer shall make a determination within 30 days, unless otherwise agreed on in the contract. The insurer shall inform the insured or the beneficiary of the result of the determination; where the claim is covered, the insurer shall fulfil its obligations to pay indemnity or insurance benefits within 10 days after reaching an agreement on the amount of indemnity payment or insurance benefits with the insured or the beneficiary. Where there are provisions in the insurance contract as to the period within which indemnity or the payment of the insurance benefits should be effected, the insurer shall fulfil its obligation accordingly.” The insurer is obliged to deal with claims in a timely manner, but it may sometimes be difficult to determine how long the insurer may take to handle a claim in order to satisfy the requirement of handling claims “in a timely manner,” for dealing with a simple claim may take less time than a complex one. The 2002 version of the Insurance Law required the insurer to handle claims in a timely manner, but did not set out a time limit for making a decision on a claim.7 This caused difficulties in practice.8 Where there was no time limit, it would be difficult to judge whether or not the claim was handled “in a timely manner.” Different courts interpreted the term “in a timely manner” differently, giving rise to uncertainty and inconsistency. So in the 2009 version of the Insurance Law, a 30-day time limit for making a decision on a complex claim was added in art. 23. If the claim is complex, the insurer is required to make a decision within 30 days of receiving the claim. By implication, the insurer must make a decision in less than 30 days for simple claims. If a clause in an insurance contract extends the 30-day time limit, it is very unlikely that the courts would enforce such a clause, because a contract clause which exempts the

3  The Insurance Law, art. 23. 4  Ibid, art. 24. 5  Ibid, art. 23. 6  Ibid. art. 25. 7  Article 24 of the Insurance Law 2002 provides: “The insurer shall, after receipt of a claim for indemnity or insurance benefits from the insured or the beneficiary, determine the matter in a timely manner. The insurer shall inform the insured or the beneficiary of the result of the determination.” 8  This will be discussed later.

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insurer’s obligations that the insurer should have borne according to law shall be invalid by virtue of art. 19 of the Insurance Law.9 A question which is unclear is what cases can be regarded as complex ones. It is suggested that to determine whether or not a case is a complex one, the insurer should take into account several factors, such as the amount claimed, the need for more information and further investigation, the need to report the claim to the head office of the insurance company10 and so on. In practice, insurance contracts usually contain a clause stipulating the time period for handling claims. Most of such clauses are simple restatements of art. 23 of the Insurance Law.11 But some contracts contain individually negotiated clauses which specify the time limit for handling claims. For instance, in ChengYang Transport Company v Ping An Insurance Company,12 a clause in the contract stated: “Upon receiving notice of an accident, the insurer shall determine the loss in one working day where the loss is less than ¥5000, or no more than three working days for cases where it is difficult to determine the loss. If the insurer does not come to the site of the accident to investigate the loss and fails to make a determination as to the loss within 48 hours after receiving the notice of the accident, the evidence provided by the insured, such as photographs of the damaged vehicle, a list of damaged property, and receipts for repair costs should be used as the basis for insurance payment.” The People’s Insurance Company of China (PICC) clearly sets out time limits for examining motor claims on its website.13 The time taken from inspecting the subject matter to ascertaining the loss varies according to the amount of loss: within 1 working day for amounts less than ¥5,000; 3 working days for ¥5,000–¥30,000; 5 working days for ¥30,000–¥50,000; and 15 working days for more than ¥100,000. For some special types of motor vehicle, the insurer will discuss and reach an agreement with the insured about the time limit. The time taken from receiving all relevant evidence and documents in relation to the claim to the completion of the determination of the claim also varies according to the amount of loss and personal injuries or death caused by the insured peril: within one working day for amounts less than ¥10,000 and no personal injury or death; three working days for ¥10,000–¥30,000 and no personal injury or death; five working days for ¥30,000 –¥50,000 and no personal injury or death; seven working days for more than ¥50,000 and no personal injury or death; and seven working days for a claim which involves personal injury or death. The insurer must make a decision on a claim within these time limits.

  9  Article 19 of the Insurance Law provides: “The following terms and conditions in an insurance contract concluded by adopting the standard clauses provided by the insurer shall be invalid: (i) those that exempt the insurer of the obligations that the insurer should have borne according to law or that aggravate the obligations of the proposer and the insured; and (ii) those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law.” 10  In China, a claim-handling department is usually required to report a claim which exceeds a certain amount of money to the Head Office of the Insurance Company. 11  For example, see clause 17 of the All Risk Property Insurance Contract, Tai Ping Insurance Company of China, 2009. 12  Qingdao Shinan People’s Court, Court Judgment (2010) No. 20243. See also Zhang Shaojie v Pingan Insurance Co., the People’s Court of Pingdue City, Court’s Judgment (2010) No. 2831. 13 See the website of the PICC, accessed in February 2016.

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As to the date when the 30-day period should start to run, the Insurance Law is silent. The Supreme People’s Court (SPC) has provided a clear rule in respect of the starting point of the 30-day period in its Second Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China (hereinafter, Interpretation II).14 Paragraph 1 of art. 15 of Interpretation II provides: “the 30-day period for the assessment of a claim as stipulated in art. 23 of the Insurance Law starts to run from the date on which the insurer has for the first time received the claim and the relevant evidence and documents from the proposer, the insured, or the beneficiary.” This provision is logical and fair. It would be unreasonable for the 30-day period to run from the date of the occurrence of the loss, for the claim has not been made and the insurer does not have any information and evidence about the loss. When an insurer sits down to check the claim documents during the 30-day period, it is possible that further evidence or information may be needed for his assessment of the claim. The law requires the insurer to notify the insured, in one comprehensive list, of all the additional documents and evidence it needs to assess a claim, but does not allow the insurer to request information on a piecemeal basis.15 If requested by the insurer, the insured needs to obtain such information. The time taken for the insured to obtain the information may vary and sometimes may exceed the 30-day period. If the time taken by the insured is included in the 30-day period, the insurer would be put in a position that it cannot control the 30-day time limit itself. It is submitted that the insurer should not be penalised for breach of the 30-day period deadline due to the insured’s delay in supplying such further information. A question can then arise whether or not the time taken by the insured should be deducted from the 30-day period. The SPC has answered this question in providing that “the People’s Courts should uphold the insurer’s request to deduct the time period (from the 30-day period for the assessment of a claim) for which the insurer requests the insured to supply further evidence and documents. The period to be deducted begins from the date when the proposer, the insured or the beneficiary has received the insurer’s notice for such request which was made in accordance with art. 22 of the Insurance Law to the date when the insurer has received such relevant evidence and documents from the proposer, the insured or the beneficiary.”16 It is now clear that the insurer has a 30-day period at its disposal for assessment of a complex claim, and any time taken by the insured to obtain further evidence and information can be deducted from this 30-day period.

14  Interpretation II was passed by the Judgment Committee of the Supreme People’s Court on 6 May 2013 and became effective on 8 June 2013. 15  Article 22(2) of the Insurance Law provides: “Where the insurer, based on the provisions of the insurance contract, considers the relevant evidence or information supplied by the insured incomplete, the insurer shall, in a timely manner, advise the proposer, the insured or the beneficiary, once and for all, to provide additional evidence or information.” 16  Interpretation II, art. 5(2).

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15.2.2 Giving a rejection notice within three days after determination of a claim If the loss is not covered under the policy, the insurer is obliged to send a rejection notice to the insured within three days after determination of the claim, specifying reasons for the rejection. This obligation is stipulated in art. 24 of the Insurance Law, which provides: “After making a determination according to the provisions in art. 23 therein, where the claim is not covered, the insurer shall, within three days from the date the determination is made, send to the insured or the beneficiary a notice rejecting indemnity or payment of insurance benefits and specifying reasons therefor.” Following the Insurance Law, the Shenzhen Insurance Regulatory Bureau published a regulatory document on the management of rejections of claims,17 which stipulates that the notice of rejection of a claim must include the following contents: (1) the facts and reasons for the rejection, including the facts which were obtained through investigation and sufficiently influenced the insurer’s decision as to the rejection of the claim, and the policy clauses and relevant laws which were invoked by the insurer to reject the claim; (2) the channels for the insured to make a complaint to the insurer, including a telephone number and the name of the contact person; and (3) the notice must be stamped by the seal of the insurance company. If an insurer does not make a decision on the claim within 30 days and does not send a rejection notice to the insured in another 3 days, the insurer would lose his defence to the claim on day 34 and should be deemed to have accepted liability for the loss. This is demonstrated in the case of Mr Guo v The Insurance Company.18 Mr Guo effected a critical illness policy on his wife on 27 June 2009, under which the insurer was liable to pay her ¥30,000 if she was diagnosed with a serious disease (such as cancer, heart disease, etc.). She suffered a heart attack on 13 December 2009 and died in the hospital on 15 December 2009. Guo notified the insurer of such event when his wife was treated in the hospital and made a formal claim in January 2010. The insurer did not respond to the claim by either accepting liability or rejecting it by sending a notice to the insured within 33 days of receiving the claim. The court held that the insurer lost its defence to the claim on day 34, so it was liable to pay the insurance money. The court’s decision is similar to the approach in art. 6:103 of the Principles of European Insurance Contract Law (PEICL) which states that the insurer is deemed to have accepted the claim if it does not reject it or defer acceptance of a claim by written notice giving reasons for its decision within one month after receipt of the relevant documents and other information.19 This approach is fair to the insured and has the advantage of certainty.

17  “Notification Concerning Management of Rejection of Insurance Claims” by Shenzhen Insurance Regulatory Bureau China Insurance Regulatory Commission, Shen Bao Jian Fa [2012] No. 89, published on 4 September 2012. 18  Gansu Province Jiu Quan City Fuzhou District People’s Court, Civil Judgment (2010) No. 166. This case is reported in the Annual Report of  Typical Insurance Cases (Volume III), edited by China Insurance Society (Law Press China 2011) pp. 255–57. 19 Article 6:103 of the PEICL provides: “(1) The insurer shall take all reasonable steps to settle a claim promptly. (2) Unless the insurer rejects a claim or defers acceptance of a claim by written notice giving reasons for its decision within one month after receipt of the relevant documents and other information, the claim shall be deemed to have been accepted.”

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15.2.3 Making a payment within 10 days after reaching an agreement on the amount of loss If the claim is covered under the policy, the insurer should pay the insurance money within 10 days after reaching an agreement with the insured on the amount of loss, in accordance with art. 23 of the Insurance Law: “where the claim is covered, the insurer shall fulfil its obligations to pay indemnity or insurance benefits within 10 days after reaching an agreement on the amount of indemnity payments or insurance benefits with the insured or the beneficiary.20 Where there are provisions in the insurance contract as to the period within which indemnity or the payment of the insurance benefits should be effected, the insurer shall fulfil its obligation accordingly.” If the insurer fails to pay the insurance money within 10 days after reaching the payment agreement, he is liable to pay damages from day 11. This can be explained by the case of GuangdongWenshi Food Company v People’s Property Insurance Company of China Guangzgou Branch.21 The insured effected a marine cargo insurance policy to cover 800 tons of fish powder. At the destination port, the goods were found to have been damaged during the period of carriage. The two parties reached an agreement on the amount of payment on 6 December 2004, but the insurer delayed in making the payment. In March 2005, the insured sued for the agreed sum of ¥824,413 and interest (¥11,616) for a bank loan for the period from 6 December 2004 to 28 February 2005. The court made judgment on 24 June 2005, holding that the interest should be calculated from 17 December 2004 (11 days after the payment agreement was made) to 28 February 2005. It is submitted that the court’s decision on the end date for calculation of interest is incorrect. The correct date should be the date when the insurance payment was made. The insurer’s statutory duty to pay within 10 days after an agreement for payment is made is subject to contracts which usually contain a clause stipulating the time period for payment of insurance money. For instance, in Cheng Yang Transport Company v Ping An Insurance Company,22 a clause in the contract set out the time limit for payment. As per the clause, the insurer must pay within 1 working day for amounts claimed less than ¥10,000, 3 working days for ¥10,000–¥50,000, and 10 working days for more than ¥50,000. The insurer must fulfil its contractual duty to pay the insurance money according to the clause. It may be possible for an insurer to extend the 10-day period by a clause in the standard form of contract, but it is very unlikely that the courts would enforce such a clause, for the reasons explained earlier.23

20 The PEICL sets a time limit of one week for payment of insurance money. Article 6:104 (3) provides: “Payment of insurance money . . . shall be made no later than one week after the acceptance and quantification of the claim or part of it, as the case may be.” 21 Guangzhou Maritime Court, Civil Judgment (2005) No. 103 ( accessed on 13 July 2013). 22  Qingdao Shinan People’s Court, Court Judgment (2010) No. 20243. See also Zhang Shaojie v Pingan Insurance Co., the People’s Court of Pingdue City, Court Judgment (2010) No. 2831. 23  The Insurance Law, art. 19.

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15.2.4 Preliminary payment within 60 days of receipt of claim documents As mentioned earlier, the insurer is required to make a decision within 30 days of receiving the insured’s claim and relevant documents. Sometimes, the insurer may request further information or/and evidence to determine whether the loss is covered or the amount of loss. The amount of time taken for the insured to acquire such evidence can be deducted from the 30-day period.24 In some complex cases, however, the insured may take many days (or even months) to obtain the requested evidence for the insurer’s determination of the amount of loss. Under these circumstances, according to art. 25 of the Insurance Law,25 the insurer must first make a preliminary payment on the basis of evidence and information available to it within 60 days of receipt of the claim and the relevant evidence, and it will pay the difference accordingly after receiving further information based on which the final amount of insurance payment is determined.26 This rule of preliminary payment within 60 days may inhibit the insurer’s delay in making a payment on the ground that it cannot determine the exact amount of loss on the basis of the evidence available. If the insurer and insured cannot reach an agreement on the amount of payment beyond 60 days, the insured is likely to sue or resort to arbitration for the insurer’s delay in making a payment. For example, in Lei Jun Yan v Behai Property Insurance Company Ltd, Xuchang Branch,27 the insured car was stolen on 8 June 2009. The insured claimed on 9 June 2009. The two parties could not reach an agreement as to the amount of payment. The insurer did not make any payment to the insured, so the insured sued on 29 December 2009. The insurer was held liable to pay the insurance money and interest. The interest ran from the date when the claim should have been paid (on 9 August 2009) to the date when the insurance payment was made (within five days after the court’s judgment which was made on 10 May 2010). The court’s award of interest to the insured was based on art. 25 of the Insurance Law which requires the insurer to make a preliminary payment within 60 days after receiving the claim and relevant documents. In this case the insurer did not make a preliminary payment and was thus in breach of its duty on 9 August 2009 (day 61 after the claim was made on 9 June 2009); it should be liable for interest arising from the late payment of the claim. Delay in performing a contractual obligation can only occur when the time limit for performance has passed. As discussed above, the time limits for the insurer to perform his duties are determined by arts 23, 24 and 25 of the Insurance Law. If an insurer fails to handle claims or pay valid claims within the time limits, it breaches these statutory duties and is thus obligated to pay compensatory damages resulting

24  Interpretation II, art. 25(2). 25  Article 25 provides: “If the amount of indemnity payment or insurance benefits cannot be determined within 60 days of receipt of the claim for indemnity payment or insurance benefits and the evidence and information relevant thereto, the insurer shall effect payment of the amount determinable with the evidence and information available; the insurer shall pay the difference accordingly after the final amount of indemnity payment or insurance benefits is determined.” 26 The PEICL also requires an insurer to make a preliminary payment. Article 6:104(2) provides: “Even if the total value of a claim cannot yet be quantified but the claimant is entitled to at least a part of it, this part shall be paid or provided without undue delay.” 27  Henan Province Xuchang City Intermediate People’s Court, Judgment on 10 May 2010 ( accessed on 7 October 2013).

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from its late payment or unreasonable rejection of valid claims.28 In the following part, two questions about the effect of late payment are considered: first, how to determine damages; and second, what kind of damages should be available to the insured who has suffered loss as a result of the late payment of a claim. 15.3 Compensatory damages for the insurer’s late payment of valid claims It is clear that the Insurance Law imposes a statutory duty on the insurer to pay damages for consequential loss caused by the insurer’s delay in examination of claims or in making payment of valid claims. Article 23(2) of the Law clearly sets forth: “Where the insurer fails to fulfil its obligations as prescribed in the preceding paragraph in a timely manner, the insurer shall compensate the insured or the beneficiary for any damages incurred therefrom, in addition to payment of the amount insured.” However, the Insurance Law does not provide any rule for dealing with the remedy of damages, so the Contract Law 1999 can be referred to for the purpose of working out solutions in respect of damages for late payment of insurance proceeds.29 15.3.1 Determination of damages The general rule under the Contract Law is that if one party breaks a contract, the other party may claim damages for the actual loss suffered, provided that it was foreseeable at the time the contract was entered into. This is provided in arts 112 and 113 of the Contract Law, which concern the liability for damages for breach of contractual obligations and determination of damages. Article 112 provides: “Where a party fails to perform his contractual obligations or where his performance of the contractual obligations is not in conformity with the agreement, and if, after performing the obligations or taking remedial measures, the other party has other losses, damages shall be paid.” Article 113 sets forth the general rule on contractual damages, providing that “the amount of damages shall be equal to the loss sustained as a result of the breach, including the benefits that could have been obtained after the performance of the contract, but shall not exceed the loss that the breaching party foresaw or ought to have foreseen at the time of the conclusion of the contract as a possible consequence of the breach of contract.” This general rule under the Contract Law is subject to three main limitations. The first one is stated in art. 113 of the Contract Law, whereby “the amount of damages . . . shall not exceed the loss that the breaching party foresaw or ought to have foreseen at the time of the conclusion of the contract as a possible consequence of the breach of contract.” This principle of foreseeability in Chinese Contract Law is similar to

28  Paragraph 2 of art. 23 of the Insurance Law 2009 provides: “Where the insurer fails to fulfil its obligations as prescribed in the preceding paragraph in a timely manner, the insurer shall compensate the insured or the beneficiary for any damage incurred therefrom, in addition to payment of the amount insured.” 29  In the Chinese legal system, special law prevails over general law. The Insurance Law is special law as compared to the Contract Law. For matters the Insurance Law covers, the Insurance Law prevails. For matters the Insurance Law does not deal with, the Contract Law operates.

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the rules originally laid down in the English case of Hedley v Baxendale.30 The issue of causation concerns the relationship between the fact of breach of contract and the loss. To ascertain the causation, the Contract Law follows the rule of foreseeability, which requires that the damages should only be awarded if they are the probable consequences of the breach and such consequences are foreseeable by the parties at the time of the contract. The rule of foreseeability functions as a gauge to help keep the damages within a certain boundary. Under this rule, causation would exist when the damages that are caused by the breach are foreseeable, and the party in breach is only responsible for the damages that could be reasonably foreseen. There is no test in the Contract Law to determine foreseeability. It is normal for the courts to determine what damages are foreseeable. The injured party is required to prove the fact of breach, the loss, and the connection between the breach and the loss. The approach generally used by the courts is whether the damages are the reasonable and natural outcome of the breach that would be contemplated by an ordinary person in the same or similar position at the time of the contract. If, however, the loss arises from special circumstances and would not ordinarily occur, the party in breach is liable only if it knew or ought to have known of the special circumstances at the time of the contract. Those special circumstances may include arrangements entered into by the injured party which may give rise to unusual profit or penalty.31 The second limitation is that the injured party must prove actual loss with certainty. Although it is not stated in the Contract Law, the limitation of proof is a corollary of the requirement that a claimant bear the burden of proving the facts in support of his claim.32 A claim for contractual damages cannot succeed unless the injured party proves his loss with reasonable certainty. In the insurance context, if the insured cannot show sufficient evidence for consequential loss, the court would not support the insured’s claim for that loss. This can be demonstrated by the case of People’s Insurance Company of China, Yaoping Branch v Chaozhou City Huafeng Petroleum Product Storing Company.33 Huafeng Petroleum Product Storing Company effected a comprehensive property insurance policy to cover the dock and petroleum product storage facilities for a total insured amount of ¥130,000,000. A typhoon caused severe damage to the dock and the facilities. The insured and the insurer could not reach an agreement on the amount of loss. The insurer refused to pay insurance money for 28 months after the occurrence of the insured event. The insured sued for payment of the loss plus damages for the consequential loss of profit (¥11,050,000) that was caused by the reduced storage capacity of 6,500 tons of petroleum per month, which was equivalent to a net profit of ¥50 per ton 30  (1854) 9 Exch 341. 31  For more, see Mo Zhang, Chinese Contract Law: Theory and Practice (Martinus Nijhoff Publishers 2006) p. 307. 32  Article 64 of the Civil Procedure Law of the People’s Republic of China provides: “It is the duty of a party to an action to provide evidence in support of his allegations. If, for objective reasons, a party and his agent ad litem are unable to collect the evidence by themselves or if the People’s Court considers the evidence necessary for the trial of the case, the People’s Court shall investigate and collect it. The People’s Court shall, in accordance with the procedure prescribed by the law, examine and verify evidence comprehensively and objectively.” 33  Guangdong Province High People’s Court, Civil Judgment (2004) No. 22 ( accessed on 12 July 2013).

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per month for 34 months (28 months plus 6 months for reconstruction of the dock and the facilities). It was estimated that it would take six months for the reconstruction, with a total cost of ¥3,428,000. The trial court held that (1) the insurer was liable to pay the total cost of ¥3,428,000 for the reconstruction of the dock; and (2) according to art. 24(2) of the Insurance Law 2002,34 the insurer was also liable to pay for the consequential loss as a result of the reduced storage capability for petroleum products, but due to the fact that the insured did not give sufficient evidence for the loss of profit and the time-bar for providing such evidence, this part of the claim was not upheld. The insurer appealed as to the amount payable for the cost of reconstruction, but the appeal was rejected by the Guangdong High People’s Court. The third limitation is that the injured party must take reasonable steps to mitigate the loss. Mitigation is the rule to preclude the recovery of damages that could have been avoided with reasonable efforts and without undue risk, burden or humiliation.35 The duty of mitigation is recognised both in the Insurance Law36 and the Contract Law37 and applied to the injured party. Article 57 of the Insurance Law provides: “Following the occurrence of an insured event, the insured is obliged to take all necessary measures to prevent or mitigate loss or damage. The insurer shall bear the necessary and reasonable expenses incurred by the insured for preventing or mitigating loss of or damage to the insured subject matter after occurrence of the insured event.” The idea is that when an insured event occurs, the insured should not sit idly and allow the loss to increase but should take reasonable measures to mitigate the loss. The Insurance Law does not provide any remedy for the insured’s non-performance of the duty of mitigation; but under the Contract Law, if the injured party fails to take appropriate steps so that the loss is aggravated, he is not allowed to claim any compensation as to the aggravated part of the loss.38 It is reasonable to request the insured take reasonable steps to mitigate loss following the occurrence of the insured event, but it is unreasonable to expect the insured to take measures to mitigate the loss arising from the insurer’s late payment of insurance proceeds if the insured lacks the financial means to do so. In Hainan Hongye Wool Textile Company v Hong Kong Minan Insurance Company, Haikou Branch,39 the insured machine (for printing coloured patterns on clothes) broke down in March 2003. The insured made a claim but the insurer did not respond to the claim for several months. This seriously affected the normal business of the

34  Para. 2 of art. 24 of the Insurance Law 2002 provides: “Where the insurer fails to fulfil its obligations as prescribed in the preceding paragraph in a timely manner, the insurer shall compensate the insured or the beneficiary for any damage incurred therefrom, in addition to payment of the amount insured.” This is exactly the same as para. 2 of art. 23 of the Insurance Law 2009. 35  Goetz and Scott, “The Mitigation Principle: Toward a General Theory of Contractual Obligation” [1983] 69 Va L Rev 967. 36  This is discussed in Chapter 13, “Risk prevention and loss mitigation.” 37 Article 119 of the Contract Law 1999 provides: “after a party breaches the contract, the other party shall take appropriate measures to prevent any increase in the loss; if the appropriate measures fail to be taken, thereby causing an increase in the loss, no compensation may be claimed in respect of the increased loss.” 38 Ibid. 39  Haikou City Intermediate People’s Court, Civil Judgment (2005) No. 2 ( accessed in October 2013).

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insured. On 22 November 2003, the insured had to purchase a new part for the machine with a bank loan (¥1,146,631) to get the machine to work; therefore the normal business was resumed and the loss caused by the delay of the insurer’s handling the claim was mitigated. The insured sued for the cost of buying the new part of the machine, and the interest for the bank loan (calculated for the period starting from 22 November 2003 to the day the insurance money was paid), which was upheld by the court.40 In summary, an insured is entitled to damages for consequential losses, provided that the loss was foreseeable at the time the contract was made and proved by the insured who claims the damages. If the insured has financial means to mitigate the consequential loss, the insurer should bear the necessary and reasonable expenses incurred by the insured. If the insured cannot afford to take steps to mitigate the loss, the insurer should not be discharged from its liability for consequential loss on the grounds of the insured’s failure to perform the duty of mitigation of loss. Having considered the question of how to determine damages for consequential loss, the next question to be considered is what types of damages should be available to the insured. 15.3.2 Types of damages available to an insured As discussed above, the insurer’s primary obligation is to pay valid claims in a timely manner. If the insurer fails to do so, it breaks the contract and is thus liable to pay damages for consequential loss due to its late payment of insurance proceeds.41 From the decided cases, generally the courts award two types of damages to the insured: loss of profit due to business interruption and loss of interest, which are considered in turn below. Meanwhile, the time point when the insurer breaks the duty of payment is considered as well, as this time point must be referred to for the calculation of the amount of consequential losses. (a) Loss of profit due to business interruption Consequential loss of profit due to late payment of insurance claims has been recognised by Chinese courts. In People’s Insurance Company of China,Yaoping Branch v Chaozhou City Huafeng Petroleum Product Storing Company,42 the delayed payment of insurance proceeds resulted in the delay in rebuilding the dock and in repairing the storage facilities for petroleum products, and consequently the loss of profit through reduced storage capacity. The court recognised that the consequential loss as a result of the reduced storage capability should be recoverable, but turned down the insured’s claim for the loss for lack of evidence.43

40 The time point when the insurer is deemed to be in breach of his duties to assess and pay claims and the starting point for the interest to run will be discussed later. 41  The Insurance Law, art. 23. 42  Guangdong Province High People’s Court, Civil Judgment (2004) No. 22 ( accessed on 12 July 2013). 43 The court should at least award interest to the insured for the late payment of the amount of the insurance proceeds.

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In a number of motor insurance cases, the courts upheld the insured’s claims for loss of income caused by the insurer’s late payment of claims. In Mr Yang v The Insurance Company,44 the insured lorry was damaged by a road accident on 8 July 2009. The insured claimed on 11 July 2009. The insurer estimated the repair cost to be ¥60,000 on 28 August 2009. The insured did not agree with the insurer’s estimate. He then requested an independent loss adjuster to make another estimate of the repair cost (¥74,940). On the basis of the latter estimate, the insured had the vehicle repaired and then claimed against the insurer for the cost of repair (¥74,940), and consequential loss of income (¥201,000). The insured claimed that the income loss was caused by the insurer’s delay in determining the repair cost and thus the insured’s inability to use the lorry for 67 days (¥3,000 per day) from the day of the road accident (8 July 2009) to the day of the determination of repair cost by the independent loss adjuster (13 September 2009). The insurer refused to pay the income loss, arguing that the income loss for the period the insured vehicle was not in operation was not covered under the policy, and that if the insured wished to be covered for that loss, he should have effected another policy for loss of income when the vehicle was not in operation. The court held that the insurer was liable for the repair cost (¥74,940), and that the insurer’s delay in determining the cost of repair breached its statutory duty to determine the claim within 30 days after receiving the insured’s claim for the loss,45 and as a consequence resulted in the insured’s loss of income for the period that the vehicle was not in operation for business. The insurer was, therefore, liable for the income loss. The insurer’s liability for that loss was irrelevant to the issue that the insured did not have a policy in place to cover the loss of income when the vehicle was not in operation. As to the calculation of the amount of income loss, the court held that the insurer was liable for the loss for the period from day 30 after the insurer received the claim to the date when the insurer estimated the repair cost (28 August 2009), which was 18 days in this case. The daily income should refer to the average for the same kind of vehicle for a similar kind of business in the same city, which was ¥433.33. Thus the total loss of income amounted to ¥7,800 (18 days × ¥433.33 per day). In this case the time point at which the insurer breached the duty to determine the claim (for the repair cost) was considered to be day 30 after the insurer received the claim. It is submitted that this is incorrect. The correct time point at which the insurer breached the duty to determine the claim should be day 31 after the insurer received the claim.46 For simple cases, courts have awarded damages even before the 30 day deadline is reached.47 For instance, in Mr Wang v The Insurance Company,48 the insured lorry was damaged in a road accident on 3 August 2009. Mr Wang reported the accident to the insurer, who sent a loss adjuster to estimate the cost of repair. Because the two 44  Xie Xian, A Hundred Insurance Cases (Law Press China 2011) p. 399. 45  The Insurance Law, art. 23. 46  This time point was determined following art. 23 of the Insurance Law, which requires the insurer to determine a complex claim within 30 days of receipt of the insured’s claim. 47  The Insurance Law, art. 23. 48 Beijing City Miyun County People’s Court, Civil Judgment (2009) No. 06207. This case is reported in the Annual Report of Typical Insurance Cases (Volume II), edited by the China Insurance Society (Law Press China 2010) p. 444.

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parties disputed the amount of loss, the insurer did not send a letter to the insured to authorise a repair for the damaged lorry. The insured waited for 10 days and then authorised a garage to repair the lorry on 12 August 2009. The lorry was repaired in two days for a total expense of ¥16,831. The insured had a contract with Beijing Transportation Company for the rental of the lorry with a rent of ¥3,500 per day. Because of the delayed authorisation of the insurer to repair the lorry, the insured incurred a loss in rental income of ¥35,000 for 10 days. The insured sued. The insurer argued that the rent loss was not covered under the policy, so it was not liable for that part of the loss. The court held the insurer liable for paying the total cost of repair (¥16,831) and some of the rental income (¥6,000). Although the rental loss was not covered under the policy, the insured’s claim for that loss was caused by the insurer’s delay in authorising the repair and should thus be upheld according to art. 23 of the Insurance Law. This case was not a complex one, so the court thought that the insurer breached its duty in determining the claim in a timely manner even before the 30-day deadline (which is only for complex cases), so awarded some discretionary rental loss. For cases which were tried before 2009, the Insurance Law 2002 was followed in determining the time point for the insurer’s breach of the duty to determine a claim in a timely manner, but the 2002 version did not set out a 30-day time limit for making a decision on a claim.49 So the courts sometimes calculated the amount of consequential loss from day 61 when the insurer broke the duty of making a preliminary payment within 60 days of receipt of the claim according to art. 26 of the Insurance Law 2002.50 The following case explains this point. In Beijing Lu Gou Bridge Zhi Hong Concrete Company v People’s Insurance Company of China (Property), Nan Le Branch,51 a concrete-mixing vehicle had a road accident and was damaged on 31 July 2007. The repair job was completed at a cost of ¥245,490 on 4 July 2008. The insurer delayed in making a payment due to the dispute over the amount of the insurance payment, so the insured vehicle was not released from the garage. The insured sued for the repair cost (¥245,490) and the loss of income (¥229,600) for the period from the date when the repair was completed (4 July 2008) to the date of the judgment (2 June 2009), which was calculated using a monthly income of ¥21,000. The insurer argued that the loss of income was not covered by the insurance contract, so it should not be liable for that loss. The court held that (1) the insurer was liable to pay part of the repair cost (¥134,515) according to the terms of

49 Article 24 of the Insurance Law 2002 provides: “The insurer shall, after receipt of a claim for indemnity or insurance benefits from the insured or the beneficiary, determine the matter in a timely manner. The insurer shall inform the insured or the beneficiary of the result of the determination.” The law did not set out a 30-day time limit but only required the insurer to act “in a timely manner.” 50  Article 26 of the Insurance Law 2002 provides: “If the amount of indemnity payment or insurance benefits cannot be determined within 60 days of receipt of the claim for indemnity payment or insurance benefits and the evidence and information relevant thereto, the insurer shall effect payment of the minimum amount determinable with the evidence and information available; the insurer shall pay the difference accordingly after the final amount of indemnity payment or insurance benefits is determined.” The only difference between art. 26 of the 2002 version and art. 25 of the 2009 version of the Insurance Law is that art. 26 of the 2002 version requires the insurer to make a preliminary payment of the minimum amount determinable with the evidence and information available. 51 Beijing City Feng Tai District People’s Court, Civil Judgment (2009) No. 891 ( accessed on 7 October 2013).

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the contract; (2) the insurer neither made a decision on the claim in a timely manner, nor sent a rejection notice to the insured, nor made a preliminary payment within 60 days of receipt of the claim,52 and the insurer was thus liable for the insured’s loss of income for the period starting on day 61 after the completion of the repairing of the vehicle (2 September 2008) to the date of the court’s judgment (2 June 2009). The amount of income loss was ¥180,000, which was calculated using a monthly income of ¥20,000. In this case, although the two parties disputed the amount of the insurance payment, the insurer should have made a preliminary payment within 60 days after the completion of the repair of the vehicle. (b) Loss of interest Delay in performance of monetary obligations is subject to rules under the Contract Law. If a party owes an obligation to pay money, its delay of payment entitles the injured party to resort to remedies generally applicable to non-performance of the contract. Article 207 of the Contract Law provides: “If a borrower defaults in repaying a loan within the agreed time, he shall pay interest for the default in accordance with the agreement or the relevant regulation of the state.” In practice, the SPC has instructed the courts to adopt the interest rate set by the People’s Bank of China for default on loans for assessing interest loss on late payment of the loan.53 In the insurance context, when a claim is wrongly refused or not handled within the time limits, the courts award interest to compensate the insured for being out of funds. The courts usually use the interest rate set by the People’s Bank of China to calculate the interest. The starting point for the running of interest is the date on which the insurer is deemed to be in breach of its duty to pay the insurance money.54 In Shanghai Zhenan Company v PICC Property Co.Wenzhou Branch,55 the ship carrying the insured cargo (steel) was sunk in the coastal sea near Ningbo on 12 March 2006. The insured immediately informed the insurer of the occurrence of the event and submitted all relevant claim documents on 30 August 2006. The insurer orally promised to handle the claim promptly but delayed in making payment. The insured sued on 10 July 2007. The court held that the insurer breached the statutory duty to handle the claim in a timely manner, so was liable for lost interest in addition to the payment for the loss of the steel. But the court did not specify the starting point for the running of interest. According to art. 26 of the Insurance Law 2002, if the amount of insurance payment cannot be determined within 60 days of receipt of relevant evidence and information, the insurer should make a preliminary payment which can be determined by the evidence and information available. It is suggested

52  The Insurance Law 2002, art. 26. 53  “The SPC Reply on the amendment of the SPC Reply to the Question What Standard of Calculation Should Be Adopted for Liquidated Damages for Delayed Payment,” The SPC Gazette, 2000, p. 203; “The SPC Reply to the Question What Standard of Calculation Should Be Adopted for Liquidated Damages for Delayed Payment,” The SPC Gazette, 1999, p. 58. 54  By contrast, under current English law, the starting point for the running of interest is the date on which the insured peril occurred, as that is the deemed date at which the assured’s action accrues, and interest terminates at the date of judgment. For more on the date of running of interest, see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 10-127. 55  Ningbo Maritime Court, Civil Judgment (2007) No. 25. (See the book Property Insurance Law (Intellectual Property Press 2009) p. 259.)

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that the interest should have run from 30 October 2006, which was 61 days after the insured’s submission of all relevant documents, to the date of the court’s judgment. If the Insurance Law 2009 were to be applied, the interest should run from 30 September 2006, which was 31 days after the insured’s submission of the relevant documents, to the date of the court’s judgment. In a motor insurance case,56 the insured’s car was stolen on 8 October 2003. The insured made a claim on 14 October 2003 and submitted all relevant documents to the insurer on 12 August 2004. The insurer neither rejected the claim nor paid the insured sum. The trial court held that according to art. 26 of the Insurance Law 2002, the starting point for calculation of interest should be 60 days after the insurer’s receipt of the relevant documents. The Guangdong Province Guangzhou Intermediate People’s Court held that the insured submitted to the insurer the relevant documents on 12 August 2004, and the starting date for the calculation of interest should be 13 August 2004. Though the courts award interest, the starting point for the running of interest is arbitrary in a number of cases, resulting in unfairness and inconsistence. In China Pacific Property Insurance Company, Dongying Branch v Zhong Xiohai,57 the insured’s car was stolen in November 2003. The insured claimed on 3 March 2004 but was turned down on 10 August 2004. The trial court held that the insured was entitled to interest which ran from the date of the insurer’s refusal of the claim (10 August 2004) to the date of court’s decision (1 November 2004). In Minfeng Special Paper Company Ltd v Gerling AllgememeineVersicherungs AG,58 goods were found to be damaged upon delivery on 1 July 2002. The interest was held to run from the date the insured filed the lawsuit (26 February 2004) to the date of the court’s judgment (24 June 2005). In Guangdong Fuhong Oil Products Ltd v China Ping An Property Insurance Company Ltd, Shenzhen Branch,59 the insured soybeans were found to be damaged on arrival at the destination on 1 August 2004. The insured claimed on 28 October 2004. The insurer received all relevant documents on 29 December 2004. It was held that the reasonable time for the insurance payment should be 15 days after the insurer’s receipt of all claim documents (which was on 13 January 2005), and the interest should run from 14 January 2005 to the date of the judgment (19 August 2005). In another case,60 the insured’s superstore was flooded on 13 April 2004. The two parties disputed the total loss. The trial court’s decision that the interest loss should run from 14 June 2004 (two months after the flood) to the date of payment of insurance money was reversed by Ganzhou City Intermediate People’s Court on the grounds that there was no clear basis for the claim of interest.

56  China Pingan Property Insurance Company Fanyu Branch v Mr Pan Jingxing, Guangdong Province Guangzhou City Intermediate People’s Court, Civil Judgment (2006) No. 1910 ( accessed on 22 July 2013). 57  Shandong Province Dongying City Intermediate People’s Court, Civil Judgment (2005) No. 62 ( accessed on 12 July 2013). 58  Shanghai Maritime Court, Civil Judgment (2004) No. 91 ( accessed on 13 July 2013). 59  Guangzhou Maritime Court, Civil Judgment (2005) No. 211 ( accessed on 13 July 2013). 60  People’s Insurance Company of China, Nankang Branch v Nankang City Laoxiong Kelong Store, Ganzhou City Intermediate People’s Court, Civil Judgment (2005) No. 207 ( accessed on 12 July 2013).

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It is submitted that interest loss should run from the date on which the insurance claim should be paid to the date on which it is actually paid. The date on which the claim should be paid is the date on which the insurer is in breach of the duty of payment of insurance proceeds within the time limits. As mentioned earlier, the 2002 version of the Insurance Law required the insurer to handle claims in a timely manner, but did not set out a time limit for the insurer to make a decision on a claim.61 Thus it was difficult to judge the time point when the insurer breached its duty of making a decision on a claim, thus giving rise to uncertainty and inconsistency of the courts’ judgments. The 30-day time limit has been introduced in the 2009 version of the Insurance Law, which offers greater protection to the insureds. (c) Damages arising from delay in litigation should not be precluded Whether or not damages arising from delay in litigation should be recognised is a controversial issue. The Insurance Law does not cover this point, resulting in uncertainty in judicial practice. This can be seen in the complex case of Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd.62 There the trial court held that damages should be awarded where they were caused by delay in the litigation process, but the Hainan Province High People’s Court gave a different judgment. It is worthwhile to see how the courts arrived at different decisions. In this case, the insured cargo (palm oil) was carried from Indonesia to Hainan Island, China, by an Indonesian ship. The cargo and the ship were confiscated by Indonesian authorities due to smuggling by the ship on 16 April 1996. As a result, the insured cargo was totally lost. After having been refused the claim for the insurance payment, the insured sued on 20 August 1996. The Haikou Maritime Court (the trial court) held the insurer liable for the insured amount (US$3.594 million). The insurer and the insured received the letter of judgment on 25 December 1996. The insurer appealed. The Hainan Province High People’s Court reversed the decision of the trial court on 27 October 1997. The insured applied to the SPC for a retrial of the case. The SPC eventually upheld the decision of the trial court on 13 July 2004. The letters of retrial judgment were received by the two parties on 16 August 2004. The insurer paid the insured amount accordingly in September 2004. Having been paid the insured amount, the insured then sued for the interest lost, in the Haikou Maritime Court in January 2005. Evidence showed that for the period from the date when the two parties received the letter of judgment from the trial court (25 December 1996) to the date when they received the letter of retrial judgment from the SPC (16 August 2004), the insured suffered an interest loss of US$1.345 million (calculated using the bank loan interest rate for the same period on the amount of the insurance payment (US$3.594 million)). Then, questions arise: (1) whether the insurer was liable to compensate the insured for the loss of interest due to the delay in the litigation process; and (2) if the insurer was liable, when the time should start to run for the calculation of interest.

61  The Insurance Law 2002, art. 24. 62 Trial Court: Hainan Province Haikou Maritime Court, Civil Judgment (2005) No. 35. Appeal Court: Hainan Province High People’s Court, Civil Final Judgment (2005) No. 35.

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The Haikou Maritime Court (the trial court) held that (1) the insurer was liable for the interest lost (US$1.345 million) due to the delay in the litigation process; and (2) the starting point for the running of interest should be the date when the two parties received the letter of judgment (for the substantive insurance claim) from the Haikou Maritime Court (25 December 1996), and interest should terminate at the date when the insurer received the letter of retrial judgment from the SPC (16 August 2004).63 The insurer appealed against the trial court’s decision as to the payment of interest. The Hainan Province High People’s Court reversed the trial court’s decision on the ground that there was no legal basis to request the insurer to pay interest for the delay in the litigation process. With respect, the Hainan Province High People’s Court’s decision was incorrect. Article 23 of the Insurance Law 2002 clearly sets out the requirement for the insurer to perform its obligation to pay valid claims in a timely manner; otherwise, the insurer must pay the insured for consequential loss caused by the late payment of the claim. It is submitted that the insurer should be made liable for damages for late payment of insurance claims arising from delays in the litigation process. 15.3.3 Limitation period for claims for late payment of insurance proceeds According to the Insurance Law, the limitation period for claims for insurance payment is two years for indemnity policies and five years for life policies, starting to run from the date when the insured or the beneficiary knows or ought to know about the occurrence of the insured event.64 However, there is no answer to the question of when the limitation period starts to run for late payment claims

63  The Haikou Maritime Court made the judgment for the following reasons: (1) The insurer’s argument that the right of the insured to claim for interest lapsed because the insured failed to make such a claim within two years of the occurrence of the insurance event was unfounded. According to art. 137 of the Civil Code, the limitation period starts to run from the time the plaintiff has known or ought to have known that his right has been prejudiced. During the period from the date when the two parties received the letter of judgment from the Haikou Maritime Court (25 December 1996) to the date when the insurer received the letter of retrial judgment from the SPC (16 August 2004), whether the insured’s claim for the insured amount would be upheld by the courts was uncertain. Only when the insured had received the letter of retrial judgment from the SPC (16 August 2004), was it possible for the insured to know for certain that he was entitled to the insurance payment for the loss of cargo and also for the insured to work out the amount of interest lost on the basis of the amount of the insurance payment (US$3.594 million). Thus the insured’s lawsuit for interest was within the two-year limitation period. (2) The insurer also argued that the insured’s interest loss was not due to the insurer’s delay in making the insurance payment but the courts’ delay in making judgments. This argument was not persuasive. After receiving the letter of judgment from the trial court (25 December 1996), the insurer should have performed its obligation to pay the insured amount (US$3.594 million) for the cargo loss. Instead, the insurer appealed, and the SPC eventually upheld the trial court’s decision. It was the insurer’s appeal that led to the retrial of the case and consequential loss of interest. According to art. 23 of the Insurance Law 2002, the insurer should pay the insured the interest loss incurred by his delay in paying the insurance money for the period from the day of receiving the letter of judgment from the trial court (25 December 1996) to the day of receiving the letter of retrial judgment from the SPC (16 August 2004). 64  The Insurance Law, art. 26.

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in the Insurance Law.65 According to art. 137 of the Civil Code,66 the two-year limitation period starts to run from the time the plaintiff has known or ought to have known that his right has been prejudiced. In the insurance context, the limitation period for late payment claims should also be two years, beginning to run from the date when the insurer breaches his statutory duties by failing to meet the time limits: (1) for making decisions on claims within 30 days after receiving the insured’s claims, (2) for making payments on valid claims within 10 days of reaching an agreement with the insured as to the amount of payment, (3) for failing to send the insured a rejection notice within 3 days after the decision to reject the claim, and (4) for making preliminary payment within 60 days of receiving the claim. Where the late payments of insurance claims and the consequential losses (such as interest lost) are caused by a delay in the litigation process, the limitation period should start to run from the date when the insured has received the final judgment of the court, because only when the insured receives the court’s final judgment is it possible for the insured to know for certain that his right has been prejudiced and he is therefore entitled to damages for consequential loss. In summary, Chinese courts award damages for late payment. The damages include loss of profit due to business interruption and loss of interest. Punitive damages that are designed to punish the defaulting party and award the injured party money damages greater than its actual loss are incompatible with the compensatory nature of contractual liability and the provision of art. 113(1) of the Contract Law which states, “the amount of damages shall be equal to the loss sustained as a result of the breach.” Hence, in principle, punitive damages are not recoverable under Contract Law.67 This is unlike the approaches in the North American jurisdictions where punitive damages are awarded to the injured insured for the insurer’s bad faith and late payment of insurance proceeds.68 In contrast to Chinese law in relation to the insurer’s duty to pay claims, English law takes a different approach, which is discussed in the next section.

65  In English law, under the “hold harmless” principle, the insurer is considered to be in breach as soon as the harm occurs and thus the limitation begins to run at that date. See Callaghan v Dominion Insurance Co. Ltd [1997] 2 Lloyd’s Rep 541 (QBD). The Law Commissions proposed that the limitation would run from a reasonable time after the claim is brought. This is the point at which the obligation to pay within a reasonable time is breached. Under Scottish law, limitation begins to run only after the passing of a reasonable time for investigation of the claim. See Strachan v The Scottish Boatowners’ Mutual Insurance Association (2010) SC 367. 66 The General Principles of the Civil Law of the People’s Republic of China were promulgated in 1986, and are referred to as the Civil Code. 67 The only exception to this rule is provided in art. 113(2) of the Contract Law, which states: “If a business operator commits a fraudulent act in the supply of merchandise or service to a consumer, he is liable in damages pursuant to the provisions of the Consumer Rights and Interests Protection Law of the People’s Republic of China.” Article 49 of the Consumer Rights and Interests Protection Law provides: “If a business operator commits a fraudulent act in the supply of merchandise or services, compensation for the loss sustained by the consumer shall be increased by one times the price or remuneration for which the consumer purchases the merchandise or receives the service.” 68  See J. Lowry and P. Rawlings, “Insurers, claims and the boundaries of good faith” [2005] 68(1) MLR 82; and R. E. Pomerantz, “Punitive damages: An insurer’s view” (1980) Ins LJ 21.

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15.4 Late payment of insurance proceeds under English law 15.4.1 An overview It has been generally accepted in most jurisdictions that an insurer’s primary obligation is to pay valid claims in a timely manner. Under English law, however, an insurer’s primary obligation is to “hold the insured harmless” against the insured event.69 In other words, the insurer is said to promise that the loss will not occur. The surprising effect is that the insurer is in breach of contract as soon as the insured suffers a loss against which it is insured. Thus an insurance payment is characterised as a payment of damages for breach of contract, rather than a contractual debt. English law does not recognise an obligation to pay damages for late or non-payment of damages.70 Consequently, an insured who has not been paid a valid claim is entitled to sue the insurer for the money owed, plus interest, but not entitled to damages for any further loss suffered due to the delay in receiving the money.71 The law has been widely criticised.72 The Law Commission and the Scottish Law Commission have in recent years been engaged in a project to reform the law of insurance contracts, and published a series of papers in respect of damages for late payment of insurance claims, including Issues Paper 6: Damages for Late Payment and the Insurer’s Duty of Good Faith in March 2010;73 Summary of Responses to Issues Paper 6 in November 2010;74 Consultation Paper: Post-Contract Duties and Other Issues in December 2011;75 the update of the Law Commissions’ proposals for the reform

69  The Fanti and The Padre Island [1991] 2 AC 1, at 35–36. 70  There is House of Lords authority that “there is no such thing as a cause of action in damages for late payment of damages.” See President of India v Lips Marine Corp. [1988] AC 395 at 424, per Lord Brandon; President of India v La Printata Compania Navigacion S.A. [1985] AC 395; and The Fanti and The Padre Island [1991] 2 AC at 35. The Law Commission and the Scottish Law Commission, Issues Paper 6: Damages for Late Payment and the Insurer’s Duty of Good Faith, para. s11, 24 March 2010 (hereinafter, Issues Paper 6). 71 See Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep IR 111. 72  See J. Al-Asady, “Damages, late payment and indemnity insurance” [2006] JBL 396; J. Birds, “No damages remedy when insurers unjustifiably repudiate liability” [1997] JBL 368; N. Campbell, “The nature of an insurer’s obligation” [2000] LMCLQ 42; M. Clarke, “Nature of insurer’s liability” [1992] LMCLQ 287; S. Drummond, “Damages for consequential loss when the insurer fails to pay” [2005] Ins LJ 1; P. M. Eggers, “Late payment of insurance claims” [2013] LMCLQ 341; D. Foxton, “Can a marine insurer be liable for loss consequential upon the late payment of indemnity?” in R. Thomas (ed.), The Modern Law of Marine Insurance (Informa 2009) p. 213; M. C. Hemsworth, “Consequential loss claims for delayed insurance settlements: Creating a financial crisis from an insurance drama” [1998] LMCLQ 154; J. Lowry and P. Rawlings, “Insurers, claims and the boundaries of good faith” [2005] 68(1) MLR 82; Lord Mance, “The 1906 Act, common law and contract clauses – all in harmony” [2011] LMCLQ 346; R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014), paras 10-106 to 10-115; G. Swaby and P. Richards, “Insurance reforms: Rebalancing the kilter?” [2011] JBL 535; and C. Ying, “Damages for late payment of insurance claims” [2006] LQR 205. 73  Issues Paper 6. 74  The Summary of Responses to Issues Paper 6: Damages for Late Payment and the Insurer’s Duty of Good Faith was published in November 2010. 75 The Law Commission and the Scottish Law Commission, Insurance Contract Law: Post-Contract Duties and Other Issues, A Joint Consultation Paper, 20 December 2011 (hereinafter, Consultation Paper).

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of the law in 2013;76 the Insurance Contracts Law Draft Bill in June 2014;77 and the report to the government in July 2014.78 The Law Commissions expressed the view that the English approach to the nature of the insurer’s obligation and the effect of late payment is lacking in principle,79 unfair and unexpected,80 an increasingly anomalous legal position,81 appears to reward inefficiency and dishonesty and can lead to injustice.82 The law is definitely in need of reform.83 The Law Commissions released draft clauses of the Insurance Contracts Bill for consultation in January and March 2014. The Insurance Contracts Law Draft Bill was published for further consultation on 17 June 2014. The recommendations relating to late payment were included in clause 14 of the draft Bill in June 2014,84 but excluded from the draft Bill in July 2014. The reason for excluding the clause relating to late payment is that the clause was not considered sufficiently uncontroversial.85 The Law Commissions redrafted the clause on late payment, and introduced a statutory right to damages for late payment into the Enterprise Act 2016 (UK).86 76 D. Hertzell and L. Burgoyne, “The Law Commissions and insurance contract law reform: an update” [2013] 19 JIML 107. 77  In January and March 2014, the Law Commissions released draft clauses of the Insurance Contracts Bill for Consultation. The Insurance Contracts Law Draft Bill was made public for further consultation on 17 June 2014. After that, the draft Bill was presented to government on 15 July 2014. 78 The Law Commission and the Scottish Law Commission, Insurance Contract Law: Business Disclosure;Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment, Law Com No. 353 / Scot Law Com No. 238, 17 July 2014 (hereinafter, the Report 2014). 79  The Report 2014, paras 26.4–26.7. 80  Ibid, paras 26.8–26.14. 81  Ibid, paras 26.15–26.26. 82  Issues Paper 6, s. 30. 83  The Consultation Paper, para. 4.14; the Report 2014, paras 26.27–26.29. 84  Clause 14 of the Insurance Contract Law Draft Bill (17 June 2014) relates to late payment. Clause 14, Implied term about payment: (1) It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time. (2) A reasonable time includes reasonable time to investigate and assess the claim. (3) What is reasonable will depend on all the relevant circumstances, but the following are examples of things which may need to be taken into account – (a) (b) (c) (d)

the type of insurance, the size and complexity of the claim, compliance with any relevant statutory or regulatory rules or guidance, factors outside the insurer’s control.

(4) If the insurer shows that there were reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable) – (a) the insurer does not breach the term implied by subsection (1) merely by failing to pay the claim (or the affected part of it) while the dispute is continuing, but (b) the conduct of the insurer in handing the claim may be a relevant factor in deciding whether that term was breached and, if so, when. (5) Remedies (for example, damages) available for breach of the term implied by subsection (1) are in addition to and distinct from – (a) any right to enforce payment of the sums due, and (b) any right to interest on those sums (whether under the contract, under another enactment, at the court’s discretion or otherwise). 85  The Report 2014, para. 1.7, Executive Summary. 86  On 4 May 2016 the Enterprise Act 2016 was enacted. Part 5 of the Enterprise Act contains provisions which will amend the Insurance Act 2015 to provide that insurers must pay sums due within a reasonable time. Policyholders will have the opportunity to claim damages if an insurer’s unreasonable delay causes additional loss.

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The Law Commissions’ main recommendation for reform of the law in respect of late payment is that a term should be implied in every insurance contract that the insurer will pay valid claims within a reasonable time.87 An insured who suffers loss as a result of the breach of that term will be able to recover damages from the insurer.88 A particular matter of concern about this recommendation is that the concept of “reasonable time” for payment of a claim is too uncertain without further definition,89 and will introduce uncertainty and scope for litigation.90 15.4.2 The insurer’s obligation to “hold the insured harmless” Section 1 of the Marine Insurance Act 1906 (MIA) stipulates: “A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.” According to the MIA, the insurer’s obligation is to indemnify the insured against marine losses, but not to prevent marine perils from occurring. However, English common law takes a different view; in The Fanti and The Padre Island,91 Lord Goff said that “a promise of indemnity is simply a promise to hold the indemnified person harmless against a specified loss or expense. On this basis, no debt can arise before the loss is suffered or the expense incurred; however, once the loss is suffered or the expenses incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense.” From the “hold harmless” point of view, the insurer’s primary obligation is to pay damages for breach of its obligation to prevent loss from occurring, but not to pay valid claims. As a result, a claim for damages caused by the insurer’s unreasonable rejection of a valid claim for insurance payment is irrecoverable, because there is no such thing as a cause of action in damages for late payment of damages.92 The “hold harmless” view is surprising. As the judge put it in Transthene Packing Co. Ltd v Royal Insurance (UK) Ltd,93 property insurers may be surprised to discover that by this argument they are, collectively, in breach of contract hundreds or thousands of times every day, whenever a fire, a flood, a road accident or other such event occurs.94 The legal fiction that an insurer’s primary obligation is to “hold the insured harmless” makes an indemnity insurance contract an exception to the usual rules of contract law under which where one party breaches a contract the injured party can claim damages for loss suffered, provided that the claimant: proves that actual, financial loss was

87  Clause 14(1) of the draft Bill. Paragraphs 28.2 and 28.3 of the Report 2014. 88  Clause 14(5) of the draft Bill. Paragraphs 28.5 and 28.6 of the Report 2014. 89  Paragraph 28.22, the Report 2014. 90 Z. Jing, “Comments on the Law Commissions’ Initial Draft of Insurance Contracts Bill 2014 in respect of late payment” (submitted to the Law Commissions on 18 February 2014); Kees van der Klugt, “Law reform and the damages for late payment of claims proposals: is this a good idea” [2012] 125 BILAJ 23. 91  [1991] 2 AC 1, at 35–36. 92 See President of India v Lips Marine Corp. [1988] AC 395 at 424, per Lord Brandon; President of India v La Printata Compania Navigacion S.A. [1985] AC 395; and The Fanti and The Padre Island [1991] 2 AC at 35. 93  [1996] Lloyds’ Rep IR 32, at 40. 94 Ibid.

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incurred; establishes the loss was foreseeable at the time of the contract; and shows that reasonable steps had been taken to mitigate that loss.95 It is noteworthy that the “hold harmless” analysis has not been applied to life insurance96 or to policies for reinstatement.97 In The Italia Express (No. 2),98 a claim for damages for consequential losses on a marine insurance policy raised issues about the nature of the insurer’s primary obligation under the policy. As to the question of whether the insurer was immediately in breach of contract when an insured loss occurred, or whether the breach occurred at some subsequent point, after the insured had made a valid claim under the insurance policy that was not paid when it should have been, the insured argued that the latter characterisation was the correct one. By contrast, the insurer argued that the insurer’s obligation was to prevent the insured loss from occurring in the first place. The remedy for this breach was to pay the liquidated damages agreed under the policy. The insurer had done this, and no further damages were payable. Hirst J rejected the insurer’s argument, holding that the insurer was immediately in breach of contract as soon as the insured loss occurred, and not in failing to pay a claim after it had been submitted, and that the “hold harmless” doctrine applied to both liability and property insurance. That the same principle also applies to non-marine insurance has been confirmed in Sprung v Royal Insurance (UK) Ltd,99 where Mr Sprung suffered damage to his factory, and the insurer failed to pay his claim for four years, by which time he had been forced out of business. As a result of the insurer’s delayed payment, he had suffered further losses of £75,000. The Court of Appeal found, with “undisguised reluctance,” that there could be no award of damages for late payment of a valid insurance claim. The anomalous reasoning in Sprung arises because of the historic rule that an insurer’s primary obligation is to “hold the insured harmless.” An insurance contract is treated as analogous to a contract with a security firm, in which the security firm undertakes to prevent a break-in. Thus, an insurer’s breach of contract occurs when the harm occurs, and the insurance payment is characterised as damages for that breach.100 English law does not recognise a claim for damages on damages. Therefore, if payment is delayed, an insured who suffers loss has no remedy other than a claim for interest. The conclusions in The Italia Express and Sprung rest on an incorrect premise and are therefore flawed. The insurer does not promise to prevent the insured event from occurring, nor promise that it will not occur,101 but promises that if it occurs, the 95  These principles were set out in the case of Hadley v Baxendale (1854) 156 ER 145. See para. 2.6, the Consultation Paper. 96  Blackley v National Mutual Life Association Ltd (No. 2) [1973] 1 NZLR 668, in which a claim was treated as a contract debt and the usual rules of contract law applied. See paras 25.2 and 25.3, the Report 2014. 97  For example, in Arbory Group vWest Craven Insurance Services [2007] Lloyd’s Rep IR 491. See para. 25.24, the Report 2014. 98  [1992] 2 Lloyd’s Rep 281. 99  [1999] 1 Lloyd’s Rep IR 111; [1997] CLC, 70. 100  Apostolos Konstantine Ventouris v Trevor Rex Mountain (The Italia Express (No. 3)) [1992] 2 Lloyd’s Rep 281. 101  N. Campbell, “The nature of an insurer’s obligation” [2000] LMCLQ 42.

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insurer will indemnify the insured for the loss it causes. Consequently, the insurer’s payment of the sum insured following the occurrence of the event is not by way of damages for breach of contract, but by way of fulfilment of the insurer’s primary obligation to indemnify. Non-fulfilment of that primary obligation that results in loss to the insured should lead to the payment of damages as a secondary obligation.102 An insured’s claim for damages for consequential losses arising from non-payment is not a claim for damages upon damages, but a claim for damages based upon a broken promise to indemnify. In addition to the principles of “hold harmless” and “no damages on damages,” another English common law rule is that the insurer has no duty to handle claims promptly.103 Insurance contracts normally do not fix a specific time for payment of a claim, and in consequence non-payment at any point in time cannot by itself be a breach of contract. Moreover, a term could not be implied that an insurer would “with reasonable diligence and due expedition” conduct negotiation after the occurrence of an insured event, assess the amount due or pay sums due, since such a term was not necessary for business efficacy.104 15.4.3 Other possible routes to redress Under the current English law, the insured has no remedy for late payment of valid claims other than a claim for interest.105 There are three other possible routes to redress, but none of them is a sufficient alternative to legislative reform: (1) An insurer may breach its duty of good faith if it denies a claim it knows to be valid.106 The only remedy is the right to avoid the policy. This is a wholly one-sided remedy in favour of the insurer and of little use to the insured who wishes a claim to be paid, not to avoid the contract.107

102  C. Ying, “Damages for late payment of insurance claims” [2006] 122 LQR 205. 103  It has been said that there is no such thing as late payment of insurance money because insurers are not obliged to pay it by any particular time, unless the policy lays down a time for payment. For more, see M. Clarke, “Compensation for failure to pay money due: A ‘blot on English common law jurisprudence’ partly removed” [2008] JBL 296. 104  Insurance Corp of the Channel Islands Ltd v McHugh [1997] LRLR at 136–37. Mance J rejected the proposition that a term requiring payment within a reasonable time could be implied for two reasons: first, for such a term to be implied it would have to be mutual, he doubted that the insured would have agreed to be under a duty not unreasonably to delay, misstate or overstate his case in making or progressing a claim; and second, since the insurer’s primary obligation is to pay damages on the occurrence of the insured event, it would be inconsistent and unusual to have an implied contractual duty to assess and pay damages for which the insurer is already liable. 105  For more, see M. Clarke, “Compensation for failure to pay money due: A ‘blot on English common law jurisprudence’ partly removed” [2008] JBL 291. 106  Professor Merkin has suggested actions requiring good faith which are relevant in the context of damages for late payment of claims. (1) Insurers should not plead policy defences other than with the utmost good faith. (2) Insurers are under a duty to reach a timely decision on a claim. And (3) insurers must act with the utmost good faith in deciding whether the insured has established a claim under the policy. See R. Merkin, “Reforming insurance law: is there a case for reverse transportation?” accessed in June 2016. 107  The Consultation Paper, para 3.1.

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(2) If an insurer fails to deal with claims “promptly and fairly,” it is in breach of Financial Conduct Authority (FCA) rules.108 The insured may be entitled to damages for breach of statutory duty under s. 138D of the Financial Services and Markets Act 2000 (FSMA).109 However, this right is only available to individuals and those groups who are not carrying on business of any kind.110 The Law Commissions think that s. 138D of FSMA has limited potential to provide redress to claimants in the present context and believe that the need for statutory reform to reverse Sprung is not diminished by the availability of s. 138D of FSMA.111 (3) Consumers and some small businesses have the right to complain to the Financial Ombudsman Service (FOS) that often awards damages for loss caused by delayed payment and poor claim-handling.112 Importantly, the FOS decides disputes on the basis of “what FOS believes is fair and reasonable in the circumstances of each individual case.”113 Although the FOS mitigates the injustice of the law for consumers and some small businesses,114 it can neither help small or medium-sized businesses which have more than 10 employees and an annual turnover of more than €2 million,115 nor provide damages of over £150,000.116 15.4.4 Reform of the law and the fruit of the reform The Law Commissions criticised the English law as unprincipled and unfair. The law appears to reward inefficiency and dishonesty, and can lead to injustice.117 The

108 The Financial Conduct Authority provides detailed rules on claims handling by insurers, set out in the Insurance Conduct of Business Sourcebook. Rule 8.1.1 requires insurers to: (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress; (3) not unreasonably reject a claim (including by terminating or avoiding a policy); (4) settle claims promptly once settlement terms are agreed. (See accessed 25 July 2014.) 109  Section 138D(2) of the FSMA states that a contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. 110  The Report 2014, para. 26.68. 111  The Report 2014, para. 26.71. 112  Ibid, para. 26.73. 113  For more on how the FOS handles disputes between businesses and consumers, see accessed on 25 July 2014. Under the FSMA (s. 228(2)), it is required to decide disputes “by reference to what is in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case.” This means that although the FOS will have regard to the law, where the legal result would be at odds with what it considers to be fair and reasonable, then the law will not be applied. In considering what is fair and reasonable, the ombudsman may take into account: relevant law and regulations, regulators’ rules, guidance and standards, codes of practice and industry practice (para. 3.27, the Consultation Paper). 114 The FOS has a jurisdiction to hear complaints from both consumers and some small businesses with an annual turnover of less than €2 million and fewer than 10 employees (FCA Handbook, DISP 2.7.3). 115  The Report 2014, para. 26.75. 116 See the FOS’s website, accessed on 25 July 2014. 117  Issues Paper 6, para. s.30.

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Law Commissions were persuaded that there was a compelling case for reform,118 and formulated recommendations for the reform of the law in order to allow the insured to recover damages for the late payment of insurance claims.119 The recommendations include: (1) It should be an implied term of an insurance contract that insurers will pay valid claims within a reasonable time.120 An insured who suffers loss as a result of breach of that term will be able to recover damages from the insurer.121 (2) A “reasonable time” will always include time to investigate and assess the claim. “Reasonable time” will be assessed by reference to all relevant circumstances, including the type of insurance, the size and complexity of the claim, compliance with any relevant statutory or regulatory rules or guidance, and factors outside the insurer’s control.122 (3) Insurers should have a defence to a claim for late payment (to a claim for damages, not for the substantive insurance claim) where they incorrectly refuse to pay a claim but can show that they acted reasonably in doing so.123 (4) The late payment provisions should be mandatory in consumer insurance contracts. This means that an insurer may not exclude the application of the implied term about payment, nor exclude or limit its liability for breach of that term. In non-consumer insurance contracts, an insurer should be able to disapply the implied term about payment, or exclude or limit its liability for breach of that term. However, such exclusion or limitation terms should be of no effect where the insurer’s breach was deliberate or reckless.124

118 The Consultation paper, para.4.14. Paul Jaffe criticised the Law Commissions’ proposals and expressed his view that the proposals do not reflect any real need for a change in the law, in his paper “Reform of the insurance law of England and Wales – separate laws for the different needs of businesses and consumers” [2013] 126 BILAJ 18. 119  See the Report 2014, chapter 27. 120 This is similar to the Australian approach. Australian courts have recognised, as a term implied in a contract of insurance, an obligation requiring the insurer to pay within a reasonable time (Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office [1997] NTSC 467). Furthermore, the High Court of Australia (Hungerfords v Walker [1989] 171 CCLR 125, per Mason CJ and Wilson J) has disapproved Lord Brandon’s dictum in The Lips that “there is no such thing as a cause of action in damages for late payment of damages.” 121  Clause 14(1) and (5) of the draft Bill, June 2014. 122 The Report 2014, paras 27.3–27.5. Clause 14(2) and (3) of the draft Bill, June 2014. The Law Commissions have moved away from the proposed three-stage timetable for deciding a claim. This was discussed at paras 5.10–5.14 of the Consultation Paper and identified collecting information, assessing the claim and making a decision, and communicating that decision as separate milestones. Consultees had considerable misgivings about the complexity of this approach to calculating what is a reasonable time. 123  The Report 2014, para. 27.6. Clause 14(4) of the draft Bill, June 2014. This protects the ability of insurers to take a robust approach to decision-making where they suspect fraud or non-compliance with policy terms. The proposals are intended to catch bad claims-handling practices, not prevent legitimate investigations by insurers. 124  The Report 2014, paras 27.9–27.11.

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(5) The limitation period for late payment claims should run from the point at which the obligation to pay within a reasonable time is breached.125 But no change to the existing limitation and prescriptive periods is recommended.126 (6) The “hold harmless” principle need not be repealed.127 The difficulty with recommendation (6) that the “hold harmless” principle need not be repealed is that this would cause inconsistency with recommendation (1). Under the “hold harmless” principle, an insurer is immediately in breach of contract when an insured loss occurs; the remedy for this breach is to pay “damages.” Recommendation (1) requires an insurer to pay valid claims within a reasonable time. If the payment of valid claims is still regarded as the payment of “damages,” a new rule would be introduced into English law, that is, “damages” are required to be paid “within a reasonable time.” This would also infringe the current rule of no damages for late payment of damages, and might affect other areas of law in relation to payment of damages. It has been accepted that the “hold harmless” principle is a fiction, which could be removed without affecting other areas of insurance law. The authoritative case for the proposition that an insurer has a duty to prevent a loss is The Fanti and The Padre Island.128 The decision in this case would be more easily explained by saying that the insurer was not required to prevent the loss occurring but only to make a payment in the circumstances specified in the contract. Alternatively, it is suggested that the “hold harmless” principle should be repealed. The major difficulty with recommendations (1), (2) and (5) is that there is no clear definition of “reasonable time.” The periods of time are not specified within which insurers are obliged to perform the duties to investigate, assess and pay claims in order to satisfy the requirement to act “within a reasonable time.” If no time limits are clearly set out, it will be difficult to judge whether or not an insurer has acted “within a reasonable time.” In other words, it will be difficult to determine the time points at which the duties to be performed “within a reasonable time” are breached. Having no clear definition of “reasonable time” would undoubtedly give rise to uncertainty and unclear scope for litigation.129 As a fruit of the law reform, the Law Commissions’ recommendations have been incorporated into the Enterprise Act 2016 on 4 May 2016. From 4 May 2017, it will be an implied term in all insurance contracts that claims must be paid within a reasonable time. The remedies for breach of this implied term will be the usual remedies for breach of contract, including damages. Any damages will be in addition to

125  Paragraph 27.7 of the Report 2014 reads: “In England and Wales, the limitation period for insurance claims will continue to run for 6 years from the date of the original loss, while we recommend that the period for late payment claims should run from the point at which the obligation to pay within a reasonable time is breached.” 126  The Report 2014, para. 28.70. 127 The Report 2014, para. 27.12. The Commissions’ aim is to make it possible for insureds to recover damages for late or non-payment of claims. Fundamental change to the structure underpinning insurance contract law would unnecessarily complicate these objectives, which can be achieved in England and Wales without the removal of the hold harmless principle. 128  [1991] 2 AC 1. 129  Kees van der Klugt, “Law reform and the damages for late payment of claims proposals: is this a good idea” [2012] 125 BILAJ 23.

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interest and in addition to the amount payable in respect of the original claim. These provisions will take effect through the inclusion of a new s.13A in the Insurance Act 2015. The limitation period in which an insured can bring a claim for damages for late payment will be one year from the date of the last payment by the insurer in respect of the relevant loss. This will be reflected in an amendment to the Limitation Act 1980. Having seen the major difficulty with the Law Commissions’ recommendations and the Enterprise Act (the lack of a clear definition of a “reasonable time”), it is now appropriate to consider the following question: what time periods would be appropriate for an insurer to perform its duties in assessing and paying claims? In clause 46.7 of the International Hull Clause 2003, a 28-day period for making a decision on a claim is specified, and it provides: “The leading Underwriter(s) shall make a decision in respect of any claim within 28 days of receipt by them of the appointed average adjuster’s final adjustment or, if no adjuster is appointed, a fully documented claim presentation sufficient to enable the Underwriters to determine their liability in relation to coverage and quantum.”130 This is much more logical than the ambiguous term “within a reasonable time.” It is submitted that if it takes 28 days to make a decision on a hull insurance claim, it would be shorter to make a decision in a simple case. It is suggested that a 28-day period for making a decision on a claim is appropriate and could be adopted in the Law Commissions’ recommendations. 15.5 Conclusion An insurer’s primary obligation is to pay valid claims in a timely manner. An insurer is deemed to be in breach of its statutory duties if it fails to meet the time limits for performing its duties.131 As a result, the insurer is liable for damages for consequential losses. Some situations are unclear or not covered in the Insurance Law, so suggestions are made in order to improve the law as follows: (1) Where the insured made a claim but the insurer did not respond to the claim (neither rejected nor accepted it), and the insured sued for insurance payments plus interest (or other damages), it is suggested that the interest should run from day 34 after the insured’s submission of the claim because the insurer breached its duties to make a decision within 30 days of receiving the claim and to send a rejection notice to the insured within 3 days after the decision to reject the claim. (2) Where the insurer could not decide the amount of payment on the basis of the information available and requested the insured to provide further information, it is suggested that the interest should run from day 61 if the insurer did not make any preliminary payment within 60 days of receiving the claim.

130  The clause continues: “If the Leading Underwriter(s) request additional documentation or information to make a decision, they shall make a decision within a reasonable time after receipt of the additional documents or information requested, or of a satisfactory explanation as to why such documents and information are not available.” 131 The time limits are briefly summarised as follows: 30 days for making a decision on a claim; 3 days for sending a rejection notice to the insured, 10 days for making a payment, and 60 days for making a preliminary payment.

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(3) It is suggested that where damages would otherwise be available, they should not be precluded because they were caused by a delay in the litigation process.132 (4) The limitation period for litigation is two years for indemnity policies and five years for life policies, starting to run from the date when the insured knows or ought to know of the occurrence of the insured event.133 It is suggested that the limitation period should also be two years for late payment claims,134 starting to run from the date when the insurer breaches its statutory duties to assess and pay claims within the time limits. Where the late payments of insurance claims and the consequential losses are caused by a delay in the litigation process, the limitation period should start to run from the date when the insured has received the final judgment of the court.135

132 This suggestion is made by referring to the view of the majority of consultees, see para. 4.9, Summary of Responses to Law Commissions’ Issues Paper 6. Also see Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd (2005), Trial Court: Hainan Province Haikou Maritime Court, Civil Judgment (2005) No. 35; Appeal Court: Hainan Province High People’s Court, Civil Final Judgment (2005) No. 35. 133  The Insurance Law, art. 20. 134  The Civil Code, art. 137. 135 This was the decision by the Haikou Maritime Court in Property Insurance Company of China Hainan Branch v Fenghai Oil and Grain Company Ltd (2005).

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CHAPTER 16

Fraudulent claims

16.1 Introduction All insurance frauds are for the purpose of obtaining insurance payments which the fraudsters would not be entitled to; in a broad sense, it may be said that all frauds in connection with claims are fraudulent claims. To put it more clearly, it can be said that a claim is fraudulent if it can be shown that the insured intended to defraud the insurer of insurance moneys, or put forward false evidence and documents when in fact there was no loss or the loss was exaggerated. With the rapid development of the insurance industry in China, insurance frauds are also increasing. In 1980s, insurance frauds accounted for about 2% of all frauds; while in 2005, this figure increased to 10%.1 Globally, the loss due to insurance frauds took 10–30% of total insurance payments.2 Insurance frauds became one of the most important running risks for insurance companies in China. To combat insurance frauds, the Insurance Law provides several articles in relation to fraudulent claims, including arts 27, 43, 44 and 174. In addition, the Criminal Law3 provides one article (art. 198) with regard to insurance frauds. These articles are examined in this chapter. 16.2 Statutory framework for insurance frauds Article 27 of the Insurance Law concerns different types of fraudulent claims and the effects of these frauds; it provides:

1  Hong Li and Zhongxin Liao, Insurance Cases on Frauds and Traps (The Press of South West University of Finance and Economics 2007) p. 1. 2  Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 181. Research carried out in 2009 by the Association of British Insurers found that fraudulent insurance claims worth over £730 million were detected during 2008. But the estimated value of undetected fraud is much greater, at £1.9 billion a year. The Association of British Insurers reports that in 2010, insurers uncovered 133,000 fraudulent claims. The value of these claims totalled £919 million or 5% of the value of all claims made on its members that year. Insurance fraud is said to cost the UK economy £2 billion every year (see the Law Commission and the Scottish Law Commission, Insurance Contract Law: Post-Contract Duties and Other Issues, the Second Joint Consultation Paper, 20 December 2011, para. 6.6). 3 The Criminal Law of the People’s Republic of China was first adopted at the Second Session of the Fifth National People’s Congress on 1 July 1979, revised at the 5th Session of the Eighth National People’s Congress on 14 March 1997, and amended eight times in the following years.

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“(1) Where no insured event has occurred, and the insured or the beneficiary fraudulently reports that an insured event has occurred and submits a claim for indemnity payment or insurance benefits, the insurer may rescind the contract and refuse to refund the premium paid. (2) Where the proposer or the insured intentionally causes the occurrence of an insured event, the insurer may rescind the contract, shall not be liable for indemnity payments or insurance benefits, and, except as provided under article 43 of this Law, does not refund the premium paid. (3) Where the proposer, the insured or the beneficiary, following the occurrence of an insured event, fabricates false causes of the insured event or overstates the extent of loss by means of forged or altered relevant documents, information or other evidence, the insurer shall not be liable for indemnity payment or insurance benefits in respect of the portion which is fraudulently claimed. (4) Where the proposer, the insured or the beneficiary has committed any of the acts provided in the three preceding paragraphs which leads the insurer to pay insurance benefits or incur expenses, it shall refund the insurance benefits paid or reimburse the expenses so incurred.”

To constitute a fraud, two factors must be satisfied: first, the fraudster’s act must be intentional, by which the fraudster knows that his deceptive act may lead the insurer to make a wrong judgement on the claim, and the fraudster expects that the insurer would pay the claim on the basis of the wrong judgement. Second, the fraudster must have actively committed the fraudulent act.4 By virtue of art. 27 of the Insurance Law, fraudulent claims can be described by several elements. The fraudsters may include the proposer, the insured or the beneficiary; the purpose is to defraud the insurer of insurance payments; the types of frauds may include: (1) fabrication of the occurrence of an insured event, (2) intentionally causing the insured event to happen, and (3) fabrication of a false cause of the occurrence of an insurance event, or exaggeration of the extent of the loss by fraudulent means or devices. In addition to art. 27 which deals with private rights of action available to the insurer in the case of a fraudulent claim, the Insurance Law also imposes administrative sanctions on the insurance fraudsters. Article 174 of the Insurance Law provides “A proposer, an insured or a beneficiary, who commits insurance fraud by means of any of the following acts, which does not constitute a crime, shall be subjected to administrative sanctions in accordance with law: (1) The proposer deliberately fabricates the insured subject matter so as to defraud the insurer of an insurance payment; (2) Falsely alleging the occurrence of an insured event which in fact has not occurred, fabricating the cause of the accident or exaggerating the extent of losses, and defrauding the insurer of an insurance payment; (3) Deliberately causing the occurrence of an insured event, and defrauding the insurer of an insurance payment; Any appraiser, accessor or attester of the insured loss, who deliberately provides false certification documents, thus providing conditions for the proposer, the insured or the beneficiary to carry out insurance frauds, shall be punished in accordance with the provisions in the preceding paragraph.”

4 Ibid.

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By virtue of art. 174, where the insured has committed an insurance fraud as specified in this article, the insured is subjected to administrative sanctions. According to the Chinese Administrative Penalty Law,5 administrative sanctions may be imposed on individual persons, legal persons or other organisations.6 Different types of administrative penalty may be created by law,7 administrative rules or regulations.8 Types of administrative penalty include: (1) disciplinary warning; (2) fine; (3) confiscation of illegal gains or confiscation of unlawful property or things of value; (4) ordering of suspension of production or business; (5) temporary suspension or rescission of permit or temporary suspension or rescission of licence; (6) administrative detention; and (7) others as prescribed by laws and administrative rules and regulations.9 The issue of whether or not an insurance fraud constitutes a crime is governed by the Criminal Law. This topic will be considered briefly below. 16.3 The types and effects of fraudulent claims Article 27 of the Insurance Law sets out a number of different types of frauds and remedies available to the insurer. The types of frauds include: (1) fabrication of the occurrence of an insured event; (2) intentionally causing the insured event to happen; (3) fabrication of a false cause of the occurrence of an insurance event, or exaggeration of the extent of the loss by fraudulent means or devices. The remedies available to the insurer vary depending on the nature and types of the frauds, including (1) release from the liability for the claim; (2) rescission of the contract; (3) retention of the premium paid; (4) recovery of the insurance payment; (5) recovery of expenses incurred by the insurer; and (6) other special remedies for life insurance. These types of frauds and the remedies are discussed in this section. Frauds in life insurance are discussed in a separate section below. 16.3.1 Fabrication of the occurrence of an insured event In the event that the insured event did not occur but the insured or the beneficiary reported that the insured event occurred and made a false claim for an insurance payment for the fabricated losses, the insurer is entitled to rescind the contract and retain the premium paid.10 In a property insurance case,11 the insured let his friend take some property (such as TV, computer, etc.) from his home. He then reported to the police that his home had been broken into and some valuable items were stolen.

5 The Law of the People’s Republic of China on Administrative Penalty was adopted at the 4th Session of the Eighth National People’s Congress on 17 March 1996 and promulgated by Order No. 63 of the President of the People’s Republic of China on 17 March 1996. 6  Ibid, art. 3. 7  Ibid, art. 9. 8  Ibid, art. 10. 9  Ibid, art. 8. 10  The Insurance Law, art. 27(1). 11  See Hong Li and Zhong xin Lao, Cases of Insurance Frauds and Traps (South-west University of Finance and Economics Publishing House 2007) p. 57.

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The police came to his home to inspect the scene. The insured then made a claim for insurance compensation of ¥28,000 for the loss of the items. The police further investigated the case and discovered that it was a fraud. According to art. 27(1) of the Insurance Law, the insured made a false claim for property loss which in fact did not happen, and the insurer was entitled to rescind the contract and retain the premium paid. Although art. 27(1) of the Insurance Law is silent as to the issues of insurer’s liability for the fabricated claim, it implies that the insurer should not be liable for such a fraudulent claim. As there was no real loss, there should be no liability for the insurer to pay for the fabricated losses. This can also be seen in art. 27(4) of the Insurance Law, which entitles the insurer to recoup the insurance money paid to the insured in the event that the insured peril did not occur but the insured or the beneficiary fabricated the occurrence of the insured event and the insurer paid for the fabricated losses. It is suggested that art. 27(1) of the Insurance Law should make it explicit that the insurer is not liable for the fabricated losses where the insured event in fact did not happen. Article 27(1) of the Insurance Law does not cover the issue of whether the insurer is liable for any genuine claim which occurred following a fraudulent claim but prior to the rescission of the contract. In judicial practice, courts tend to support a valid claim in this situation. For example, in Mr Hong v The Life Insurance Company Beijing Branch,12 Mr Hong effected a life policy on his own life with coverage of hospital expenses in May 2002. His wife effected an accident policy on him with the same insurer in 2003. Mr Hong was injured by an accident in June 2010 and stayed in hospital for treatment for 24 days. He claimed for medical costs of ¥16,580. The insurer paid ¥10,000 under the accident policy effected by his wife. The insurer further investigated the claim and found that in 2006, Mr Hong made a fraudulent claim under his own hospital expenses insurance policy, so the insurer refused to pay the rest of the amount claimed and rescinded the hospital expenses contract. The court held that according to art. 27(1) of the Insurance Law, the insurer had the right to rescind the hospital expenses contract; but the genuine claim for the hospital expenses should be paid. It seems that the effect of the rescission of the contract under art. 27(1) of the Insurance Law is prospective, not retroactive.13 The effect of the rescission of the contract appears from the moment of rescission, not from the moment when a fraud took place; therefore, a legitimate claim following a fraudulent claim should be recoverable under the policy. But there is so far no clear-cut answer in the Insurance Law as to the exact effect of a fraud on a valid claim following the fraud. It is suggested that if a claim for real loss occurred before the fraud was made, the insurer

12 This case was cited in the book Typical Cases and Adjudgment Considerations of Insurance Law by Jianxun Liu (Law Press China 2012) p. 351. 13  This is in contrast to the position on intentional misrepresentation of material facts prior to conclusion of the contract under art. 16(4) of the Insurance Law, by which the insurer is not liable for losses that occurred prior to the rescission of the contract, where the insured intentionally misrepresented material facts to the insurer.

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should be liable for the valid claim; while if a valid claim occurred after the fraud was made, the insurer should not be liable for it.14 There is also considerable uncertainty about the effect of a fraud on other claims made under the policy in English law.15 The Law Commissions proposed, in their Second Consultation Paper, that a fraud should discharge an insurer from future liabilities. Thus an insurer would not be obliged to pay any claim which arises following a fraud, whether or not it has taken action to terminate the contract.16 Accordingly, the Law Commissions recommended that an insured who commits a fraud should forfeit any claim where the loss arises after the date of the fraud, but be entitled to be paid for any previous valid claim which arose before the fraud took place.17 This recommendation has now been incorporated into s.12(2) of the Insurance Act 2015 (UK). In the above-mentioned case of Mr Hong v The Life Insurance Company Beijing Branch, the insurer uncovered the insured’s fraud in 2006 in the process of examining the latest claim in 2010; nevertheless, the insurer still needed to meet the latest genuine claim before setting aside the contract. Assuming that the insurer had known about the fraud in 2006 but still paid the claim and did not exercise its right of rescission, this could be taken as an indication of affirmation of the contract. The insurer should be deemed to have waived its right of rescission of the contract in 2006 and should be prohibited from exercising the right of rescission in 2010. It is suggested that the concept of waiver should be introduced into art. 27(1) of the Insurance Law to the effect that the insurer should exercise its right of rescission within a certain period of time (say, 30 days)18 from the date of becoming aware of the insured’s fraud, or else the insurer is taken to have waived such right of rescission. 16.3.2 Intentionally bringing about the happening of the insured event Where the proposer or the insured intentionally causes the occurrence of an insured event, the insurer is free from liability for that claim, and is entitled to rescind the contract and retain the premium paid.19 The Insurance Law does not define the term “intentional.” The definition of the term “intentional” is provided in the Criminal Law. An intentional crime refers to an act committed by a person who clearly knows that his act will entail harmful consequences to society but who wishes or allows such consequences to occur.20 In the insurance context, the motivation for

14  See Jianxun Liu, Typical Cases and Adjudgement Consideration of Insurance Law (Law Press China 2012) p. 366. 15  See the Law Commission and the Scottish Law Commission, Insurance Contract Law: Post-Contract Duties and Other Issues, the Second Joint Consultation paper, 20 December 2011, para. 6.1. 16  Ibid, para. 6.3(3). 17  Ibid, paras 8.2 and 8.17. 18  The Insurance Law sets out time limits within which the insurer may exercise the right of rescission for intentional and grossly negligent non-disclosure or misrepresentation. The right of rescission shall lapse where the insurer does not exercise it within 30 days after having become aware of the material non-disclosure, or within two years from the date of formation of the contract. See art. 16(3) of the Insurance Law. 19  The Insurance Law, art. 27(2). 20  The Criminal Law, art. 14.

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intentionally causing the insured risk to occur is to deceive the insurer and gain an insurance payment. For example, in Mr Shen v The Property Insurance Company,21 Mr Shen spent ¥480,000 on purchasing a second-hand car (Mercedes Benz S350) in January 2010 and insured the car for the amount of ¥1,400,000. In February 2010, Mr Shen drove his car outside the town and set the car on fire deliberately. He made a fraudulent claim for an insurance payment in the amount of ¥970,000. He intentionally caused the insured risk to occur, which constituted a crime. Not only was his claim refused and the contract rescinded, but he was sent to prison for five years and fined ¥100,000. If the proposer or the insured intentionally brings about the insured event and then claims an insurance payment, the remedies for the insurer include: no payment of that claim, rescission of the contract and retention of the premium paid. One issue open to debate is whether or not the insurer is entitled to rescind the contract if the insured has attempted to bring about the occurrence of an insured event, but the event has not occurred in the end. It could be argued that even if the insured’s attempt has failed, the insurer should be entitled to rescind the contract, but the severity and the nature of the insured’s act should be taken into account. For example, if an insured is trying to set fire to an insured property, but is found by someone who stops the insured’s action, and the property is not damaged by fire, the insured should be taken as having attempted a crime and the insurer should be entitled to rescind the contract. 16.3.3 Fabrication of a false cause of the occurrence of an insurance event and exaggeration of the extent of the loss by fraudulent means or devices According to art. 27(3) of the Insurance Law, where the proposer, the insured or the beneficiary, following the occurrence of an insured event, fabricates false causes of the insured event or overstates the extent of loss by means of forged or altered relevant documents, information or other evidence, the insurer shall not be liable for indemnity payments or insurance benefits in respect of the portion which is fraudulently claimed. Unlike the situations described in art. 27(1) and (2) of the Insurance Law, under which the insured event did not occur (art. 27(1)) or the insured intentionally caused the insured event to happen (art. 27(2)), the situation described in art. 27(3) refers to the situation where the insured event has occurred – the insured fraudulently misrepresents the cause of the insured event or the extent of the losses, which is supported (or not supported) by forged or altered documents. It is now convenient to consider fraudulent causes of insured events and exaggeration of losses.

21 See China Insurance Newspaper, 29 May 2014 ( accessed in January 2016).

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(a) Fabrication of false causes of the insured event When an insured event occurs and causes damage to the insured subject matter, the insurer is not liable for paying the claim if the cause of the insured event is excluded from the scope of coverage under the policy. For example, in fire insurance, the insured event is fire. The insurer is liable for a loss occasioned by fire. However, the insurer’s undertaking to indemnify the insured loss by fire can be qualified by exceptions which expressly provide that the insurer is not to be liable for a loss occasioned by certain specified causes, such as explosion, riot or hostilities. So if the fire is caused by any of these excluded causes, the insurer is free from liability. In motor vehicle insurance, the policy covers damage to the vehicle by collision but excludes damage caused by overloading the vehicle. In the event that the damage or loss of the insured subject matter is caused by an excluded cause under the policy, the insured sometimes conceals the real cause of the loss but makes up a false cause of the loss which is within the scope of coverage in order to defraud the insurer of the insurance payment. This can be illustrated by the case of Beijing Yuan Da Machinery Construction Company v China Property Insurance Company Ltd Beijing Branch.22 The iron horizontal beam of the insured vehicle (a heavy dump truck) was bent by overloading the truck with stones. This damage to the vehicle was excluded from the scope of coverage under the policy. The insured deliberately misrepresented the cause of the damage to the vehicle by saying that the horizontal beam was bent by a collision with stones when reversing the vehicle, which was covered under the policy, and claimed for an insurance payment of ¥49,602. Upon investigation, it was revealed that the real cause of the damage of the vehicle was the overloading of the vehicle with stones, not by collision. It was held that the insurer was not liable for the loss because the cause of the loss was excluded from the coverage. The insured’s fraudulent claim was turned down according to art. 27(3) of the Insurance Law. For the sake of argument, assuming that the insured genuinely believed that the vehicle was damaged by collision with stones and no fraudulent element was involved in the claim, the question of whether the insurer should be liable for the loss would simply be a question of determination of the causation of the loss. In the present case, no matter whether the insured fraudulently misrepresented the cause of the loss or truthfully believed that the cause of the loss was collision, the consequence would be the same, i.e. rejection of the claim. The problem with art. 27(3) of the Insurance Law is that the law does not provide any deterrent against fraudulent making up of the cause of losses. An insured would lose nothing in the case of fabrication of false causes of the insured event. (b) Exaggeration of losses Consider if the insured event did happen and caused loss within the scope of the coverage under the policy, and the insured exaggerates the loss in order to get a larger insurance payment by fraudulently misrepresenting the real loss which may be supported (or not supported) by false evidence or fabricated documents, etc. In order to determine the extent of the insured’s exaggeration of the loss, it is important

22  See Jianxun Liu, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press China 2010) p. 230.

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to determine the real loss caused by the insured event. For property insurance, it is important for the insurer to come to the site to inspect the loss upon the occurrence of the insured risk. For medical insurance, it is necessary to check the correctness and reasonableness of the medical expenses incurred by the life insured, and the determination of the grade of disability, etc. The remedy for a fraudulently exaggerated claim is that the insurer is not liable for insurance payments in respect of the portion which is fraudulently claimed, but liable for the genuine portion of the claim.23 For example, a fire occurs on insured premises, which destroys 100 computers on the site. The insured submits a fraudulently exaggerated claim for 150 computers. Then the insurer is liable to pay only the genuine portion of the claim for 100 computers. In another example, the insured spends ¥2,000 on medical costs for the treatment of an accidental injury to his arm. He fabricates a few receipts for medical expenses and makes a fraudulent claim for medical costs of ¥2,500. The insurer is only liable to pay the real expenses of ¥2,000. This is in contrast to the English law position, under which an insured who fraudulently exaggerates an insurance claim forfeits the whole claim.24 An example of this principle is Galloway v Guardian Royal Exchange (UK) Ltd.25 Mr Galloway was burgled and suffered a genuine loss of around £16,000. When he submitted his claim, however, he fabricated a claim for a fictitious computer for around £2,000. The Court of Appeal rejected the whole claim, including the £16,000 of genuine loss. English law provides a strong deterrent against exaggeration. The consequences of exaggeration may be severe. For example, in Aviva v Brown,26 the insured claimed for subsidence to his home, which led him to seek alternative accommodation. He claimed rent for alternative accommodation without revealing he owned the property concerned. This was held to be fraudulent. The claim for the cost of repairing subsidence (£177,000) and for the alternative accommodation (£58,500) were held to be the same claim, as both arose from the same incident. Both the accommodation and the repair elements of the claim were forfeited. 16.3.4 Recouping insurance payments and expenses incurred for claim investigation Where the proposer, the insured or the beneficiary has committed any of the acts provided in art. 27(1), (2) or (3) which leads the insurer to pay insurance moneys or incur expenses, the insurer who has paid for what turns out to have been a fraudulent claim may recover the money, and is also entitled to recover the costs incurred in investigating the claim.27 The following two cases explain the situations where the insurer can recover the insurance money paid and expenses sustained in investigation of the claim.

23  The Insurance Law, art. 27(3). 24  See the Law Commission and the Scottish Law Commission, Insurance Contract Law: Post-Contract Duties and Other Issues, the Second Joint Consultation Paper, 20 December 2011, para. 6.1. 25  [1999] Lloyd’s Rep IR 209. 26  Aviva Insurance Ltd v Brown [2011] EWHC 362 (QB), [2012] Lloyd’s Rep IR 211 (QBD). 27  The Insurance Law, art. 27(4).

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In Mr Bao v The property Insurance Company,28 it was held that the insurer was entitled to recoup the insurance payment. Mr Bao (the insured) hid his car in Mr Shen’s warehouse, and then fraudulently reported to the local police that his car was stolen. The insurer paid him ¥20,000 under the policy. Later, Mr Shen needed the warehouse for his own goods, so he moved the car out of his warehouse and parked it on the road next to the warehouse. Mr Bao took off the registration board from the car and erased the engine number. Eventually the local police found this vehicle. The court held that the insured event did not occur, and that Mr Bao intentionally fabricated a story of his car being stolen and defrauded the insurer of the insurance payment; according to art. 28 of the Insurance Law 2002,29 the insurer was entitled to recoup the insurance payment, rescind the contract and retain the premium paid. In addition, the insured was required to pay the expenses incurred by the insurer in investigating the fraudulent claim. It was also held by the criminal court that Mr Bao’s act constituted a crime according to art. 198 of the Criminal Law, and thus he was sentenced to a fixed-term imprisonment and also punished with a fine. In Mr Wang v The Insurance Company,30 it was held that the insured was liable for paying the cost incurred in investigating the claim. In this case, a clause in the insurance policy stated that at the time of making an insurance claim, the insured shall not conceal facts, forge documents, fabricate false cases and commit other fraudulent acts. If the insured is in breach of this clause, the insurer is entitled to refuse such fraudulent claims. Mr Wang’s vehicle collided with another vehicle. The car was damaged. The traffic police found that Mr Wang was fully responsible for the accident. The insurer entrusted an agent of loss investigation and evaluation to investigate the cause of the accident and the loss and paid ¥1,500 for the investigation. It was found by the agent that the traces of collision on the insured vehicle did not match those on the other vehicle, indicating that the damage to the vehicle was not caused by the reported accident. The insured claimed for an insurance payment for the damage to the insured vehicle and the other vehicle, but was rejected by the insurer by reason of the insured’s fraud. The insurer counter-claimed for the cost of ¥1,500 for the investigation of the accident and the claim was upheld by the court. In contrast to the Chinese law in respect of the cost of investigating a fraudulent claim, English law does not recognise damages for the expenses incurred by the insurer in investigating a fraudulent claim.31 The Law Commissions recommended32 that damages should be available to the insurer to cover the reasonable costs of investigating a fraudulent claim. To establish a damages claim, the insurer would need to prove all the elements of the claim. It would therefore need to show that (1) the insured committed a fraud; (2) the insurer actually incurred costs in investigating the fraud, and the insurer will need to prove each expense; (3) the costs

28  This case was cited in the book by Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 186. 29  Article 28 of the 2002 version of the Insurance Law has the same content as art. 27 of the 2015 version of the Law. 30  This case was cited in the book by Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 185. 31  London Assurance v Clare (1937) Lloyd’s L Rep 254, per Goddard L at 270. 32 The Law Commission and the Scottish Law Commission, Insurance Contract Law: Post-Contract Duties and Other Issues, the Second Joint Consultation Paper, 20 December 2011, para. 8.22.

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were reasonable and proportionate in the circumstances; and (4) the costs were not offset by any saving from legitimate, forfeited claims.33 Although the Insurance Law entitles the insurer to recoup the expenses incurred, it does not give detailed rules for the insurer to follow in order to get reimbursement of the cost incurred. It is thus suggested that in order to establish a claim for recovery of the cost sustained, the insurer must prove that (1) the costs were actually incurred in investigating the fraud, and the insurer should prove each expense; and (2) the costs were reasonable and proportionate in the circumstances. 16.4 Fraudulent claims in life insurance In the event that the insured intentionally causes the occurrence of the insured event, the Insurance Law provides different rules for non-life insurance and for life insurance. For non-life insurance contracts, the insurer may rescind the contract, is not liable for indemnity payments and is entitled to retain the premium paid.34 For life insurance contracts, the relevant rules are provided in art. 43 of the Insurance Law. The Law provides different consequences for the proposer intentionally causing the insured event to occur and for the beneficiary’s intentional action. Article 43(1) states: “Where the proposer deliberately causes the death, injury, disability or illness of the life insured, the insurer shall bear no obligation to pay insurance money. In the event that the proposer has paid the premium for two years or more, the insurer shall, in accordance with the contract, return the cash value of the policy35 to other person(s) who are entitled to their rights as such.” The second sentence of this article is unclear in respect of the question of who should be the other persons entitled to receive the cash value, and the question of what is the sequence for the other persons to receive the cash value. These ambiguities are clarified by art. 16 of the SPC Interpretations III 2015,36 which provides that “where the proposer has intentionally caused the death, disability or illness of the life insured, and the insurer refunds the cash value of the insurance policy pursuant to the provision of art. 43 of the Insurance Law, other persons entitled to receive the cash value can be determined according to the sequence of the life insured, and then the life insured’s successors.” This means that if the proposer has intentionally caused the disability or illness of the life insured, the cash value of

33  The English common law position in respect of a claim with fraudulent and genuine elements is that the whole claim is forfeited if the insured committed a fraud in relation to the claim. In Galloway v Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209, the insured suffered a burglary and claimed £16,000 for lost goods. He also fraudulently misrepresented that his computer worth £2,000 was stolen. The value of the fraudulent claim was some 11%. This was substantial and tainted the whole claim. 34  The Insurance Law, art. 27(2). 35  Cash value is also known as surrender value: the sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. 36 The third Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China was published on 25 November 2015 and came into force on 1 December 2015.

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the policy shall be paid to the life insured; if the proposer has intentionally caused the death of the life insured, the cash value of the policy shall be paid to the life insured’s successors.37 Article 43(2) of the Insurance Law provides: “Where the beneficiary deliberately causes the death, injury, disability or illness of the life insured, or attempts to murder the life insured but fails, the beneficiary shall lose his right to claim the insurance money.” This implies that other beneficiaries (if any) can still claim insurance money. It is obvious that the remedies are different between the two situations where the proposer commits illegal acts as mentioned in art. 43(1) of the Insurance Law and where the beneficiary does the same as mentioned in art. 43(2) of the Law. This may cause problems which will be discussed in detail in Chapter 20, “Life and accident insurance.”38 Suicide is a moral hazard against public policy. The Insurance Law provides a different consequence for the life insured’s suicide and for the proposer intentionally causing the death of the life insured. Article 44 of the Insurance Law is concerned with suicide of the life insured, and it states: “In the case of contracts in which the death of a person whose life is insured is set as the condition for payment of the insurance moneys, the insurer shall not be liable for payment of insurance moneys where the life insured commits suicide within two years from the date of conclusion (or restoration) of the contract, except the life insured with no capacity for civil acts when he commits suicide.” It implies that if the life insured commits suicide after two years from the date of conclusion of the contract, the insurer should be liable for paying the insurance moneys in accordance with the contract. 16.5 Criminal prosecutions In China, three mechanisms are employed in battling insurance frauds: civil liability,39 administrative sanctions40 and criminal prosecutions.41 The first two mechanisms have been discussed above; the third one is examined in this section. Many cases relating to insurance frauds have been tried in criminal courts. Criminal punishment plays an important role in deterring insurance frauds. The relevant statutory law dealing with criminal punishments for insurance frauds is art. 198 of the Criminal Law, which provides “Any of the following persons who commit insurance fraud in any of the following ways shall, if the amount involved is relatively large, be sentenced to fixed-term imprisonment of not more than five years or criminal detention and shall also be fined not less than ¥10,000 but not more than ¥100,000; if the amount involved is huge, or if there are other serious circumstances, he shall be sentenced to fixed-term imprisonment of

37  For more, see Zhen Jing “The Latest Development of the Insurance Law in Life Insurance in China: The Third Judicial Interpretation on the Insurance Law by the Supreme People’s Court of China” [2016] 129 BILAJ 1. 38  For more on beneficiaries in life insurance in China, see Zhen Jing, “Beneficiaries in Life Insurance in Chinese Law and Practice” [2013] JBL 463. 39  The Insurance Law, art. 27. 40  Ibid, art. 174. 41  The Criminal Law, art. 198.

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not less than five years but not more than 10 years and shall also be fined not less than ¥20,000 but not more than ¥200,000; if the amount involved is especially huge, or if there are other especially serious circumstances, he shall be sentenced to fixed-term imprisonment of not less than 10 years or life imprisonment and shall also be fined not less than ¥20,000 but not more than ¥200,000 or be sentenced to confiscation of property: (1) a proposer defrauds insurance money by deliberately falsifying the subject matter of the insurance; (2) a proposer, an insured or a beneficiary defrauds insurance money by cooking up the cause of an insured accident or overstates the extent of loss; (3) a proposer, an insured or a beneficiary defrauds insurance money by inventing stories of an insured accident that does not occur; (4) a proposer or an insured defrauds insurance money by deliberately causing the occurrence of an insured accident that leads to property damage; or (5) a proposer or a beneficiary defrauds insurance money by deliberately causing the death, disability or illness of the insured. Whoever commits the acts listed in subparagraph (4) or (5) of the preceding paragraph, which also constitutes another crime, shall be punished in accordance with the provisions on combined punishment for several crimes. Where a unit commits the crime mentioned in the first paragraph, it shall be fined, and the persons who are directly in charge and the other persons who are directly responsible for the crime shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention; if the amount involved is huge, or if there are other serious circumstances, they shall be sentenced to fixed-term imprisonment of not less than 5 years but not more than 10 years; if the amount involved is especially huge, or if there are other especially serious circumstances, they shall be sentenced to fixed-term imprisonment of not less than 10 years. Any expert witness, witness or property assessor of an insured accident who deliberately provides false supporting documents, thus creating the conditions for another to practise fraud, shall be deemed an accomplice in insurance fraud and punished as such.”

According to the first paragraph of art. 198 of the Criminal Law, the term of imprisonment and the amount of fine depend on the seriousness of fraud and the amount of money involved. However, this article uses vague words “relatively large,” “huge,” and “especially huge” to describe the amount involved in a fraud, but does not specify the exact figures. This vagueness was cleared up by the Interpretation of the Supreme People’s Court of China on Certain Issues Concerning Application of Relevant Laws in Trying Fraud Cases.42 By this Interpretation, in the case of an individual person who has committed insurance fraud, the thresholds of the amounts involved in the fraud as being “relatively large,” “huge,” or “especially huge” are specifically provided as being ¥10,000, ¥50,000 or ¥200,000, respectively; in the case of a legal person (i.e. a factory, a company, etc.) or an organisation, the amounts are ¥50,000, ¥250,000 or ¥1,000,000, respectively.43 If the amount falls short of ¥10,000 for an individual or ¥50,000 for a legal person, it is likely that an administrative sanction may be applied in accordance with art. 174 of the Insurance Law, as mentioned above.

42 This Interpretation was published on 18 September 1996 and became effective on the same day (see accessed in April 2016). 43  Ibid, art. 8.

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In a criminal case of fraudulently overstating the degree of the insured event by falsifying a medical report,44 Mr Wang purchased for his wife nine accident policies with total amount insured of ¥5,700,000 for his wife from six insurance companies during the period from November 2012 to January 2013. On 17 February 2013, his wife was poisoned by carbon monoxide. The next day, he reported the accident to two of the six insurance companies and received insurance payments of ¥110,000. In August 2013, she had a medical test in the hospital, and the hospital issued her a medical report about her physical condition. In order to meet the requirements for claiming a disability payment, he amended her medical report using Photoshop software. A forensic centre in Ningbo City on the basis of the forged test report issued a judicial report which said that her disability reached the level five. He used this judicial report to claim insurance payments with an expectation of obtaining insurance payments of ¥740,000. The court held that according to art. 197 of the Criminal Law, Mr Wang defrauded insurance money by overstating the extent of loss using a forged document; he committed a crime and was sentenced to six years in prison. He was also fined ¥50,000. In a motor insurance case,45 the insured intentionally burned his car and then claimed for an insurance payment of ¥971,900. He was sentenced to five years in prison and also fined ¥100,000. In another case,46 Mr Qiao (the insured) reported to the insurance company on 14 March 2013 that Mr Zhang, the named driver under the insurance policy, had a road accident and injured Mr Xu who was on a bicycle. Upon arriving at the site to inspect the accident, the insurer found that Mr Xu was already dead. According to the terms of the contract, the insurer would be liable for paying the insured ¥400,000 for the loss caused by the accident. On the same day, traffic policies investigated the accident and found that Mr Xu had had a medical operation before his death. Mr Qian confessed the fact that Mr Xu fell down accidently from the fourth floor of an old building, while he was working for Mr Qiao in demolishing the building, and was seriously injured. He died in the hospital in the early morning on 14 March 2013. Mr Qiao agreed to pay ¥450,000 to Mr Xu’s family as compensation for his death. In order to reduce his own loss, Mr Qiao fabricated this false story of the road accident, with the intention of defrauding the insurer of the insurance payment. The court sentenced Mr Qiao to one year in prison and fined him ¥10,000, and sentenced Mr Zhang to six months in prison and fined him ¥3,000. 16.6 Criminal prosecution versus civil liability As discussed above, an insurance fraud may involve both criminal action and civil liability. An issue as to the sequence of a criminal or civil trial is worth considering

44  See the case reported by Guolian Life Insurance Company ( accessed in April 2016). 45 See China Insurance Newspaper, 29 May 2014 ( accessed in January 2016). 46 Ibid.

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here. As a general rule, a criminal trial takes place first, and then a civil trial follows. In some circumstances, this general rule may not apply. The circumstances under which an insurance fraud case must be tried first by a criminal court, or it should be tried by both a criminal court and a civil court, or it can only be tried by a civil court, are governed by the rules in arts 10, 11 and 12 of the Stipulations of the Supreme People’s Court on Certain Issues Concerning Suspicion of Economic Crimes Involved in the Trial of Economic Disputes.47 It is clearly stipulated that if a civil court, in the trial of a case on an economic dispute, discovers clues or legal materials which indicate a suspicion of economic crime, the court should transfer such relevant legal materials to the Public Security Bureau or the Procuratorate for them to investigate and prosecute, and the court will continue with the trial of the case on the economic dispute.48 Let us explain this situation with a hypothetical case. The insured murdered his wife for insurance money. He claimed that his wife died of a heart attack. The civil court trying the case found some clues in her medical records and suspected the cause of her death. The civil court then transferred such materials to the Public Security Bureau for them to investigate. It was found in the end that she was poisoned by her husband (the insured). Then both the criminal court and the civil court would try the case. In the situation where a court has accepted the case as an economic dispute, but after hearing evidence the court finds that the case is not merely a simple economic dispute but an alleged economic crime, the court should then reject the prosecution and transfer the relevant material to the Public Security Bureau or the Procuratorate.49 Where the civil court finds that the insurance case has a fraudulent element but the fraudulent element is not so severe as to reach the threshold of criminal prosecution, the court will deal with the case as a civil case only. For example, where a person made a fraudulent claim, if the amount of insurance money claimed is more than ¥10,000 for an individual or ¥50,000 for a legal person, a criminal prosecution will be applied in accordance with art. 198 of the Criminal Law and art. 8 of the Interpretation of the Supreme People’s Court of China on Certain Issues Concerning Application of Relevant Laws in Trying Fraud Cases. If the amount of insurance money claimed is less than the threshold for criminal prosecution, an administrative sanction may be applied in accordance with art. 174 of the Insurance Law, as mentioned above.

47 The Stipulations of the Supreme People’s Court on certain issues concerning suspicion of economic crimes involved in the trial of economic disputes was published on 9 April 1998 and became effective on 29 April 1998. 48  Ibid, art. 10. 49  Ibid, art. 11.

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16.7 Conclusion In China, an insured’s fraudulent claim is a serious problem; three mechanisms are employed in combating insurance fraud: civil liability,50 administrative sanctions51 and criminal prosecutions.52 Article 27 of the Insurance Law provides a number of rules for handling different types of insurance fraud: (1) For fabrication of the occurrence of an insured event, the insurer has the right to rescind the contract and retain the premium. (2) For intentionally causing the insured event to happen, the insurer is free from liability for the claim, and has right to rescind the contract and retain the premium. (3) For fabrication of a false cause of the occurrence of an insurance event, or exaggeration of the extent of the loss by fraudulent means or devices, the insurer is not liable for the portion of the claim to which the fraud is related. (4) If an insured commits any of the three types of the fraud, the insurer can recover the insurance money paid and expenses incurred in investigating the claim. In life insurance, remedies for an intentional act to cause the insured event to occur are different from those in property insurance, and differ between the two situations where the proposer commits illegal acts as mentioned in art. 43(1) of the Insurance Law and where the beneficiary does the same as mentioned in art. 43(2) of the Law. In addition to civil liability, administrative sanctions are also imposed on fraudsters in accordance with art. 174 of the Insurance Law. Criminal prosecutions as provided in art. 197 of the Criminal Law play an important role in deterring insurance fraud. However, there are shortcomings and ambiguities in the relevant provisions of the Insurance Law: (1) the effect of a fraud on a subsequent genuine claim is uncertain; and (2) the remedy for fraudulent fabrication of the cause of an insured and exaggeration of losses under art. 27(3) of the Insurance Law seems to have no deterrent effect against fraud. These deficiencies are in need of improvement in the future.

50  The Insurance Law, art. 27. 51  Ibid, art. 174. 52  The Criminal Law, art. 198.

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CHAPTER 17

Subrogation

17.1 Introduction In the insurance context, the doctrine of subrogation means that where an insured event is caused by a negligent third party, after the insurer has indemnified the insured’s loss as required by the policy, it is entitled to step in the insured’s shoes and enforce the insured’s right to sue the third party wrongdoer. The primary purpose of the doctrine of subrogation is to prevent the insured from being over indemnified for a loss from the insurance payout and any compensation paid to him by the third party for the same loss. This hinges on the indemnity nature of insurance contracts.1 In China, matters relating to subrogation are governed by arts 46, 60, 61, 62 and 63 of the Insurance Law for non-marine insurance. This chapter critically examines the relevant provisions of the Insurance Law in relation to subrogation and considers the manner in which these rules of law are interpreted and applied by Chinese courts.2 17.2 The nature and origin of subrogation in insurance contract law Modern insurance activities, together with the principles and doctrines of insurance contracts, were introduced to China from western countries, particularly from Britain, in the early 19th century. To begin with, it is appropriate and convenient to examine the nature and justification of the doctrine of subrogation developed in English law so as to help set the scene for later discussion on Chinese law in respect of subrogation. 17.2.1 The nature of subrogation The nature of the principle of indemnity was well established in the English classic case of Castellain v Preston.3 Brett LJ said: “The fundamental rule of insurance law is that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and this contract means that the assured, in the case of a loss against which the policy has been made, shall be fully indemnified, but

1  Castellain v Preston (1883) 11 QBD 380. 2  Rules of subrogation in marine insurance will be examined in Chapter 24, “Marine insurance.” 3  (1883) 11 QBD 380.

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shall never be more than fully indemnified.”4 The nature of indemnity laid down the foundation for the principle of subrogation in insurance law. Where the contract of insurance is one of indemnity, after the insured has been indemnified for his loss by the insurer, the insurer acquires two distinct rights from the insured – the right to any benefits already in the hands of the insured which extinguish or diminish the loss, and the right to any cause of action which the insured may have against a third party, in relation to the said loss. The transference of both these rights from the insured to the insurer is known as subrogation in insurance law. 17.2.2 Origin of the doctrine of subrogation The origin of the doctrine of subrogation can be traced back to Roman law.5 It was introduced to England as one of the fundamental principles in insurance law in the 18th century.6 The doctrine was codified into the Marine Insurance Act 1906 (MIA).7 There were two theories regarding the issue of whether the doctrine of subrogation derived from equity or common law. A number of authorities referred to it as a creature of equity. In Burnand v Rodocanachi,8 Lord Blackburn said in reference to a marine policy: “If the indemnifier has already paid it, then, if anything which diminishes the loss comes into the hands of the person to whom he has paid it, it becomes an equity that the person who has already paid the full indemnity is entitled to be recouped by having that amount back.”9 In Morris v Ford Motor Co. Ltd,10 Lord Denning MR refused the cleaners’ claim against Ford’s employee by using Ford’s name, on the reasoning that subrogation was an equitable remedy and could be refused where it would be inequitable.11 The other more recent theory is that subrogation is a common law principle which is implied in every contract of indemnity by the operation of law. The authority which represents the contractual theory of subrogation is the judgment delivered by Diplock J in Yorkshire Insurance Co. Ltd v Nisbet Shipping Co. Ltd,12 though it was

4  Ibid, at 387. 5  See S. R. Derham, Subrogation in Insurance Law (The Law Book Company Limited 1985) p. 4. 6 Lord Mansfield in an 18th-century case of Mason v Sainsbury (1782) 3 Doug 61, at 64 stated: “Every day the insurer is put in the place of the assured.” In the English case of John Edwards & Co. Ltd v Motor Union Insurance Co. Ltd [1922] 2 KB 249, McCardie J said that the doctrine of subrogation “was derived by our English courts from the system of Roman law. . . . The doctrine has been widely applied in our English body of law, e.g. to sureties and to matters of ultra vires as well as to insurance. In connection with insurance it was recognized ere the beginning of the eighteenth century.” See J. Birds, MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 23-001. 7  The MIA, s. 79. 8  (1882) 7 App Cas 333. 9  Ibid, at 339. Similar opinions were expressed by Wynn-Parry J in Re Miller, Gibb & Co. Ltd [1957] 1 WLR 703 at 707. See also Randal v Cockran (1748) 1 Ves Sen 98, 27 ER 916. The old cases which upheld the view that the doctrine of subrogation was derived from equity are expertly analysed by Derham, Subrogation in Insurance Law (Law Book Company 1985), chapter 1. There is also an Australian authority supporting the equitable nature of subrogation, see the statement of Hale J in the Western Australian Supreme Court in Hartford Fire Insurance Co. v Hurse [1962] WAR 1987 at 191. 10  [1973] 1 QB 792. 11  Ibid, at 801. 12  [1962] 2 QB 330, at 339. His Lordship explained what he considered to be the relationship of subrogation to both law and equity. He said: “The doctrine of subrogation is not restricted to the law of insurance. Although often referred to as ‘equity’ it is not an exclusively equitable doctrine. It was applied

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found in some earlier cases.13 In Napier v Hunter,14 the above two theories were seriously considered by the House of Lords. The notion that subrogation is an equitable right was reaffirmed in the case. 17.2.3 Application of the doctrine of subrogation It is well known that the doctrine of the subrogation applies only to indemnity insurance (such as property, fire, liability, motor vehicle insurance and marine insurance), and does not apply to life insurance.15 The Insurance Law expressly prohibits subrogation in life insurance,16 but it is not very clear whether medical insurance is included. According to the Insurance Law, medical insurance is one of the types of personal insurance, which consists of life insurance, health insurance and accident insurance.17 Article 46 of the Insurance Law provides: “Where an insured event, such as death, disability, or illness, etc. occurs in respect of the insured as a result of a third party’s act, the insurer shall, after paying insurance benefits to the insured or the beneficiary, have no right of subrogation against the third party, and the insured or the beneficiary remains entitled to claim compensation from the third party.” “Illness” mentioned in this article should be covered by medical policies. If this is correct, by virtue of art. 46 there is no room for the doctrine of subrogation in medical insurance. However, other legal materials indicate that whether subrogation applies to medical policies depends on the type of medical policy. In 2006, the China Insurance Regulatory Commission (CIRC) published the regulation “the Measures on Administration of Health Insurance,”18 in which medical insurance is divided into indemnity medical insurance (pay for actual medical expenses) and

by the common law courts in insurance cases long before the fusion of law and equity, although the powers of the common law courts might in some cases need to be supplemented by those of a court of equity in order to give full effect to the doctrine; for example, by compelling an assured to allow his name to be used by the insurer for the purpose of enforcing the assured’s remedies against third parties in respect of the subject-matter of the loss.” 13  This theory is found as early as 1882 in Burnand v Rodocanachi Sons & Co. (1882) 7 App Cas 333, in which Lord Fitzgerald considered that the insurer may recover from the insured any compensation received by him from a third party in diminution of the loss by means of the action for money had and received. It is also found in Boag v Standard Marine Insurance Co. Ltd [1937] 2 KB 113; in this case, Scott LJ said that the insurer has a “contractual right” to any compensation coming into the hands of the insured from third parties (at 126–29); while Lord Wright in that case commented that the right of subrogation “is an integral condition of this policy” (at 118–25). 14  [1993] AC 713; [1993] 1 All ER 385. 15  See the English case of Solicitors & General Life Assurance Society v Lamb (1864) 2 De GJ & S 251. However, in England, in the days when life insurance was still believed to be indemnity insurance prior to the decision in Dalby v India & London Life Assurance Co. (1854)15 CB 365, the principle of subrogation was applied to a contract of life insurance. See Burnand v Rodocanachi (1882) 7 App Cas 333 and Godsall v Boldero (1807) 9 East 72. This position is explained in MacGillivray on Insurance Law, para. 23-025. Chinese Insurance Law adopts the same approach on this point. See art. 46 of the Insurance Law 2009, which clearly prohibits subrogation in life insurance. 16  The Insurance Law, art. 46. 17  Article 95 of the Insurance Law stipulates: “The scope of business of an insurance company shall be as follows: (1) personal insurance business, consisting of life, health and accident insurances; (2) property insurance, consisting of property loss, liability, credit and surety bond insurances.” 18 The CIRC Order [2006] No. 8, see accessed in May 2016.

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non-indemnity insurance (payment of a fixed sum agreed in the policy).19 If the policy is the former, subrogation applies. On the basis of the Measures on Administration of Health Insurance, some guiding rules are provided by Shanghai High People’s Court (SHPC) on disputes of whether subrogation applies to medical insurance. In its Notification concerning “Questions and Answers on How to Deal with Insurance Cases Relating to Subrogation” 2010,20 the SHPC pointed out that according to arts 2 and 4 of the Measures on Administration of Health Insurance, medical expenses are divided into indemnity medical policies and non-indemnity medical policies. The doctrine of subrogation applies to indemnity medical policies and not to non-indemnity medical policies.21 In academic circles, there are two different views as to the issue of whether or not subrogation is applicable to life and medical insurance.22 Some take the view that the human life and body cannot be valued in terms of money. When the insured suffers injury and incurs medical expenses for treatment of the injury, he cannot be said to be unjustly enriched if he is paid twice by his insurer and the third party for the same injury and medical costs, so subrogation should be prohibited in medical insurance.23 Some others argue that many forms of life policy have indemnity components. For instance, an accident policy usually has a section on medical expenses. There can be no doubt that these policies are for indemnity purposes and therefore should attract the right of subrogation.24 In judicial practice, courts sometimes have held that the insurers are liable to pay the insured under accident insurance and medical insurance policies, even if the latter has been indemnified by the negligent third party; and the insurers are restricted to being subrogated to the rights of the insured to claim against the third party wrongdoer. Sometimes, the courts have made different decisions. In the case of Mr Dong v The Insurance Company,25 Mr Dong was insured under an accident

19  The CIRC “Measures on the Administration of Health Insurance” 2006, art. 4 provides: “Medical insurance is classified into medical insurance on a reimbursement basis and medical insurance on a fixed payment basis according to the nature of benefit payment. ‘Medical insurance on a reimbursement basis’ refers to medical insurance under which the amount of benefit is determined in accordance with the standard agreed upon on the basis of medical expenses actually incurred by the insured. ‘Medical insurance on a fixed payment basis’ refers to medical insurance under which benefits are paid in accordance with the amount agreed upon. The amount of payment for medical insurance on a reimbursement basis shall not exceed the medical expenses actually incurred by the insured.” 20  See Question 1 of the Notification [2010] No. 2. This Notice acts as guidance for the lower courts when they hear disputes on subrogation. The rules have no legal force. 21  Answer to Question 1 of the Shanghai High People’s Court in the Notification concerning “Questions and answers on how to deal with insurance cases relating to subrogation” No. 2 [2010]. To decide whether a policy is an indemnity medical policy, courts will refer to the terms of the contract. If on the construction of the contract, the insurer promises to indemnify the insured according to his actual expenses for medical treatment, the policy is an indemnity medical policy, and subrogation applies. If the insurer promises to pay a certain sum of money on the happening of an event insured against, such as medical treatment, no subrogation will arise. 22  Zhou Xin, “Medical expenses and principle of indemnity” in Xie Xian (ed.), A Hundred Insurance Cases (Law Press China 2012) pp. 155–59. 23 Zou Hailin and Chang Min, Interpretation of the Insurance Law of the People’s Republic of China (China Procuratorial Press 1995) p. 172. 24  Wang Linqing, The Insurance and its Judicial Application: Studies on the Hot Issues since the Enactment of the New Insurance Law (Law Press China 2013) p. 537. 25  This case was decided by the People’s Court, Gulou District, Nanjing City, Jiangsu Province, Civil Court Judgment (2011) No. 0117, and is reported in the Annual Report of  Typical Insurance Cases (Law

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policy. In February 2010, Dong was injured by a car and was taken to hospital for treatment. The total medical costs amounted to ¥14,029. His left leg was in the end disabled. The third party’s insurer paid him the full amount of the medical costs and other costs. Dong then claimed an insurance payment for disability (¥7,000) and medical costs (¥5,000) under the accident policy. His insurer agreed to pay for his disability but rejected the claim for medical costs on the ground that Dong had already been indemnified for the medical costs by the third party’s insurer, so he should not be entitled to another payment for the same medical costs, because otherwise he would be unjustly enriched. The court made the judgment for the insurer. However, in another similar case,26 the court made a different decision. There the insured was injured in a road accident and treated in hospital, but died in hospital in the end. The medical costs amounted to ¥5,327. The third party wrongdoer paid all the costs (including the medical costs) to the insured’s family. The insured family made a claim against the insurer for the amount of ¥5,327, but were turned down by the insurer on the grounds that the insured’s family had already received compensation for the medical costs from the third party; they should not be entitled to another payment for the same medical costs. The court held that the accident medical policy is in the category of life insurance to which the indemnity principle is not applicable. After being paid by the third party’s insurer, the insured remained entitled to claim compensation from the insurer. The insurer was thus liable to pay the medical costs. Under English law, insurance policies other than life or accident policies are usually held to be indemnity policies to which subrogation applies.27 However, there are disputes on whether subrogation applies to health and medical policies. Although these policies fall into the category of life insurance, they have indemnity intentions. As Professor Birds comments, there can be no real doubt that these policies are indemnity policies and therefore should attract the right of subrogation.28 The current position of English law is that if, on a proper construction of the contract of insurance, the insurer has promised to pay a certain sum of money on the happening of a certain event (e.g. on accident or death) regardless of the actual loss suffered by the assured, there is no room for the doctrine of subrogation.29 17.3 The legal framework relating to subrogation in China At this stage, a brief introduction to the Chinese insurance law framework relating to subrogation is helpful for the later discussion of the relevant provisions in detail. The doctrine of subrogation was initially adopted in the Economic Contract Law 1981, art. 25(3) of which stated: “Where the insured property sustains a loss within the scope of the insurance cover for which a third party is held responsible, and if

Press China 2012) vol. 4, p. 171. 26  Mr Liao v The Insurance Company; this case was decided by the Intermediate People’s Court, Yancheng City, Jiangsu Province, Civil Court Judgment (2012) No. 741, and is reported in the Annual Report of   Typical Insurance Cases (Law Press China 2012) vol. 4, p. 174. 27 E.g. Blascheck v Bussell (1916) 33 TLR 74. 28  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 17.1. 29  MacGillivray on Insurance Law (12th edn, 2012) para. 23-05.

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the insured makes a claim against the insurer, the insurer shall make indemnity in advance according to the provisions of the contract of insurance. In such a case, however, the insured shall subrogate to the insurer the right of recovery against the third party and assist him in pursuing such recovery.” In the Regulations on Property Insurance Contracts 1983, a very similar provision was provided.30 17.3.1 The Insurance Law The doctrine was adopted in the Insurance Law in 1995. Articles 44 to 47 of the Insurance Law 1995 concern subrogation.31 Matters relating to subrogation are now governed by arts 60, 61, 62 and 63 of the Insurance law 2009. Article 60 vests in the insurer the right of subrogation to sue the third party after the insured has been indemnified under the policy. Article 61 deals with the legal consequences for the insured’s waiver of his right to claim against the third party. Article 62 sets out the circumstances under which the insurer is not allowed to exercise his subrogation right. And art. 64 requires the insured to assist the insurer in exercising its rights of subrogation against the third party. These articles will be examined in detail in the following sections. 17.3.2 Marine insurance laws Marine insurance is a type of indemnity insurance, so it falls into the category in which the doctrine of subrogation operates. In China, marine insurance is governed by the Maritime Code 1992, chapter 12, consisting of 31 articles.32 Articles 252 to 254 of the Code are concerned with the doctrine of subrogation. These rules are very similar to those provided in the Insurance Law.33 There are also some other laws and regulations concerning subrogation in marine insurance, including the Special Maritime Procedure Law,34 the Supreme People’s Court (SPC) Interpretations35 on Certain Questions Concerning the Application of the Special Maritime Procedure Law36 and the SPC Stipulations on Certain Ques30  Article 19 provides: “If the insured property sustains a loss within the scope of cover for which a third party shall be held liable, the insured shall file a claim with such a third party. The insurer may make indemnity in advance according to the provisions of the contract of insurance if the insured claims against him. In such a case, however, the insured shall subrogate to the insurer the right of recovery against the third party and assist him in pursuing such recovery.” 31  The Insurance Law 1995, arts 44–47. 32  The Maritime Code of the People’s Republic of China was enacted in 1992 (hereinafter, the Maritime Code). The Maritime Code covers 15 chapters; chapter 12 concerns matters of marine insurance. Articles 252–54 deal with subrogation. 33  Articles 252–54 of the Maritime Code are very similar to arts 60 to 63 of the Insurance Law 2009 regarding subrogation. 34 The Special Maritime Procedure Law of the People’s Republic of China was enacted in 1999 (hereinafter, the Special Maritime Procedure Law). 35  According to arts 5 and 6 of the Stipulations of the Supreme People’s Court on the Judicial Explanations (2007 No. 12), the Supreme People’s Court stipulations, judicial interpretations or decisions have legal effect. This means that the Supreme People’s Court stipulations, judicial interpretations or decisions are legal sources in China. 36 The Supreme People’s Court Interpretation on Certain Questions Concerning the Application of the Special Maritime Procedure Law (2003, No. 3) was published in December 2002 and took effect on 1 February 2003 (hereinafter, SPC Interpretation 2003).

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tions for Hearing Marine Insurance Cases.37 However, problems such as ambiguity and contradiction are found in relevant provisions of the laws, regulations and SPC Interpretations which cause difficulties in judicial and industrial practice. Courts often make different decisions on similar facts in subrogation disputes. All these provisions will be critically discussed in Chapter 24, “Marine insurance.” 17.4 The insurer’s subrogation rights against the third party The doctrine of subrogation confers two distinct rights on the insurer after an insurance payment. The first one is that the insurer receives the benefit of all rights and remedies of the insured against the third party.38 The second is that subrogation vests in the insurer the right to claim from the insured any benefit conferred on the insured by third parties with the aim of compensating the insured for the loss in respect of which the insurer has indemnified him.39 These two subrogation rights are the corollary of the two common law principles. (1) If a person suffers a loss for which he can recover against a third party, and is also insured against such a loss, his insurer cannot avoid liability on the ground that the insured has the right to claim against the third party.40 (2) Conversely, the third party, if sued by the insured, cannot avoid liability on the ground that the insured has been or will be fully indemnified for his loss by his insurer.41 Accordingly, there are two limbs to the doctrine of subrogation. The first limb allows an insurer who has made payment to the insured to pursue, in the name of the insured, any remedy against a third party vested in the insured. The second limb requires an insured who recovers a sum from the third party to compensate for his loss for which the insurer has already made payment to him, to repay the insurer. The purposes of these two limbs are the same; the rules and qualifications surrounding each limb are, however, different. Thus they merit separate examination. In this section, the first limb is discussed, namely the insurer’s right to sue the third party. It has been long established that after the insurer has paid the insured for the loss caused by a third party, it is entitled to step into the insured’s shoes to exercise

37 The Supreme People’s Court Stipulations on Certain Questions for Hearing Marine Insurance Cases (2006, No. 10) was enacted in 2006 (hereinafter, SPC Stipulations 2006). 38  Castellain v Preston (1883) 11 QBD 380; H. Cousins & Co. Ltd v D. & C. Carriers Ltd [1971] 2 QB 230. 39 See Randal v Cockran (1748) 1 Ves Sen 98; Castellain v Preston (1883) 11 QBD 380; Stearns v Village Main Reef Cold Mining Co. Ltd (1905) 10 Com Cas 89; Yorkshire Ins. Co. v Nisbet Shipping Co. Ltd [1962] 2 QB 330. 40  This principle was developed from the ancient case of Collingridge v Royal Exchange Assurance Corp (1877) 3 QBD 173; see also the recent case of Bristol & West Building Society v May, May and Merrimans (No. 2) [1998] 1 WR 338. See MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 23-2. 41 This principle was developed in some early cases: Bradburn v Great Western Railway Co. (1874) LR 10 Ex 1; Mason v Sainsbury (1782) 3 Doug KB 61. See also some recent cases: Bee v Jenson [2008] Lloyd’s Rep IR 221 (CA); Sousa v London Borough ofWaltham Forest [2011] 1 WLR 2197; W vVeolia Environmental Services (UK) Plc [2011] EWHC 2020 (QB).

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the right to sue the third party in the insured’s name.42 In Mason v Sainsbury,43 Lord Mansfield said: “Every day the insurer is put into the shoes of the assured.” Based on Lord Mansfield’s dictum, many rules of subrogation have been developed in English law. For example, the insurer sues in the name of the insured and the insured or insurer must sue the third party wrongdoer for the whole loss. However, rules relating to subrogation in Chinese law are different from those in English law. Here, the rules provided in the Insurance Law are discussed as compared with English law. Article 60 is the major provision in the Insurance Law in respect of the insurer’s right of subrogation, and it stipulates: “Where a third party damages the subject matter of the insurance, thereby leading to the occurrence of an event insured against, the insurer shall, from the date of payment of insurance moneys to the insured, be subrogated to the insured’s right to claim indemnity from a third party within the amount of the payment.” There are at least three elements in this article: (1) the occurrence of the insured event is caused by a negligent third party; (2) the insurer is entitled, upon payment, to be subrogated to the insured’s rights to take action against the third party, and once the payment is made, the insurer is entitled to start the action immediately and automatically and does not depend on the insured’s agreement; and (3) the amount the insurer is allowed to claim against the third party is limited to the amount of its payment to the insured. These elements will be discussed one by one. Two other points which are not mentioned in the Insurance Law but are very important for the insurer to exercise its subrogation rights, namely whose name should be used and who controls the proceedings, will also be discussed here. 17.4.1 The loss must be caused by the negligent third party Where the loss is not due to the fault of the third party, the insurer cannot exercise subrogation rights against the third party. In Huatai Insurance Company v Ms Li Lan,44 Ms Li borrowed the insured’s car. The car was stolen while it was parked in front of her building in the night. The insurer had paid the insured for the loss of his car. The insurer then took subrogation action against Ms Li as the third party. However, the court rejected the insurer’s claim, holding that the third party had no fault for the loss of the car, and the insurer cannot exercise subrogation rights against the third party. Where the third party has fault, but there is no causal connection between the fault of the third party and the occurrence of the insured event, the insurer cannot 42  However, it is important to note that, in MacGillivray, there is a new theory found for the second limb of subrogation. It is said that the doctrine of subrogation confers two distinct rights on the insurer; these are the right to oblige the assured to pursue remedies against third parties for the insurer’s ultimate benefit (this in fact refers to the second limb of the subrogation, namely the right of the insurer to sue the third party by using the insured’s name), and the right to recover from the assured any benefits received by the assured in extinction or diminution of the loss for which he has been indemnified. It is continued (in a footnote) that adherents to the “equitable” theory of the origins of subrogation might prefer to describe the right of suit as being exercised by the insurer in the assured’s name, but this is, strictly, incorrect. See MacGillivray (12th edn, Sweet & Maxwell 2012) para. 23-035 and note 20. 43  (1782) 3 Doug KB 61, at 64. 44  This case is cited in the book by Liu Jianxun, Insurance Cases and Analysis (Law Press China 2007) p. 184.

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exercise subrogation rights against the third party. This is illustrated by People’s Insurance Company of China, Guang Dong Branch v Beijing Jinhai Transport Ltd,45 where Beijing Jinhai Transport Ltd made a contract with the insured for transporting a piece of electric equipment from Beijing to Jieyang in Guangdong province. There was a clause in the carriage contract which prohibited Beijing Jingai (the carrier) from transporting this equipment together with any corrosive chemical in the same vehicle. Beijing Jinhai, however, breached this clause by transporting the electrical equipment with some bottles of peracetic acid (corrosive) in the same lorry and also with some other goods such as a few packages of books. When the lorry arrived at the destination, the buyer of the equipment refused to take the delivery on the ground that the equipment was damaged by corrosive chemicals. The insurer paid the insured the full amount under the policy, obtained the rights of subrogation and then sued Beijing Jinhai for the amount paid. The court held that (1) Beijing Jinhai breached the contract of transport by loading the equipment on the same vehicle as corrosive chemicals; (2) but the damage to the equipment was not caused by the fault of Beijing Jinhai. Evidence showed that there was no leakage of the peracetic acid from the bottles. Other goods on the lorry were not damaged by the peracetic acid at all. In fact, the damage to the equipment was from the mandatory spray of an anti-SARS chemical on the lorry.46 The chemical penetrated the packing of the electrical equipment and caused the damage. 17.4.2 The insured must be indemnified According to art. 60 of the Insurance Law, the insured must be indemnified by the insurer before the latter’s subrogation right arises. This rule is adopted by many other countries. It is well established in English law. In Page v Scottish Insurance Corp,47 the court left open the question of whether the insurer “is not subrogated though he has paid the whole amount due on his policy if the insured has a further loss.”48 The decision of Napier v Hunter49 answered the question, and now it seems certain that the courts would hold that the insurer would be subrogated where it has paid a full indemnity to the insured under the policy.50 Under Chinese law, it is clear that a full indemnity by the insurer is sufficient for it to be subrogated to the insured’s right to take action against the third party. The law expressly provides that from the date of payment of insurance moneys to the insured, the insurer is subrogated to the insured’s right to claim against a third party.51 In the case where the insurer’s indemnity is insuf-

45  Ibid, p. 192. 46  In spring and summer 2003, Severe Acute Respiratory Syndrome (SARS) was spreading in Beijing. In order to prevent the spread of SARS to other places in China, all vehicles leaving Beijing were required to be sprayed with a sterilising chemical. 47 See Page v Scottish Insurance Corp (1929) 98 LJKB 308; s. 79 of the MIA. 48  See M. Clarke, The Law of Insurance Contracts (6th edn, 2009) para. 31-3B1. See also J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 17.6. 49  [1993] 2 WLR 42. 50  J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 17.6. 51  The Insurance Law, art. 60(1).

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ficient to make up the whole loss of the insured, both the insured and the insurer can sue the third party separately or jointly for their respective benefits.52 17.4.3 The amount for the insurer to recover from the third party Article 60 of the Insurance Law vests in the insurer the subrogation right to take action against the third party. The prerequisite for the insurer to sue the third party is that it has paid the insured under the policy.53 The amount it is allowed to claim is limited to what it has paid to the insured.54 For example, the insured suffers loss of ¥6,000, which is caused by the third party. The insured amount is only ¥4,000 (under-insurance). The insurer has paid ¥4,000 to the insured, and is subrogated to the insured’s right to sue the third party for the amount of ¥4,000. This rule is not consistent with the nature of subrogation. By contrast, under English law, the insurer must sue the third party for the whole loss for its own benefit as well as the insured’s uninsured portion of his loss.55 It is submitted that the Insurance Law should vest in the insurer the right to claim the whole loss for its and the insured’s benefit. Following this, another important question arises, i.e. whose name should be used when the insurer exercises its subrogation right against the third party. 17.4.4 Whose name is used in proceedings Is whose name is used in proceedings an essential or just a procedural matter? It is well established under English common law that the insurers sue in the insured’s name.56 In China, however, this is a really big issue in both law and practice. The nature of subrogation is “substitution”; after payment to the insured, the insurer steps into the insured’s shoes to take action against the third party. The chose in

52  Ibid, art. 60(3). 53  It is also the English law approach. See Page v Scottish Insurance Corporation [1929] 140 LT 571. 54  Article 60(1). 55  See A. McGee, The Modern Law of Insurance (3rd edn, 2011) para. 22.13. It is common practice for insurers in these circumstances to seek in the claim to recover any uninsured loss (e.g. the policy excess) on behalf of the insured. However, there is no authority on the nature of the insurer’s duties when exercising subrogation rights. 56  London Assurance Co. v Sainsbury (1783) 3 Doug 245; Esso Petroleum Co. Ltd v Hall Russell & Co. Ltd [1988] 3 WLR730; Mercantile and General Reinsurance Plc v London Assurance, unreported, 1989. There are, however, authorities taking the view that the insurer may sue the third party in his own name in subrogation actions. In Caledonian North Sea v London Bridge Engineering [2002] 1 All ER (Comm) 321, para. 11, Lord Bingham states: “I am in full agreement with the conclusions expressed by Lord Mackay on the second (subrogation) issue. The law has long been that an insurer who has fully indemnified an insured against a loss covered by a contract of insurance between them may ordinarily enforce, in the insurer’s own name, any right of recourse available to the insured.” However, in the same case, Lord Bingham continues to cite the view of Lord Cairns LC in Simpson & Co. v Thomson (1877) 3 App Cas 279, at 286: “My Lords, these authorities seem to me to be conclusive that the right of the underwriters is merely to make such claim for damages as the insured himself could have made, and it is for this reason that (according to the English mode of procedure) they would have to make it in his name.” From the above authorities, it appears that the views are inconsistent on the point of whose name is used in subrogation actions. However, it is submitted that Lord Bingham in Caledonian North Sea focuses his statement on what the insurer’s rights are in subrogation rather than on the issue of whose name is used in subrogation actions. See Insurance Company of Pennsylvania Ltd v IBM UK Ltd [1989] Chartered Surveyor Weekly, in which the English court noted the rule that the insurer sues in the name of the insured, but was required to apply New York law which permits a direct action by the insurer in his own name.

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action remains with the insured, so it is logical that the insured’s name should be used. Whose name is used is an essential not just a procedural matter, as Professor Merkin comments:57 “The fact that the assured is the nominal claimant is not, however, simply a procedural matter; the substantive effect of the rule is that any legal obstacle applicable to the insured’s right of action binds the insurer suing in the insured’s name. There are a number of situations in which this becomes relevant.” (1) A claimant cannot sue himself. Consequently, if the third party is the insured himself, i.e. if the assured has caused his own loss but nevertheless has a claim on the policy, the insurer cannot seek any set-off against the insured as wrongdoer.58 (2) Any agreement between the insured and the wrongdoer third party which relieves that third party from some or all liability binds the insurer.59 (3) The insured’s action might be time-barred. Any limitation provision applicable to the insured’s action is necessarily operative against an insurer exercising subrogation rights.60 (4) The law applicable to the insured’s cause of action against the third party similarly governs the subrogation action brought by the insurer. In China, the Insurance Law does not expressly provide whose name should be used. It could be inferred from art. 60 of the Insurance Law that the insurer sues in his own name. Article 60(3) stipulates that the insurer’s exercise of its subrogation right shall have no impact on the insured’s right to claim against the third party for the portion which has not been indemnified by the insurer. The rule described in art. 60(3) can only be satisfied where the insurer and the insured sue the third party by using their own names. If the insurer sues in the insured’s name, and the insured does it also using his own name, many problems will arise.61 First, it may cause duplicate legal actions, which are not allowed under the Chinese Procedural Law;62 and second, it may confuse the third party and cause inconvenience to him.63 If the insurer sues in its own name, a “Subrogation Form” (as will be shown and discussed later) is necessary. Without such a form, the third party may refuse to pay on the grounds that it is nothing to do with the insurer in the case.64 Because of the

57  See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-016. 58  This was established in Simpson v Thomson (1877) 3 App Cas 279. 59  Similar opinions appear in MacGillivray on Insurance Law: “the insurers will, of course, be prejudiced by the assured’s unconditional release of a third party, since it binds them indirectly just as it binds the assured” (12th edn, 2012) para. 23-054; see also F. Rose, Marine Insurance: Law and Practice (2nd edn, Informa 2012) para. 27.26, p. 523. 60  London Assurance Co. v Johnson (1737) Hardw 269; RB Policies v Butler (1949) 65 TLR 436. 61  Zhen Jing, “The Confusion between Subrogation and Assignment in the Insurance Law of the People’s Republic of China 1995 – A Critical Analysis of Article 44 of the Insurance Law” [2002] JBL 608. 62  This is not allowed in Chinese legal procedure. See art. 111(5) of the Law of Civil Procedure 1991. 63  If the insurer uses the insured’s name to claim, the third party may think that it is the final settlement for the insured’s loss, but if the insured later claims against the third party by using his own name, the third party will be confused as to why the insured is claiming again when he has already paid the insured. Thus it must cause some inconvenience to the third party, which is unfair to him. 64 Where a wrongdoer damages the insured’s subject matter of insurance, it may be caused either by a breach of contract or by tort, but he is liable to pay damages to the insured no matter what the cause is, according to the Civil Law. Article 111 of the Civil Law provides: “If a party fails to fulfil its contractual obligations or violates the terms of a contract while fulfilling the obligations, the other party shall have the right to demand fulfilment or the taking of remedial measures and claim compensation for its losses.” Article 117 states: “Anyone who damages the property of the state, a collective or another person shall restore the property to its original condition or reimburse its estimated price. If the victim suffers

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confusion in the law, a “mixture form” of subrogation and assignment (although it is called a Subrogation Form) has been used in practice in China. It allows the insurer to exercise its subrogation right by using either the insured’s name or its own name. Practically, in most cases, the insurer exercises its subrogation right in its own name. If the insured also sues the third party in his own name where the indemnity paid by the insurer cannot make up his whole loss, problems may still arise; the main issue would be who (the insurer or the insured) has the priority to receive the money from the third party. In May 2013, the SPC promulgated its Second Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China (hereinafter, Interpretation II).65 Article16 of Interpretation II expressly stipulates that “The insurer shall use his own name to exercise his subrogation right.” It is doubtful that the SPC’s single sentence interpretation in this aspect would totally solve the problem of confusion in the law and practice, because whose name is used is, as mentioned above, an essential not just a procedural matter. An insurer being able to sue by using its own name is a feature of assignment, and other rules of assignment should thus also be followed. 17.4.5 Control of the proceedings By virtue of art. 60(1) and (3) of the Insurance Law, after having paid the insured under the policy, the insurer may take action against the third party for the amount it has paid to the insured regardless of whether the payment is partial or full compensation of the insured’s loss. But it does not mean that the insurer shall control the whole proceedings for its own benefit and for the insured’s benefit. Whether it can control the proceedings depends on whether the insured is fully covered and therefore fully compensated under the policy. If the insured is fully compensated for the total loss, the insurer may control the proceedings after payment. If, however, the insurance is an under-insurance, and the insurer’s indemnity is only part of the insured’s loss, the insurer cannot control the proceedings. By virtue of art. 60(3) of the Insurance Law, the insured is entitled to take action against the third party for his uninsured loss and his action must not be interfered with by the insurer.66

other great losses therefrom, the infringer shall compensate for those losses as well.” Accordingly, the wrongdoer is liable to pay the insured to whom he causes a loss. There is really no relationship between the wrongdoer and the insurer. If the insurer claims against the wrongdoer by using its own name and without a necessary assignment form, the wrongdoer must refuse it. So the insurer must use the insured’s name to do so. 65  The Supreme People’s Court Second Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China was passed by the Judgment Committee of the Supreme People’s Court on 6 May 2013 and became effective on 8 June 2013. 66  A Chinese case illustrates this: Trade Co. Ltd v Transport Co. Ltd (cited by Lin Baoqing, Insurance Law Principles and Cases (Qinghua University Press 2006) p. 166). The issue in this case was whether the payment agreement between the insurer and the third party bound the insured’s claim against the third party for his uninsured loss. In this case the insured effected a comprehensive lorry insurance policy with the insurer in 1999. The insured lorry was collided by another lorry owned by the defendant and the insured suffered total loss of ¥100,000 yuan. The insurer paid the insured ¥80,000 yuan and the insured issued a “Subrogation Form” to the insurer. Ignorantly, the insured transferred to the insurer all the rights for claiming against the third party for the whole loss of ¥100,000 yuan. With the Subrogation Form, the insurer then claimed against the third party and recovered ¥70,000 yuan. Being

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Equally, the insurer, upon payment to the insured, is entitled to sue a third party for the amount it has paid to the insured, and the insured has no right to stop the insurer from doing so. Each party may act independently without the other’s intervening because they are both the creditors of the third party. Thus neither the insurer nor the insured may control the proceedings as a whole. This approach is inconsistent with the nature of subrogation, and problems which may be caused by this approach will be discussed later. 17.5 The insured cannot make a profit The second limb of subrogation is that an insured cannot make a profit out of his indemnity insurance contract at the expense of either the insurer or a third party. Where the insurer has indemnified the insured under the policy and the third party has later also compensated the insured for his loss, the insured is bound to return the insurance money to the insurer. The leading authority is the English case of Castellain v Preston.67 In this case, the insured vendor of a house which was burnt down between the contract and completion recovered money from his insurer for which he was held not accountable to his purchaser. However, the purchaser later subsequently completed the purchase and paid the agreed price for the house despite the damage to the house. The court held that the vendor was therefore bound to account to his insurer for the money the latter had paid. The fundamental rule of indemnity insurance was established in this case, that is, the insured, in the case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That means that the insured can claim from the insured or the third party or from both up to the amount he has suffered, but he cannot make a profit from his loss. The Insurance Law has similar rules preventing the insured from making profits. The essence of the second limb of subrogation is stipulated in art. 60(2) of the Insurance Law which provides: “Where the insured event provided in the preceding paragraph occurs and the insured has obtained indemnity from the third party, the insurer may, at the time of payment, deduct therefrom a comparable amount which the insured has received as indemnity from the third party.” Where the loss suffered by the insured is caused by the third party, the insured may claim against the third party or/and against his insurer. If the insured recovers a sum from the third party by way of diminution of his loss before the insurer has made any payment, such a sum should be deducted from the sum payable by the insurer.68 It implies that if the third aware of the recovery of the insurer from the third party, the insured claimed against the third party for the uninsured amount of ¥20,000 yuan. The third party rejected the insured’s claim on the ground that the insured transferred all the rights to the insurer, and the insurer was paid ¥70,000 yuan. The court held that the insured was entitled to claim against the third party for the amount not covered under the policy. Although in this case, the insured made a mistake due to a lack of knowledge, the court’s decision reflected the current Chinese law that the exercise of the insurer’s subrogation right does not affect the insured’s claim against the third party for his uninsured loss (art. 60 of the Insurance Law). 67  (1883) 11 QBD 380. This was the sequel to the decision in Rayner v Preston (1881) 18 Ch DA. Later cases followed the rule. See Stearns v Village Main Reef Gold Mining Co. Ltd (1905) 10 Com.Cas 89; Yorkshire Insurance Co. v Nisbet Shipping Co. Ltd [1962] 2 QB 330. 68  See art. 60(2) of the Insurance Law. English common law has the same approach. See the English cases of West of England Fire Insurance Co. v Isaacs [1897] 1 QB 226; Connecticut Fire Insurance Co. v Erie

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party has compensated the insured for his whole loss, the insurer does not need to pay anything to the insured, and that if the insurer makes a payment to the insured without knowing that the insured has been paid by the third party, the insurer is entitled to any sum in the hands of the insured up to the amount of its own payment. The insured is not allowed to take more than he has lost – he cannot make a profit at the expense of the insurer and the third party. If the insured is fully covered under the policy, there should be no problem. However, disputes may arise in the following situations: (1) where the policy contains an excess clause69 so that the insured himself bears the first part of any loss; (2) where the insured is in the position of under-insurance, so that the insured himself bears the part of uninsured loss. Issues will arise when the insured’s actual loss is greater than the value of his insurance, while the damages recovered from the third party are in fact less than the amount of his actual loss. Either the insurer may not be able to recoup the full amount of its payment, or the insured may fail to obtain a full indemnity. The issue as to who (the insured or the insurer) should have priority to recover from the third party will be discussed in detail in the section “Distribution of the subrogation recoveries” below. 17.6 Subrogation and assignment Subrogation and assignment are two different doctrines, although they have some similarities. They vest in the insurer different rights to sue the third party. Both of them permit one party to enjoy the rights of another, and in many respects a subrogated insurer is in a position similar to that of an equitable assignee of the insured’s chose in action, but it is well established that subrogation is not a species of assignment.70 Each of them has its own rules. In China, these two doctrines are mixed in the Insurance Law and in practice. Thus it is necessary to clarify the confusion between subrogation and assignment in the Insurance Law and practice. 17.6.1 Differences between subrogation and assignment According to English insurance law and the Law of Property Act 1925 s. 136 (UK),71 the two doctrines have several differences as follows:

73 NY App 399 (1878); British Traders Insurance Co. Ltd v Monson (1964) ALR 845. 69  Excess clause: An insurance policy clause that requires an insurer to respond to a loss only after any other source of coverage has been exhausted. For example, the insurer will only pay the amount of loss to the insured which is over the amount agreed by the parties in the policy, such as ¥200. The insured will bear the loss himself below ¥200. The insurer will offer the insured a lower premium if the insured agrees not to seek compensation for amounts under, say, ¥200. 70 See Morris v Ford Motor Co. [1973] QB 792; Orakpo v Manson Investments Ltd [1978] AC 95; King v Victoria Ins. Co. [1896] AC 250; James Nelson & Sons Ltd v Nelson Line Liverpool Ltd [1906] 2 KB 217. 71  See Law of Property Act, 1925 [15 Geo 5, C 20], s. 136 of which regards the doctrine of assignment. Under the heading of “Legal assignments of things in action,” rules are provided: (1) Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice:

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(1) Rights of subrogation are vested by the operation of law rather than as the product of an express agreement and can be enjoyed by the insurer as soon as payment is made,72 while a legal assignment requires an agreement that the rights of the insured be assigned to the insurer, and an express notice in writing is required to be given to the third party from whom the insured would have been entitled to claim for the loss.73 (2) The essential difference between the two doctrines is: under subrogation, the chose in action remains in the insured, while if there has been an assignment the chose in action vests in the insurer.74 (3) The procedural difference is that the insurer sues a third party in the name of the insured under subrogation, while it should sue (and indeed is obliged to sue) in its own name under an assignment.75 (4) The insurer cannot exercise the subrogation right until the insured is fully indemnified,76 while the insurer may sue the third party under an assignment before it provides an indemnity to the insured. (5) The insurer is entitled, by exercising a subrogation right, to recoup only for a loss which it has paid and to the extent of its payment, while it is entitled, under an assignment, to retain any proceeds in excess of those which it has actually paid to the insured.77 Keeping in mind the differences between subrogation and assignment, the confusion between these two doctrines in the Insurance Law is to be clarified.78 17.6.2 Confusion between subrogation and assignment in the Insurance Law (a) Confusion in law Article 60 of the Insurance Law is a mixture of subrogation and assignment. The reason for this is the confusion between the two doctrines. As analysed earlier, art. 60(1) raises three points: (1) the insured event is caused by a third party; (2) the

(a the legal right to such debt or thing in action; (b) all legal and other remedies for the same; and (c) the power to give a good discharge for the same without the concurrence of the assignor: Provided that, if the debtor, trustee or other person liable in respect of such debt or thing in action has notice: (a) that the assignment is disputed by the assignor or any person claiming under him; or (b) of any other opposing or conflicting claims to such debt or thing in action; he may, if he thinks fit, either call upon the persons making claim thereto to interplead concerning the same, or pay the debt or other thing in action into court under the provisions of the M1Trustee Act, 1925. 72  Castellain v Preston [1883] 11 QBD 380; West of England Fire Ins. v Isaacs [1897] 1 QB 226; s. 79 of the MIA. 73  See the Law of Property Act 1925 (UK), s. 136. 74  King v Victoria Ins. Co. [1896] AC 250; Cia Colombiana de Seguros v Pacific Steam Navigation Co. [1965] 1 QB 101. 75  King v Victoria Ins. Co. [1896] AC 250, at 255–56, per Lord Hobhouse; Cia Colombiana de Seguros v Pacific S.W. Co. [1965] 1 QB 101. 76  Page v Scottish (1929) 98 LJKB 308. 77  Compania Colombiana de Seguros v Pacific Steam Navigation Co. [1965] 1 QB 101. 78  For more, see Zhen Jing, “The Confusion between Subrogation and Assignment in the Insurance Law of the People’s Republic of China 1995 – A Critical Analysis of Article 44 of the Insurance Law” [2002] JBL 608.

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insurer shall be subrogated to the insured’s right as soon as the insured has been paid by the insurer under the policy; and (3) the amount the insurer is entitled to sue for is limited to the amount it has paid to the insured. These three aspects are completely in conformity with the general rules of the doctrine of subrogation where the insured is fully covered under a policy. However, if the insured is partly covered by the policy, i.e. it is an under-insurance or there is an excess clause in the policy, the element mentioned above in (3) is inconsistent with the general rule of subrogation which requires either the insured or the insurer to take action by using the insured’s name to claim for the whole loss in good faith for his own and the other’s benefit. Element (3) is an assignment feature. Article 60 has features of both subrogation and assignment. It is therefore submitted that this article is a mixture of the two doctrines. From art. 60(3), it is clearer that this article refers, to large extent, to assignment. Article 60(3) provides: “The insurer’s exercise of his right of claim by subrogation in accordance with the first paragraph shall have no impact on the insured’s right to claim indemnity from the third party for the portion which has not been indemnified.” It is obvious that this provision refers to the situation where the insured is not fully covered under the policy, such as where the policy contains an excess or it is an under-insurance. Under this circumstance, this provision means that (1) the insurer is entitled to be subrogated to the insured’s right to act against the third party for the insured amount it has paid; and (2) the insured is entitled to retain the right to sue the third party for the part of his uninsured loss. The insurer and the insured may sue the third party separately or jointly.79 The issue is whose name should be used in these situations. The Insurance Law does not mention this, but it is implied in this provision that the insurer must use its own name to sue for the amount it paid to the insured and the insured uses his own name to sue for the amount of his uninsured loss. Although the word “subrogation” is used in this article, it is more like assignment. The weight of the assignment in this article is heavier than that of subrogation. The only sentence from which the feature of subrogation could be spelt out is that “the insurer shall, from the date of payment of insurance moneys to the insured, be subrogated to the insured’s right to claim indemnity from a third party.”80 This sentence implies that the insurer’s right to take action against the third party is vested by the operation of law rather than as the product of an express agreement, and the right of subrogation is transferred to the insurer automatically but not through an agreement. In addition, from the procedural point of view, by virtue of art. 60(3), the insurer and insured can sue the third party only by using their own names separately; otherwise, several problems in respect of legal procedure may arise. (1) If the insurer uses the insured’s name to sue the third party, and the court makes a judgment, but later the insured brings an action against the third party by using his own name, it must bring a duplicate suit for the same

79  Article 95(2) of the Special Maritime Procedure Law 1999 provides: “Where the insurance indemnity obtained by the insured cannot make up all the losses caused by a third party, the insurer and the insured may, as joint plaintiffs, demand compensation from the third party.” 80  The Insurance Law, art. 60(1).

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cause of action by the same plaintiff and against the same third person, which is not allowed in China’s legal procedure.81 Similarly, if the insured commences the proceedings first for his uninsured loss, and is successful, the insurer will not be allowed to reopen the litigation in the insured’s name. (2) If the insured and insurer sue the third party together, and both use the insured’s name, it will be strange that two same-named plaintiffs appear in the court for the same cause of action, but each for their own benefit; (3) As a general rule of subrogation, the insurer cannot control the proceedings until the insured has been fully compensated; the insured may control the proceedings but he must sue in good faith for both his own benefit and the insurer’s interest. If the insured does not wish to control the proceedings, the insurer may do so, but it must do it bona fide for both its own benefit and the insured’s interest. Article 60(3) therefore conflicts with the general rule of subrogation. However, if art. 60(3) is understood as assignment, the insurer should use its own name and the insured also uses his own name to sue the third party. Thus, the third party would face two claimants, one is the insurer and the other the insured, and problems still may arise under these circumstances. Assuming that the insured is not fully covered by the policy, and the third party cannot afford to satisfy the two claims, i.e. he is unable to pay for the whole loss, the following situations may happen: (1) If the insured takes an action before the insurer to claim for the uninsured portion against the third party, can he keep all the recoveries without regard to the insurer’s interest? For example, an insured took out insurance for his house under a fire policy, and the insured sum was ¥60,000, with an excess of ¥10,000. The real value of this house, when it was destroyed by fire, was ¥80,000. The insurer paid the insured ¥50,000 under the policy. The insured claimed against the third party for ¥30,000 (the excess of ¥10,000 plus the sum above the insurance limit of ¥20,000 yuan) and his claim was satisfied. The insurer also claimed later for ¥50,000 against the third party, but he was only able to pay the insurer ¥10,000 due to financial problems. Can the insured keep all the ¥30,000 and the insurer retain the ¥10,000? The positive answer is implied in art. 60. It seems that this approach would not cause much objection, because it is thought to be fair and reasonable for the insured to make up his uninsured loss by recovering damages from 81  See the Law of Civil Procedure 1991, art. 111(5): “Where the litigant starts a second action for a case in which a judgment of ruling has already become legally effective, the litigant shall be informed that the case shall be dealt with as an appeal.” In art. 112, it states: “If the plaintiff is not satisfied with the court’s decision, he may appeal.” It is implied that the plaintiff cannot reopen the litigation for the same cause of action once the court has made the right judgment. In England, it is also not allowed to reopen a decided case. For example, if the insured commences proceedings for his own benefit, and obtains judgment against the third party, the insurers will not normally be able subsequently to reopen the case on the grounds that the insured did not claim for his insured losses from the third party. See Hayler v Chapman [1989] 1 Lloyd’s Rep 490. Similarly, if the insurer exercises subrogation rights to settle his claim against the third party and signs a form of discharge of the claim which refers to all claims which might arise out of the relevant event, the insured will be bound by that discharge and unable to reopen the claim. See Kitchen Design and Advice Ltd v Lea Valley Water Co. [1989] 2 Lloyd’s Rep 221.

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a third party who causes the loss,82 and it also reflects the nature of the principle of indemnity. (2) If the insurer makes a claim, prior to the insured’s action, against the third party for the amount he paid to the insured, is it entitled to keep it all, including a surplus, if any, regardless of the insured’s interest? The above example is still used here. After having paid the insured and having been assigned the insured’s right to claim, the insurer takes action first, claiming against the third party for ¥50,000 (the amount it has paid to the insured) and has obtained that amount. The insured later makes a claim against the third party for ¥30,000 but has recovered nothing. May the insurer keep the entire sum recovered from the third party without regard at all to the insured’s uninsured loss? A positive answer is implied in art. 60. Because, as was analysed earlier, the insurer’s subrogation right vested by art. 60, in fact, is an assignment right, and, accordingly, rules of assignment should apply which allow the insurer to keep whatever it recovered from a third party.83 (3) If the insured and insurer claim against the third party together, but for their respective benefits, how does the third party cope with the situation where he is unable to pay the whole loss? And how will the court deal with this?84 We still take the above example: if the third party can pay only ¥40,000 for the loss, who has a priority to be satisfied from the recovery, the insured or the insurer? Should the third party pay them proportionately between the insurer and the insured, or are there any alternative solutions?85 The Insurance Law does not give any provision for these questions. However, the People’s Courts have the function of mediation for civil disputes,86 so if there are no laws to be followed or the stipulations of law are ambiguous, or if the parties are willing to be mediated by the courts, the function of mediation operates.87

82  This is in contrast to the English solution that the insured bears the excess for any loss, so he cannot obtain the recovery for the excess before the insurer is satisfied, as decided in Lord Napier v Hunter [1993] AC 713; [1993] 2 WLR 42, which will be discussed in detail later. 83  Compania Colombiana de Seguros v Pacific Steam Navigation Co., [1965] 1 QB 101; see also art. 80 of the Contract Law of the PRC 1999. 84 The English solution is that it is assumed that there are insurances in layers, and each insurer can recoup through the “recover down” principle, i.e. the top layer will be satisfied first and then the second insurer and any surplus goes to the first insurer. The leading case is Napier v Hunter [1993] AC 713, which will be fully considered later. 85  The English prevailing law solves this problem by assuming that there are insurances in layers, and each insurer can recoup through the “recover down” principle, i.e. the top layer will be satisfied first and then the second insurer and any surplus goes to the first insurer. See Napier v Hunter which will be fully considered later. 86  See the Law of Civil Procedure 1991 (PRC), where in art. 85 it is stated: “Where a civil case it has accepted can be mediated, the People’s Court shall resolve it through mediation on the basis of the litigant’s voluntary participation and by ascertaining the facts and distinguishing right from wrong.” 87  The court’s mediation function is illustrated in the case of Insurance Company v Construction Team: a worker of a construction team under a contract with a film company caused a serious fire for this film company when he was working. The insured company claimed against the insurance company for the loss of ¥ 800,000. The insurance company indemnified the company and was subrogated to the insured’s right to sue the construction team. The team was not able to pay the whole loss due to financial problems. Through the mediation of the People’s Court, the insurance company agreed to accept only 30% of the

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The above issues will be further discussed in detail later under the heading “Distribution of subrogation recoveries.” (b) Confusion in practice In practice, in China, where an insured event is caused by a third party, after the insurer has paid the insured, a “Receipt and Subrogation Form” is issued by the insured to the insurer, by which the insured’s right against the third party is transferred to the insurer and by which the insurer may take action against the third party. From this form it is even clearer that the two doctrines of subrogation and assignment are confused. An example of the Receipt and Subrogation Form is as follows: Receipt and Subrogation Form Loss No. _____

Policy/Certificate No. ___

Insured Amount _______ To The People’s Insurance Company of China, Qingdao Branch. Received from The People’s Insurance Co. of China, Qingdao Branch the sum of ___ in full and final settlement of the claim under the above-mentioned policy/ certificate on _______ Shipped per S/S ________ From ________ To ________ In consideration of having received this payment, we hereby agree to assign, transfer and subrogate to you, to the extent of your interest, all our rights and remedies in and in respect of the subject matter insured, and to grant you full power and give you any assistance you may reasonably require of us in the exercise of such rights and remedies in our or your name and at your own expense. Dated at ________ This ________ day of ________ 20 ________ Signed ________ This is a typical piece of evidence that in China subrogation is mixed with assignment. In the form, the three words “assign, transfer and subrogate” are used concurrently to vest in the insurer the insured’s rights against third parties. On the other hand, the form allows the insurer to take action against the third party by using either the insured’s name or its own name. Again, academically, some writers hold the view that subrogation is assignment of the creditor’s right from the insured to the insurer. It is said: “subrogation, which is also called assignment, means when the insured loss is caused by a third party, and after payment by the insurer, the insured assigns to the insurer the rights which he enjoys to recover against the third party.”88

full payment. See Zhu Tao and Wang Baoshu, The Selected Cases of the Commercial Disputes (The Enterprise Administration Press 1995) p. 724. 88  See Sun Jilu, The Theory of Insurance Law (Chinese Legal Affair Press 1997) p. 117. It is noted that in China, in several books subrogation is called assignment, and in some books they are interchangeable.

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Any attempt to effect both subrogation and assignment is misconceived because subrogation and assignment are mutually exclusive. They are two distinct doctrines – one or the other occurs, but never both. The insurer can exercise its subrogation right or rely on legal assignment at its option, but these two rights cannot be possessed by an insurer concurrently to sue a third party. If subrogation has occurred, the chose in action remains with the insured and the rules of subrogation apply. If there has been an assignment, either at law or in equity, the chose in action vests in the insurer and the rules of assignment should operate. (c) Subrogation and assignment have their advantages and disadvantages so far as the insurer is concerned (1) Where the insured does not cooperate in prosecuting the claim, an insurer who takes as a legal assignee brings proceedings in its own name and so has control of the claim. While under subrogation, the insurer must sue in the name of the insured, and it has no better right than that which the insured possesses. (2) Where the insured becomes insolvent and, if a company, is dissolved, an insurer who takes as a legal assignee before the insolvency cannot be affected by the insured insolvency or dissolution, because an assignment vests the chose in action in the insurer and the insurer can sue in its own name. Thus it can avoid procedural problems. Whereas a subrogated insurer has no better position than the insured, where the insured becomes insolvent or dissolved, any chose in action that it holds is automatically extinguished. (3) Where the insured, without the insurer’s authority, settles the claim with the third party, an insurer who takes as a legal assignee may have a better position than a subrogated insurer. In order to effect a legal assignment of a chose in action under the statutory regime, notice of the assignment must be given to the third party. The purpose of this notice is to alert the third party to the fact of the assignment. Once on notice, the third party cannot rely on agreements with, or payments to, the insured. Only agreements with, or payments to, the insurer will discharge the third party’s liability. A subrogated insurer is bound by the settlement which is made by the insured and the third party no matter whether it is or is not a bona fide settlement or a compromise agreement, but, of course, the insurer may be able to sue the insured in some circumstances. (4) An insurer who takes as an assignee can keep everything it recovers from the action, and the principle of Yorkshire Insurance Co. v Nisbet Shipping Co.89 will not apply simply because the cause of action is entirely the insurer’s and the insured has forfeited all interests in it.90 The insurer can only recover the amount of its payment to the insured under subrogation.91

See also Yan Xinjian and Zhou Jianlu, Chinese Insurance Law and Practice (Zhong Xin Press China 1996) p. 80 and Li Yuquan, Insurance Law (Legal Press 1997) p. 184. 89  [1962] 2 QB 330. 90  See s. 136 of the Law of Property Act 1925 (UK). 91  The Insurance Law, para.1 of art. 60.

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(5) There will be no requirement that the insured be fully indemnified before the insurer can sue under a legal assignment, while the insurer must indemnify the insured before it exercises the subrogation right. Although there are so many advantages of legal assignment so far as the insurer is concerned, most insurers still prefer to exercise the subrogation right. First, in exercising the rights of subrogation against the third party by using the insured’s name, the insurer may avoid the consequence of the publicity. This would appear to be the overriding consideration militating against the widespread use of assignment as an alternative to subrogation. Another reason that an insurer prefers to exercise a subrogation right is that the court usually does sympathise with the individual insured, so there is a better chance for the insurer to succeed by using the insured’s name, although it is often obvious, in practice, that the “true” claimant is the subrogated insurer. Third, subrogation operates automatically on payment by the insurer, whereas the insurer may have to take positive steps to obtain an assignment, such as reaching agreement of assignment with the insured and giving notice to the third party. So far as the insured is concerned, assignment is not in his favour, because once the right of the insured against the third party is assigned to the insurer, the insurer can keep any proceeds recovered from the third party. If, for example, there is any prospect of the insured being able to recover more than his actual loss from a third party,92 the insurer, who had taken an assignment of the insured’s rights, would be able to recover the extra money for itself. In art. 81 of the Contract Law 1999, it is provided that “Where the creditor assigns his right to the assignee, the assignee obtains all rights of the assignor including the incidental rights concomitant with the claim, unless such incidental rights are personal to the creditor.”93 However, an insurer who was confined to the rights of subrogation would have not been allowed to retain the surplus; the authority for this is the English leading case of Yorkshire Ins. Co. v Nisbet Shipping Co.94 It could be assumed that in Yorkshire if the insured had assigned his right to the insurer, the insurer would have kept the windfall for itself, subject to some collateral bargain to different effect.

92  If the third party is a foreigner, and he pays with foreign currency, there might be a chance that the insured would receive extra money than his factual loss as a result of the fluctuations in the exchange rate. 93  See also s. 136 of the Law of Property Act 1925 (UK). 94  [1962] 2 QB 330. In this case, an insured ship was lost in 1945 as the result of a collision, and the insurers paid its agreed value of £72,000. With the latter’s consent, the insured started proceedings against the Canadian government, owners of the other ship, and in 1955 the government was eventually found liable. The damages awarded were some £75,000 which were properly converted into Canadian dollars at the rate of exchange prevalent at the time of the collision. That sum was paid to the insured in 1958, but when it was transmitted to the UK and converted into sterling, it produced a sum of some £126,000, because the pound had been devalued in 1949. The insured could not of course deny the insurer’s entitlement to £72,000, but disputed that they were entitled to the surplus of nearly £55,000. Diplock J held that the subrogation rights of the insurers extended only to the sums they had paid out. As Birds comments on the case: “the result is somewhat unfair. After all, the insured had the benefit of prompt payment of the money in 1945. It was the insurers who were out of pocket for some 13 years or more. Had the insurer actually exercised their right to sue the Canadian government in the insured’s name, they would probably have been better off because they would have been entitled to claim interest on the money for their own benefit.” See J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 17.4.3.

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Another example is that where an insurance policy contains an excess clause or is an under-insurance, the insurer, under an assignment, will retain all recoveries claimed from the third party without considering whether or not the insured has recovered for his portion which was not covered by the policy, whereas an insurer who was confined to rights of subrogation would pay regard to the insured’s interest in respect of the portion which is not covered by insurance.95 How to distribute the recoveries from the third party is the next issue. 17.7 Distribution of subrogation recoveries 17.7.1  The Chinese position Distribution of recoveries between the insured and the insurer is an important aspect in insurance subrogation, especially where the insured is under-insured or where the contract contains an excess clause and the recoveries from the third party are insufficient to compensate the whole loss of the insured. However, the Insurance Law does not cover this aspect. It is thought that this is not an omission because matters of the distribution of recoveries do not need to be involved according to art. 60 of the Insurance Law, which allows the insurer and the insured to sue the third party separately for their respective benefits. However, as discussed earlier, where the insured is not fully covered by the policy and the third party cannot afford to satisfy the two claimants (the insurer and the insured), the court will have to decide who should have priority to receive money from the third party. The Shanghai High People’s Court published some guiding rules on how to deal with insurance cases in respect of subrogation.96 For an under-insurance contract, where the insurer’s right of subrogation against a third party and the insured’s right to demand damages from the third party co-exist, the insured should have priority to receive money from the third party for the uninsured amount to the limit of his total loss; in other words, the insured’s total loss should be fully compensated by the insurance payment plus the damages from the third party.97 The court may still face difficulty where the insurer takes action before the insured to claim against the third party for the amount it paid to the insured, but the third party cannot afford the amounts claimed by the insurer and the insured. For example, a third party has caused a loss of ¥10,000, and the insured amount under the policy is ¥6,000. The insurer has paid the insured ¥6,000 and then takes a subrogation action against the third party for ¥6,000. The third party can only afford to pay the insurer ¥6,000. Later the insured claims ¥4,000 (the uninsured loss) from the third party but receives nothing because of the financial difficulty of the third party. The question then arises, is the insurer entitled to keep the full

95  Lord Napier v Hunter [1993] AC 713. 96  Shanghai High People’s Court, No. 3 [2010], Notification concerning “Questions and answers on how to deal with insurance cases relating to subrogation.” The Notification is to guide the lower courts rather than to bind them. 97  Ibid, Question 5: for under-insurance contracts, where the insurer’s right of subrogation against a third party and the insured’s right to demand damages from the third party co-exist, how to decide the amount to be demanded from the third party? Answer to Q5: the insured has priority to seek damages from the third party for the uninsured amount to the limit of full indemnity.

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recovery (¥6,000 yuan) without regard to the insured’s uninsured loss (¥4,000 yuan)? According to art. 60 of the Insurance Law, the answer would be positive. This is unfair to the insured – the insurer has received a premium but suffered no loss, while the insured is left with a loss of ¥4,000. This is not in agreement with the fundamental principle of indemnity, which is to prevent unjust enrichment of the insured. To avoid this unfairness, it is suggested that the insurer should claim for the full amount from the third party and then distribute the recoveries between the insurer and the insured. This can also save the insured’s time and costs of taking action against the third party for an uninsured loss. On point of allocation of subrogation recoveries between the insurer and the insured, it is worthwhile to see how English and Australian law deals with the matter. In England there is a leading case of Lord Napier v Hunter 98 on how to allocate recoveries from the third party. In Australia, the Insurance Contracts Amendment Act 2013 provides a new provision on allocation of subrogation recoveries. 17.7.2 The English approach Distribution for recoveries in subrogation had been strongly disputed in England for a long time, until the case of Lord Napier v Hunter, so it is appropriate here to give a brief account of the decision in this case. This case in fact involved a reinsurance policy. The insureds were members of Lloyd’s syndicate who reinsured the risks they had agreed to bear by insuring with “stop loss” insurers (they were Lloyd’s syndicates as well). Losses occurred and claims on the insurance were made against the stop loss insurers. The insurers indemnified the insureds. Money was consequently recovered from the third party whose negligence had caused the loss to the insureds. These recoveries were held by a firm of solicitors. The main purpose of the proceedings between insurer and insured was to establish the respective claims on these moneys given that they were insufficient to meet the totality of the insured and uninsured losses.99 On this issue, the House of Lords decided that the insured should stand behind the insurer so far as recovery in respect of the excess was concerned. In this case, the loss suffered by the insured was £160,000. The limit of the insurer’s liability, that is the sum insured, was £125,000, and there was an excess of £25,000. The sum recovered from the third party responsible for the loss was £130,000. The insurers paid the insured £100,000, that is, the sum insured less the excess. The question was how to distribute the moneys of £130,000 recovered from the third party. In this situation, Lord Templeman determined that the order of the distribution could be dealt with by assuming that there were in fact three insurers to bear the liability: the first bore liability for the first £25,000 of any loss, the second was liable for the next £100,000 and the third was obliged to pay for the loss above the £125,000. On the loss of £160,000, the insured would recover £25,000, £100,000 and £35,000 from the respective insurers. On the recovery of £130,000, £35,000 would first go 98  [1993] AC 713. 99 The other issue, as was mentioned above, was whether the insurers were entitled to exercise any proprietary rights by way of trust or lien over the moneys. On this issue the House of Lords decided that the insurers had an equitable lien over the moneys.

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back to the third insurer as it assumed this risk only if the other two insurers were insufficient. The second insurer, the stop loss insurer, would then be entitled to the remaining £95,000, which would exhaust the settlement moneys. There was insufficient money to be recovered by the first insurer under the excess. Following the decision of Napier v Hunter, England v Guardian Insurance Ltd100 reconfirmed the approach that an insurer has an equitable lien or charge over subrogation recoveries. England is another English decision which is in favour of insurers, following Napier. However, the decision of Napier v Hunter is not free from criticism. The fundamental rule of subrogation is to prevent unjust enrichment, and it could be argued that, before the insured obtains the compensation in full for the loss he actually sustained, he couldn’t be said to be unjustly enriched. The only possibility for the insured to make a profit is by a double payment from the insurer and the third party. There is no doubt that the possibility of overlapping payment for the loss only occurs within the insurance coverage, for which the insurer has a liability to pay the insured and the third party also has to pay if he is held liable. For any uninsured loss, there is no possibility at all for the insured to get double payment because the insurer has no liability to pay for an uninsured loss and the only possibility of compensation is the third party’s payment. 17.7.3 The Australian solution The Insurance Contracts Amendment Act 2013 provides a new section in respect of the destination of subrogation recoveries.101 This new section is now s. 67 of the Insurance Contracts Act 1984 (ICA). This section details the way in which proceeds from a recovery action against a third party by an insurer under a right of subrogation are to be distributed between the insurer and the insured. Either the insurer or the insured may take action against the third party for recovery of the loss for the benefit of both the insured and the insurer. Section 67 of the ICA provides that: (1) the party taking the recovery action (i.e. the insured or the insurer) is entitled to priority reimbursement for their loss and administrative and legal costs; (2) once that party is reimbursed, the remaining balance is to be paid to the other party but only to the extent that it does not exceed their loss; (3) where there remain excess recovered funds, the party taking the recovery action is entitled to the excess; (4) where both parties contributed to the recovery action, the costs of both parties are reimbursed or shared on a pro rata basis if there are insufficient recovered funds to reimburse both in full; (5) where there remain excess recovered funds following joint recovery action, both the insurer and insured are each entitled to a portion of these funds calculated on a pro rata basis in proportion to their administrative and legal costs; and (6) interest goes to the party who took the action, and is shared between

100  [2000] Lloyd’s Rep IR 404. For the detailed discussion on this case, see R. Merkin, “Allocation of Subrogation Recoveries” [2000] 12 ILM 1. 101 The Insurance Contract Amendment Act 2013 (No. 75, 2013), schedule 7, “Subrogation.” On 28 June 2013, the Insurance Contracts Amendment Act 2013 (Cth) (Amendment Act) was brought into law with the effect of introducing a number of long-awaited changes to the Insurance Contracts Act 1984 (Cth). The changes are aimed at streamlining the operation of the ICA, with some of the changes taking effect from the commencement date of 28 June 2013 and others over the course of the next 30 months.

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both parties in a joint recovery action. The operation of s. 67 is subject to any agreement between the insurer and the insured with respect to a loss. After having compared the three approaches in Chinese, English and Australian laws relating to the distribution of the recoveries from the third party, it is suggested that where the loss caused by the third party includes insured loss and uninsured loss, after the insurer has paid the insured for the insured’s loss, the insurer is entitled to be subrogated the insured’s right of action to sue the third party for the whole loss. It must do so for the benefits of itself as well as the insured. Where the recoveries from the third party are not sufficient to satisfy the insured for his uninsured loss and the insurer for its payment to the insured, the insured should have the priority to be paid for his part of the uninsured loss from the recoveries before the insurer can recoup. If the insured is willing to sue, he should sue for the benefit of himself as well as the insurer for the whole loss. 17.8 Persons immune from subrogation action By the general rules of subrogation, the insurer is, in fact, exercising its subrogation right against a wrongdoer using the insured’s name. So, in certain situations, the party with a subrogation right may be prevented from acting against the third party wrongdoer by the relationship between the insured and the third party,102 by virtue of a contract between the insured and the third party or by operation of law. In China, the insurer usually uses its own name to sue the third party. Restrictions on the insurer’s subrogation rights in certain situations are based on the reasoning of moral sense and the economic interdependence between the insured and the third party. 17.8.1 The insured’s family members Article 62 of the Insurance Law provides: “The insurer may not exercise his right to claim indemnity by subrogation against the insured’s family members or other persons comprising such a family of the insured,103 unless the insured’s family members or other persons comprising such a family of the insured cause an event insured against to occur intentionally as mentioned in art. 60(1) hereof.” This article prevents an insurer from exercising its subrogation right against the members of the insured’s family or other persons comprising such a family of the insured, where such persons cause the insured event to occur carelessly or negligently rather than intentionally. The purpose of this provision is to protect the interest of the insured and his family. However, there are no definitions of the two phrases “family members” (jia ting cheng yuan) and “other persons comprising such family of the insured” (bei bao xian ren de zu cheng ren yuan). This ambiguity causes different interpretations of the two phrases. For example, one interpretation holds that the phrase “family members” consists of husband and wife, their parents and

102 Zhen Jing, “Restrictions on the insurer’s rights of subrogation in Chinese Law” [2013] 126 BILAJ 107. 103 The meaning of the Chinese version of the phrase “bei bao xian ren de zu cheng ren yuan” is not very clear. There are two different translations for this phrase: one being “other persons comprising such family of the insured,” and the other being “staff members of the insured.” This will be discussed later.

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children, and the phrase “other persons comprising such family of the insured” includes grandparents, grandparents-in-law, grandchildren, grandchildren-in-law, brothers, sisters and persons who are supporters of the insured or persons who are supported by the insured.104 Another interpretation gives different meaning to the two phrases:105 in a broad meaning, the “family members” of the insured (bei bao xian ren de jia ting cheng yuan) refers to persons who live with the insured, such as spouses or relatives with a blood relationship or marital relationship, or persons who do not live with the insured, but are financially interdependent. The phrase “Bei bao xian ren de zu cheng ren yuan” refers to persons who act for the insured or as the insured’s trustee or have a special relationship with the insured, such as the insured’s employees or business partners or his agents. In another version of English translation of the Insurance Law, the phrase “bei bao xian ren de zu cheng ren yuan” is translated as “staff members of the insured.”106 Shanghai High People’s Court has recently interpreted the phrase “family members” of the insured broadly, including (1) his spouse, parents, children, brothers and sisters, grandparents, grandparents-in-law, grandchildren and grandchildren-in-law; and (2) other persons having a foster or support or maintenance relationship with the insured.107 The court does not interpret the phase “bei bao xian ren de zu cheng ren yuan.” In China, husband and wife have a duty to maintain each other,108 parents have a duty to bring up and educate their children, and children have a duty to support and assist their parents;109 they are economically interdependent. In this situation, to allow an insurer to exercise its subrogation right against a member of the insured’s family would constitute a case of giving with one hand and taking with the other. For instance, a person insured his house against fire, and his mother who lived with him and was financially dependent on him caused a fire negligently when she was cooking, and damaged the house. If after paying the insured, the insurer exercises its subrogation right to claim against the insured’s mother, it is, in fact, an action against the insured in a financial sense, because he was her financial supporter and he has to satisfy the claim himself. It is obviously unfair to permit an insurer to exercise its subrogation right where the insured paid the premium but finally has to bear the loss himself. It is also unreasonable in a moral sense to allow an insurer to sue the insured’s mother by way of subrogation even if the insurer uses its own name. The same reasoning applies to the other family relationships.110 However, if the 104  See Yu Xinnian and Gao Shengping, The Most Recent Interpretation on the Articles of the Insurance Law (People’s Court Press 1995) p. 118. 105 HanYanchun, The Handbook of Insurance Law (China Procuratorial Press 1996) p. 346. 106  See the English translation of the Insurance Law of the PRC, China Legal Publishing House, 2000. 107  Shanghai High People’s Court, [2010] No. 2, Notification concerning “Questions and answers on how to deal with insurance cases relating to subrogation.” 108  The Marriage Law 2001, art. 20. 109  Ibid, art. 21. 110  It is submitted that in China, the restriction of the insurer’s subrogation right is not based on the procedural rule that the plaintiff cannot sue his own family member. Rather, it is based on the financial relationship and moral sense, because in China it is not necessary that the insurer sues a third party by using the insured’s name – usually the insurer acts in his own name. However, in England, as a subrogated insurer has to take action by using the insured’s name, he is therefore only entitled to the benefit of any right of action that the insured himself possesses. It follows that any defence that the third party could raise in an action brought against him by the insured personally should also be an effective defence

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loss is caused by wilful misconduct of the insured’s family members or other related persons, they cannot enjoy the immunity from the insurer’s subrogation action. In a Chinese case,111 the insured’s son (15 years old) drove his father’s car and had an accident in October 2003. The car was damaged, at a loss of ¥170,000. The insured claimed but was refused by the insurer, who argued that the loss was caused by the insured’s son; even if the insurer had paid the insured, he had the subrogation right to claim the money back from his son. Because the son was not over 18 and without legal capacity, his father had to face the subrogation action and pay the money back to the insurer. According to art. 45 of the Insurance Law 2002,112 the insurer may not exercise its right to claim indemnity by subrogation against the insured’s family members, so the insurer was liable to pay the insured for the loss caused by the insured’s son. In Australia, s. 65 of the ICA113 limits an insurer’s right of subrogation against an uninsured third party when the insured himself has not exercised or might reasonably be expected not to exercise those rights because of (1) a family or other personal relationship between the insured and the third party;114 or (2) the insured having expressly or impliedly consented to the use, by the third party, of a motor vehicle that is the subject matter of the contract.115 Where the third party is not insured in respect of the third party’s liability to the insured, the insurer does not have the right to be subrogated to the rights of the insured against the third party in respect of the loss.116 By this section, the insurer’s rights of subrogation are effectively limited to the extent that the third party has insurance in respect of his liability to the insured.117 17.8.2 The insured’s staff members If the phrase “bei bao xian ren de zu cheng ren yuan” in art. 62 of the Insurance Law is interpreted as “staff members of the insured” who act for the insured or as the

to a subrogation action. Thus the insurer has no right to sue his own insured by way of subrogation simply because the insured has no right of action to sue himself for the damage. See Simpson v Thomson (1877) 3 App Cas 279. Also, the insurer was not entitled to exercise his subrogation right against the insured’s wife because the insured himself had no right of action to sue his own wife until the English Law Reform (Husband and Wife) Act 1962 by which interspousal immunity was abolished. See Midland Insurance Co. v Smith and Wife (1881) 6 QBD 561. 111 This case is cited in the book Insurance Disputes and Cases, by Li Ke and Song Caifa (People’s Court Press 2004) p. 147. 112  This article is exactly the same as art. 62 of the Insurance Law 2009. 113  Part 8 of the ICA is concerned with subrogation. The new Insurance Contracts Amendment Act 2013 provides in this part that a reference to an insured includes a reference to a third party beneficiary. 114 Similarly, article 10:101(3) of the Principles of European Insurance Contract Law provides: “The insurer shall not be entitled to exercise rights of subrogation against a member of the household of the policyholder or insured, a person in an equivalent social relationship to the policyholder or insured, or an employee of the policyholder or insured, except when it proves that the loss was caused by such a person intentionally or recklessly and with knowledge that the loss would probably result.” 115  Section 65 of the ICA does not apply where the conduct of the third party giving rise to the loss was serious or wilful misconduct, or occurred in the course of or arose out of the third party’s employment by the insured. 116  Section 65(3) of the ICA. 117  See M. Skinner and J. Coss, “Subrogation,” published on 7 August 2006 at the website accessed in May 2016.

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insured’s trustees, the insured’s employees or business partners or his agents, such person should be covered in art. 62. If the phrase is interpreted as “other persons comprising such a family of the insured,” the restriction for the insurer’s subrogation right in industrial relationships, for example, where the third party is an employee of the insured employer or a partner of the insured or a co-insured, would not be covered in art. 62. It is unclear which interpretation is correct. If the insurer’s right of subrogation is allowed in this situation, good working relationships between the insured and his employee or his partners could be prejudiced. It is suggested that the SPC should provide a clear interpretation of this phrase. In China Ping An Property Insurance Company,Foushan City Nanhai Branch v Mr Gue Behua,118 the court dealt with a dispute on whether or not the insured’s employee was immune from subrogation action. The insured’s driver went to Lianxing Motor Repair Centre (LMRC) to negotiate business in November 2003. Mr Chen (an employee of LMRC) met the driver and helped, with the consent of the driver, to park the mini-bus as a courtesy. While parking the mini-bus, an accident occurred due to the fault of Mr Chen. The mini-bus was damaged at a loss of ¥295,000. The insured made a claim for the loss against Mr Guo Behua (the owner of LMRC) and Mr Chen. The court held that Mr Chen’s action to help park the mini-bus was in the course of his employment by Mr Guo. The accident was caused by the fault of Mr Chen, so Mr Guo and Mr Chen were liable for the loss. Because the insured was unable to show sufficient evidence for the loss, his claim for the loss was turned down by the court. The insured then turned to his insurer and was paid ¥295,000 by the insurer. The insurer was then subrogated to the right of the insured to claim against Mr Guo and Mr Chen for the loss. The trial court held that the insurer’s cause of action against Mr Guo and Mr Chen came from the insured whose action against Mr Guo and Mr Chen had already been rejected by the court, so the insurer would not be in a better position than the insured. The High Court on appeal held that (1) Mr Guo and Mr Chen were liable for the loss, and the failure of the insured’s previous action to claim against them was due to lack of evidence for the loss; (2) according to art. 47 of the Insurance Law 2002,119 the insurer was restricted from exercising its subrogation right against the insured’s staff member. This restriction on subrogation applied to the employees of the insured, not to the employee of the third party (Mr Guo). Mr Chen’s help to park the insured’s mini-bus was in the course of employment by Mr Guo, not by the insured, so the insurer’s subrogation right against Mr Guo and Mr Chen was allowed. Because Mr Chen was Mr Guo’s employee, Mr Guo was liable to pay the insurer ¥295,000 for the loss. It is suggested that in this case, the insurer should be prohibited from exercising its right of subrogation against the third party by reason that the insured had expressly consented to Mr Chen’s help in parking the vehicle; Mr Chen should be treated as the insured himself in respect of the restriction on the insurer’s subrogation right.120

118  Guangdong Province Foushan City Intermediate People’s Court (2006), civil case final judgment report No. 53. 119  It was the same as art. 62 of the Insurance Law 2009. 120  This is the approach in s. 65 of the ICA.

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The English authorities in respect of the relationship between an employer and his employee are Lister v Romford Ice and Cold Storage Ltd.121 and Morris v Ford Motor Co.122 The facts were similar in these two cases, but the decisions different. In Lister, it was held that the employee was liable to his employer for loss suffered as the result of the employee’s negligence in the performance of his work. The insurance industry subsequently accepted that it was not appropriate to pursue recovery against a negligent fellow employee and entered into a voluntary agreement – known as the “gentlemen’s agreement” or “Lister v Romford Ice Agreement” – not to enforce its right in such circumstances.123 In Morris, Lord Denning stated that it was not just and equitable that Ford should be compelled to lend its name to Cameron to be used to sue its servant or, alternatively, there was no implied term that Cameron should be entitled to use Ford’s name to do so.124 The decision of Morris has effectively stymied the application of subrogation in the employer’s liability field as a matter of practice in England. The decision of Morris was obviously influenced by the “gentleman’s agreement.” However, the “gentlemen’s agreement” lacks legal force, so the British National Consumer Council recommends law reform to restrict the insurer’s subrogation rights against an employee by the employer’s insurer.125 In the Joint Scoping Paper, the Law Commission and the Scottish Law Commission raised a question on subrogation, asking, “Do you agree we should consider the law of subrogation?” But in the end, the Law Commissions decided that the law of subrogation causes problems, but it is not necessarily a priority for reform – this will only be looked at as a separate topic if time allows after other work has been concluded.126 It is suggested that the gentlemen’s agreement should be codified to restrict the application of subrogation in the employer’s liability field in the future reform. Australian law does not allow the insurer to be subrogated to the rights of the insured against the employee. Section 66 of the ICA provides that the insurer does not have the right to be subrogated to the rights of the insured against the employee, where (a) the rights of an insured under a contract of general insurance in respect of a loss are exercisable against a person who is the insured’s employee; and (b) the conduct of the employee that gave rise to the loss occurred in the course of or arose out of the employment and was not serious or wilful misconduct.127 Accordingly, s. 66 of the ICA may defeat any purported subrogated action by an insurer against a co-insured who was also an employee. This provision represents great progress in view of protection of the working relationship between the employer and employee.

121  [1957] AC 555. 122  [1973] QB 793. 123  The Law Commission and the Scottish Law Commission, Insurance Contract Law,  A Joint Scoping Paper, December 2005, para. 2.22. 124  [1973] QB 793, at 801–02. 125 See J. Birds, Insurance Law Reform, the Consumer Case for a Review of Insurance Law (British National Council 1997) p. 76. 126 The Law Commission and the Scottish Law Commission, Insurance Contract Law, Analysis of Responses and Decisions on Scope, August 2006, para. 3.27. 127 This provision is quite similar to the English “gentleman’s agreement.” While the “gentleman’s agreement” has no legal force, s. 66 puts the “gentleman’s agreement” into statutory form, omitting the reference to “collusion.” See Ray Hodgin, Insurance Law: Text and Materials (2nd edn, Routledge-Cavendish 2002) p. 565.

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17.8.3 The co-insured The nature of co-insurance is that, under one policy, two (or more) persons insure property in which each (or all) of them has an interest. Lots of examples can be given for co-insurance situations, such as contractor and subcontractor, mortgagor and mortgagee, landlord and tenant, bailor and bailee and other business partnerships, etc. The question here is that if the property is damaged by the fault of one of the co-insureds, and the insurer indemnifies the other against his loss, is the insurer then entitled to exercise the right of subrogation, suing the person at fault in the name of his co-insured?128 Since 1980, when the economic reform started in China, lots of private partnership businesses have emerged, and they usually insure their property jointly under a single policy – that is the case of co-insurance. If the insurer is entitled to sue a negligent partner after paying the victim partner, not only would their partnership be harmed, but also their business would be affected. In practice, the insurer is not allowed to exercise its subrogation right against a co-insured. For example, there is an Extra Third Party Liability Insurance attached to the Contractor All-Risks Policy, and the main content of this extra insurance is that “for the loss caused by a co-insured due to his fault or negligence, after the payment by the insurer to the insured who suffered the loss, the co-insured who caused the loss is immune from the insurer’s subrogation action.”129 It is suggested that this good practice should be adopted in the Insurance Law. The Insurance Law does not cover the co-insurance case, and it is beneficial here to see how English law deals with co-insurance matters. In theory, the rights of subrogation do exist between co-insureds but will usually in practice be defeated by circuity of action,130 or by an implied term in the policy that the insurer will not exercise its rights of subrogation against a co-insured.131 The question of circuity was first addressed by Lloyd J in The Yasin.132 In this case both the plaintiff and the defendant took out insurance for the plaintiff’s cargoes loaded on the vessel.133 The vessel became a total loss, and the plaintiff was paid under the policy. One of the issues was whether the plaintiff was entitled to make any claim against the defendant on the account of the subrogated underwriters. The learned judge rejected the argument that there was any general principle which prevented an insurer from exercising subrogation rights against a co-insured. He held that any subrogation immunity rested on the principle of circuity. He also held that the rule of subrogation immunity

128  For more on co-insurance, see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) paras 11-043 to 11-052. 129  See the Contractor’s All Risk Policy and the Extra Third Party Liability Insurance of the People’s Insurance Company of China. 130 See MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 23-098. For more on circuity and co-insurance in the English and Australian positions, see P. Mead, “Of Subrogation, Circuity and Co-insurance: Recent Development in Contract Works and Contractor’s All Risk Policies” [1998] 9 ILJ 1. 131  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) paras. 23-099 and 23-100. 132  The Yasin [1979] 2 Lloyd’s Rep 45. 133  In this case, the charterparty provided that if any vessel chartered was more than 15 years old (the vessel in question was), the owners of the vessel were to procure insurance from Lloyd’s in respect of the cargo.

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applies only under the situation where A is insured against damage to goods, and B is insured against his liability for damage to the goods under the same policy. If the damage to A’s property is caused by B’s negligence, after the insurer has indemnified A, the insurer plainly cannot exercise subrogation rights in A’s name against B, because B himself is entitled to claim under the policy which covers his liability for A’s property. Thus the subrogation action would give rise to circuity in claims. If A and B were both insured against damage to property, and B negligently damaged A’s property, B would not be immune from a subrogation action merely because he was a co-insured under the policy, as his interest under the policy was not the same as that of A.134 However, in his later judgment in Petrofina Ltd v Magnaload Ltd,135 the learned judge somewhat modified the view he had in The Yasin. He insisted in the latter case that the principle of circuity applies to both types of policy described above. So the insurer was not allowed to exercise its subrogation right in the latter case. A similar view was taken in the subsequent decision in National Oilwell (UK) Ltd v Davy Offshore Ltd.136 However, if a co-insured has been guilty of wilful misconduct which disqualifies him from claiming under the policy, English law does not protect him from the insurer exercising subrogation rights against him.137 An alternative to the circuity analysis found favour based upon an implied term of the insurance policy. A term was to be implied in a joint names policy that where two or more insureds were insured in respect of the same loss or damage which has occurred, the insurer would not seek to exercise rights of subrogation to recoup from a second insured the cost of an indemnity which has been paid to the first insured.138 Accordingly, a co-insured made defendant to a subrogated action can raise the breach of the implied term as a defence.139 17.8.4 Suggestions for amendment of art. 62 of the Insurance Law Article 62 of the Insurance Law restricts the application of an insurer’s subrogation right against the family members of the insured, but there is no explicit provision in respect of the insurer’s subrogation right on an insured’s employee or co-insured. It

134  Lloyd J stated: “It is said to be a fundamental rule in the case of joint insurance, that the insurer cannot exercise a right of subrogation against one of the co-insureds in the name of the other. I am not satisfied that there is any such fundamental rule. In my judgement, the reason why an insurer cannot normally exercise a right of subrogation against a co-insured rests not on any fundamental principle relating to insurance, but on ordinary rules about circuity. In the present case, a claim in the name of the plaintiffs might well have been defeated by circuity if the insurance had purported to protect the defendants against third party liability. But that was not argued by Mr. Philips (Counsel for the defendants). As I have already mentioned, his submission was that the insurance protected the defendants’ proprietary interest as bailees. That being so, I do not see how circuity can help the defendants in this case.” [1979] 2 Lloyd’s Rep 45 at 54–55. 135  [1984] 1 QB 127. 136  [1993] 2 Lloyd’s Rep 582. 137 See National Oilwell v Davy Offshore, in which Colman J took the view that, if wilful misconduct were proven, the subcontractor would lose subrogation immunity. 138  National Oilwell v Davy Offshore [1993] 2 Lloyd’s Rep 582, at 613–14; Tate Gallery v Duffy [2007] 1 All ER (Comm) 1004, at 1025–26. 139  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) paras. 23-099 and 23-100. See Co-operative Retail Services Ltd v Taylor Young Partnership Ltd (2002) 1 WLR 1419; BP Exploration Operating Co. Ltd v Kvaerner Oilfield Products Ltd (2004) EWHC 999.

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is suggested that Australian and English models about the restriction on the insurer’s subrogation right against the insured’s employee, co-insured or a third party without insurance for its liability to the insured could be referred to in the reform of art. 62 of the Insurance Law in the future, as follows: (1) The insurer shall not exercise its right to claim indemnity by subrogation against the family members of the insured or the other members comprising such family of the insured unless the occurrence of the insured event referred to in the first paragraph of art. 60 has resulted from the wilful misconduct of such a third party. “Family members of the insured” refers to husband and wife, their parents and children. “Other persons comprising such family of the insured” refers to persons, such as grandparents, grandchildren, brothers, sisters and other persons having foster or support or maintenance relationships with the insured.140 (2) The insurer shall not exercise the subrogation right against his insured’s employee if the loss is caused by the employee in the course of or arising out of the employment and is not due to the employee’s wilful misconduct.141 (3) Where the insured has expressly or impliedly consented to the use, by a person, of a road motor vehicle that is the subject matter of the contract, the insurer shall not exercise the subrogation right against the person unless the loss is caused by the person’s wilful misconduct.142 (4) Where a person is not insured in respect of the third party’s liability to the insured, the insurer does not have the right to be subrogated to the rights of the insured against the person in respect of the loss. Where the person is so insured, the insurer may not, in the exercise of it’s rights of subrogation, recover from the person an amount that exceeds the amount that the person may recover under the person’s contract of insurance in respect of the loss.143 (5) The insurer shall not exercise its subrogation right against the insured’s partners or co-insureds where the loss is caused by such partners or co-insureds negligently rather than by wilful misconduct.144 17.9 The insured’s duties under subrogation Articles 61 and 63 of the Insurance Law expressly impose duties on the insured under subrogation. The insured’s performance of his duties is vital for the insurer to successfully exercise the rights of subrogation against the third party. The rules seem to cover the situation only after the insured event has occurred. The insured’s

140  The interpretation of the two phrases is according to Yu Xinnian. See Yu Xinnian and Gao Shengping, The Most Recent Interpretation on the Articles of the Insurance Law (People’s Court Press 1995) p. 118 and Shanghai High People’s Court [2010] No. 2. 141 With reference to the English “gentleman’s agreement” and the decision in Morris v Ford Motor Co.; s. 66 of the ICA; and art. 10:101(3) of the Principles of European Insurance Contracts Law. 142  This is the approach in s. 65 of the ICA. 143 Ibid. 144 With reference to the English approach on restriction of an insurer’s subrogation right against a negligent co-insured.

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duties before the occurrence of the insured event during the insurance period and at the time of the contract appear undefined, giving rise to difficulties in practice.145 This section critically examines relevant provisions in the Insurance Law relating to the insured’s duties under subrogation and some related duties to subrogation, such as the post-contract duty of notification of increase of risk during the currency of the insurance policy146 and the pre-contract duty of disclosure of material fact at the time of the contract.147 Both Chinese law and English law require the insured not to do anything to prejudice the insurer’s right. However, there are some differences between Chinese law and English law in respect of the application of this rule. In China, the insurer usually exercises its subrogation right in its own name, and once the insured has been paid by the insurer, the former’s right is assigned to the latter, so any settlement or compromising agreement between the insured and the third party after the insurer’s payment to the insured will not bind the insurer.148 In England, a compromise entered into between the insured and the third party is normally binding on the insurer, no matter whether it is made before or after indemnification by the insurer. This is because the insurer exercises its subrogation right by using the name of the insured, who is the nominal plaintiff. The insurer cannot have any better position than the insured. So once the insured has renounced his rights, the insurer’s subrogation right must be lost. 17.9.1 Insured’s duty not to waive his right to claim against the negligent third party The Insurance Law expressly requires the insured not to renounce his right against a third party after the occurrence of the insured event. It does not deal with an insured’s waiver of his rights against a third party before the occurrence of an insured event. If the insured is in breach of this statutory duty, the remedy available to the insurer varies, depending on the time when the insured waives his right to claim compensation from a third party. In this section, two situations are considered: the insured’s waiver after the occurrence of the insured event, and the insured’s waiver before the occurrence of the insured event during the currency of the insurance contract.

145 For more, see Zhen Jing, “The insurer’s duties under subrogation: A comparative analysis of Chinese, English and Australian law” [2013] Ins LJ 70. 146  During the insurance period, if the insured abandons his right to claim against a third party by an agreement with the third party before the insured event occurs, the insurer will lose his subrogation right against the third party. The insured is required to notify the insurer of the agreement according to art. 52 of the Insurance Law 2009. This related duty will be discussed later in the text. For more on the topic of the insured’s duty of notification of increase of risk during the insurance period, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) JBL 842. 147  At the time the insurance contract is entered into, the insured should disclose, upon the request of the insurer, the information to the insurer that he has abandoned his right to claim against a third party by an agreement with the third party. This related duty will be discussed later in the text. For more on the topic of the insured’s pre-contract duty of disclosure, see Zhen Jing, “Insured’s Duty of Disclosure and Test of Materiality in Marine and Non-Marine Insurance Laws in China” [2006] JBL 681. 148  Article 61(2).

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(a) After the occurrence of the insured event (I) BEFORE PAYMENT BY THE INSURER The insured’s duty not to waive his right to demand indemnity from the third party following the occurrence of the insured event, and the remedy available to the insurer for the insured’s breach of the duty are stipulated in art. 61 of the Insurance Law. Article 61(1) provides: “Where the insured waives his right to claim indemnity from a third party following the occurrence of an event insured against and prior to the insurer’s payment of insurance moneys, the insurer shall not be liable for the payment of insurance moneys.” In practice, the insured’s right to claim against a third party is assigned to the insurer, which is evidenced by a Receipt and Subrogation Form upon the insurer’s payment under the policy. Thus, if the insured has waived his right of claim against the third party before the payment by the insurer, he will have no right to transfer. The insurer will have no subrogation right to sue the third party and is then entitled to refuse the insured’s claim. This can be illustrated by the case of The Plastics Company v The Chinese Insurance Company.149 The insured effected a policy with the insurer to cover the risk of waterway carriage of cargo with an insured amount of ¥340,000. The ship carrying the cargo collided with another ship (the third party) in the Yangtze River near Wuhan City. The ship was sunk, with a loss of the cargo. Two members of the crew were drowned and one member injured. The Wuhan Port Administration investigated the event and found that the third party was fully responsible for the collision. Without notifying the insurer, the insured accepted mediation by the Wuhan Port Administration and entered into an agreement with the third party by which the third party would pay for the death of the two crew members and the injured member and also for the damage to the ship (¥100,000) to the insured, and the insured abandoned his right of claim against the third party for the loss of the cargo. The insured turned to the insurer for full loss of the cargo but the insurer agreed to pay only a part of the full loss.150 The insured then sued. The trial court held that the insurer was liable for the full loss of the cargo. The insurer appealed and the High Court reversed the decision of the trial court, holding that according to art. 44 of the Insurance Law 1995,151 which provides “Where the insured waives his right to claim indemnity from a third party following the occurrence of an event insured against and prior to the insurer’s payment of insurance moneys, the insurer shall not be liable for the payment of insurance moneys,” the insurer in this case was not liable for the loss of the cargo because of the insured’s waiver of his right against the third party, which defeated the insurer’s right of subrogation to claim against the third party. Article 61(1) of the Insurance Law does not cover the situation where the insurer has paid the insured without knowing that the insured waived his right to claim against the third party. No decided case has been found on this point, but there is no doubt that sooner or later disputes will occur on this issue. It is suggested that

149  This case is cited in the book, Insurance Cases by Zongjian Li (China Modern Economic Publishing House 2007) pp. 237–40. 150  The insurer should not be liable for even a part of the loss because the insured has abandoned his right to recover from the third party before the insurance payment. 151  This case was decided in 1999, so the 1995 version of the Insurance Law was applied.

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the insurer should be entitled to claim back the money paid to the insured in this situation. In order to avoid disputes on this issue, it is recommended that art. 61(1) be rewritten as follows: “Where the insured waives his right to claim indemnity from a third party following the occurrence of an event insured against and prior to the insurer’s payment of insurance moneys, the insurer shall not be liable for the payment of insurance moneys. If the insurer has paid the insured without knowing that the insured waived his right to claim against the third party, he shall be entitled to request such payment be returned.”152 In English law, before the insured has received the indemnity from the insurer, he definitely has the right to sue the third party and solely control the proceedings.153 An agreement compromising the third party’s liability to the insured is normally binding on the insurer. The insured has a duty (by an express154 or implied term155 in the policy) not to deal with any claim he possesses, or will possess, against a third party in such a manner as to prejudice the insurer’s rights of subrogation in relation to it.156 If the insured does anything which causes the insurer to lose its subrogation right, the insured is liable to the insurer. Before the insurer has paid the insured under the policy, any settlement or compromise made by the insured and the third party which prejudices the insurer’s subrogation rights will entitle the insurer to set up, in response to the insured’s claim, a counterclaim for damages to the amount of the loss thereby suffered by the insurer.157 The insurer might be entitled to repudiate liability if an express provision were made for such a contingency in the policy.158 In Australia, by virtue of s. 68(1) of the ICA, this kind of provision to exclude or limit the insurer’s liability in the policy is not effective if the insurer did not clearly inform the insured in writing of the effect of the provision, before the insurance contract was entered into. (II) AFTER PAYMENT BY THE INSURER In China, the insurer usually exercises its subrogation right in its own name; once the insured has been paid by the insurer, the former’s right is assigned to the latter by a Receipt and Subrogation Form, so any settlement or compromising agreement between the insured and the third party after the insurer’s payment to the insured will not bind the insurer.159 Article 61(2) of the Insurance Law sets up rules regard-

152  It is suggested that the sentence in italics is added into this paragraph. 153 See Commercial Union v Lister (1874) 9 Ch App 483. 154  A typical insurance policy subrogation clause reads: “The insured shall at the insurer’s expense do and concur in doing and permit to be done all actions that may be necessary or required by the insurers in the interests of any rights or remedies or for the purpose of obtaining relief or indemnity to which the insurers are or would become entitled or which is or would be subrogated to them upon indemnification or rectification of any loss or damage under this policy of insurance, regardless of whether such action is or becomes necessary or required before or after the insured’s indemnification by the insurers.” See N. Pengelley, “When can an insurer exercise its right of subrogation?” [2013] 24 Ins LJ 90, note 4. 155 See Napier and Ettrick (Lord) v Kershaw [1993] 1 All ER 385, per Lord Templeman. This is so held in Horwood v Land of Leather Ltd [2010] EWHC 546 (Comm). 156 See West of England Fire Ins. Co. v Isaacs [1897] 1 QB 226; Boag v Standard Marine Ins. Co. [1937] 2 KB 113. 157 See MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 23-053. 158  Ibid, para. 23-053. 159  The Insurance Law 2009, art. 61(2). For more, see Zhen Jing, “The Confusion between subrogation and assignment in the Insurance Law of the People’s Republic of China 1995 – A critical analysis on

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ing the insured’s duty not to waive his right against the third party after the insurer’s payment, and it provides: “Where the insured, without the consent of the insurer, waives his right to claim indemnity from a third party after the insurer has paid insurance moneys to him, the waiver shall be invalid.” Indeed, as discussed above, after the insurer has paid the insured, the insured’s right against the third party is assigned to the insurer through a Receipt and Subrogation Form, so the insured then does not have any right to waive.160 Thus the waiver is invalid. In English law, once the insured has received full compensation either from the insurer alone or from a combination of payments by the insurer and the third party, the insured loses the right to control proceedings brought in his name against the third party, and he thus no longer has the right as against the insurer to reach any form of settlement with the third party. Even if they have made one which is bona fide, it does not have any legal effect on the insurer.161 It has been held that the insurer who has paid out under its policy is never bound by a compromise agreement made by his insured with the third party if the third party has notice of the payment before concluding the agreement.162 If the insured has been paid the insurance money but has not received a full indemnity, he is still entitled to make a bona fide settlement in the joint interest of himself and his insurer.163 (III) INSURED’S INTENTIONAL OR GROSSLY NEGLIGENT ACT TO THE PREJUDICE OF THE INSURER’S SUBROGATION RIGHTS Article 61(3) of the Insurance Law provides: “Where the insurer is unable to exercise his right to claim indemnity by subrogation due to the intention or the gross negligence of the insured, the insurer may make a corresponding deduction from the amount of indemnity or request such an amount be returned.”164 This provision stresses consequences of the insured’s intentional or grossly negligent act to the prejudice of the insurer’s rights of subrogation. It is the modified version based on art. 44(3) of the Insurance Law 1995. The first two paragraphs of art. 61 of the 2009 version are the same as those in art. 44 of the 1995 version. But the third paragraphs of art. 44 and art. 61 are different. Article 44(3) of the Insurance Law 1995 provides that “where the insurer is unable to exercise his subrogation right due to the fault of the insured, the insurer may make a corresponding deduction from the amount of indemnity.” The effect of the old law was that if the insurer lost its right of subrogation as a article 44 of the Insurance Law” [2002] JBL 608. Under English law, a compromise entered into between the insured and the third party is normally binding on the insurer, no matter whether it is made before or after indemnification by the insurer. This is because the insurer exercises his subrogation right by using the name of the insured, who is the nominal plaintiff. The insurer cannot have any better position than the insured. So once the insured has renounced his rights, the insurer’s subrogation rights must be lost. 160  If the insured is fully covered by a policy, after payment by the insurer, the right against the third party for the whole loss will be transferred to the insurer. If the insured is under-insured, after the insurer has paid him under the policy, the insured’s right against the third party will be partly transferred to the insurer based on the amount of the insurer’s payment according to art. 60 of the Insurance Law 2009. 161  See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-073. 162 See Haigh v Lawford (1964) 114 NLJ 208. In this case the county court authority held that a third party who is aware that the insured has lost control of the action may not be able to plead the settlement in defence to a subrogation action by the insurer. 163  Globe & Rutgers Fire Ins. Co. v Truedell [1927] 2 DLR 659. 164 The italic phrases in the paragraph are new as compared with the 1995 and 2002 version of the Insurance Law.

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result of any fault of the insured (whether it was innocent or intentional, minor or serious), it could then reduce the amount of its payment to the insured accordingly. Previously, the author suggested that the rule in the Insurance Law 1995 in this respect was too harsh to the innocent insured,165 who was unaware of the complexity of the doctrine of subrogation and unconsciously did something (such as a compromise agreement with the third party etc.) which prejudiced the insurer’s subrogation right.166 The insured’s innocent act should be “forgiven.” Indeed, the 2009 version of the Insurance Law (art. 61(3)) takes account of the extent of the insured’s fault in order to protect the innocent insured. Only where the insured acted intentionally or by gross negligence so that the insurer is unable to exercise its subrogation right can the insurer then reduce the amount of payment to the insured. Innocent fault of the insured is not actionable. The purpose of art. 61 of the Insurance Law is to protect the insurer’s rights of subrogation. Before the payment of insurance moneys to the insured, control of proceedings remains with the insured, and the insurer has no right to sue the third party in the insured’s name,167 so any settlement or compromise agreement between the insured and the third party binds the insurer. The insurer will lose its subrogation right and is therefore entitled to respond to the insured’s prejudicial act. A Chinese case illustrates this point.168 A truck named “East Wind” owned by Mr Zheng was hit by a “Yellow River” truck due to the carelessness of the driver of Yellow River. The insured owner of East Wind made a claim against the owner of Yellow River, and agreed to accept a sum of ¥7,000 in full settlement, which he thought should be enough for the repair cost. The actual repair cost turned out to be ¥8,800. The insured then turned to his insurer for ¥1,800, but was turned down by the insurer on the grounds that the insured’s settlement with the third party bound the insurer and prejudiced the insurer’s subrogation right. Although Mr Zheng was innocent and unaware of the intricacies of the insurer’s subrogation right, the law then did not forgive an innocent insured, and so the court upheld the insurer’s argument. It should be noted that this case was dealt with by applying art. 44(3) of the Insurance Law 1995 which was operating then, by which if the insurer was unable to exercise its subrogation right to claim indemnity against the third party due to any fault of the insured, the insurer would make a corresponding deduction from the amount of payment. The amount of deduction in this case would be ¥1,800. If the 2009 version169 had been applied in this case, the decision would have been different; the insurer should have paid ¥1,800 to Mr Zheng because his prejudice to the insurer’s subrogation right was not due to his intentional or grossly negligent act.

165  Zhen Jing, The Fundamental Principles of Insurance Contract Law and Practice in the People’s Republic of China – A Comparative Study with English and Australian Counterparts (2001) PhD thesis, Queen Mary, London University, p. 349–51. 166 There is no doubt that there are some insureds who were aware of the doctrine of subrogation and made compromise agreements with a third party which prejudiced the insurer’s subrogation right, but feigned ignorance of the doctrine of subrogation. 167  See art. 61(1) of the Insurance Law 2009. 168  Zheng Guangming v Insurance Company; see Hu Wenfu, The Guidance of the Insurance Claim and Settlement (China Procuratorate Press 1993) p. 174. 169  The Insurance Law 2009, art. 61.

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It is unclear in respect of the scope of the application of art. 61(3) of the Insurance Law. Three questions may arise in the application of this paragraph. First is whether or not art. 61(3) limits the scope of the application of art. 61(1) only to the insured’s intentional or grossly negligent act – in other words, whether or not the insurer is not liable for the payment of insurance money only where the insured waives his right to claim indemnity from a third party intentionally or by gross negligence, but is still liable in the case of the insured’s innocent waiver. A positive answer to this question seems reasonable and would reflect the intention of the law to protect the innocent insured in art. 61(3). It is certain that art. 61(3) does not limit the application of art. 61(2), for the insured’s waiver of his right to claim against the third party after an insurance payment is invalid. The remedy in art. 61(2) is irrelevant to the extent of the insured’s fault. The second question is whether or not art. 61(3) is meant to apply in the situation only after the loss has occurred. If it is intended to apply in the situations both before and after the insured loss has occurred, it is suggested that this paragraph be modified as follows: “During the currency of the insurance contract,170 where the insurer is unable to exercise his right to claim indemnity by subrogation due to the intention or the gross negligence of the insured, the insurer may make a corresponding deduction from the amount of indemnity or request such an amount be returned.” By this modification, this paragraph would be applied both before and after the insured loss has occurred. The law should cover both situations because no matter before or after the occurrence of the loss, the insured’s prejudicial act would result in the insurer’s right of subrogation being defeated. The third question is whether or not the application of art. 61(3) can be extended to cover other situations, such as the insured’s failure to assist the insurer in its exercise of subrogation rights, or to protect the time-bar for action. This question will be discussed later. (b) Before the occurrence of the insured event during the insurance period We have considered the relevant rules of law relating to the insured’s obligations after the insured loss has occurred. The issue to be considered here is whether, before the insured loss has occurred, the insured is under a duty not to prejudice the insurer’s potential rights of subrogation and what remedy is available to the insurer if the insured has abandoned or limited his right to claim against the third party, thereby defeating the insurer’s subrogation right. In practice, it often happens that the insured waives, for various reasons, his right to claim against the third party before the insured loss occurs.171 The Insurance Law does not cover this point. The lacuna in the law could cause disputes in practice and difficulties for the courts in dealing with the disputes. There are two different views to this issue. Some people are of the view that the insurer should not be liable to pay the insured if he abandoned his right to claim against the third party for indemnity before the insured loss has occurred because

170  The italic phrase is added to modify para. 3 of art. 61 of the Insurance Law. 171  For example, in transport contracts, the shipper of goods often gives up his right to claim against the carrier when the loss of goods occurs in return for lower freight charges.

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the abandonment would prejudice the insurer’s subrogation right against the third party.172 Some others argue that as the subrogation rights have not arisen before a loss has occurred, the insured’s waiver cannot be said to prejudice to the insurer’s subrogation rights, so there is no legal basis to support this view.173 The author disagrees with the latter view and submits that although the actual subrogation rights do not arise prior to the occurrence of the insured event and the insurer’s payment to the insured, the potential subrogation rights do exist and would indeed be prejudiced by the insured’s waiver, so the insurer should be entitled to have the remedy specified in art. 61(3) of the Insurance Law, as discussed earlier. These arguments raise an important question, that is, when should the insurer have subrogation rights? It is submitted that an insurer’s subrogation rights come into existence at the time when the insurance contract is entered into. These rights are then only potential ones. Whether or not these potential rights can become actual exercisable rights depends on three factors: first, the insured loss is caused by a negligent third party; second, the insured has a right to claim for the loss against the third party; and third, the insurer has indemnified the insured under the policy. Thus if the insured has given up his right to claim against the third party, the insurer’s subrogation right is defeated. The insurer should then be entitled to refuse to pay the insured loss on the basis of the insured’s waiver of his right to claim against the third party. The Shanghai High People’s Court published some guiding rules to questions relating to subrogation.174 The issue discussed above is dealt with in the guiding rules. In answering the question of how to handle insurance subrogation cases with regard to the insured’s waiver of his right, before the insured loss has occurred, to claim indemnity against the third party wrongdoer, the Court suggests that the insurer should first check the validity of the exclusion clause which excludes the third party’s liability to the insured in the contract between the insured and the third party according to art. 58 of the Civil Code 1986,175 and arts. 40, 52 and 53 of the Contract Law 1999.176 If the exclusion clause is invalid, the court will not support

172 The view is cited by the Research Project Group of Shanghai High Court on “Rules of law in dealing with disputes in insurance subrogation” [2011] 5 Journal of Law Application 21. 173  See Wang Linqing, The Insurance and its Judicial Application: Studies on the Hot Issues since the Enactment of the New Insurance Law (Law Press China 2013) p. 540. 174 Shanghai High People’s Court, No. 3 [2010], Notification (II) concerning “Questions and answers on how to deal with insurance cases relating to subrogation.” 175 The General Principles of the Civil Law of the People’s Republic of China was promulgated in 1986. Under art. 58, civil acts in the following categories shall be null and void: (1) those performed by a person without capacity for civil conduct; (2) those that according to law may not be independently performed by a person with limited capacity for civil conduct; (3) those performed by a person against his true intentions as a result of cheating, coercion or exploitation of his unfavourable position by the other party; (4) those that performed through malicious collusion are detrimental to the interest of the state, a collective or a third party; (5) those that violate the law or the public interest; (6) economic contracts that violate the state’s mandatory plans; and (7) those that performed under the guise of legitimate acts conceal illegitimate purposes. Civil acts that are null and void shall not be legally binding from the very beginning. 176  The Contract Law of the People’s Republic of China was enacted on 15 March 1999. Article 40: A standard term is void if it involves any of the circumstances provided for in arts. 52

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the third party’s defence to the insurer’s subrogation act. If the exclusion clause is valid, the court will not support the insurer’s subrogation action to recover from the third party. The insurer may request the insurance payment be returned177 on the basis of the insured’s breach of his duty of disclosure, or breach of his duty of notification of increase of risk during the insurance period according to art. 16178 or art. 52(2)179 and art. 61(3) of the Insurance Law, unless the insurer has known or ought to have known the fact of the insured’s waiver of his right to claim against the third party and has still agreed to underwrite (at the time of the contract) or continue to underwrite (during the insurance period) the insured event. By virtue of this guiding rule of the Court, the insured is required to perform his duty of disclosure of the fact of his waiver of the right to claim against the third party at the time the contract was entered into if the waiver had been made before the contract.180 If the waiver happens after the contract is concluded but before the loss occurs, the insured is obliged to notify the insurer of the waiver, because the waiver would significantly increase the risk of loss.181 There are two reasons for the point that the insured’s waiver is a material increase of risk: first, so far as the insured subject matter is concerned, if the insured has abandoned his right through an exclusion clause in a contract to claim against the third party for damages where the loss is caused by the third party, the third party might take less care to avoid the insured event occurring than he may otherwise do. The risk for the insured event to occur will then increase. As a result, the risk of loss covered by the insurance policy will significantly increase. Second, from the insurer’s point of view, the insurer’s rights of subrogation can be defeated by the insured’s release of a third party’s liability. Therefore, the insured should be required to notify the insurer of the material change of circumstances (i.e. the insured has effected a contract with the third party which excludes the third party’s liability to the insured) which significantly increases the risk of loss. The insurer may

and 53 of this Law, or if it excludes the liability of the party supplying the standard term, increases the liability of the other party or deprives the other party of a major right. Article 52: A contract is void in one of the following situations: (1) Where a party uses fraud or duress to conclude the contract, thereby harming the interests of the state; (2) Where it involves malicious collusion to harm the interests of the state, a collective organisation or a third person; (3) Where it conceals an illegal purpose in a lawful form; (4) Where it violates the public interest; (5) Where it violates mandatory provisions of laws or administrative regulations. Article 53: The following exception clauses in a contract are void: (1) One that exempts liability for personal injury caused to the other party; (2) One that exempts liability for property loss caused to the other party either intentionally or as a result of gross negligence. 177  For an unknown reason, the court does not mention whether or not the insurer may refuse liability of payment to the insured on the same basis. 178  Article 16 of the Insurance Law is concerned with non-disclosure and misrepresentation. This point will further be discussed later. See Chapter 8 on the topic of the insured’s pre-contract duty of disclosure of material information. 179 The Insurance Law, art. 52; see Chapter 10 on the topic of increase of risk during the insurance period. 180  This point will be further discussed later. 181  For detailed discussion of the insured’s duty of notification of increase of risk, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) JBL 842.

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demand a higher premium or terminate the policy in response to the increase of the risk according to art. 52 of the Insurance Law.182 If the insured fails to notify the insurer of such an increase of risk during the insurance period, the insurer shall not be liable for indemnity for the loss caused by the material increase in risk.183 In judicial practice, if there is a valid exclusion clause in the contract between the insured and the third party which excludes the third party’s liability, the courts usually make the exclusion clause effective as a defence of the third party to the insurer’s subrogation action. For example, in the case of Nanjing Electronic Products Company v Jiangsu Property Insurance Company,184 the insured effected a policy with the insurer to cover the loss for transport of its products in January 2005 for one year. During the insurance period in June 2005, the insured entered into a contract with a transport company (a third party). It was agreed in the contract that the third party was not liable to pay the insured for any loss of goods in transport. In September 2005, a road accident occurred due to the fault of the driver (the third party’s employee) and the insured’s goods were damaged. The insured claimed and the insurer paid the insured ¥508,600 for the loss. The insurer then exercised its subrogation right to claim against the third party for the loss but was turned down. The court held that the insured abandoned his right to claim against the third party in the agreement between them. The third party was not liable to pay the insured for the loss, so the insurer’s right of subrogation to claim against the third party was lost. It is suggested that the court should apply the doctrine of increase of risk to deal with this case. The insured should have notified the insurer of the fact that during the insurance period he entered into a contract which excluded the third party’s liability to the insured. This was a material change of circumstances which significantly increased the risk of loss under the policy. As the insured failed to perform his duty of notification of the material increase of risk to the insurer and the loss was caused by the increase of the risk, the insurer should have refused the insured’s claim. In this case, the insurer paid the insured, and it should have been entitled to request the amount (¥508,600 yuan) be returned according to art. 61(3) of the Insurance Law. At this stage, it would be appropriate to look at approaches in other jurisdictions in respect of the insured’s release of the third party’s liability and the remedy available to the insurer. Under the law of the US, in the absence of a prohibition in the insurance contract against the insured’s entering into any exculpatory agreements with the third party, the insurer should not be entitled to repudiate liability for payment on the ground that the insured has abandoned or restricted his right to claim indemnity against the third party through an exclusion or limitation clause in the contract entered into between the insured and the third party during the insurance period.185 In Great Northern Oil Company v St. Paul Fire and Marine Insurance Company,186 the plaintiff insured procured from the several defendants (insurers) a three-year policy 182  Article 52(1) of the Insurance Law imposes a duty on the insured to notify the insurer of a material increase of risk in accordance with the contract. 183  The Insurance Law, art. 52(2). 184  This case is cited in the book Insurance Cases by Zongjian Li (China Modern Economic Publishing House 2007) pp. 356–59. 185  Great Northern Oil Company v St. Paul Fire and Marine Insurance Company, 189 NW 2d 404 (Minn 1971). 186 Ibid.

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of “all-risk” insurance covering, among other things, losses due to the interruption of the insured’s business. During the insurance period, the insured entered into an agreement with a contractor for construction of buildings and facilities. There was an exculpatory clause in the construction contract which provided: “Contractor shall not be responsible or held liable for any damages or liability for loss of use of the Work, loss of profits therefrom, or business interruption thereof however the same may be caused.” When the insured event occurred, the insured claimed against the insurers for business interruption loss which was covered by the policy, but the insurers refused to pay on the ground that the insured could not recover under the policy because the insured, by releasing the contractor from liability before the accident occurred, had defeated the insurers’ rights of subrogation under the policy. The Supreme Court of Minnesota affirmed the trial court’s decision and held that the insured, in the absence of a prohibition in the insurance contract against entering into any exculpatory agreements, is not precluded from pursuing his action to recover his loss under the insurance policy. There exists no reason in equity or public policy to preclude the insured from pursuing such a recovery. Under English law, in the absence of any warranty concerning subrogation recoveries in the policy, the insurer cannot avoid the policy where the insured has entered into an agreement with the third party during the insurance period, exempting the latter from liability to the insured.187 It has been held in Australia that there is no implied obligation on an insured to refrain from entering into an agreement after the insurance policy has incepted which excludes or restricts the third party’s liability: State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd.188 This case held that an insured is not in breach of the insurance contract by entering into an agreement with an exculpatory term, because an insured cannot compromise a right he did not have before he entered into the agreement.189 In the case of Nanjing Electronic Products Company v Jiangsu Property Insurance Company, assume for the sake of argument that the contract between the insured and the third party which excluded the third party’s liability for any loss to the insured had been entered into before the insurance contract was made, the insurer would then definitely be unable to exercise subrogation rights to claim against the third party when the insured event occurred. What remedy would be available to the insurer in this situation? This will be discussed in the following section. 17.9.2 Does the insured have a duty to disclose his waiver of the right to claim against the third party at the time of the contract? We have considered above several situations concerning the insured’s duty under subrogation during the insurance period. Here we consider the question of whether or not the insured is under a duty to disclose the fact to the insurer, at the time of the contract, that he has made a contract with a third party which excludes or limits

187  Boag v Standard Marine Insurance Co. Ltd [1937] 2 KB 113. For more, see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11–071. 188  (1969) 123 CLR 228. 189  Ibid, per Barwick CJ at [27]. For more, see Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis Butterworths 2015) para. 27.5, p. 482.

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the right of the insured to recover from the third party. There is no answer to this question in the Insurance Law. Before the insured has entered into a policy with the insurer, insurer subrogation rights do not exist, so it cannot be said that the insurer’s subrogation rights have been prejudiced by the insured’s giving up his rights to claim against the third party.190 However, it is obvious that if the insured has abandoned or limited his right against the third party before the insurance contract is entered into, the insurer will not have any rights of subrogation to recover from the third party, once the insured event occurs. It is suggested that if the insurer wishes to know this fact, it should raise a question in the proposal form, such as “have you abandoned or limited your right to recover from a person when the insured event is caused to occur by the fault of that person?” The insured should truthfully answer the question. If the insurer does not ask such a question, the insured has no duty to voluntarily disclose the fact to the insurer.191 It is submitted that the fact of the insured’s giving up his right to claim against the third party is a material one if it decisively influences a prudent insurer’s decision on whether or not to accept the risk and, if so, on what terms.192 If the insurer failed intentionally or by gross negligence to answer the question at the time of the contract, the remedy available to the insurer is to rescind the contract.193 If the insurer was aware of the fact but still accepted the risk, it is deemed that the insurer waived its potential rights of subrogation against the third party at the time the contract was entered into. It cannot, upon the occurrence of the insured event, refuse the insured’s claim on the grounds of either non-disclosure or prejudice of its subrogation rights by the insured’s act. In a Chinese case,194 the insured seller effected an open policy with the insurer to cover the risks of his goods in transport for one year (from 1 May 2005 to 30 April 2006). In May 2005 the insured instructed a manufacturer to deliver the goods to the place where the buyer was located. The manufacturer then instructed a transporter to deliver the goods to the buyer. In a contract entered into between the manufacturer and the transporter in April 2005 (before the insurance contract was made), there was a clause to limit the transporter’s liability to the manufacturer in respect of a loss of goods to the maximum amount of ¥200,000. A road accident occurred due to the fault of the transporter, resulting in damage to the goods. The total loss suffered by the insured seller was ¥1,000,000 due to the negligence of the transporter. The insurer paid the insured and then exercised the right of subrogation to claim against the transporter but was refused. The argument in this case was over whether or not the transporter could refuse the insurer’s claim on the ground of the limitation clause. The trial court held that the transporter was not entitled to 190  For more, see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-070. 191  For pre-contract disclosure, the Insurance Law 2009 adopts the method of inquiring disclosure (not voluntary disclosure). The proposer is only obliged to disclose the information asked in questions by the insurer in the proposal form, and the insurer may not avoid a policy on the ground that the proposer did not disclose something material which is beyond the questions raised in the proposal form. For more, see Zhen Jing, “Insured’s duty of disclosure and test of materiality in marine and non-marine insurance law in China” [2006] JBL 681. 192 Ibid. 193  The Insurance Law, art. 16. 194 This case is cited in the book One Hundred Selected Insurance Cases, edited by Xie Xian and Li Yougen (Law Press China 2011) pp. 347–51.

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invoke the limitation clause as a defence to the insurer’s claim because the limitation clause was effective only between the manufacturer and the transporter. The insured seller was not bound by the limitation clause, and thus the transporter was liable to pay the insurer for the claim. The transporter appealed. The High Court settled the dispute by mediation and requested the transporter to pay a part of the total loss.195 In this case, if we assume that the transport contract was concluded between the insured seller and the transporter, two different situations would occur. (1) The limitation clause would bind the insured. The insurer would then lose the right of subrogation to claim against the transporter for the amount of ¥800,000 (which is the difference between the total loss and the maximum amount payable under the limitation clause). (2) The contract, limiting the transporter’s liability, was made before the insurance contract was entered into. At the time of the insurance contract, if requested by the insurer in the proposal form, the insured should disclose the fact of the existence of the limitation clause between the insured and the transporter. The insurer would either increase the premium or refuse to underwrite the risk. If the insured failed to disclose the fact, the rules relating to pre-contract disclosure of material information should be applied. For intentional non-disclosure, the insurer is free from liabilities for any loss that occurred before contract termination whether or not the loss is caused by the undisclosed facts.196 For grossly negligent non-disclosure, the insurer is liable for pre-termination losses unless the insured’s non-disclosure has a material impact on the occurrence of the insured event.197 By contrast, the ICA does not require the insured to disclose, at the time of the insurance contract, the fact of existence of an exclusion or limitation clause in an agreement between the insured and the third party. Section 68(2) of the ICA clearly stipulates that the duty of disclosure does not require the insured to disclose to the insurer the existence of a contract that the insured is a party to an agreement that excludes or limits a right of the insured to recover damages from a person other than the insurer in respect of the loss.198 It cannot be said that the insured has prejudiced the insurer’s subrogation rights where the insured made an agreement with a third party which excludes or limits the latter from liability, before the insurance policy is entered into, as there are no contingent subrogation rights available to the insurer until the insurance contract is made.199 For the protection of the insurer itself, the insurer may include a provision in the insurance policy to exclude or limit its liability in respect of a loss by reason that the insured has an agreement with a third party which excludes or limits the insured’s right to recover damages from the third party, but this provision is not effective if the insurer did not clearly inform the insured in writing of the effect of the provision, before the insurance contract was entered into.200

195  The People’s Court of China has the function of mediation. See arts 85–91 of the Civil Procedure Law of China 1991. 196  The Insurance Law, art. 16(4). 197  Ibid, art. 16(5). For more, see H. Y. Yeo, “Of remedies and non-disclosure in the insurance law of the People’s Republic of China” [2011] JBL 556. 198  ICA, s. 68(2). 199  State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228. 200  ICA, s. 68(1).

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In English law, there has so far been no clear-cut authority as to the question whether or not an agreement between an insured and a third party which excludes or limits the third party’s liability to the insured amounts to a material fact. In Tate & Son v Hyslop,201 the insured cargo owner entered into an agreement with lightermen under which they were to be liable only for negligence. The cargo insurer operated a dual premium structure under which a higher premium was charged where lightermen were liable only in negligence, but the insured did not disclose that such an agreement existed and obtained insurance at the lower premium rate. The Court of Appeal held that a material fact had not been disclosed, so that the policy could be avoided. However, the court stressed the exceptional nature of the case and, in particular, that it did not raise the general question whether an agreement which restricted potential subrogation rights amounted to a material fact. If it can be shown that subrogation recoveries do permit premium levels to be kept at a lower level than would otherwise be possible, inability to exercise subrogation rights would appear to fall squarely within the definition of materiality.202 17.9.3 The insured’s duty to assist the insurer in exercising subrogation rights In addition to the insured’s duties not to waive his right to claim indemnity from the third party wrongdoer and not to do anything to prejudice the insurer’s subrogation right, the insured is also obliged to assist the insurer in the subrogation proceedings. Article 63 of the Insurance Law provides: “When the insurer exercises his right to claim indemnity by subrogation against a third party, the insured shall provide the insurer with the necessary documents and relevant information known to him.” These documents and relevant information would include the insurance policy and certificate, receipts for premium payments, a report of causes of the insured event, a report of the extent of loss or damage, a list of lost or damaged items, receipts or other evidence of costs for investigation and ascertaining the nature and cause of the insured event and so on.203 If the insured intentionally or by gross negligence failed to perform his duty of assistance to the insurer, the insurer is entitled to reduce the amount of the insurance payment correspondingly or request such an amount be refunded in accordance with art. 61(3) of the Insurance Law.204 The insured’s statutory duties in relation to subrogation have been considered above, and the insured’s contractual duties in subrogation will be considered in the following section. 17.10 Contractual duties versus statutory duties under subrogation The Insurance Law does not provide any stipulation as to the insured’s duty to take all reasonable steps to preserve the insurer’s rights of subrogation, such as the right

201  (1885) 15 QBD 368. See also Marc Rich & Co. AG v Portman [1996] 1 Lloyd’s Rep 430, a point did not arise on appeal, [1997] 1 Lloyd’s Rep 225. 202  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 11-070. 203  Wang Linqing, The Insurance and its Judicial Application: Studies on the Hot Issues since the Enactment of the New Insurance Law (Law Press China 2013) p. 542. 204 Ibid.

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to recover damages from the third party against any relevant legal or arbitration time-bar. This is, however, usually dealt with by the subrogation clause in an insurance policy. For example, in a property insurance policy, a clause states that “where a third party is held responsible for the loss or damage covered under this policy, the insured shall, whether being indemnified by the company or not, take all necessary measures to enforce or reserve the right of recovery against the third party, and upon being indemnified by the company, subrogate to the company the right to claim against the third party, transfer all necessary documents to and assist the company in pursuing recovery from the responsible party.”205 It is clear from this clause that the insured is required to take all necessary steps to enforce or reserve the right of recovery against the third party. This would include protecting the claim against any relevant legal or arbitration time-bar. It seems reasonable to request that the insured reserve the right to claim damages from the third party and protect against a timebar through a contract clause. However, some subrogation clauses have gone so far as to significantly extend the insurer’s rights and impose harsh duties on the insured. For example, a subrogation clause in a motor vehicle insurance policy provides: “Where the insured vehicle sustains damage or loss within the scope of the coverage for which a third party shall be held liable, the insured shall file a claim against the third party. If the third party refuses to indemnify him, the insured shall bring a legal action to the court against the third party. The insurer shall, after the insured has brought an action against the third party, indemnify the insured under the policy where the insured has made a claim in writing. The insurer shall be subrogated to the insured’s rights of recovery, and the insured shall assist the insurer in pursuing recovery from the third party. Where the insurer is unable to exercise his right of subrogation due to the insured’s fault or due to the fact that the insured has waived his right to claim indemnity from the third party, the insurer shall not be liable for the payment of the insurance moneys or make a corresponding deduction from the amount of the indemnity.”206 It is clear that this clause makes it a condition precedent to the insurer’s indemnity liability that the insured must make a claim or bring a legal action against the third party before submitting a claim to the insurer. It imposes a harsh obligation on the insured. The Insurance Law does not impose a statutory obligation on the insured to take legal action against the third party before he can claim an indemnity against the insurer. This clause undoubtedly increases the insured’s obligation. Such a clause, which is unfair to the insured, should not be enforceable according to art. 19 of the Insurance Law, which provides: “the following terms and conditions in an insurance contract concluded by adopting the standard clauses provided by the insurer shall be invalid: (1) those that exempt the insurer of the obligations that the insurer should have borne according to law or that aggravate the obligations of the proposer and the insured; (2) those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law.”

205  See the policy for property all-risks insurance of the Ping An Insurance Company of China. The same clauses are also provided in the policy for public liability insurance and in the policy for construction all-risks and third party liability insurance of the Ping An Insurance Company of China. 206  See art. 19 of the old version of the Motor Vehicle Insurance Policy of the Ping An Insurance Company of China, which is not used anymore.

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In England, insurance policies frequently contain a clause expressly requiring the insured to take all necessary steps to protect the insurer’s rights. If an insured under such a policy allowed a time-bar to elapse, thereby precluding the insurer from enjoying the exercise of remedies against a third party, the insurer could recover damages for the breach of that stipulation in the amount which would have been recoverable from the third party.207 It has never been decided in English law whether or not the insured is obliged to take active steps to prosecute a claim against a third party, in the absence of an express clause in the policy, so as to stop it becoming time-barred to the detriment of the insurer.208 In Andrews v The Patriotic Assurance Co.,209 it was held that an insurer on a building policy was not entitled to repudiate liability by reason of the failure of the insured to sue the wrongdoer before the latter became bankrupt, in the absence of any request by the insurer to do so. 17.11 The limitation period for subrogation Where the insured loss is caused by a third party, after indemnifying the insured for the loss under the policy, the insurer acquires the rights of subrogation. However, the insurer may run the risk of being time-barred against exercising the right to sue the third party. Though the Insurance Law clearly provides that the limitation period for insurance claims is two years for indemnity policies, and five years for life policies, starting from the date when the insured or the beneficiary knows or ought to know of the occurrence of the insured event,210 but does not give any stipulation as to the limitation period for the insurer’s exercise of the subrogation right against the third party.211 Because the insurer’s right of subrogation to sue the third party comes from the insured, the Shanghai High People’s Court (SHPC) provides that the limitation period for the insurer’s exercise of subrogation rights should be the same as that for the insured’s right to sue the third party.212 The limitation period for the insured to sue the third party varies according to relevant laws which govern the legal relationship between the insured and the third party.213 According to the Chinese Civil Code, except as otherwise stipulated by another law, the limitation of action for protection of civil rights shall be two years which begins when the entitled person knows or should know that his rights have been infringed.214 Accordingly, if 207  MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 23-049. 208  Ibid, para. 23-050. 209  (1886) 18 LR Ir 335. Cf. Carter v White (1883) 25 Ch D 666, where a surety was held not to be discharged merely because the creditor has allowed his action against the principal debtor to become time-barred. 210  The Insurance Law, art. 26. 211  See Zhen Jing, “Restrictions on the insurer’s rights of subrogation in Chinese Law” [2013] 126 BILAJ 107; Beiping Chu, “Current issues and developments in Chinese insurance law” in J. Hjalmarsson and D. J. Huang (eds), Insurance Law in China (Routledge 2015) pp. 96–112. 212  Answer to Question 11, Shanghai High People’s Court, No. 3 [2010]. 213  For example, if the legal relation between the insured and the third party is governed by the Contract Law (art. 129), the limitation period is four years for the international sale of goods; if by the Civil Code (art. 126), the limitation is one year for injury to the human body; and if by the Maritime Code (art. 257), the limitation period is one year for carriage of goods by sea. 214  Articles 135 and 137 of the General Principles of the Civil Law of the People’s Republic of China which was promulgated in 1986. Article 135: Except as otherwise stipulated by law, the limitation of action regarding applications to a People’s Court for protection of civil rights shall be two years.

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the time-bar for the insured to sue the third party is two years, the insurer’s subrogation action to sue the third party is also two years. The issue here is when the limitation period for the insurer’s subrogation action starts. Again, the Insurance Law does not cover this point. The SPC answered the question in its Interpretation II. Article16 of Interpretation II provides: “the limitation period for exercising the rights of subrogation starts to run from the date when the insurer acquired the rights of subrogation.” However, art. 16 does not stipulate when the limitation period should end, and this may cause confusion as shown below. Let us make a hypothetical case to see how art. 16 of Interpretation II would work. The insured’s goods were damaged by a road accident due to the fault of the transporter on 1 February 2010. The limitation period for the insured to claim against the transporter is two years from 1 February 2010 to 31 January 2012.215 Instead of making a claim against the transporter, the insured claimed against his insurer on 1 March 2010. The insurer paid the insured for the loss on 1 May 2010. The right of the insured to claim compensation from the transporter was then subrogated to the insurer from 1 May 2010.216 The question here is when the limitation period would end. There are two possible answers: (1) the limitation period for the insurer exercising its subrogation right to sue the third party starts from the time the insurer has obtained the subrogation right and ends at the same time as the insured’s limitation period, that is, the period from 1 May 2010 to 31 January 2012, or (2) the limitation period for the insurer exercising its subrogation right to sue the third party is two years, beginning from the time the insurer has obtained the subrogation right, that is, the period from 1 May 2010 to 30 April 2012. It seems that the first answer does not make sense; if the limitation period for the insurer’s exercise of the subrogation right ends at the same time as for the insured’s limitation period, it would be pointless to stipulate when it starts. It is submitted that art. 16 of Interpretation II refers to the second situation, which is two years from the date when the insurer obtained the subrogation right. If this is the case, the third party transporter was put in a position (the limitation period was for two years and three months) which he would otherwise not have been in if the insured himself had made a claim against him (the limitation period was for two years). The law is certainly unfair to the transporter. Article16 of Interpretation II aims to protect the insurer from being time-barred for exercising subrogation rights but at the expense of the third party’s interest. It is submitted that Interpretation II in respect of the starting point of the limitation period does not make the situation clearer but rather the reverse. The rule that the insurer is in no better position than the insured

Article 137: A limitation of action shall begin when the entitled person knows or should know that his rights have been infringed upon. However, the People’s Court shall not protect his rights if 20 years have passed since the infringement. Under special circumstances, the People’s Court may extend the limitation of action. 215  Arts 135 and 137 of the General Principles of the Civil Law of China. 216  In marine insurance, art. 252 of Maritime Code 1992 provides: “Where the loss of or damage to the subject matter insured within the insurance coverage is caused by a third person, the right of the insured to demand compensation from the third person shall be subrogated to the insurer from the time the indemnity is paid.”

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should apply to the limitation period, as it does to any other aspect of subrogation. So the limitation period for the insurer to exercise its right of subrogation should be exactly the same as that for the insured to sue the third party. In contrast to the SPC’s approach, the SHPC suggests that the limitation period for the insurer’s exercise of its subrogation right to sue the third party should start from the time when the insured knows or ought to know that his rights have been infringed upon.217 Accordingly, the correct answer to the hypothetical situation is that the limitation period for the insurer’s exercise of his subrogation right should be two years from 1 February 2010 to 31 January 2012, which is exactly the same as the limitation period for the insured to sue the transporter (1 February 2010 to 31 January 2012). In order to protect the insurer’s subrogation right to recover damages from the third party against any relevant legal or arbitration time-bar, it is suggested that the insurer may add a clause in the insurance contract to request the insured take necessary steps to reserve the right against the third party.218 According to art. 19 of the SPC Interpretations on Questions Concerning Civil Cases in respect of Limitation Periods, after having acquired rights of subrogation, the insurer or the insured may notify the third party that the insured’s right to claim against him has been transferred to the insurer. The limitation period will stop running when the third party has received the notification.219 17.12 Conclusion Provisions of the Insurance Law and other relevant laws relating to subrogation are critically examined in this chapter. It could be concluded that the laws in some respects are ambiguous and confusing. The main problem is that the rules of law have confused the two doctrines of subrogation and assignment. The laws should adopt either subrogation or assignment, but not a mixture of the two. Any attempt to effect both of the two doctrines is misconceived because they are distinct doctrines and are mutually exclusive. It is suggested that the rules in Chinese insurance laws should be amended to meet the nature and general rules of subrogation. Therefore, it is recommended that art. 60 of the Insurance Law be amended as follows: Where a third party damages the subject matter of insurance, thereby leading to the occurrence of an event insured against, the insurer shall, after the payment of insurance moneys to the insured, be subrogated to the insured’s right to claim indemnity from the third party.

217  See the Answer to Question 12, Shanghai High People’s Court, No. 3 [2010]. 218  For example, in the property insurance policy, a clause states that “where a third party is held responsible for the loss or damage covered under this policy, the insured shall, whether being indemnified by the company or not, take all necessary measures to enforce or reserve the right of recovery against the third party, and upon being indemnified by the company, subrogate to the company the right of claim against the third party, transfer all necessary documents to and assist the company in pursuing recovery from the responsible party.” See the policy for property all risks insurance of the Ping An Insurance Company of China. The same clauses are also provided in the policy for public liability insurance and policy for construction all risks and third party liability insurance of the Ping An Insurance Company of China. 219  See the Answer to Question 14, Shanghai High People’s Court, No. 3 [2010].

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Where an insurer exercises the right of subrogation to recover from the third party, he shall use the insured’s name, and claim the amount for the full loss the insured has suffered. From the recoveries, the insured shall have a priority to obtain the amount which is not covered by the insurance. The insurer is then entitled to recoup the amount which does not exceed the insurer’s payment. If the insurer is unwilling to sue the third party, the insured may do so for the full loss for both his and the insurer’s benefit. If the insured has obtained damages from the third party before the insurer’s payment, the insurer shall, at the time of paying the insurance money, deduct such amount recovered from the third party. If the insured has received payment from the third party after the insurer’s payment, he is entitled to keep the amount up to his total loss, and is then liable to return to the insurer the amount which does not exceed the insurer’s payment.

The recommendations for the amendment of arts 61 and 62 of the Insurance Law are shown at sections 17.9.1 and 17.8.4 of this chapter, respectively.

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CHAPTER 18

Modification and rescission of insurance contracts

18.1 Introduction During the insurance period, when circumstances as to an insurance contract have been changed, it may become necessary for the parties to modify the terms of the contract, change the contractual relationship of the parties or rescind the contract. Since an insurance contract is entered into voluntarily, the parties to the contract may modify their contractual relationship under the principle of freedom of contract. Modification refers to alteration of any of the contractual elements, such as the terms of the contract and the parties to the contract. A contract may not be unilaterally modified, under the principle of pacta sunt servanda, thus an agreement must be reached by the relevant parties before any modification can take place. Rescission of an insurance contract means that after the conclusion of a contract, and before the contract is completed, the contract is terminated by one party unilaterally by the operation of law or by both parties bilaterally in accordance with an agreement. There are different reasons for which the contract can be rescinded. Situations may change during the currency of the contract, and the proposer may want to rescind the contract in response to the changed situation. An insurer may rescind an insurance contract as well by operation of law or in accordance with the contract. In this chapter, circumstances under which an insurance contract may be modified or rescinded are examined. Relevant provisions of the Insurance Law, SPC Interpretations, judicial practice, disputes and scholar’s opinions relating to modification and rescission of an insurance contract are considered. This chapter covers the following points: modification of a contract; rescission of a contract upon agreement between parties; rescission of a contract unilaterally by the proposer by the operation of law; circumstances under which the insurer is entitled to rescind an insurance contract by law; situations in which the contract cannot be rescinded; return of premiums where the contract is rescinded; and consequences for rescission of an insurance contract. 18.2 Modification of an insurance contract 18.2.1  The conditions for modification Article 20 of the Insurance Law provides that “the proposer and the insurer may alter the contents of an insurance contract through consultation.” This provision permits the parties to modify the contract. The way of modification is through consultation 543

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between the parties. As a general rule, modification of the contents of the contract must be agreed between the parties; otherwise the modification is ineffective. A case can explain this situation:1 a trade company sent three employees to Saudi Arabia to work there on a project. The company effected an accident insurance policy with the insurer for the three persons to cover the period of 54 days from 17 February 2001 to 11 April 2001. The policy was issued and the people had gone to Saudi Arabia. A few days later, the insurer unilaterally changed the completion date of the policy to 19 March 2001 and sent the modified policy to the trade company. The reason for the change was that the insurer had changed its underwriting practice, i.e. the insured period for these persons going to Saudi Arabia should be no more than 30 days. It was held that the insurer’s change of the completion date of the contract was ineffective. In some special situations, however, the proposer may be allowed to change the content of the contract without the need to obtain the insurer’s consent for the change. For example, a proposer who effected a life policy on his own life can change the beneficiary unilaterally – all the proposer needs to do is to notify the insurer of such a change. Modification of terms of the contract can also be done by the operation of law. For example, according to arts. 49, 52 and 53 of the Insurance Law, when the risks of the insured subject matter have been materially increased or decreased, the insurer can increase or decrease the rate of the premium in response to the increase or decrease of the risks. Modification must be done in writing; this is provided in art. 20 of the Insurance Law: “where an insurance contract is altered, the insurer shall endorse the original policy or any other insurance certificate or attach an endorsement slip to the insurance contract or insurance certificate, or the proposer and the insurer may enter into a written agreement on the alteration.” 18.2.2 The parties which can be changed (a) Changing the insured According to art. 49 of the Insurance Law, where the insured subject matter is assigned to another person, the assignee shall assume the rights and obligations of the insured under the policy, and the insured or the transferee must notify the insurer about such a transfer in a timely manner. In this situation, the insured has been changed; the insurer may increase the premiums or rescind the contract if the risk of the insured subject matter has been significantly increased after the transfer of the insured subject matter. This often occurs in motor vehicle insurance. The seller of a car can assign the insurance policy to the buyer. The buyer or the seller must notify the insurer of this assignment. The insurer may simply endorse the policy and the change of the insured (the buyer becomes the insured after the assignment), or increase the premium or rescind the contract in the case of risk increase.

1  A Trade Company v The Insurer; this case was cited in the book Insurance Law and Analysis of Cases, written by the China Life Insurance Company Ltd (China Financial Press 2010) p. 92.

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(b) Changing beneficiaries The Insurance Law permits changing the beneficiary by providing that “the life insured or the proposer may change the beneficiary by written notice to the insurers. The insurer shall endorse the change on the policy or other insurance certificate or attach an endorsement slip to the insurance contract or insurance certificate upon receipt of the notice. Change of the beneficiary by the proposer is subject to the life insured’s consent.”2 More on changing the beneficiary will be presented in Chapter 20. 18.2.3 The contents of the contract which may be modified The contents of the contract which may be modified usually include the risks covered, risks excluded, insurance period, premiums, the way and the duration of paying premiums, the insured’s profession, address, matters of dispute resolution, etc. The change of some of these contents may result in change to the risks. Where the risk covered has been materially increased, the insurer may modify the terms or premium rate or rescind the contract.3 For instance, the change of the insured’s profession may result in an increase of premium or rescission of the contract. In Mr Wang v The Life Insurer,4 Mr Wang was a junior bank clerk, and he effected an accident policy. During the insurance period, he changed his job to work as an operator of explosives in a mine. Unfortunately, he broke his leg in an accident during working hours. His claim for an insurance payment was rejected by reason of his failure to notify the insurer of his change of job. Modification to some other term, such as change of communication address, may not give rise to any increase or decrease of premium, but is important in the communication between the insurer and the proposer on matters in respect of reminders to pay premiums, claims payment, etc. 18.2.4 The legal effect of the modification Prior to reaching an agreement of modification of the contents of the policy by the parties, the policy is still effective. After modification, the parties to the policy must perform their obligations under the modified policy. The effect of modification is prospective, not retroactive. 18.3 Rescission upon agreement between the parties Generally, rescission is allowed for any contract upon an agreement of the parties. The Insurance Law does not expressly mention this point; nevertheless, an insurance contract, like any other contract, can be rescinded upon an agreement of the parties in accordance with the Chinese Contract Law. By virtue of art. 93 of the

2  The Insurance Law, art. 41. 3  Ibid, art. 52. This topic is discussed in detail in Chapter 10. 4  This case was cited in the book Insurance Law and Analysis of Cases, written by the China Life Insurance Company Ltd (China Financial Press 2010) p. 97.

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Contract Law, the parties may rescind a contract if they have so agreed.5 Similarly, the parties may reach an agreement for the rescission of an insurance contract. 18.4 An insurance contract can be rescinded by the proposer 18.4.1  Insurance contract rescinded by the proposer The Insurance Law vests in the proposer the right to rescind an insurance contract after the formation of the contract. According to art. 15 of the Insurance Law, “Unless otherwise prescribed in this Law or agreed in the insurance contract, after the formation of an insurance contract, the proposer may rescind the contract but the insurer may not.” This provision indicates that the proposer may rescind the contract unilaterally and freely at any time after the conclusion of the contract, and does not need to explain to the insurer the reason for the rescission and does not need to reach an agreement with the insurer on the rescission. This is an insured-oriented provision. There are several justifications for giving the proposer the right of free rescission of an insurance contract. First, it is for the purpose of protecting the proposer – the weaker party to the contract. An insurance policy is usually a standard form contract supplied by the insurer; the insurer has the better understanding of the terms of the policy and has more knowledge of insurance law and the policy. To protect the weaker party, the Insurance Law gives the proposer the right to rescind the contract after the conclusion of the contract if he feels that the contract is not suitable for him. Second, in the case where the situation has changed during the period of contract, there is no need for the proposer to continue with the policy. For instance, the insured property has been assigned; or where a wife effects a policy on her own life and designates her husband as the beneficiary, the wife may rescind the contract if the couple get divorced. Third, if the contract is a long-term policy, there may be the situation that the proposer loses the ability to continue to pay the premiums – he may rescind the contract. However, it does not mean that the proposer may rescind an insurance contract in any situation arbitrarily. In order to avoid the right being abused by the proposer, the Insurance Law sets up two restrictions on the proposer’s right of rescission: first, the proposer cannot rescind the contract where the policy terms (if any) specify that he cannot do so; second, where the rescission of a contract is prohibited by operation of law.6 These two restrictions will be discussed shortly. In practice, matters relating to rescission by a proposer are very complex. Usually there is no argument if the proposer rescinds the contract in the situation where the proposer, the insured and the beneficiary are the same person and the policy is effected for the benefit of the proposer himself. In property insurance, for instance,

5 The Contract Law of the PRC 1999, art. 93, provides: “A contract may be rescinded if the parties to the contract reach a consensus through consultation.” 6  According to art. 50 of the Insurance Law, for cargo transportation insurance and voyage insurance for a means of transport, neither the proposer nor the insurer may rescind the contract after the commencement of the liability.

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the proposer takes out insurance for his property and the beneficiary is himself,7 so he can rescind the contract freely during the currency of the contract if he wishes unless the contract specifies otherwise, or where the law provides otherwise. Disputes may arise where the proposer, the insured and the beneficiary are different persons, and the policy is effected for the benefit of persons other than the proposer himself. This type of contract is known as an altruistic contract. This is often the situation in life insurance. Many life insurance contracts are altruistic contracts.8 Issues often arise on whether the proposer may rescind a life policy without the consent of the life insured or the beneficiary. 18.4.2 Where an insurance contract is effected for the benefit of others, whether the other persons’ consents are needed if the proposer rescinds the contract Perhaps the most disputable issue in respect of the proposer’s right of rescission is whether the insured’s or beneficiary’s consent must be obtained where the proposer rescinds the insurance contract. This issue often arises in life insurance. In property insurance, usually the proposer, the insured and the beneficiary are the same person, so in general this issue does not arise when the proposer rescinds the contract.9 However, most life insurance policies are concluded for the benefit of others. For example, where the proposer and life insured are the same person but the beneficiary is another person, or the proposer, the life insured and the beneficiary are all different persons. In these situations if the proposer rescinds the contract, there is no doubt that the beneficiary’s interest will be prejudiced. So the question of whether the consent of the life insured or a beneficiary is needed becomes important. This is a controversial issue. Given that the Insurance Law does not provide rules in this respect, different courts have made different decisions for similar cases, and there are different views on this point in academia. (a) Courts’ decisions In Mr Liu v Life Insurance Company,10 Mr Liu’s employer (a factory) effected a group pension insurance policy for the benefit of its employees with the insurer in 1988. In 2000, the factory was closed. The accountant of the factory, on behalf of the factory, applied for rescission of the policy without the lives insured’s consent. The insurer agreed the application and returned partial premiums to the accountant after deducting the amount of the premium from the date of the commencement

7  There are other types of property insurance which are effected for other persons’ benefit. For example, a mortgagor takes out insurance for the benefit of the mortgagee who lends money to the proposer to purchase property with a mortgage. In property insurance, where the proposer and the insured are not the same person, the insured has the right to recover the insurance money for loss of the property, this type of insurance also falls into the category of altruistic insurance. See Jing Wang, Insurance Cases, Rules of Judgment and Application of Laws (People’s Court Press 2003) p. 31; Shiyang Wen, Insurance Law (2nd edn, Law Press 2007) p. 61. 8  Zejian Wang, Principles of the Law of Obligation (2): Unjust Enrichment (China University of Political and Law Press 2007) p. 86. 9  There are exceptions. For example, a mortgagor takes out insurance for the benefit of the mortgagee who lends money to the proposer to purchase property with a mortgage. 10  Jing Wang, “Discussion on the Proposer’s Rescission Right in an Altruistic Insurance Contract” [2013] 2 Law Adaption 15–22.

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of the insurer’s liability and the date of rescission. Mr Liu sued the insurer and declared that the rescission of the policy should be invalid without the insureds’ consent and the insurer should not have agreed with the rescission. The court held that because pension insurance is a long-term policy, and the insured (he is also the beneficiary) has the expectation to the insurance benefits, where the proposer rescinds the contract, the insured’s consent should be obtained. The rescission was invalid without the consent of the insured. However, in another case with similar facts,11 the court made an opposite judgment and held that it is not necessary to obtain the insured’s or the beneficiary’s consent when the proposer rescinds the contract, because the proposer is the party who enters into the contract with the insurer, so he has the right to rescind the contract whenever he wishes. (b) Academics’ views There are different opinions among academics on the issue of whether the insured’s or the beneficiary’s consent is needed where the proposer rescinds the contract. Some scholars are of the view that when the proposer rescinds the contract, it is not necessary to get the permission of the life insured or the beneficiary, for the following reasons: (1) the third party’s contractual benefit is specified by the contract, while the contracting party’s right of rescission is a right vested by law, and the latter cannot be deprived by the former; and (2) although an altruistic contract is effected for the benefit of a third party, if the beneficiary suffers loss as a result of the rescission of the contract, the dispute can be resolved between the proposer and the beneficiary, and it is beyond the scope of governance of the Insurance Law.12 Some others have a quite different view and argue that the purpose of taking out an insurance contract is to protect the insured or the beneficiary – their right to enjoy the protection is the primary right under the policy, while the proposer’s right of rescission is the secondary right in the contract. To give the proposer the priority to rescind an altruistic contract without considering the interests of the insured or the beneficiary would amount to “putting a cart before the horse.” They suggested that the insured’s or the beneficiary’s consent should be obtained where the proposer rescinds the contract.13 (c) Rules provided by the CIRC and the SPC on rescission of an insurance contract The China Insurance Regulatory Commission (CIRC) provides some guiding rules on the above issue in the CIRC Administrative Measures for Pension Insurance Business of Insurance Companies 2007;14 art. 30 of the Measures states: “In case of

11  Lu v XY Insurance Life Company. This case was cited by Jing Wang, “Discussion on the Proposer’s Rescission Right in an Altruistic Insurance Contract” [2013] 2 Law Adaption 15–22. 12  Wenbin Wu, Principles and System of Altruistic Contracts (Law Press 2009) p. 150; Jing Wang, Insurance Cases, Rules of Judgment and Application of Laws (People’s Court Press 2003) p. 37. 13  Jianxun Liu and Guanmeng Huang, “Legislation Omissions on Rescission of Life Insurance Contracts in the Insurance Law” (2010) 3 Insurance LR 45; Yubo Zheng, “Discussion on the Civil Law and the Law of Obligation” (China Politics and Law Press 2004) p. 361. 14 Administrative Measures for Pension Insurance Business of Insurance Companies 2007 was promulgated on 30 September 2007 and became effective on 1 January 2008, CIRC Order [2007] No. 4 (see accessed in June 2016).

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policy surrender of group pension annuity insurance, an insurance company shall ask the applicant to provide valid proof showing that the insureds have been notified of the surrender, and the insurance company shall pay the surrender value to the group applicant via bank transfer.” This provision requires the proposer to show evidence that the insureds have been notified of the fact that the proposer is to rescind the contract, but does not require the proposer to provide evidence of the insured’s consent to the rescission. In the SPC Interpretation III 2015, this issue is clarified.15 It is stated that “Where the proposer rescinds the contract, if the parties claim that the rescission is invalid without the consent of the life insured or the beneficiary, the People’s Courts shall not uphold such a claim, except where the life insured or the beneficiary has paid a sum of money equivalent to the cash value of the policy and informed the insurer.”16 This provision confirms that the life insured’s or the beneficiary’s consent is not needed when the proposer rescinds a contract. Nevertheless, the declaration of the life insured or the beneficiary of the invalidity of the rescission of the contract can be upheld by the courts if the insured or the beneficiary has paid a sum of money equivalent to the cash value of the policy to the proposer.17 As to this point, the SPC Interpretation III (Draft for Comments) 2014 was fairer.18 According to art. 28 of the Draft, where the proposer, the insured and the beneficiary are different persons, if the proposer rescinds the contract, the consent of the life insured and the beneficiary are not needed. However, the proposer must inform the life insured and the beneficiary when he rescinds the contract. If the life insured or the beneficiary or any person with the insured’s consent wishes to take over the contract by paying some money equivalent to the cash value of the policy, this shall be upheld by the courts.19 It seems that the approach adopted in the SPC Interpretation III (Draft for Comment) is a better solution for the issue discussed above. Although the life insured’s or the beneficiary’s consent is not required where the proposer rescinds a life policy, the proposer should notify them with the purpose that if the life insured or the beneficiary is willing to take over the policy, the People’s Court shall support their demand upon the payment of a sum of money equivalent to the cash value of the policy to the proposer. This can save a long-term policy which has lasted many years with the payment of the premiums. (d) Approaches in English law Under the Contracts (Rights of Third Party) Act 1999 (UK), s. 2 (Variation and rescission of contract) provides: “(1) Subject to the provisions of this section, where a third party has a right under s. 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his

15 The SPC Interpretation III on Certain Issues Concerning the Application of the Insurance Law (2015). 16  Ibid, art. 17. 17 Ibid. 18  The SPC’s Interpretation III (Draft for Comments) 2014, art. 28. 19  Ibid, art. 28.

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entitlement under that right, without his consent if – (a) the third party has communicated his assent to the term to the promisor, (b) the promisor is aware that the third party has relied on the term, or (c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.”

This section indicates that, where a contract is concluded for the benefit of a third party, a contracting party cannot rescind the contract in the above situations. This provision is quite reasonable in terms of protecting the third party to a contract. An insurance contract which it is formed for a third person’s benefit should fall into this category. 18.4.3.Whether the life insured or a beneficiary is allowed to rescind a contract As mentioned above, according to art. 15 of the Insurance Law, the proposer has the right to rescind an insurance contract after the conclusion of the contract and the insurer has not. However, the Insurance Law does not mention whether, in respect of life insurance, the life insured or the beneficiary may rescind the contract. In theory, it should not be the case, because the life insured or the beneficiary is not the policyholder. In the SPC Interpretations III (Draft for Comments) 2014,20 the SPC proposed that the life insured and a beneficiary cannot rescind a contract. The SPC gave an interpretation on this point from a judicial perspective and expressly provided that in life insurance where the proposer, life insured and beneficiary are not the same person, if the life insured or the beneficiary demands to rescind the contract, the court shall not support the requirement unless the contract provides otherwise.21 It is obvious from this provision that the life insured or the beneficiary is not allowed to rescind a life insurance policy.22 The SPC Interpretations III 2015 made some changes in its Draft for Comments.23 As to the life insured’s right of rescission, art. 2 of the SPC Interpretations III provides that the insured may revoke his consent, as required by art. 34 of the Insurance Law24 by notifying the insurer and the proposer in writing. Where the life insured has done so, the contract is rescinded accordingly.25 Article 2 of the SPC Interpretations III gives the life insured the right to withdraw his consent after the conclusion of the contract; this is equivalent to giving him the right of rescission, because the validity of a life insurance contract with death as a condition for payment

20 The SPC Interpretation III on Certain Issues for the Application of the Insurance Law (Draft for Consultation) 2014. 21  Ibid, art. 26. 22  Bixin Jiang, Insurance Disputes (Law Press China 2014) p. 26. The author comments that “in an insurance contract, only one party has the right to rescind the contract freely, that party is the proposer.” 23  Articles in the SPC’s Interpretation (III) are reduced to 25 from 46 in the Consultation Draft of the Interpretation (III). 24  Under art. 34 of the Insurance Law, a life insurance contract with death as the condition for payment of insurance benefits is invalid without the life insured’s consent and acceptance of the sum insured in writing. 25 Article 2 of SPC Interpretation III provides: “Where the insured notifies in writing the insurer and the proposer that he revokes the declaration of intention made in accordance with article 34 of the Insurance Law, it is may be determined that the insurance contract is rescinded.”

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of insurance money is based on the insured’s consent,26 and once his consent is revoked the contract becomes void and therefore is rescinded. The Insurance Law is silent on this point, but the Interpretation fills the gap of the Law. In a previous publication,27 the issue of whether a life insured may withdraw his consent was discussed. The author argued: “The Law requires the life insured to give consent at the time of contract, but does not mention whether the consent can be withdrawn afterwards. The Law neglects the simple fact that the life insured may wish to withdraw his consent when he feels that his life is at risk because of the existence of the death policy on his life. The Law expressly entitles the proposer to terminate the contract28 but does not give such a right to the life insured. It is the life insured whose life may be at risk of a moral hazard, so he should be entitled to withdraw his consent in the situation where he feels his life is at risk.”29

In that paper, a new provision was recommended to be added into the Insurance Law: “The life insured shall be entitled to withdraw his consent to a contract under which his death is a condition for the payment of the insurance money and the contract shall be terminated accordingly.” The SPC Interpretation III takes the same approach as the author recommended.30 18.4.4 Whether the proposer may rescind a pension policy made for the benefit of another person According to the CIRC Administrative Measures for Pension Insurance Business of Insurance Companies 2007,31 pension insurance includes individual personal insurance, group pension insurance and company annuities. The term “individual pension annuity insurance” mentioned in these Measures refers to life insurance products satisfying all of the following criteria: (1) having the purpose of providing old-age protection; (2) premiums are paid by individuals to insurance companies; (3) it is stipulated in the contract that the proposer may choose instalment payments of the like benefits from the insurance company after surviving to a certain age; and (4) in the event of instalment payments, the payment interval is one year or shorter. A pension insurance policy is usually taken out by the proposer for the benefit of himself or for other persons’ benefits. Where the proposer and the life insured are different persons, an issue may arise of, where the proposer rescinds the contract, whether the life insured’s consent must be obtained. As discussed above, the Insurance Law does not deal with the matter of where the proposer rescinds a life insurance policy (including a pension insurance policy), which is made for another person(s)’s benefit, whether the other person’s consent is needed. A guiding rule on

26  The Insurance Law, art. 34(1). 27  The issue whether a life insured may withdraw his consent was discussed in an earlier paper by the author. Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] JBL 337; see also Chapter 20 of this book, “Life and accident insurance” for more discussion. 28  The Insurance Law, arts. 15 and 47. 29  Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] JBL 337, 348. 30  The SPC Interpretation III, art. 2. 31 CIRC Administrative Measures for Pension Insurance Business of Insurance Companies 2007 Order [2007] No. 4 (see accessed 6 June 2016).

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this point is provided in the CIRC Administrative Measures for Pension Insurance Business of Insurance Companies 2007;32 art. 30 of the Measures states: “In case of policy surrender of group pension annuity insurance, an insurance company shall ask the applicant to provide valid proof showing that the insureds have been notified of the surrender, and the insurance company shall pay the surrender value to the group applicant via bank transfer.” According to this rule, where the proposer applies for rescission of a pension insurance contract made for another’s benefit, the insurer has the duty to check whether the life insured is informed of the fact that the proposer wishes to rescind the contract from which he will get benefit. It is implied that the insurer shall not agree the proposer’s application for rescission if the proposer cannot provide evidence that the life insured is aware of the rescission. It is also implied that the life insured’s consent is required. Judicial practice adopts the same approach as that of the CIRC. In Xiaocheng Lu v Yixing City Smelting Plant,33 the Smelting Plant took out a Group Pension Insurance for its employees, including Xiaocheng Lu in 1994. In 2000, the Plant was closed by the local Business Sector. The accountant of the Plant did not hand over the Group Policy and the Plant’s Stamp to the Business Sector when he left the Plant. In February 2004, the accountant, using the Plant’s name, applied to the insurer for rescission of the policy without disclosing the fact that the Plant had been forced to close by the Business Sector. The insurer agreed the application for the rescission of the policy and returned the cash value of the policy to the accountant. After the policy had been rescinded, Xiaocheng Lu, one of the insured employees of the Plant, sued the accountant and the insurer and argued that the rescission was invalid because it was done without informing the insureds and without obtaining the insureds’ consent. The court held that (1) the rescission of a pension insurance contract without the insured’s consent is invalid, and (2) when the insurer handles an application for rescission of a pension insurance contract, the insurer shall review the relevant procedure carefully. In September 2004, the accountant was sentenced for the crime of fraud. Although this case was a criminal case, the decisions were related to the effect of rescission of a life policy: (1) in a life insurance or pension insurance, which is a contract concluded by the proposer for another person(s), where the proposer rescinds the contract, the other person’s (the beneficiary’s) consent should be obtained; and (2) in order to protect the insured’s interest, the insurer must examine the proposer’s rescission application carefully. However, some scholars take the view that if the third party is not aware of the existence of the insurance policy, it is not necessary to give him special protection when the proposer rescinds the contract.34 Some others comment that the beneficiary is appointed by the life insured or proposer (with the consent of the life insured), and the life insured or the proposer (with the consent of the life insured) may change the beneficiary at any time during the policy without notifying the

32 Ibid. 33  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 423. 34  Wang Jing, “Debate on proposer’s right of free rescission of an insurance which is for the benefit of others” (2013) 2 Adaption of Laws; see also accessed 30 October 2014.

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beneficiary, so it is meaningless to discuss the issue of whether the beneficiary’s consent is needed when the proposer rescinds the contract.35 18.5 The return of the cash value of the policy where the proposer rescinds a contract In life insurance, by virtue of art. 47 of the Insurance Law, the insurer is required to return the cash value of the policy where the proposer rescinds the contract. The cash value must be returned within 30 days from the date when the insurer receives the notice of rescission. The provision sets out the period of time within which the cash value must be returned. The Insurance Law does not provide to whom the cash value should be returned. The SPC Interpretation III has a provision indicating that the cash value should be returned to the proposer. It is provided that where the insurance contract is rescinded, if the proposer, the life insured and the beneficiary are different persons, the claim for the return of the cash value by the life insured or the beneficiary shall not be upheld by the courts, unless the contract agrees otherwise.36 18.6 The proposer rescinds the contract during the cooling-off period In life insurance, after the conclusion of a life insurance contract, there is usually a 10-day cooling-off period in which the proposer may rescind the contract if he wishes. The insurer shall return all premiums where the proposer rescinds the contract during this period.37 The reasons that the proposer is allowed to rescind the contract during a cooling-off period are as follows: (1) a life insurance is usually a long-term policy, and the proposer needs to pay premiums for many years, so he needs time to think carefully about whether he is willing to and is able to pay the premiums for so many years; and (2) the clauses of a life insurance policy are very complex, and the proposer may read the policy carefully after he has received it and see whether he has taken out the right policy. It should be noted that the effect of the rescission of an insurance contract within the cooling-off period and after the cooling-off period is different. The proposer can get all of the premiums back in the former situation, and he can only get back part of the premium or cash value of the policy in the latter. 18.7 Can a proposer rescind a contract after the insured event has occurred? Another related issue is where the contract was entered into for another’s benefit, whether the proposer is allowed to rescind a contract after the occurrence of the

35  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 423. 36  The SPC’s Interpretation III (2015), art. 16. 37  According to a CIRC Notice, “cooling-off period” is a 10-day period counting from the date when the proposer receives the insurance policy and signs the receipt of the policy. See CIRC Notice on Regulations for Life Insurance Business Related Issues, Order [2011] No. 36, art. 4 of which abolished the CIRC Notice on Regulations for Life Insurance Business Related Issues, Order [2000] No. 133.

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insured event and claim for return of the cash value of the policy. The Insurance Law expressly vests in the proposer the right of rescission after the conclusion of the contract,38 but does not mention whether a proposer may rescind a contract after the occurrence of an insured event. In the SPC Interpretation III (Draft for Comments) 2014, the SPC proposed a rule on this point which prohibits the proposer from rescinding a contract after the insured event has occurred. Article 29 of the Draft stated that after the occurrence of the insured event, where the proposer demands the rescission of a corresponding part of the insurance contract, and requests a refund of the cash value of the policy, the People’s Court shall not uphold such a rescission. Accordingly, the proposer could not rescind the contract after the occurrence of the insured event.39 To read art. 29 of the Draft and art. 15 of the Insurance Law together, the proposer can only rescind a contract in the period after the conclusion of the contract and before the occurrence of the insured event. As SPC Interpretation III 2015 does not include the rule provided in art. 29 of the Draft, there is still no law to be followed on whether a proposer is allowed to rescind a contract after the insured event has occurred. It is suggested that the rule provided in art. 29 of the Draft was reasonable. This is because after the insured event has occurred, the beneficiary’s expected right to claim for the insurance proceeds becomes a real property right – if the proposer rescinds the contract then, there is no doubt that the beneficiary will lose the right to recover the insurance proceeds. So in order to protect the beneficiary’s interest, the proposer should not be allowed to rescind the contract after the occurrence of the insured event. Some scholars strongly argue that the nature of such an insurance policy is to protect the beneficiary, and the beneficiary’s interest should have priority of consideration.40 If the beneficiary’s benefits would be prejudiced as a result of the proposer’s rescission, the proposer should not be allowed to rescind the contract.41 18.8 Circumstances under which the insurer is entitled to rescind an insurance contract Generally, an insurer is not allowed to rescind an insurance contract after the conclusion of the contract. That is because the insurer bears the risk specified by the contract and would be liable to pay the insured loss (if any); it therefore may not rescind the contract unless the law or the contract provides otherwise. Nevertheless, the Insurance Law vests in the insurer the right to rescind an insurance contract in some situations, mainly where the proposer or the insured fails to perform his duties provided by law. Situations in which an insurer is entitled to rescind an insurance contract are examined as follows.

38  The Insurance Law, art. 15 provides that “the proposer may rescind the contract after the contract has been concluded.” However, it is not clear from this article whether the proposer may rescind the contract after the occurrence of the insured event. 39  The SPC Interpretation III (Draft for Comments) (2014), art. 29. 40  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 415. 41  Ibid, p. 416; see also Jun Luo and Zhigang Song, “Whether the proposer’s rescission of an insurance contract is valid after the death of the life insured,” cited by People’s Court Newspaper of 6 July 2008.

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18.8.1 Where the proposer fails to perform the duty of disclosure The insurer may rescind the contract where the proposer fails to perform the duty of disclosure provided by art. 16 of the Insurance Law. The proposer is required to disclose material information by truthfully answering the questions raised by the insurer about the status of the insured subject matter or of the insured. If the proposer fails to fulfil the obligation intentionally or by gross negligence so as to affect the insurer’s decision on whether to take the risk or what premium will be charged, the insurer shall have the right to rescind the insurance contract.42 Article 16 emphasises two aspects which make the insurer’s right of rescission justifiable. One is that the proposer’s non-disclosure or misrepresentation must be made by the proposer intentionally (deliberately) or in gross negligence (recklessly); second, the fact withheld or misrepresented must be material and would decisively influence the insurer’s decision on whether it will take the risk and, if so, on what terms.43 However, the insurer’s right of rescission shall lapse if it is not exercised within 30 days after the insurer knows that there is cause for rescission or where over two years have passed from the date of formation of the contract.44 18.8.2 Where the age of the life insured is wrongly declared The Insurance Law also provides a separate provision which gives the insurer the right to rescind a contract where the proposer provides wrong information about the life insured’s age. Article 32 provides: “Where the age of the life insured declared by the proposer is untruthful, and the actual age of the life insured does not fall within the age limit specified in the contract, the insurer may rescind the contract and refund the cash value of the insurance policy according to the contract.” This article entitles the insurer to rescind a contract if the true age of the life insured is outside the age limitation specified in the contract and it is irrelevant whether the wrong information is made by the proposer intentionally, negligently or innocently. The insurer shall return the cash value to the proposer where it exercises the right of rescission. However, if the life insured’s age declared by the proposer is wrong and his actual age falls within the age limit in the life policy, the insurer has no right to rescind the contract, but has the right to adjust the premium according to the insured’s actual age.45

42  See Chapter 8, “The insured’s duty of disclosure and representations” for more detailed discussion. 43 The Maritime Code 1992 has a similar provision to vest in the insurer the right to rescind the contract where the insured withheld material facts deliberately (art. 222). 44 The Insurance Law, art. 16(3). The concept of incontestability is discussed in detail in Chapter 8, “The insured’s duty of disclosure and representations.” See also Zhen Jing and Ming Zhong, “Incontestability Provisions in Insurance Law and Policies” (2016) JBL 253. 45 Where the age of the life insured declared by the proposer is untruthful so that the proposer has paid lower premiums than he should have paid, the insurer shall have the right to rectify it and request the proposer to make up the balance of the premiums or at the time of payment of the insurance money, to pay the money in proportion according to the amount of premiums actually paid to the amount that should have been paid (the Insurance Law, art. 32(2)). Where the age of the insured declared by the proposer is untruthful so that the insured has paid higher premiums than he should have paid, the insurer shall refund the overpaid portion of the premium to the proposer (art. 32(3)).

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18.8.3 Fraudulent claims Where the insured or the beneficiary makes a fraudulent claim, the insurer has the right to rescind the contract. Article 27 of the Insurance Law provides two examples in which the insurer is entitled to rescind the contract for fraudulent claims. (1) Where no insured event has occurred, but the insured or the beneficiary fraudulently reports that an insured event has occurred and submits a claim for payment of insurance money, the insurer may rescind the contract and shall not refund the premium.46 (2) Where the proposer or the insured intentionally causes an insured event to occur, the insurer may rescind the contract, and shall not be liable to pay insurance money, and shall not refund the premium.47 18.8.4 Where the insured risk increases during the contract Another situation in which the insurer has the right to rescind a contract is provided in arts 49 and 52 of the Insurance Law, which provide rules governing the consequence where the insured risk increases during the contract and where the increase of risk is caused by the assignment of the subject matter of insurance.48 (a) Risk increases as a result of assignment of the subject matter of insurance Article 49 of the Insurance Law deals with the situation where the insured risk increases as a result of the assignment of the subject matter. By virtue of art. 49, where the insured subject matter is assigned, the proposer must notify the insurer immediately.49 Where there is a significant increase of the risk as a result of the assignment of the subject matter, the insurer may increase the premiums or rescind the contract in accordance with the contract within 30 days upon receiving the notice. Where the insurer rescinds the contract, it shall refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission.50 Where the insurer charges extra premiums, the contract may continue upon the amendment of some policy terms and change the assignee to be the new insured. (b) Risk increases during the currency of the policy Article 52 of the Insurance Law concerns the situation where the insured risk increases during the currency of the contract. It states: “Where the risk of the insured subject matter increases significantly during the period of the contract, the insured shall, in accordance with the contract, promptly notify the insurer and the insurer shall have the right to increase the premiums or rescind the contract.”51

46  The Insurance Law, art. 27(1). 47  Ibid, art. 27(2). 48  See Chapter 19, “Property insurance” for detailed discussion on the assignment of the subject matter of insurance and the increase of risk as a result therefrom. 49  The Insurance Law, art. 49(2). 50  Ibid, art. 49(3). 51  See Chapter 10, “Increase of risk during the insurance period” for more discussion relating to increase of risk and consequences of the increase. See also Zhen Jing, “The Insured’s Post-Contract Duty

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The insurer may choose either to charge extra premiums for the increased risk or rescind the contract. Where the insurer rescinds the contract, it shall refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission. In this article the important issue is what increase of risk amounts to “significant increase.” This issue is fully discussed in Chapter 10, “Increase of risk during the insurance period.”52 18.8.5 Where the insured fails to perform his duty in loss prevention In addition to the function of indemnifying the insured for losses caused by an insured event, insurance also plays a positive role in loss prevention.53 If some positive measures are taken to protect the insured subject matter, risks and losses for the subject matter of insurance may be reduced, and both the insured and the insurer may benefit from the loss prevention.54 The Insurance Law imposes duties on the insured to take active steps to maintain the safety of the insured subject matter in accordance with the relevant regulations of the state regarding firefighting, security, production operation and labour protection, etc.55 Meanwhile, the Insurance Law vests in the insurer the rights in terms of loss prevention for the insured subject matter. The insurer has the right to inspect the safety conditions of the subject matter in accordance with the contract, and to give written recommendations to the proposer or insured for eliminating risky elements and latent problems of the insured subject matter.56 If the proposer or the insured fails to fulfil the duties to take reasonable steps following the state loss prevention provisions and the insurer’s suggestions to ensure the safety of the insured subject matter, the insurer has the right to increase the premium or rescind the contract.57 18.8.6 Where an agreement on reinstatement of a suspended policy has not been reached For a suspended life policy, if the parties have not reached an agreement for restoration within two years after the suspension of the contract, the insurer may rescind the contract.58 By virtue of art. 36 of the Insurance Law, where the premiums are paid by instalments in accordance with the contract, the proposer is required to pay each instalment on time. Nevertheless, the Law gives the proposer two grace periods

of Notification of Increase of Risk: A Comparative Perspective” [2013] JBL 842. 52  See also Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” [2013] JBL 842. 53  See Chapter 13, “Risk prevention and loss mitigation” for more discussion. 54  The insured may benefit from the measures of loss prevention because although he may be paid the insurance money if he suffers the insured loss, sometimes money cannot solve all problems, for instance, the insurance money can indemnify the insured financially, but cannot restore the subject matter physically. From the insurer’s perspective, if the probability of occurrence of insured loss is reduced, the payment of the insured loss may be reduced accordingly. 55  The Insurance Law, art. 51(1). 56  Ibid, art. 51(2). 57  Ibid, art. 51(3). 58  Ibid, art. 37(3). See Chapter 20, “Life and accident insurance” for detailed discussion on matters of suspension and restoration of a life policy.

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for the payment of each instalment. One grace period is a 30-day period from the date when the insurer urges the proposer to pay the instalment, and the other is a 60-day period from the date when the instalment specified in the contract is due. The contract shall be suspended if the proposer fails to pay an instalment within either of the two grace periods.59 The suspended policy can be restored if the requirements specified in art. 37 of the Insurance Law are satisfied. Under art. 37, the suspended contract would be restored if the parties have reached an agreement and the proposer has paid the premium arrears. However, the insurer has the right to rescind the contract if there is no agreement reached within two years from the date when the contract is suspended. Where the insurer rescinds the contract, a cash value of the policy should be returned to the proposer. In the SPC Interpretation III 2015, it is provided that where the proposer applies for restoration of a suspended policy, unless the degree of the risk in respect of the insured has significantly increased during the period of suspension, the insurer should not reject the proposer’s application.60 In other words, only where there is significant increase of risk to the subject matter of insurance during suspension61 does the insurer have the right to reject the proposer’s application for restoration of the suspended policy; the contract is then rescinded. The SPC Interpretation III also provides that after having received the proposer’s application for reinstatement of the validity of the contract, if the insurer does not explicitly reject it within 30 days, it shall be deemed that the insurer agrees to resume the validity of the contract. The validity of the contract shall be resumed from the date when the proposer pays the premium arrears.62 18.8.7 Where the insurer’s right of rescission is specified in the policy In addition to the right vested by law to the insurer on rescission, in some policies, the insurer is given the right to rescind the contract where the proposer fails to perform the contractual obligations. For example, in the Comprehensive Property Insurance of Ping An Property and Casualty Insurance Company of China, the policy provides that the insurer has the right to rescind the contract if the proposer fails to perform the following obligations: Clause 20: To pay the premium in accordance with the agreement before the policy becomes effective; Clause 21: To perform the duty of disclosure and truthfully answer the questions raised by the insurer about the insured and the subject matter of insurance;

59  Article 36 provides: “Where the contract specifies payment of the premiums in instalments and the proposer has paid the first instalment but fails to pay the current instalment over thirty days from the date when the insurer reminds about the payment or over sixty days from the date the instalment is due, the contract shall suspend, or the insurer may reduce the sum insured in accordance with the contract, unless otherwise agreed in the contract.” 60  The SPC Interpretation III (2015), art. 8(1). 61 On how to determine a significant or material increase of risk, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” [2013] JBL 842, 846. 62  The SPC’s Interpretation III, art. 8(2).

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Clause 22: To comply with the regulations provided by relevant departments of the state on protection of the properties and ensure the safety of the property. For a potential risk discovered during the procedure of safety inspection, the insured must take reasonable measures to avoid or reduce the loss of or damage to the property upon receiving the rectification notice of the relevant safety department or the insurer; Clause 23: To notify the insurer if, during the insurance contract, the insured changes his name, changes the use of the subject matter, changes the address of the subject matter, where risk has been increased or where the subject matter is assigned; Clause 24: Where the insured event occurs and the subject matter suffers loss, if the insured fails to take reasonable steps to salvage the subject matter to reduce the loss to the minimum level, to protect the scene of the insured event, to notify the insurer about the event in a timely manner or to give the insurer assistance in surveying the insured event.

If the insured fails to perform the above-mentioned obligations provided in clauses 20–24, the insurer may reject liability and rescind the contract after 15 days from the date when the rescission notice is delivered to the insured. 18.9 Rescission of a marine insurance contract For marine insurance, arts 226 to 228 of the Maritime Code provide rules governing matters of rescission of the insurance contract. According to art. 226, the insured may rescind a contract only before the commencement of the insurer’s liability. Article 227 provides that once the insurance liability has been commenced, neither the insured nor the insurer may rescind a contract, unless the contract provides otherwise.63 If the contract specifies that the parties have the right of rescission of the contract in some situations, the insured or the insurer may rescind the contract in the specified situations.64 Where the insured demands to rescind the contract, the insurer has the right to retain the premium for the period from the date of commencement of the liability to the date of rescission of the contract. The rest shall be returned to the insured. If it is the insurer who demands the rescission of the contract, the unexpired premium from the date of the rescission of the contract to the date of the expiration of the period of insurance shall be refunded to the insured.65 18.10 Contracts which cannot be rescinded by any party For some types of insurance, after the conclusion of the contract, neither the proposer nor the insurer is allowed to rescind the contract. 18.10.1 Cargo transportation insurance For non-marine insurance, art. 50 of the Insurance Law provides: “With respect to cargo transportation insurance contracts and transportation conveyance voyage insurance contracts, the parties thereto shall not rescind the contracts after commencement of the insurance liability.” This provision refers to the exception mentioned in art. 15: “Unless otherwise prescribed in this Law . . . the proposer may 63  The CMC, art. 227(1). 64  Ibid, art. 227(2). 65 Ibid.

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rescind the contract and the insurer may not.” That means the proposer may rescind a contract except for the types of insurance specified in art. 50. The provision is a legal prohibition on the rescission of a contract – it cannot be contracted out of by the parties. This provision prohibits both the proposer and the insurer from rescinding a contract where it is a cargo transportation insurance contract or a voyage insurance contract for ships or other transportation conveyances. This provision in essence is to prohibit the proposer from rescinding the contract, although it mentions the “parties to the contract,” because an insurer is generally not allowed to rescind a contract unless otherwise provided by law or agreed by contract. The types of insurance mentioned in this article are transportation and voyage insurance; the duration of the coverage is for a voyage not a period of time. There are similar provisions in the Maritime Code prohibiting the rescission of a marine insurance contract. As discussed above, in marine insurance, unless the law provides otherwise or the contract specifies otherwise, neither the insured nor the insurer may rescind a contract after the commencement of the liability unless the contract specifies otherwise.66 For marine cargo insurance and voyage insurance of ships, the insured may not demand rescission of the contract after the commencement of the insurance liability. This is a compulsory rule and cannot be contracted out of by parties. This rule is very similar to art. 50 of the Insurance Law for non-marine insurance, under which the parties are not allowed to rescind a cargo transportation or transportation conveyance voyage insurance contract. It is clear that in cargo transportation insurance or transportation conveyance voyage insurance, the subject matter of insurance with high mobility has high risk, and usually they are covered by insurance for a single voyage rather than for period of time, thus the risk is relatively concentrated. Allowing any party to rescind a contract for such a type of insurance may cause the situation that the insured subject matter may not be covered. Some have the view that in allowing the insured to rescind the contract, it may happen that the insured will demand to rescind the contract once the insured event occurs and the claim for the loss is paid, or he thinks that the risk is reduced where the ship is approaching the destination.67 This argument is not very persuasive. On the other hand, in allowing the insurer to rescind the contract, the insured may face the risk without insurance coverage because it is difficult for him to find other insurance in a short time. So the laws prohibit the parties from rescinding a contract for cargo transportation insurance or transportation conveyance voyage insurance.68 It is said that the prohibition of rescission of an insurance contract for cargo transportation insurance or transportation conveyance voyage insurance is due to the special nature of these contracts. These types of insurance are very important for

66  The Maritime Code, art. 227(1). 67  Xiaoming Xi, The Insurance Law of the PRC – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 73; Bixin Jiang, Insurance Disputes (Law Press China 2014) p. 26; Xiang Lan Zhang, Maritime Law (Wuhan University Press 2008) p. 335. See also Xiaoming Xi, The Insurance Law of the PRC – Insurance Contracts – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 333. 68  Xiaoming Xi, The Insurance Law of the PRC – Insurance Contracts – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 73; Xiang Lan Zhang, Maritime Law (Wuhan University Press 2008) p. 335.

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the national economy, and in China, domestic waterways and railway transportation account for about 70% of total domestic transport, and, especially, almost all bulk cargo transportation is completed through waterways and railways. In international trade, the carriage of goods by sea is a very common way to transport goods from one country to another, and cargo and ships need to be covered by insurance, so marine cargo insurance and voyage insurance of ships is very important. It would have an impact on the transportation business if any party rescinded such an insurance contract.69 18.10.2 Compulsory motor vehicle insurance Another type of insurance for which the proposer’s right of rescission of the contract is prohibited is the compulsory motor vehicle insurance. For example, art. 16 of the Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance provides that “The proposer cannot rescind a motor vehicle traffic accident liability compulsory insurance contract, except in the following situations: (1) the insured vehicle is legally deregistered; (2) the use of the insured vehicle is suspended; (3) the insured vehicle has been proved missing by the public security office.”70 This topic will be further discussed in Chapter 22. 18.11 Consequences for rescission of an insurance contract The consequences for rescission of an insurance contract are different where an insurance contract is rescinded on different grounds and in different periods. Where a proposer seeks to rescind the contract before commencement of the insurance liability, the proposer shall pay handling charges to the insurer and the insurer shall refund the premium.71 Where a proposer requests to rescind the contract after commencement of the insurance liability, the insurer shall refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission.72 In life insurance, where a proposer rescinds the contract, the insurer shall refund the cash value of the policy within 30 days in accordance with the contract, after receipt of notice of rescission.73 Where the contract is rescinded by the insurer, the insurer shall return the cash value of the policy to the proposer in two situations: (1) where the insurer rescinds the contract on the ground that the proposer gives the wrong age of the life insured, and the actual age is beyond the specified age limit;74 and (2) where a suspended insur-

69  Xiaoming Xi, The Insurance Law of the PRC – Understanding and Application of the Provisions (People’s Court Press 2010) p. 114. 70  This Regulation was enacted by the State Council on 21 March 2006, came into force on 1 July 2006 and was amended for the first time on 30 March 2012 and for the second time on 17 December 2012. 71  The Insurance Law, art. 54; the CMC, art. 226. 72  The Insurance Law, art. 49(3); art. 52(1); art. 54; the CMC, art. 227(2). 73  The Insurance Law, art. 47. 74  Ibid, art. 32(1). Where the insurer rescinds the contract on this ground, art. 16(3) of the Insurance Law shall apply. According to art. 16(3), the insurer must rescind the contract within 30 days from the

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ance contract is rescinded by the insurer due to the failure to reach an agreement as to the reinstatement of the policy between the parties within two years from the date of suspension.75 Where the insurer rescinds the contract on the ground of a deliberate non-disclosure by the proposer, the insurer may rescind the contract and is not liable for any insured loss occurred before the rescission and does not need to return the premium. For a grossly negligent non-disclosure which has a serious impact on the occurrence of the insured event, the insurer may rescind the contract and is not liable for the insured loss occurring before the rescission, but should return the premium. In the circumstances where the proposer, the insured or the beneficiary makes a fraudulent claim, the insurer is entitled to rescind the contract and refuse refunding of the premiums paid by the proposer.76 18.12 Conclusion The Insurance Law allows the insurer and the insured to modify the terms of the contract by law or by way of consultation and agreement. Generally, after the conclusion of an insurance contract, the proposer may, but the insurer may not, rescind a contract;77 this is important in terms of the protection of insureds. Nevertheless, the Insurance Law vests in the insurer the right of rescission of an insurance contract in certain situations where the proposer or the insured fails to perform his legal or contractual duties.

date when he is aware of the reason for rescission or within two years from the date when the contract is entered into. 75  The Insurance Law, art. 37(2). 76  The Insurance Law, art. 27(1). 77  The Insurance Law, art. 15.

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CHAPTER 19

Property insurance

19.1 Introduction Property insurance is one of the main types of insurance. In China, generally, the non-marine insurance business is divided into two categories: personal insurance and property insurance.1 Personal insurance will be examined in Chapter 20; property insurance is considered in this chapter. According to art. 12(4) of the Insurance Law, property insurance refers to the type of insurance where properties and the interest therein are the insured subject matter. Property insurance business includes property loss or damage insurance, liability insurance, credit insurance and surety bond insurance.2 Rules governing property insurance are provided in arts 48 to 65 of the Insurance Law, concerning insurable interest, increase of risk during the lifetime of a policy, subrogation, valued or unvalued policy, double insurance and contribution, assignment of insured subject matter, the insured’s duties of risk prevention and loss mitigation, rescission of the contract and so on. Some of these doctrines and aspects have been discussed in previous chapters, so they will not be examined here in detail but a brief account will be given where necessary. For those topics in respect of property insurance which are not covered in the previous chapters, a more detailed discussion will be given in this chapter. Thus, emphasis will be on the following aspects: material facts which must be disclosed in relation to property insurance, assignment of the subject matter of insurance, valued or unvalued policies, the insurer’s right to the damaged property, and coverage of risks and exception of risks. 19.2 Types of property insurance According to the China Insurance Regulatory Commission (CIRC),3 as of the end of 2014, the top six lines of non-life insurance business are motor vehicle insurance,

1 The Insurance Law, art. 95 provides: “The scope of business of an insurance company shall be as follows: (i) Personal insurance, including life insurance, health insurance and accident insurance, etc.; (ii) Property insurance business, including property loss or damage insurance, liability insurance, credit insurance and surety bonds, etc.; and (iii) Other insurance-related business approved by the insurance supervision and administration authority of the State Council.” 2 Ibid. 3  The CIRC Annual Report of the Chinese Insurance Market 2015.

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commercial property insurance, agricultural insurance,4 liability insurance, credit insurance and guarantee insurance, accounting for 73.1%, 5.1%, 4.3%, 3.4%, 2.7% and 2.6%, respectively, of the total non-life insurance business in China, which altogether accounted for 91.2% of the market share. It can be seen that the major type of property insurance is motor vehicle insurance in China. This type of insurance very often includes first party insurance which covers the loss of or damage to the insured vehicle, and third party liability insurance which covers the loss of or damage to the third party’s vehicle and physical injury and death of the third party. Considering the special characteristics and the importance of the market share of motor vehicle insurance, this topic merits separate treatment in Chapter 22, “Motor vehicle insurance.” The Insurance Law divides property insurance business into four broad types, i.e. property loss or damage insurance, liability insurance, credit insurance and surety bond insurance.5 (1) Property loss and damage insurance. Property loss and damage insurance refers to the type of insurance under which physical properties are covered. Property damage insurance mainly includes household property insurance, enterprise property insurance, transportation insurance, cargo transportation insurance and engineering (construction) insurance.6 Loss can be total or partial. Total loss refers to the situation where the subject matter is totally destroyed beyond repair or loses its identity, while partial loss means the situation where the subject matter is damaged, or some or part of the goods are lost (in the case of goods being the insured subject matter). (2) Liability insurance. Liability insurance covers the insured’s potential legal liability to compensate a third party who suffers damage to property or physical injury or death caused by the negligence of the insured. Article 65(4) of the Insurance Law defines it as follows: “Liability insurance means the type of insurance for the insured subject matter of which it is the insured’s liability to indemnify a third party according to law.” The subject matter insured is not physical objects (property or goods) but a legal liability to indemnify an injured third party. In China, some types of liability insurance are compulsory in law, for example, compulsory motor vehicle third party liability insurance.7 This topic of liability insurance is considered in detail in Chapter 21. (3) Credit insurance. Credit insurance protects the insured’s business from non-payment of commercial debt. It ensures that the insured’s invoices will be paid and allows the insured to reliably manage the commercial and political risks of trade. Credit insurance is to protect the insured who is the

4  China is now the second largest agriculture insurance market, just after the US, and the largest livestock insurance and forest insurance market. See The CIRC Annual Report of the Chinese Insurance Market 2015, p. 51. 5  The Insurance Law, art. 95. 6  Chongmiao Xu, Principles of the Insurance Law and Analysis of Difficult Cases (Law Press China 2011) p. 267. 7  For more, see Chapter 22, “Motor vehicle insurance.”

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creditor where he lends money under credit loans, or where he sells goods on credit sales. Under a credit insurance policy, where the debtor is unable to pay the debt or pay the price of the goods to the insured, and the insured suffers loss as a result of the debtor’s non-payment, the insurer will indemnify the insured’s loss. There are mainly three types of credit insurance: export credit insurance, domestic trade credit insurance and investment credit insurance.8 Credit insurance is not covered in this book. (4) Surety bond insurance. The Insurance Law does not give a definition of surety bond insurance, but the CIRC provides a definition in its document.9 It states: “Surety bond insurance is one of the types of property insurance; under this type of insurance, the insurer acts as the guarantor of the insured, and provides a guarantee to the person who suffers economic loss due to the insured’s default and non-performance of the obligations of the contract that the insurer shall pay the insured or his beneficiary.” Surety bond insurance is not covered in this book. 19.3 Insurable interest in property insurance The doctrine of insurable interest applies to all types of insurance. Rules governing insurable interest in property insurance are provided in arts 12 and 48 of the Insurance Law. The Law requires the insured to possess an insurable interest in the subject matter insured, which is a legally recognised interest,10 at the time when an insured event occurs.11 The insured cannot claim for insurance money if he does not have an insurable interest at the time of loss.12 Matters on insurable interest are discussed in detail in Chapter 7 of this book. One point must be emphasised here, that is, the insurable interest in property insurance must strictly reflect the nature of indemnity principle under which the insured will be indemnified where he has suffered loss. If the insured has no insurable interest in the property,13 then he suffers loss, and he cannot be indemnified under the policy. 19.4 Material facts in property insurance At the pre-contract stage, the insured is required to disclose information and facts material to the risks of the property to be insured, so as to enable the insurer to decide whether to accept the risks and, if so, on what terms.14 The materiality of

8 For more discussion on these three types of credit insurance, see Tingzhong Fu, Insurance Law (Qinghua University Press 2011) pp. 165–69; Chongmiao Xu, Principles of the Insurance Law and Analysis of Difficult Cases (Law Press China 2011) pp. 273–74. 9  CIRC Reply to Insurance Companies about the Disputes on Surety Bond Insurance Contracts, Order (1999) No. 16. 10  The Insurance Law, art. 12(6). 11  Ibid, art. 12(4). 12  Ibid, art. 48 13  As discussed in Chapter 7 of this book, the insured must have a legally recognised insurable interest. It is suggested that an economic or pecuniary insurable interest for property insurance should be adopted in the Insurance Law. 14  The Insurance Law, art. 16.

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facts to be disclosed depends on the type of property to be insured. For example, a fire hazard may not be material to a burglary policy. In general, what facts can be regarded as physical hazards depends upon the type of property and the risks to be covered by the policy. For example, the most important facts for premises under a fire policy are the materials which were used to build the premises,15 and the type of the premises (detached or semi-detached). For storage fire insurance, the material facts are the nature of the stored goods, i.e. whether or not they are flammable material or inflammable material. Similarly, different types of insurance for the same subject matter can raise different material facts to be disclosed. For instance, for a fire policy, information concerning whether or not the extinguishing equipment is properly installed is material,16 and the fact of whether or not locks and a burglar alarm have been properly fixed is material to a burglary policy. Generally, the following categories of information are regarded as material for all types of property insurance. (1) The location of the insured property. Whether or not a property is located in a hazardous area is material information.17 A Chinese case gives a good example of this.18 A wooden product company effected a property insurance contract with an insurer under a flood policy. The company’s timber was flooded and carried away by water. The insurer declined the claim on the grounds that the timber was located below the warning line of the flood, which was not within the scope of the insurance but the insured failed to disclose this fact. It was held that the insurer was not liable. (2) The condition of the insured property. The condition of the property is material for any insured property, as it can affect the insurer’s decision in assessing the risk or fixing the premium. In a Chinese case,19 a packing material factory took out an insurance contract of enterprise property insurance on its machines for cardboard production. Two months later, a typhoon hit the area, and trees were blown down and destroyed the roof of the building. One of the machines was seriously damaged by a falling

15  In the trader’s combined shops proposal form a question is asked: “Is the building constructed of brick, stone or concrete and roofed with slates, tiles, asbestos, metal, concrete or asphalt?” 16  For example, in the property all-risk insurance proposal form, details of the safety facilities are asked: (1) Is there an automatic alarm? (2) Are there fire hoses and extinguishers, and (3) Is there a security guard? 17  For example, in the trader’s combined shops proposal form of the China Insurance Co. (UK) Ltd, a question is asked: “are the premises in an area affected by flooding”? In the comprehensive property insurance proposal form of the Ping An Insurance Company of China, the insurer inquires about the names and distances of the nearest rivers, lakes and seas and their records of the lowest, normal and highest water levels. Generally speaking, the question about the location of the insured property is very important. In China, every year there are floods here and there, especially in the catchments of the Yellow River and the Yangtze River. For example, a flood in China in 1998 was the worst in the last 50 years. Approximately a quarter of the whole population of China suffered to varying extents from the flooding. It was reported that the flooding covered eight provinces. The estimated economic loss amounted to ¥166.6 billion, accounting for 2.2% of total GNP for 1997. The estimated claims for insurance money from the China Insurance Property Insurance Company Limited only were up to ¥3 billion (see Chinese News from Internet, 28 August 1998). 18  (1996) 4 Insurance Studies 57. 19  Zhu Tao and Wang Baoshu, Leading Case Selections for the Enterprises Economic Disputes (Enterprise Administration Press 1995) p. 721.

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fragment of the roof, which caused an interruption of production. The insured made a claim against the insurer. The insurer sent some persons to inspect the scene of the event, and they found that there was a repair mark on that machine which obviously proved that the machine had been damaged and repaired before the occurrence of the event. The insured did not disclose this material fact to the insurer when the contract was concluded. So the insurer refused the claim by reason of the insured’s non-disclosure of the machine’s bad condition. The insured applied for arbitration against the insurer. The arbitrator held that the machine’s defective condition was material and the insured should have disclosed this to the insurer, and the insurer was thus entitled to decline the claim and rescind the contract. (3) The use of the insured property. The use of the property and by whom the property will be used are material facts that the insured needs to disclose to the insurer. This question is asked by the insurer in almost all proposal forms for property insurance. A car, for instance, has different hazards when being used for a commercial purpose or for private use, so the question of what purpose the vehicle will be used for is always asked in all vehicle insurance proposal forms. Similarly, a building has different risks when being used for a trading or professional or business purpose rather than as a private dwelling house.20 (4) The age of the property. The age of a building or a machine is also regarded as material information. An old building obviously has higher risks in respect of earthquake, typhoon and flood, etc. than a new one; an old machine is more likely to break down than a new one. 19.5 The contents of a property policy must be explained by the insurer prior to entering into the contract It is the usual practice that a standard form contract is used to conclude a contract. The terms of the contract are formulated by the insurer, so the insurer is in a position to use its knowledge and skill to define well the scope of the coverage and the scope of exception of the risks, and the relevant rights and obligations of the parties in the contract. The individual insureds do not have the bargaining power to negotiate the terms of the contract and usually do not understand or fully understand the terms of the contract. By the requirement of the principle of good faith and for the sake of consumer protection, the Insurance Law imposes a duty on the insurer to explain the contents of an insurance contract, and to clearly explain the exemption clauses, to the insured before or at the time of concluding the contract,21 so as to enable the insured to understand the contents of the contract and, particularly, the risks covered and the risks not covered, and then decide whether to enter into the

20 For example, in the Home Insurance Proposal Form of China Insurance Co. (UK) Ltd, the insured is required to answer the question of whether “the building has been used for trade, professional or business purposes.” 21 The Insurance Law, art. 17. For more on the insurer’s duty of good faith, see Chapter 9, “The insurer’s pre-contractual duty of good faith.”

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contract. The exemption clauses are ineffective if the insurer failed to clearly explain them to the insured prior to the conclusion of the contract.22 19.6 The assignment of the subject matter of insurance Assignment of the insured subject matter usually arises where the insured property is sold or otherwise disposed of by the insured. The Insurance Law provides some rules to govern the assignment of the insured subject matter. In comparison with the old versions of the Insurance Law (1995 and 2002), the Insurance Law 2009 provides more detailed rules relating to the assignment of the subject matter of insurance. Article 34 of the Insurance Law 200223 provided: “The insurer must be notified of the assignment of the subject matter of insurance, and with the consent of the insurer to continue the insurance, the original insurance contract may be amended according to law. However, cargo transportation insurance contracts and those contracts having terms otherwise specified are excepted.” This article requires the insured to notify the insurer where the insured wants to assign his insured subject matter to another person, then the insurer will amend the contract and change the name of the original insured to the name of the assignee if the insurer agrees to continue the insurance after the assignment. However, this article does not provide remedies for failure in complying with the duty of notifying the insurer of the assignment of the subject matter insured. The 2009 version of the Insurance Law provides more rules about the assignment of the insured subject matter. Article 49 of the Insurance Law 2009 provides: “(1) Where the insured subject matter is assigned, the assignee of the insured subject matter shall enjoy the rights and assume the obligations of the insured. (2) Where the insured subject matter is assigned, the insured or the assignee shall notify the insurer thereof in a timely manner, with the exception of cargo transportation insurance contracts and those contracts which provide otherwise. (3) Where the insured subject matter is assigned and the level of risk increases substantially as a result, the insurer may increase the premiums in accordance with the contract or rescind the contract within 30 days of receipt of the notice provided in the preceding paragraph. Where the insurer rescinds the contract, it shall refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission. (4) Where the insured or the assignee fails to fulfil the obligation of giving notice provided in paragraph two of this article, and an insured event occurs due to the substantial increase in the level of risk in respect of the insured subject matter as a result of the assignment, the insurer shall not be liable for indemnity payment.”

This article concerns several points which are worthy of discussion here: (1) The rights and obligations under the insurance policy are assigned to the assignee with the insured subject matter; (2) The insured must notify the insurer of the assignment, and the consequence for failure to give notice of the assignment is that the insurer is not liable

22  The Insurance Law, art. 17. 23  The Insurance Law 1995, art. 33.

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for the loss caused by the increase of the risk after assignment of the subject matter insured; (3) The remedies available to the insurer where there is an increase of risk resulting from the assignment of the insured subject matter are that the insurer can raise the premium or rescind the insurance contract. 19.6.1 Is the insurance policy assigned with the assignment of the insured subject matter? Where the insured assigns the subject matter insured to another person, the question may arise as to whether or not the insurance policy is assigned to the person with the assignment of the insured subject matter. The answer to this question varies in different jurisdictions. There are two approaches to this issue. First, an insurance policy is not assigned to another person with the assignment of the subject matter. English and Australian laws adopt this approach. Second, an insurance policy is automatically assigned to the assignee with the assignment of the subject matter; Chinese and German laws take this approach. (a) The English and Australian positions Under English law, an insurance policy is not automatically assigned with the assignment of the subject matter. A property insurance policy is regarded as personal to the particular insured, and any assignment of the policy requires the consent of the insurer. In Peters v General Accident Fire and Life Assurance Corp Ltd,24 the vendor of a van handed over his insurance policy issued by the insurers to the purchaser. The latter subsequently injured the claimant by negligently driving the van. It was held that the insurers were not liable under the policy, as the insured vendor could not simply assign his motor policy to the purchaser without the insurers’ consent.25 The policy would have lapsed upon the sale of the van.26 Similarly, under Australian law, an insurance contract is a personal contract that insures the insured’s interest in its subject matter, not the subject matter itself. Subject to express policy wording to the contrary and with some exceptions,27 the insurance does not run with the subject matter of the contract. Accordingly and subject to the operation of the Insurance Contracts Act 1984 (ICA), a person who acquires an interest in the subject matter of an insurance policy taken out by, for or on behalf of someone else, does not also acquire the benefit of the policy unless they become a party to it (by assignment or novation) or the benefit of the policy is expressly extended to them. An insured can assign an insurance policy to some other person, but only with the consent of the insurer, and any other parties to the contract.28

24  [1938] 2 All ER 267. 25  J. Birds, Bird’s Modern Insurance Law (9th edn, 2013) para. 11.4. 26  Rogerson v Scottish Automobile and General Insurance Co. Ltd (1931) 48 TLR 17. See J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 11.1.3. 27  For example, a compulsory motor vehicle third party personal injury or death policy where the contract runs with the vehicle. 28  Greg Pynt, Australian Insurance Law: A First Reference (3rd edn, LexisNexis Butterworths 2015) paras 9.26 and 9.27.

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(b) The Chinese and German positions By virtue of art. 49(1) of the Insurance Law, where the insured subject matter is assigned, the assignee of the insured subject matter shall enjoy the rights and assume the obligations of the insured upon the assignment of the subject matter. This provision indicates that where the insured subject matter is assigned, the insurance policy shall be assigned to the assignee as well. This approach seems reasonable.29 First, it saves time, as the assignee does not need to apply for a new insurance contract for the subject matter assigned. Second, it will avoid the gap between the termination of the original contract and conclusion of a new contract during which no insurance cover is available. The assignment of the subject matter from one person to another may not significantly change the probability of the risk occurring if there is no substantial increase of risk as to the subject matter.30 German Insurance Law takes an approach similar to the Chinese Law on this point. Section 95 of the German Insurance Contract Act 2008 is about the Sale of the Insured Object and provides: “(1) If the policyholder sells the insured object, the policyholder shall assign to the buyer the rights and obligations resulting throughout the period of his ownership. (2) The seller and the buyer shall be liable as joint and several debtors for the premium payable during the current period of insurance at such time as the seller assigns the rights to the buyer. (3) The insurer must not accept the assignment against him until he has learned thereof.” It is clear from this section that the insurance contract can be assigned with the assignment of the subject matter of insurance. The insurer must be notified of the assignment. 19.6.2 Notification of assignment In China, the insured or the assignee must notify the insurer of the assignment of the insured subject matter in a timely manner.31 The duty of notification can be excepted in two sets of circumstances. First, this duty can be excluded by contractual agreement in the policy. The duty of notification seems not to be mandatory in the sense that the parties can exclude the duty by contractual agreement. Second, the duty of notification does not apply to cargo transportation insurance policies.32 Usually assignment of cargo does not change the risk covered under a cargo transportation insurance policy. And also for the purpose of trade convenience, insurance policies can be assigned to the buyer of the cargo at the same time as the assignment of the cargo. For example, in a CIF (Cost, Insurance and Freight) contract, an insurance policy is freely assignable by indorsement but without the need to notify the insurer.33 Once the insured or the assignee has notified the insurer of the assignment of the subject matter insured, the insurer may decide whether or not to continue to cover

29  See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 242. 30  Xiaoming Xi, The Insurance Law of the PRC – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 326. 31  The Insurance Law, art. 49(2). 32 Ibid. 33  For more on this topic, see Chapter 24, “Marine insurance.”

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the subject matter under the same policy or rescind the contract. If there is no significant increase of risk to the subject matter insured after the assignment, the insurer has no right to raise premiums or rescind the contract, but can continue with the policy. In this case, the insurer may change the name of the old insured to the name of the assignee, so that the assignee may become the new insured and continue to enjoy the benefit of the insurance policy and assume the liability to pay the premium to the insurer if the original insured has not paid the full premium, or repay some premium to the original insured if the original insured has paid the full premium for the insurance.34 In the case where the risk to the insured subject matter increases substantially as a result of the assignment, the insurer may increase the premiums in accordance with the contract or rescind the contract.35 19.6.3 The increase of risk arising from the assignment of the insured subject matter There are possibilities that the risk to the insured subject matter may increase upon the assignment of the insured subject matter. For example, a vehicle, which was originally insured for private use only, is sold to another person who will use it as a taxi (for a business purpose). The insured or the purchaser must notify the insurer of the assignment and the change of the purpose for the use of the vehicle. Article 49(3) of the Insurance Law provides rules governing the consequences where the risk increases as a result of the assignment of the subject matter, i.e. the insurer may either increase the premiums or rescind the contract.36 If the insured or the assignee has failed to give notice to the insurer of the assignment, and an insured event occurs due to the substantial increase in the level of risk in respect of the insured subject matter as a result of the assignment, the insurer shall not be liable for an indemnity payment.37 Here the important words are “substantial increase of the risk.” The issue of what level of increase can be taken as a substantial increase is fully discussed in Chapter 10, “Increase of risk during the insurance period.” In the case where the risk substantially increases as a result of the assignment of the insured subject matter, the insurer must make a decision on whether it will increase the premium or rescind the contract. The insurer may, according to the agreement of the contract, charge extra premiums for the increased risk. For example, the premium for insuring a car for private use is lower than that for commercial use. If the use of the car is changed from private use to commercial use after the assignment of the subject matter (the car), the insurer may increase the premium, corresponding to the use for commercial purposes. If the assignee does not agree with the increase of the premium, he may terminate the contract. If the risk has increased to such a level as a result of the assignment of the subject matter that the insurer would not have accepted the risk at the time of the contract, the insurer may rescind the contract.38 In the case where the insurer rescinds the contract, it shall return the premium paid by the insured for

34 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 193. 35  The Insurance Law, art. 49(3). 36  Ibid, art. 49(3). 37  Ibid, art. 49(4). 38  For more on this point, see Chapter 10 of the book.

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the original contract after deducting the amount for the period from the date of commencement of the liability to the date of rescission.39 The insurer is required to make a decision on an increase of the premium or rescission of the contract within 30 days after it has been notified of the assignment, in the case of a substantial increase of risk to the subject matter insured after assignment.40 If the assignee has notified the insurer of the assignment, and an insured event occurs within the 30-day period, is the insurer liable for the loss? There is no clear answer to this question. It is suggested that the insurer should be liable for the loss, as the insurance policy is still effective before the insurer makes its decision to raise the premium or to rescind the contract. Such a requirement would encourage the insurer to make a decision promptly. 19.6.4 Ambiguity of art. 49 of the Insurance Law There is an ambiguity in art. 49 of the Insurance Law. Article 49(2) requires the insured or the assignee of the insured subject matter to notify the insurer promptly where the insured subject matter is assigned, but art. 49(4) implies that the insured or the assignee is required to give notice only where the assignment of the subject matter would cause substantial increase of risk (otherwise the notification is unnecessary). In other words, even if the insured is not notified of the assignment, he is still liable for loss if there is no increase of risk, or the increase of the risk is not substantial after the assignment of the subject matter insured. This ambiguity causes disputes in practice. In Mr Wu v X Insurance Company,41 Mr Yin effected a motor vehicle insurance policy with the insurer in June 2004 for one year. In December 2004, Mr Yin sold the vehicle to Mr Wu. But neither Yin (the assignor) nor Wu (the assignee) notified the insurer of the assignment of the vehicle. On 18 December, Mr Li, the driver of Mr Wu, caused a traffic accident when he was driving the vehicle, and killed the other driver, for which Mr Li was fully responsible. Mr Wu, the assignee of the vehicle, paid the other driver for the accident, and claimed against the insurer under the insurance policy assigned to him by Mr Yin (the seller of the car and the original insured under the motor insurance policy). The insurer rejected the claim on the ground that neither the insured nor the assignee notified the insurer of the assignment of the vehicle. The key issue here is whether the insurer should be liable for loss occurring after the assignment of the subject matter of insurance without being notified of the assignment. The insurer argued that the insurance contract ceased to be effective from the date of the assignment. So the insurer was not liable for the loss. The court held that according to the Insurance Law 2002,42 the insured or the assignee was required to notify the insurer of the assignment and the insurer should change the

39  The Insurance Law, art. 49(3). 40 Ibid. 41  See Xiaoming Xi, The Insurance Law of the PRC – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 328. 42  The case was decided in 2006; the 2002 Insurance Law was in operation then (see art. 33).

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contract, but no consequences were provided for not performing the duty of notification. So the insurer was liable for the loss. The case was decided in 2006; the 2002 version of the Insurance Law operated then, and it did not provide the consequences for failure to give notice to the insurer of the assignment of the subject matter insured. The 2009 Insurance Law provides consequences for failing to notify the insurer of the assignment of the subject matter, but, as mentioned above, it is very ambiguous and needs clarification. 19.6.5 Unfairness of art. 49(4) of the Insurance Law Article 49(4) provides: “Where the insured or the assignee fails to fulfil the obligation of giving notice provided in paragraph two of this article, and an insured event occurs due to the substantial increase in the level of risk in respect of the insured subject matter as a result of the assignment, the insurer shall not be liable for indemnity payments.” If the loss is not caused by the increase of risk, the insurer is still liable. A causal connection needs to be established between the loss and the increased risk if the insurer can refuse the claim. There are two major flaws in this provision. (1) In some situations, the risk has substantially increased but the loss is not caused by the increased risk; the insurer is nevertheless liable for the loss because there is no causal connection between the increased risk and the loss. Thus the insurer may receive a low premium but bears high risk which was not contemplated at the time of the contract. (2) Sometimes, it is difficult to show a causal connection between the increased risk and the loss. These flaws are similar to those in art. 52(2) of the Insurance Law, which are critically discussed in Chapter 10, section 10.8.1, and some suggestions on how to improve the law are made in Chapter 10, section 10.9. 19.7 The insured’s duties during the insurance period After the conclusion of the contract, the insured’s main duties are to pay the premium,43 to maintain the safety of the subject matter insured, to notify the insurer in the case of a significant increase of risk to the subject matter insured, and to mitigate or reduce loss when the insured event occurs. 19.7.1 Notification of increase of risk The concept of increase of risk44 is one of the important concepts in the Insurance Law. Article 52 of the Insurance Law requires the insured to notify the insurer if the insured risk increases during the currency of the insurance contract; the insurer, upon receiving the notification, may increase the premium or rescind the contract. The consequence for failing to perform the duty is that the insurer shall not be liable for indemnity in the case of the occurrence of an insured event which is caused by

43  The topic of premiums is discussed in Chapter 6, “Premiums.” 44  It is also known as the concept of alteration of risk.

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the material increase in risk. An in-depth analysis of the concept of increase of risk is presented in Chapter 10, “Increase of risk during the insurance period.”45 19.7.2 Insured’s duty to prevent and mitigate insured loss Article 51 of the Insurance Law imposes a duty on the insured to take measures to prevent or reduce the insured risks during the currency of the contract. It requires the insured to comply with all the provisions of the state with respect to fire prevention, safety, production operations and labour protection, etc. and to ensure the safety of the insured subject matter. Where the insured fails to fulfil his duty to ensure the safety of the insured subject matter, the insurer shall have the right to demand an increase of the premiums or to rescind the contract. In practice, almost all types of property insurance policy include clauses requiring insureds to take reasonable steps to prevent or reduce the loss for or damage to the insured subject matter.46 In the case of Paint Manufacturer v The Insurance Company,47 the Manufacturer insured its building, machines and other facilities under a property all-risks policy with the insurer for one year from 21 March 2004 to 20 March 2005. The Manufacturer built a simple building as the raw material warehouse. In December 2003, before the conclusion of the insurance contract, the local Fire Supervision Department sent someone to inspect the firefighting system in the properties of the Manufacturer. Upon inspection, it was found that there was a major fire hazard in the warehouse. In January 2004, the Fire Supervision Department sent a notice to the Manufacturer to request it to take measures to prevent or reduce the hazard. However, the Manufacturer did not take any active measures to improve it. An explosion occurred eventually and caused a fire which destroyed the raw materials and some machines and facilities. The Manufacturer claimed for an insurance payment, but the insurer rejected the claim and argued that the Manufacturer did not disclose the material fact that there was a fire hazard in the factory and the insured had not taken any accident prevention measures following the recommendations of the Fire Supervision Department. Therefore the insurer was not liable for the loss. The court gave judgment for the insurer. Article 57 of the Insurance Law obliges the insured to take necessary measures to mitigate the loss after the occurrence of the event insured against. The insurer shall bear the necessary and reasonable expenses incurred by the insured for taking the necessary steps. Usually in an insurance policy there is a clause to impose on the insured the duty to take active and reasonable steps to avoid loss of or damage to the insured property or to rescue the property after the occurrence of the

45 See Chapter 9 for detailed discussion on this concept; see also Z. Jing, “The Insured’s PostContract Duty of Notification of Increase of Risk” (2013) JBL 842. 46  See Property Insurance Clauses of Ping An Insurance Company of China, clause 5(3); Property Comprehensive Insurance of Pingan Insurance Company of China, clause 22; Property All Risks Insurance of China Property Insurance Company, clause 5(3); Property All Risks Insurance of Huatai Insurance Company of China, clause 5(3). 47  See Xiaoming Xi, The Insurance Law of the PRC – Understanding and Application of the Provisions (China Legal Publication House 2010) p. 337.

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insured event.48 It is reasonable and fair to require the insured to take measures to reduce the loss because the insured subject matter is usually under the control of the insured, who is usually the first person to know of the occurrence of the insured event. The law requires the insurer to bear the expenses incurred by the insured for taking reasonable and necessary steps to reduce the loss. 19.8 Valued and unvalued policies A property insurance policy can be a valued or unvalued policy. A valued policy specifies the agreed value of the subject matter insured when an insurance contract is made. In the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject matter intended to be insured, whether the loss be total or partial. Most marine policies are valued policies. The purpose of fixing in advance the amount of compensation to be paid to the insured is to avoid disputes as to the value of the subject matter insured. According to art. 55(1) of the Insurance Law, “where the insured and the insurer have agreed on the insured value of the insured subject matter and specified the value in the contract, and loss or damage occurs on the insured subject matter, the agreed insured value shall be the basis for calculating the amount of the indemnity payment.” Accordingly, in the event of total loss under a valued policy, the insurer is liable for the agreed value of the subject matter as specified in the policy; in the case of partial loss under a valued policy, the insurer is liable only for the proportion of the agreed value represented by the extent of damage to the subject matter. An unvalued policy does not specify the value of the subject matter insured, but is subject to the maximum sum insured, and leaves the insurable value of the property or goods to be determined at the time of loss. By virtue of art. 55(2) of the Insurance Law, where the insured and the insurer have not agreed on the insured value of the insured subject matter, and loss or damage occurs to the insured subject matter, the actual value of the insured subject matter at the time of the occurrence of the insured event shall be the basis for calculating the amount of the indemnity payment. Unless otherwise specified in the contract, where the sum insured is less than the insured value, the insurer shall assume liability for indemnity in proportion to the sum insured and the insured value.49 In accordance with art. 55(3) of the Insurance Law, the sum insured shall not exceed the insured value of the insured subject matter. Any portion in excess of the insured value is null and void, and the insurer shall refund the corresponding premiums.

48 Almost all property insurance policies include clauses to impose duties on the insured to take active measures to avoid or mitigate loss and reduce loss to a minimum. See Property Insurance Clauses of Ping An Insurance Company of China, clause 24; Property Comprehensive Insurance of Ping An Insurance Company of China, clause 5(4)(2); Property All Risks Insurance of China Property Insurance Company, clause 5(4); Property All Risks Insurance of Huatai Insurance Company of China, clause 5(4). 49  The Insurance Law, art. 55(4).

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19.9 The insurer’s right of subrogation and the right to the damaged property Under the principle of indemnity, the insured is entitled to be indemnified for his loss but no more than the loss. When an insured event occurs and causes losses to the insured subject matter, after indemnifying the insured, the insurer acquires the right of subrogation and the right to the damaged subject matter. After the insurer has indemnified the insured’s loss under the policy, the doctrine of subrogation confers two distinct rights on the insurer. The first one is that the insurer receives the benefit of all rights and remedies of the insured against a third party. The second is that the insurer is entitled to claim from the insured any benefit conferred on the insured by third parties with the aim of compensating the insured for the loss in respect of which the insurer has indemnified him. The operation of the doctrine of subrogation effectively prevents the insured from being over indemnified for a loss from the insurance payout and any compensation paid to him by the third party for the same loss. The topic on subrogation has been considered in Chapter 17, “Subrogation.” As far as the insurer’s right to the damaged property is concerned, art. 59 of the Insurance Law provides: “Where an insured event occurs, and the insurer pays in full the sum insured and the sum insured equals the insured value, all rights to the insured subject matter which is lost or damaged shift to the insurer; where the sum insured is less than the insured value, the insurer shall obtain partial rights to the insured subject matter which is lost or damaged in proportion to the sum insured and the insured value.” This provision entitles the insurer to take over automatically the damaged property (or part of the damaged property) after indemnifying the insured loss under the policy. There is no need for the insured to give notice to the insurer as to the abandonment of his right to the damaged property. In other words, the insurer has a statutory right to the damaged property no matter whether or not the insured abandons it. 19.10 Risks covered and risks excluded in a property policy A property policy usually specifies the scope of coverage and exceptions. Different types of property insurance have different scopes of coverage. In the following, as an example, a household property insurance policy is used to show the coverage of risks and exceptions of the insurer’s liabilities.50 Scope of coverage. If within the insured period, the insured subject matter in the named address as shown in this policy suffers loss by the following causes, the insurer is liable to indemnify in accordance with the stipulations of this insurance policy: (1) fire or explosion caused by, but not limited to, household gas appliances, electrical equipment, electricity lines and other internal or external sources of ignition, and household gas appliances, as well as liquefied petroleum gas tank explosion caused by a gas leak; (2) flying objects falling down, or external objects collapsing; or (3) typhoons, storms, heavy rain, tornadoes, lightning, floods, hail, snow, cliff 50  See the Household Property Insurance Policy of Ping An Insurance Company of China, accessed in January 2016.

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collapse, ice, sudden landslides, mudslides and natural disasters caused by subsidence or sinking. After the occurrence of the insured event, the insurer shall pay the necessary and reasonable expenses incurred by the insured for preventing or mitigating loss of or damage to the insured subject matter. Liability exceptions. The insurer is not liable for losses due to the following causes: (1) the intentional or grossly negligent act by the insured or his family members or household employees or temporary tenants; (2) war, hostilities, military or armed conflicts, strikes, riots, insurrection, terrorism, confiscation, expropriation; (3) nuclear radiation, nuclear explosions, nuclear pollution and other radioactive contamination; (4) earthquake or tsunami; (5) administrative action or judicial action; or (6) air pollution, land pollution, water pollution and other types of pollution, with the exception of pollution incidents caused by an event insured against within the scope of the insurance policy. The insurer is also not liable for the following loss and expenses: (1) damage to or losses of household electric equipment, due to overuse, over-voltage, short-circuit, leakage of electricity, self-heating or other causes; (2) the defect of the subject matter insured itself, improper storage, deterioration, mildew, moisture, insect damage, natural wear and tear; (3) subsidence of the foundation, cracks in buildings, collapse of the buildings, failure to construct the buildings following the standards of construction; (4) property placed on balconies or in open air, or loss of or damage to property caused by storms or heavy rain which is stored in a building with the exterior walls built with simple materials such as straw, asphalt felt, straw, reeds, poles, canvas or other materials, and with a simple roof; (5) losses of the subject matter insured suffered outside the house at the named address in the policy, with the exception of an air conditioner installed in the outer housing and solar water heaters and other household appliances, and outdoor equipment; (6) indirect loss; or (7) excess and deductibles as specified in the policy. The insurer is not liable for other losses and expenses which are not within the scope of coverage in the insurance contract. 19.11 Conclusion In China, currently the major type of property insurance is motor vehicle insurance, accounting for 73% of the total property insurance business. Private household insurance business accounts for a very small portion of property insurance. There is a big potential for the growth of property insurance business in China. The current rules in relation to property insurance are, however, inadequate; some rules are ambiguous and unfair (e.g. art. 49 and art. 52 of the Insurance Law). It is expected that new rules of law will be developed to cope with new situations brought about by the rapid development of the property insurance business.

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CHAPTER 20

Life and accident insurance

20.1 Introduction Under the Insurance Law, non-marine insurance business is divided into two categories: personal insurance and property insurance.1 Property insurance has been considered in Chapter 19. Personal insurance is considered in this chapter. Many aspects will be examined, such as types of personal insurance, insurable interest in personal insurance, the insured’s pre-contractual duty of disclosure and representation, the insurer’s pre-contractual duty of explanation of policy terms, formation of a life insurance contract, suspension and reinstatement of a life policy, matters on beneficiaries in life insurance and the concept of incontestability. Some of these aspects have been examined in detail in the previous chapters, i.e. insurable interest,2 the insured’s duty of disclosure3 and the insurer’s duty to explain policy terms,4 so brief accounts in respect of those aspects will suffice in this chapter. The rules of law and practice in relation to formation of a life insurance contract and matters of beneficiaries merit detailed discussion, as lots of disputes have arisen from these two aspects. 20.2 Definition of personal insurance According to art. 12(3) of the Insurance law, personal insurance is an insurance under which the insured’s life or physical body is covered. This means the subject

1  Article 95 of the Insurance Law provides: “The scope of business of an insurance company shall be as follows: (i) Personal insurance, including life insurance, health insurance and accident insurance, etc.; (ii) Property insurance business, including property loss or damage insurance, liability insurance, credit insurance and surety bonds, etc.; and (iii) Other insurance-related business approved by the insurance supervision and administration authority of the State Council. An insurer shall not engage in property insurance and insurance of the person business concurrently. However, an insurance company conducting property insurance business may conduct short-term health insurance and accident insurance businesses with the approval of the insurance supervision and administration authority of the State Council.An insurance company shall engage in insurance business activities within the scope of business approved by the insurance supervision and administration authority of the State Council to law.” 2  See Chapter 7. 3  See Chapter 8. 4  See Chapter 9.

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matter of the personal insurance is the life or physical body of the insured. Article12(5) defines the term “the insured,” which refers to a person whose property (for property insurance) or physical body (for personal insurance) is covered by the insurance, and who has the right to make claims for insurance money. The proposer (the policyholder) may be the insured. 20.3 Types of personal insurance According to the Insurance Law, personal insurance business includes life insurance, health insurance and accidental injury insurance.5 The law, however, does not define these different types of personal insurance. The China Insurance Regulatory Commission (CIRC) has promulgated a number of regulations for the administration and supervision of personal insurance business. These regulations give definitions of personal insurance. In the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies (2015),6 personal insurance is classified into four types: life insurance, annuity insurance, health insurance and accidental injury insurance.7 Life insurance. Life insurance can be divided into whole life insurance, term life insurance and endowment insurance.8 A whole life policy refers to a policy where the sum insured is payable on the death of the life insured only, and not on the expiry of any fixed period, and the insured period is for the whole life of the life insured.9 Under a term life policy, the sum insured is payable on the death of the life insured within a fixed term (say, 10 years).10 An endowment policy refers to a policy whereby the primary liability of the insurers is to pay a fixed sum at the end of a fixed term or on the death of the life insured, whichever occurs first.11 Annuity insurance. Annuity insurance refers to the insurance by which the insurer makes insurance payments to the insured whose survival is the condition of the payment of insurance money, at the agreed time intervals.12 Annuity Insurance shall meet the following conditions: (1) the age agreed in the insurance contract for payment of insurance money to the insured shall not be less than the retirement age as stipulated by the state; and (2) the time interval between two consecutive payments shall not exceed one year.13 Health insurance. Health insurance is defined by the CIRC in the Measures on Administration of Health Insurance.14 It refers to the type of insurance under

5  The Insurance Law, art. 95(1) 6 The Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies were promulgated on 30 December 2011 (No. 3 [2011]) and amended on 19 October 2015 (No. 3 [2015]). 7  Ibid, art. 7. 8  Ibid, art. 8. 9 Ibid. 10 Ibid. 11 Ibid. 12  Ibid, art. 9. 13  Ibid, art. 10. 14 The Measures on Administration of Health Insurance (No. 8 [2006]) were adopted at the Chairmen’s Meeting of the China Insurance Regulatory Commission on 12 June 2006, and became effective as of 1 September 2006.

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which an insurance company pays benefits for losses caused by health reasons in the form of illness insurance, medical insurance, disability income insurance and care insurance, etc. “Illness insurance” refers to the type of insurance under which payment of benefits depends upon occurrence of diseases specified in an insurance contract. “Medical insurance” refers to the type of insurance under which payment of benefits depends upon occurrence of medical treatment activities specified in an insurance contract and which provides coverage for medical expenses incurred by the insured during medical treatment. “Disability income insurance” refers to the type of insurance under which payment of benefits depends upon loss of working ability as a result of diseases or accidental injuries specified in an insurance contract and which provides coverage for reduction or interruption of income of the insured for a certain period of time. “Care insurance” refers to the type of insurance under which payment of benefits depends upon needs for care arising from impediments to daily living capability specified in insurance contracts and which provides coverage for care expenses of the insured. Accident insurance. Accident insurance is a branch of personal insurance,15 by which persons are enabled to provide against loss to themselves or their families in case they are injured or disabled for a time or permanently, or killed, by some cause operating on them from without.16 An accident insurance policy covers the insured’s physical body, and where the specified insured events occur, the insurer pays the insurance money to the insured or to the beneficiary under the policy. Several types of insurance may fall in the category of accident insurance, such as travel accident insurance and air accident insurance, etc. For example, in the Short-Term Comprehensive Accidental Injury Insurance Policy of Ping An Insurance Company of China, the policy covers the insured’s death, disability and the costs of medical treatment caused by accident. In an accident insurance policy, phrases related to the word “accident” are often included in a policy, such as “injury by accident,” “accidental injury,” “injury caused by or resulting from an accident” or “injury caused by accidental means,” and in each of these phrases it has the connotation of an unexpected occurrence outside the normal course of events.17 20.4 Parties in life insurance Insurer. A life insurance company specifically conducts life insurance business. According to art. 95 of the Insurance Law, an insurer is not allowed to engage in property insurance and personal insurance business concurrently. However, an insurance company conducting property insurance business may conduct shortterm health insurance and accident insurance business with the approval of the insurance supervision and administration authority of the State Council.18

15 The Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies was promulgated on 30 December 2011 (No. 3 [2011]) and amended on 19 October 2015 (No. 3 [2015]), art. 12. 16  See R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 18-003. 17  MacGillivray on Insurance Law (10th edn, 2012) para. 26-001. 18  The Insurance Law, art. 95(2).

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Proposer. According to the Insurance Law, a proposer refers to a party who enters into an insurance contract with an insurer and is obligated to pay the premiums under the contract.19 A proposer can also be called a policyholder. Life insured. A life insured refers to a person whose life or physical body are covered under the policy, and who enjoys the right claim insurance moneys if he is alive at a specified date.20 The proposer may be the life insured.21 The beneficiary may claim for the insurance money where the life insured dies. Beneficiary. A beneficiary refers to a person who is designated by the insured or the proposer in a life insurance contract and who is entitled to make claims for the insurance benefits. The proposer or the insured may be the beneficiary.22 20.5 Insurable interest in life insurance It is well known that the proposer must have an insurable interest in the life insured at the time of the contract. The justifications for the requirement of the interest are to discourage gaming and wagering in the guise of insurance and to minimise the risk of destruction by the proposer of the subject matter of the insurance. In the Insurance Law, there are a number of provisions in relation to insurable interest in life insurance, such as arts 12, 31, 33 and 34 in the Insurance Law. All these articles were examined in detail in Chapter 7, “Insurable interest,” so here it is appropriate to give a brief account of the rules in respect of insurable interests in life insurance. Article 31 of the Insurance Law is the major article regarding insurable interests in life insurance, and it provides: “A proposer shall have an insurable interest in the following persons: (1) himself; (2) his spouse, children and parents; (3) apart from the above-mentioned, other family members and close relatives having a foster or support or maintenance relationship with the proposer; and (4) a worker who has working relationship with the proposer.23 In addition to the persons mentioned in the preceding paragraphs, the proposer shall be deemed to have an insurable interest in any insured person who agrees that the proposer may conclude a contract on his life. The contract is void where the proposer has no insurable interest in the life insured at the time of the contract.”

It can be seen from art. 31, in addition to the family or working relationships, the proposer has an insurable interest in a person who gives consent to the proposer to effect a life policy on his life. The time point requiring the existence of an insurable interest for a life policy is the time when the contract is entered into, not the time

19  Ibid, art. 10(2). 20  For an endowment or an annuity policy, if the life insured is alive at a specified date, he can claim for payment against the insurer. For a whole life insurance, where the life insured dies, the beneficiary may claim the insurance proceeds. 21  The Insurance Law, art. 12. 22  Ibid, art. 12(5). 23  This is a new sub-article which was added to the Insurance Law 2009.

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when the insured event occurs. The legal consequence of a life policy without an insurable interest is that the policy is void. 20.6 Good faith in life insurance The principle of utmost good faith must be complied with by both proposer and insurer for all types of insurance contract. The proposer’s duty of good faith has been examined in depth in Chapter 8; the insurer’s duty of good faith has been considered in detail in Chapter 9. 20.6.1 The proposer’s duty of disclosure At the time of the contract, the proposer is obliged to truthfully answer the questions raised by the insurer in the proposal form.24 The insurer is entitled to rescind the contract where the proposer has failed to comply with the duty of disclosure intentionally or by gross negligence and the undisclosed or misrepresented information is material to the risks in the sense that the information or facts would decisively influence the insurer’s decision on whether it will take the risk and, if so, what premium would be charged.25 (a) Material information in life insurance (I) THE AGE OF THE LIFE INSURED In life insurance, the life insured’s age is material information since it affects his life expectancy, and it directly influences the insurer’s decision either in accepting the risk or in determining the premium. So the Insurance Law requires the proposer to disclose the true age of the insured.26 Questions in relation to the age of the life insured are always raised in proposal forms in life insurance. Also, in some insurance policies, the age of the life insured is strictly restricted when the policy is effected. For instance, the endowment life policy of Ping An Insurance Company of China requires that the life insured’s age should be less than 55 when the contract is concluded.27 The accident policy of China Life Insurance Company only covers a person whose age is 28 to 65.28 If the life insured is older than the age limit when the contract is concluded, the insurer will not insure him.29 So when making a life insurance contract, the proposer must tell the insurer the true age of the life insured. A failure to do so may result in two consequences according to the Insurance Law. Where the declared age of the life insured is not true, but his true

24  The Insurance Law, art. 16(1). 25  Ibid, art. 16(2). 26  Ibid, art. 32. 27  Endowment life policy of Ping An Insurance Company of China, 2013 version. 28  The accident policy of China Life Insurance Company, 2013 version. 29  It does not mean that the insurance coverage will cease when the insured reaches 65. The age of the insured is limited only at the time when the contract is concluded, i.e. if an insured is within the age limit set up by the policy when the contract is concluded, for example 50 years old, the cover will continue when he reaches 65 or older. Insurers do not like to insure old people, because the older the age, the higher the risk, so insurers set up a limit on the insured’s age at the time when the contract is concluded.

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age is within the age limitation set forth in the contract, the Insurance Law does not give the insurer the right to rescind the contract, but allows it to adjust the premium once the true age is known.30 Where the age of the insured as declared by the insured is not true and his true age is beyond the age limit set forth in the contract, the insurer is entitled to rescind the contract on the ground of misstatement of the age.31 For example, a company took out industrial life insurance for its employees, and a worker was declared to be aged 62, but his true age was 64 when the contract was concluded. The insurer may not rescind the contract; instead, it may adjust the premium paid to make up the premium amount corresponding to the insured’s true age. However, if the declared age of the insured was 62, and he was in fact 66, older than the top limit of age of 65, the insurer would then have the right to rescind the contract. However, the insurer may not rescind the contract after two years from the date of the conclusion of the contract by virtue of the incontestability clause.32 (II) THE HEALTH STATUS AND MEDICAL HISTORY OF THE LIFE INSURED The life insured’s state of health and his medical history are clearly material facts for a life insurance policy, since they may have an impact on life expectancy and will help the insurer to estimate the risk and decide whether it will accept the risk and on what terms and premium rate. If the insured has ever had a disease or is suffering from any disease when the contract is concluded, the proposer should disclose such facts to the insurer. In practice, questions about the insured’s state of health are always asked in the proposal form. In some life insurance policies, it is clearly stipulated that people who are suffering from serious disease may not effect a life policy. In A Beneficiary v Guangzhou Insurance Company,33 the insured effected a life policy. The insured failed to disclose to the insurer the fact that he had suffered from heart disease which caused him to stay in hospital for treatment where he had a pacemaker installed in his heart four years before he effected the policy. When the insured died from heart disease, the insurer refused liability on the grounds of the non-disclosure of the insured’s heart disease, because the proposal form clearly stated that people who were suffering from a serious heart problem could not effect such a policy. The beneficiary argued that the insured had suffered from the heart disease four years before he effected the policy and he had recovered and was able to work when he took out the insurance, so the insured’s heart problem should not be regarded as a serious problem, and the insurer should be liable to pay the insurance money. The insurer contended that the insured had had a pacemaker installed, which was regarded as indicating a serious heart disease. The point at issue was what was a serious heart disease? The medical expert’s opinion was that the insured’s own heart could not start normally and was in need of a pacemaker, and that such a degree of heart problem should be regarded as a serious disease. So the court gave judgment for the insurer.

30  The Insurance Law, art. 32(2) and (3). 31  Ibid, art. 32(1). 32  Ibid, art. 16(3). The doctrine of incontestability is discussed in detail in Chapter 8. 33  See W. F. Hu, The Guidance on Claim Settlement (Procuratorate Press of China 1993) p. 51.

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In order that the proposer can understand what health problems need to be disclosed, in all life insurance proposal forms a list of diseases is provided, and the proposer must disclose if the life insured has any of the diseases.34 The status of the health of the life insured’s close relatives is not required to be disclosed in Chinese law, but it is regarded as a material fact in English law.35 (b) Medical examination and the proposer’s duty of disclosure In life insurance, the life insured is often required to have a medical examination after the proposer has submitted the proposal form and before the insurer makes the decision on whether it will take the risk and, if so, on what terms and premium rate. In this situation, an issue often arises, that is, whether medical examination may replace the proposer’s duty of disclosure of material facts in terms of the insured’s health condition.36 The Insurance Law does not mention this point, but many courts have the view that medical examination of the life insured cannot be a substitute for the insured’s duty of disclosure of the life insured’s health condition. The High People’s Court (HPC) of Beijing and the HPCs of Guangdong Province and Shandong Province have the same view that the proposer’s duty of disclosure cannot be replaced by medical examination by the medical agents authorised by the insurers.37 In judicial practice, some courts have held that if the proposer withholds material facts about the insured’s health condition which are not revealed by the medical examination, it is deemed to be a non-disclosure.38 The question of whether medical examination arranged by the insurer can replace the insured’s duty of disclosure has been answered by the SPC Interpretation III

34  For example, in the life insurance proposal form of China Ping An Insurance Company Ltd, a question is asked by the insurer as to whether or not the life insured has had the following diseases within the past five years: (1) hypertension, heart disease, blood vessel disease, and cardiovascular disease; (2) epilepsy, mental disease, brain disease; (3) tuberculosis, asthma, bronchitis, pneumonia; (4) digestive inflammation, ulcer and bleeding, pancreatitis, hepatitis, fatty liver, hepatocirrhosis; (5) nephrosis, venereal disease, disease of the genito-urinary system; (6) diabetes, thyroid disease, gout, metabolic disease; (7) cataract, glaucoma, retinal and optical disease; (8) anaemia, haemophilia, spleen disease; (9) vertebra or spinal cord disease, rheumatic disease, muscle, skeleton, joint disease; (10) cancer, tumour, cyst; (11) AIDS; (12) stone (calculus), poisoning. 35 See Holmes v Scottish Legal Life Assurance Society (1932) 48 TLR 306. 36 This issue was discussed in a previous article. See Zhen Jing and Ming Zhong, “Limitations on the Insured’s Duty of Disclosure: A Comparative Analysis with English, Australian and German Laws” (2015) 26(7) ICCLR 224, at 233. 37 The Guidance of Beijing City High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2005, art. 9; the Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011, art. 5; and the Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011, art. 6. 38 In Mr Liu v Life Insurance Co., Mr Liu applied for a life policy with critical illness cover, and had a medical examination in the hospital (which was nominated by the insurer). After the examination the insurer effected the policy in August 2006. In July 2008, Mr Liu was diagnosed with coronary heart disease, hypertension, hyperlipidemia and fatty liver, and was treated in hospital. The insurer rejected Liu’s claim for medical expenses on the ground of non-disclosure of the fact that Liu was treated in hospital for hypertriglyceridemia and suspected hypertension in January 2006, but he had answered “no” to the question “Have you had any medical treatments in hospital in the last 5 years” in the proposal form. Liu argued that he had taken the medical examination arranged by the insurer before the contract was entered into, so he had no duty of disclosure on this. The court held that medical examination cannot replace the insured’s duty of disclosure. (This case was decided by the People’s Court of Xingqing District, Yinchuan City, Ningxia Autonomous Region, Civil Court Judgment (2009) No. 312, and reported in the Annual Report of  Typical Insurance Cases (Law Press China 2010) vol. 2, p. 15.)

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2015.39 Article 5 of Interpretation III states: “When entering into an insurance contract, where the life insured is requested to have a medical examination in a medical institution designated by the insurer, if a party claims that the proposer’s duty of disclosure is exempted by the medical examination, the People’s Courts shall not uphold such a claim.” This provision indicates that even if the life insured has a medical examination which may show the health problems (if any), the proposer still owes the duty of disclosure, and the medical examination cannot replace the proposer’s duty. The proposer cannot argue that the medical examination report may tell the insurer the physical condition of the life insured, so that it is not necessary for him to disclose the fact to the insurer about the health status of the life insured. However, the scope of the proposer’s duty of disclosure is limited to the questions asked by the insurer. Article 5 of Interpretation III must be read with art. 16 of the Insurance Law. Article 16 of the Insurance Law requires the insurer to make inquiries about the status of the insured subject matter or the insured when entering into an insurance contract, and the proposer must make a truthful disclosure thereof. To satisfy these two articles, it is submitted that in additional to the insured’s medical examination, the proposer still needs to truthfully answer the insurer’s questions about the life insured’s health status. On the other hand, art. 5(2) of the SPC Interpretation III further provides that “where the insurer is aware of the result of the life insured’s medical examination, but still demands rescission of the contract on the ground that the proposer failed to disclose the relevant facts, the People’s Courts shall not uphold such a demand.” This means that where the insurer knew the fact which was revealed by the medical examination, but still entered into the contract, if it wants to rescind the contract on the grounds of the proposer’s non-disclosure of the relevant fact, the People’s Court will not uphold the insurer’s demand. This provision is in fact an instance for art. 16(6) of the Insurance Law, which provides that “where the insurer is aware of the information that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payments or paying insurance benefits.”40 (c) Incontestability clauses Most life insurance policies include an incontestability clause, e.g. “this policy is incontestable after two years from the date of issue.” It is said that the most basic and important clause in a life insurance policy is the incontestability clause.41 The purpose of such a clause is to restrict the insurer to a definite period of time within which to discover any non-disclosure or misrepresentation made by the insured at the time of applying for the insurance and to take appropriate action either to rescind

39  The SPC Interpretation III, art. 5. 40 This is similar to the German law, under which an insurer does not have the right to rescind the contract if the insurer was aware of the undisclosed risk factors or the incorrectness of the disclosure (s. 19(5) of the German Insurance Contract Act 2008). For more on this point, see Zhen Jing and Ling Zhu, “Restrictions on the insurer’s defence of non-disclosure or misrepresentation in Chinese Insurance Law” (2015) 26 Ins LJ 145. 41  G. Salzman, “The incontestable clause in life insurance policies” (1969) Ins LJ 142.

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the contract, amend the terms of contract or raise the premium. If there is no time limit for the insurer to excise its right of rescission, the insurer may abuse his right. The doctrine of incontestability was introduced into the Insurance Law in 2009.42 In the case of an intentional or grossly negligent and material non-disclosure or misrepresentation by the proposer, the insurer is entitled to rescind the contract.43 The insurer’s right of rescission must be exercised within 30 days after the insurer becomes aware of the cause for rescission or within two years from the time of conclusion of the contract. After these time limits have lapsed, the insurer is barred from contesting the validity of the contract on the ground of non-disclosure or misrepresentation.44 The incontestability provision plays an active role in preventing the insurer from abusing his right to rescind contracts and in protecting the insured or his beneficiaries. More detailed discussion on the doctrine of incontestability can be seen in Chapter 8. 20.6.2 The insurer’s duty of explanation of the policy terms A unique feature of the Insurance Law is that the insurer is obliged to explain the content of the insurance contract, and to clearly explain exemption clauses to the insured, at the time of concluding the contract. This obligation is provided in art. 17 of the Insurance Law which reads: “Where standard clauses provided by the insurer are adopted for concluding an insurance contract, the standard clauses shall be attached to the proposal form, and the insurer shall explain the contents of the contract to the proposer. When an insurance contract is concluded, the insurer shall make reference to clauses which exempt it of its liabilities on the proposal form, the insurance policy, or other insurance certificate that are so conspicuous as to draw the proposer’s attention, and make specific and clear explanations thereof to the proposer orally or in writing. Otherwise such clauses shall not take effect.”

The insurer’s pre-contract duty of explanation of the insurance contract consists of three aspects. First, the insurer must supply the insured with a copy of the standard form contract and explain the clauses to the insured. Second, the insurer must make reference to the clauses which except or limit the insurer’s liabilities in the contract or other insurance documents to draw the attention of the insured. Third, the insurer must clearly explain to the insured the content and the meaning of the exemption clauses so that a reasonable person in a similar position to the insured would understand the meaning of the exception clauses and the legal consequences of a breach of the exception clauses. These requirements must be complied with by the insurer at the time of the contract. If any of these obligations are not performed,

42  For more detailed discussion about the doctrine of incontestability see Z. Jing and M. Zhong, “Incontestability Provisions in Insurance Law and Policies” [2016] 4 JBL 253. In this paper, the author discussed incontestability from the perspective of law and practice, and compared several countries’ laws relating to the doctrine of incontestability, such as England, Australia, New Zealand, China, Germany, Macao, Taiwan and the US. See also Chapter 8, “The insured’s duty of disclosure and representations.” 43 The Insurance Law, art. 16(1) and (2). For more discussion on the insured’s pre-contract duty of disclosure, see Zhen Jing, “Insured’s duty of disclosure and test of materiality in marine and non-marine insurance laws in China” [2006] JBL 681. 44  The Insurance Law, art. 16(3).

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the court shall determine that the insurer has failed to perform the pre-contractual duty of explanation, and thus the exemption clauses are ineffective. The detailed examination of the insurer’s duty of explanation can been seen in Chapter 9. 20.7 Formation of a life insurance contract General rules relating to formation of an insurance contract are examined in Chapter 4. Certainly, these general rules govern the formation of a life insurance contract as well. In addition, some special steps are adopted for making a life insurance contract. These special steps are considered at this stage. 20.7.1 Special steps for formation of a life insurance contract The procedure for the formation of a life insurance contract is more complex than that for the formation of a contract of property insurance. The common practice in making a life insurance contract in China’s insurance market is that the marketing staff or the agents of the insurance companies introduce insurance products to the customers and invite them to make an application and fill in the proposal form.45 Usually, the life insured is required to have a medical examination before the insurer makes the decision on whether it will accept the risk and what premium it will charge. In practice, the insurer usually requires the proposer to pay part of the premium when the proposer submits his proposal form. Insurance agents, especially individual agents, play a crucial role in selling life insurance products and concluding life insurance contracts. There are three types of insurance agents in China;46 they are professional insurance agents,47 part-time agents48 and individual agents.49 It is a very common practice for insurers to employ some individual agents to conduct life insurance business. The agents look after their customers from the stage of the formation of an insurance contract to the stage

45  Usually the marketing staff or the agents help the customers to complete the proposal form and ask the proposer to sign the form and then take the completed form to the insurer for consideration. 46  Article 117 of the Insurance Law provides: “An insurance agent means an entity or an individual who is entrusted by and charges commissions from an insurer to transact insurance business on behalf of the insurer within the scope of the delegated authority. Insurance agencies include professional agencies specialising in insurance agency business and side-line insurance (or part-time) agencies who engage in insurance agency as a side-line business.” 47  Professional agents are agency entities, established by the approval of the CIRC, and they must obtain an insurance agency business licence issued by the CIRC (Insurance Law, art. 119). They are entrusted by and charge commissions to an insurer and undertake insurance agency business within the scope of the insurer’s authority. 48 They are also known as “side-line” insurance agencies which refer to entities who have their own business but delegate insurance business as side-line business, just as air lines, railway stations and travel agents delegate personal accident insurance for the insurance companies with their authorities and banks delegate bank insurance. See also the Interim Measures for Side-line Agency (CIRC [2000], No. 144). 49  Individual agents refer to the individuals who are entrusted by and charge commissions from the insurers and do insurance agency business within the scope authorised by the insurer. According to art. 125 of the Insurance Law: “An individual insurance agent, in conducting life insurance agency business, shall not accept entrustment of more than two insurers concurrently.”

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of claim of insurance money (if there is any claim). Some special steps have been adopted for making a life insurance contract in many insurance companies.50 First step (invitation to treat): the individual insurance agents contact and visit some insurance consumers, to introduce and explain the insurance products of the company and the terms of the policies to them. If a consumer is interested in any of the insurance products, he will fill in and sign a “Confirmation Form for Electronic Proposal” by which the proposer confirms that he agrees that the insurer or its agent may complete an electronic proposal form on his behalf according to the information provided in the Confirmation Form.51 There is also a declaration made by the proposer in the Confirmation Form that the insurer’s agent explained the policy terms to him and he has understood them. To explain policy terms is a legal duty imposed on the insurer or its agent before or at the time of contract.52 Second step (making an offer by completing a proposal form): upon the completion of the Confirmation Form by the proposer, the agent brings the Form back to the insurance company and the insurer or the agent will complete an Electronic Proposal Form, based on the information provided in the Confirmation Form, on behalf of the proposer through the company’s internal electronic system. Once the Electronic Proposal Form is completed, the proposer is requested to pay part of the premium.53 Third step (having a medical examination): the insurer may request the life insured to have a medical examination.54 All lives insured who are 45 years old or over are required to have a medical examination. Those who are under 45 years old are usually not asked to do so. The insurer must notify, within five days after receiving the proposal, the life insured who needs a medical examination to go through the medical examination.55 Upon receiving the life insured’s medical examination report and the information provided in the proposal form, the insurer will decide on whether or not to accept the insurance and, if so, on what terms and at what premium rate. Fourth step (notifying the acceptance): if the insurer agrees to accept the insurance, it will inform the proposer by sending messages to the proposer or giving him a call, or notifying him through the agent.56 The contract is then concluded.

50 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 69. 51  Some companies produced a “Confirmation Form for Electronic Proposal,” e.g. Ping An Insurance Company of China, for the proposer to fill in which includes very brief information and a declaration by the proposer to declare that the insurer’s employee or the individual agent has explained the policy terms to him and then confirmed that he agrees that the employee or the agent may fill the proposal form on behalf of the proposer through the company’s computer. 52  The Insurance Law, art. 17. 53 That is the common practice in China, that when the proposer submits the proposal, some of the premium should be paid. The method of money transfer from bank to bank is usually used for the payment of the premium. 54  The insurer prepares a medical examination form, and asks the life insured to have an examination in a specified hospital. When the examination is over, the hospital puts the results into an envelope and seals it and sends it to the insurer. 55  CIRC Regulation for Life Insurance Business Service (2010) No. 4, art. 11(1). 56  If the proposer does not have a mobile phone, the insurer calls his home phone. At the same time, the individual agent will be informed as well that the insurer has agreed to accept the insurance.

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Fifth step (issuing a policy): the insurer will issue a life policy to the proposer at the time when the contract is concluded or afterwards, and deliver the policy to the proposer. There is a 15-day time limit for making a life insurance contract. For a simple case where an insured is not asked to have a medical examination, the whole process takes about 15 days from the time when the proposer makes the application to the time when the insurer makes its decision on the application.57 In the case where the life insured is required to have a medical examination, upon receiving the medical examination report or the survival investigation report of the life insured, the insurer must notify the proposer of its decision on whether or not it agrees to take on the insurance within 15 days. If the insurer agrees to take on the insurance, it shall issue the policy and deliver it to the proposer within the 15-day period.58 20.7.2 Loss which occurs during the gap between the application and the acceptance Between offer and acceptance, there is usually a gap of insurance coverage, especially for life insurance, because the process of forming a life insurance contract is more complex than that for a property insurance contract. In most cases, the life insured is required to have a medical examination, and it takes a longer time for the insurer to examine the proposal. This raises an issue in that if the proposer is required to pay the premium at the time of submitting the proposal, is the insurer liable for the loss which occurs during the period when the insurer is checking the proposal? It is a common practice in China that the insurer asks the proposer to pay part of the premium before it has accepted the proposal. Although the proposer has submitted the proposal and paid the premium, there is no insurance cover during this period. This is inconsistent with the Insurance Law59 and may cause injustice for the proposer. The following case illustrates the problem.60 Mr Ma submitted a proposal form on 17 March 2010 for a life insurance policy, and paid the premium of ¥4,000 on the same day as requested by the insurer. On 23, 25 and 26 March, the life insured was asked to have medical examinations and provide medical reports which would help the insurer to decide whether or not it would accept the proposer’s application for insurance. On 27 March, the insured was injured by a car when he was riding a motorcycle on the road. He was taken to hospital but died on 12 April 2010. The beneficiaries of the life insured claimed against the insurer. The insurer rejected the claim and argued that the insurer had not accepted the proposal when the accident occurred, and there was no contract, so it was not liable. The beneficiaries sued. The court held that the formation of an insurance contract is a process which is achieved by offer and acceptance. The contract is concluded when the insurer’s acceptance

57  CIRC Regulation for Life Insurance Business Service (2010) No. 4, art. 11(2). 58  Ibid, art. 12. 59  According to arts 13 and 14 of the Insurance Law, the proposer is required to pay the premium after the conclusion of the contract. 60 This case was cited by Yonglong Jin, “The Insurance Contract is concluded when the insurer accepts the proposer’s offer,” published on China Insurance’s website (China Insurance News Paper) on 11 October 2012, accessed 20 December 2015.

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becomes effective.61 In this case the insurance contract had not been concluded at the time of the occurrence of the accident although the proposer had paid some of the premium, because the insurer had not accepted the application, so the insured was not covered by the insurance. This is unfair for the proposer who is asked to pay the premium before the contract is formed but can get nothing from the insurer if the loss occurs before a contract is concluded. This practice is inconsistent with the law. Article 14 of the Insurance Law clearly stipulates that upon the conclusion of the contract, the proposer shall pay the premium in accordance with the agreement and the insurer shall begin to assume liability from the agreed time.62 It is suggested that in order to avoid disputes between the parties and unfairness to the proposer, the insurer should not be allowed to ask the proposer to pay the premium before the contract is concluded. Asking for pre-payment of the premium may cause misunderstanding by the proposer that the insurer has accepted or will accept the application. Now such a case can be dealt with following the provisions in the SPC Interpretation II 2013.63 Article 4 of Interpretation II provides: “Where the insurer has received the proposal form and accepted the premium paid by the proposer, if the insured event occurs before the insurer has made the decision on whether it will accept the insurance application, where the insured or the beneficiary claims for insurance money the court shall uphold the claim if the insurance proposal meets the underwriting conditions. However, the insurer shall not be liable if the insurance proposal does not meet the underwriting conditions, but shall return the premium paid by the proposer.”64 It is submitted that this is an ideal solution for the problem where the insured event occurs between offer and acceptance. It is suggested that when the proposer submits the proposal form and part of the premium, the insurer or its agent must explain this rule to the proposer.65 By following the SPC’s rules, today it is common practice that if the insured event occurs in the period between the time when the proposer has submitted the proposal with part of the premium and the time when the contract is concluded, the consequences are as follows: (1) if the life insured’s health condition

61  Both the Insurance Law (art. 13) and the Contract Law (art. 25) make it clear that a contract is formed when the acceptance becomes valid. 62 The Insurance Law, art. 14, indicates that the payment of the premium is the proposer’s contractual duty which should be performed after the conclusion of the contract. Certainly, in some situations the parties can agree otherwise. 63 The SPC Interpretation II 2013 clarifies a number of issues relating to insurable interest, duty of disclosure and the insurer’s obligations to explain insurance clauses. 64  Ibid, art. 4. 65  As to this point, the practice in the UK is that the insurer issues interim protection pending the acceptance or rejection of a proposal by the directors or others. The interim cover is provided subject to appropriate monetary limits. In industrial assurance business, it is common practice for the collector or agent who secures a proposal to require payment of a first premium, to deliver a premium receipt book and to continue to collect premiums during such time as the proposal is under consideration by the head office. The premium receipt book usually contains a notice to the effect that it is issued subject to the acceptance or rejection of the proposal, and that the company does not accept liability in the event of a claim until a policy is issued. In the absence of such a notice being brought to the attention of the proposer, it might be contended that the receipt of premiums provided a temporary cover pending the consideration of the proposal but the general principles of life insurance are against any such inference being drawn from the mere receipt of premium. See MacGillivray on Insurance Law (10th edn, 2002) para. 4-2.

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meets the requirement of the insurance, the insurance contract is deemed concluded, and the insurer should be liable for the loss which occurs between the application and the acceptance; (2) if the insured’s health condition does not satisfy the requirement of the insurance, the contract is not deemed to be concluded, and the insurer is not liable for the loss which occurs between the application and the acceptance. 20.7.3 Cooling-off period A cooling-off period (also known as “hesitation period” in China) is usually adopted in life insurance, which refers to a short period of about 10 days beginning from the time when the proposer receives the policy issued by the insurer, within which the proposer may rescind the contract if he wishes to do so, and the insurer shall return all the premium the proposer has paid after deducting some administrative expenses.66 The CIRC published its “Notice on Regulating Life Insurance Business Related Issues” in 2011,67 and art. 2 concerns the “cooling-off period”: (1) “Cooling-off period” is a 10-day period beginning from the date when the proposer receives the insurance policy and signs the receipt for the policy. The proposer’s right during the cooling-off period should be specified in the insurance policy or an insurance clause and the right should be explained by the marketing staff of the insurance company to the proposer or the insured when they sell the insurance products to them or when the insurer or its agent delivers the policy to the proposer or the insured. (2) Where the proposer rescinds the contract within the cooling-off period, the insurer shall, after deducting fees of not more than ¥10, refund all premiums to the proposer. For investment life insurance the insurer shall deduct the fees according to relevant provisions of “The Administrative Measures for the Information Disclosure of New-Type Personal Insurance Products.”68 The reasons that the proposer is allowed to rescind the contract are that on the one hand a life insurance is usually a long-term policy, and the proposer needs to pay premiums for many years, so he needs time to think about whether he is really willing to effect the policy and whether he is able to pay the premiums for so many years. On the other hand, the clauses of a life insurance policy are very complex, and the proposer or the insured may need time to read the policy after he has received it and see whether he has effected an appropriate policy. On 14 October 2015, the Legal Affairs Office of the State Council published the draft of the proposed amendment of the Insurance Law and a Notice inviting comments on the proposed amendment of the Insurance Law on its website.69 In the proposed amendment, a new article (art. 48) is introduced which reads: “A life insurance contract with an insurance period of more than one year shall provide a cooling-off period. The proposer has the right to rescind the contract within the

66  See CIRC “Notice on Regulation Life Insurance Business Related Issues” [2000] No. 133, art. 3. 67  See CIRC “Notice on Regulation Life Insurance Business Related Issues” [2011] No. 36, art. 2. 68  See CIRC “The Administrative Measures for the Information Disclosure of New-Type Personal Insurance Products” 2009, art. 17. 69  accessed in May 2016.

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period, and the insurer shall refund the whole premium paid. The cooling-off period shall not be less than 20 days as from the date when the proposer has received the insurance policy.” 20.8 The life insured’s consent as a condition precedent for the validity of a life policy 20.8.1 When and how the consent can be made (a) Statutory rules and practice By virtue of art. 34 of the Insurance Law, an insurance contract with death as the condition for payment of insurance money is void without the insured’s consent and his approval for the sum insured. The article makes it clear that the consent of the life insured is a condition precedent for the validity of such a life insurance. The purpose of art. 34 is to provide further protection for the life insured from moral hazard. For a valid death policy, the proposer must demonstrate he not only has an insurable interest in the life insured, but has also obtained the life insured’s consent to the insurance and the amount insured. The approach of consent as an additional requirement is also adopted by some other jurisdictions. In New York law, for example, in addition to demonstrating a lawful and substantial economic interest in the life insured, the policyholder must also show the life insured’s consent to the insurance.70 Under German law, consent of the life insured is necessary before insurance can be taken out on anyone’s life for the value of more than it would cost to bury that person.71 It has been convincingly argued by experts that the consent of the life insured should be a condition precedent to the validity of a life policy.72 Such consent would clearly diminish the risk of murder. If a person agrees that a third party may take out a life policy on his life, he is at least put on notice that a motive for murder has been created. It is important for the life insured to know that insurance on his life does exist. Such consent also gives the life insured an opportunity to discuss the

70  In New York, for example, even if the policyholder can establish a “lawful and substantial economic interest in the continued life” of the life insured, it is compulsory that the life insured (provided that he is of lawful age and is competent to contract) must give written consent at the time or before the contract is made. See s. 146(3) of New York Insurance Law. The requirement for consent is waived in the following case: a person who takes out insurance on the life of his spouse; a person who has an insurable interest in the life of a minor under the age of fourteen years and six months or a person upon whom the minor is dependent for support and maintenance, up to a maximum amount of $25,000; and a person who has entered a group life insurance, group or blanket accident and health insurance, or family insurance (New York Insurance Act, s. 3205(3)(c)). 71  Section 150 of the German Insurance Contract Act 2008 provides: (1) Life insurance may be taken out for the policyholder or for another. (2) Where the life insurance is taken out against the death of another person and the agreed benefit exceeds normal funeral costs, the written agreement of the other person shall be necessary for the contract to be effective; this shall not apply in the case of collective life insurances in company pension schemes. If the other person has no legal capacity to act or only limited capacity to act, or if a custodian has been appointed and the policyholder is entitled to represent that person’s interests, he may not represent the other person when giving his consent thereto. 72 R. Merkin, ‘Gambling by insurance – A study of the Life Assurance Act 1994’ (1980) 9 Anglo-American Law Review 339.

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desirability of the policy with the proposer. For example, in the case of a creditor’s policy on his debtor, whether an alternative form of security is preferable.73 The issue of how to prove the life insured’s consent has been left open. In China, the 1995 and 2002 versions of the Insurance Law required written consent,74 while the requirement of written consent is deleted in the 2009 version.75 It is not clear why the 2009 version deletes the requirement for written consent. In China the current practice is that both the proposer and the life insured are required to sign the declaration at the end of the proposal form.76 The signature of the life insured can be an evidence of his written consent. However, it often happened that the life insured did not sign the proposal form, and other persons did it on his behalf. First, it often happened that the proposer signed the proposal form for himself and also signed it on behalf of the life insured. Second, the insurance agent often signed the form on behalf of the life insured where the agent could not reach the life insured but wanted to finish the proposal form in hand for the sake of a commission.77 Third, for a group policy, the manager of a factory or a company signed the form on behalf of all his employees to be insured. In any of the above situations, the insurer may refuse liability on the ground that the proposal form was not signed by the life insured, and thus the policy is void. The insurer thus appears to be in an “all to gain” and “nothing to lose” position. This is unfair to the policyholder. It is suggested that consent “in writing” is still necessary and should be retained in the Insurance Law. Because the law does not mention when and how the life insured’s consent must be obtained, it is thus unclear whether the insured’s written consent must be obtained or his oral consent is sufficient,78 and whether the insured’s consent must be obtained before or after the contract is entered into. (b) SPC Interpretation III 2015 The SPC has attempted to clarify the ambiguity of art. 34 of the Insurance Law on this matter and provides rules in art. 1 of the Interpretation III 2015, which states that “where a party enters into a contract with death as the condition for 73 Ibid. 74  Article 55 of the Insurance Law 1995 and art. 56 of the Insurance Law 2002. “Where the insurance contract is a contract under which the death of the life insured is a condition for the payment of the insurance money, the insurance contract shall be void without obtaining the written consent of the life insured in terms of the contract itself and the amount insured.” 75  The Insurance Law, art. 34. 76 The Declaration usually states: “I declare that the above is true to the best of my knowledge and belief, and hereby agree to effect the policy. You have explained to me the clauses of the policy, particularly the exclusion clauses. I agree with the content of clauses and specially agreed clauses.” 77  A Chinese case can illustrate this. In Mr Wang v Pingan Insurance Company, Mr Wang took out a life policy on his uncle (Wang could show the supporting relationship with his uncle, so an insurable interest existed then) in 2003. His uncle did not sign the proposal form. The insurance agent who handled the proposal form signed the declaration on behalf of his uncle. The uncle died in 2004. Wang claimed, but was turned down by the insurer due to the fact that his uncle did not sign the declaration of the proposal form (as evidence of consent), thus the policy was void. (See Li Zongjian, Insurance Case Book (China Modern Economic Publishing House 2007) pp. 37–39.) 78  In the 2002 version of the Insurance Law, art. 56 requires the proposer to obtain the life insured’s written consent for making a life insurance contract on him and his approval on the insured amount. For more on this point, see Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” (2014) JBL 346.

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the payment of insurance money, in accordance with the provision of art. 34 of the Insurance Law, ‘the insured’s consent and approval of the insured amount’ can be made in writing, orally or in any other form when the contract is entered into or can be ratified after conclusion of the contract.” Article 1 of the SPC Interpretation III has now answered the questions of when and how the life insured’s consent can be given. The consent can be given in any form when the contract is entered into or the ratification of the consent can be made after conclusion of the contract. However, as mentioned above, in practice, it is not uncommon that the declaration made by an insured to agree that the proposer may effect the life policy on the insured’s life at the end of the proposal form is not signed by the life insured himself, but by other persons, such as his spouse, parents, brothers or sisters, or insurance agent, etc. So disputes often occur as to the insured’s consent and the validity of the contract and the insured amount. To reduce the disputes in this aspect, the SPC Interpretation III sets out a number of circumstances under which the life insured is deemed to have agreed the insurance contract to be effected on his life without his personal signature. Article 1 of the Interpretation III goes further to provide that the life insured shall be deemed to give consent to the proposer to take out the life insurance on him and confirm the insured amount under any of the following circumstances: (1) The life insured is aware of the fact that someone else has signed insurance documents (proposal form and policy) on his behalf in terms of his consent, but gives no dissent. (2) The life insured consented to the beneficiary designated by the proposer. (3) Any other circumstances under which there is sufficient evidence to prove that the life insured gives consent to the proposer to take out insurance on him. The SPC Interpretation III requires the courts, when hearing life insurance cases, to check carefully whether the proposer has an insurable interest at the time of conclusion of the contract, and whether the life insured’s consent and approval of the insured amount have been obtained.79 For group insurance, it is practically inconvenient to put all the lives insured’s signatures into the group policy. Requiring all the persons to sign a policy may cause problems. The case of Mrs Chen v Ping An Life Insurance Company Shanghai Branch80 illustrates this. The Office of People’s Affairs of Caolu Town in Shanghai effected a group accident policy for its 14 staff members (as a kind of benefit for them) in August 2008. Mr Chen was one of the members insured and died in an accident in September 2009. Mrs Chen claimed but was refused by the insurer on the ground that Mr Chen did not sign the proposal form. The court held that the policy was void because no consent of the life insured was obtained. It is submitted that it is inconvenient and unnecessary for a group policy to have all the insureds’ signatures on the form. On the other hand, a group life policy effected by an employer is for the benefit of his employees, not for the employer’s own benefit. The death of his

79  The SPC Interpretation III, art. 3. 80  Report of Civil Department of the Second Middle Court of Shanghai (2009) No. 408.

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employee in a group policy is to the employer’s detriment but not to his benefit. There is no motive at all under such a group policy for the employer to murder any employee. The purpose of the requirement of the life insured’s consent for a death policy is to protect the life insured from being murdered, and there is no need to get his consent for group policies of this type. It is suggested that, for a group policy, the English approach may be followed. If the class or description of the lives insured is stated in the policy with sufficient particularity to establish the identity of all persons who at any given time are entitled to benefit under the policy, there is no need to get all lives insured’s signatures (as consent) to such a group policy.81 (c) Insurer’s duty not to underwrite a death policy without the life insured’s consent The Insurance Law provides rules for prohibiting a death policy from being effected without the life insured’s consent, and the effect of not following the rule is that the contract is void. The consequence of a void insurance contract is usually that the insurer returns the premium paid by the proposer.82 However, it is submitted that in some situations, the return of the premium for a void contract does not make sense from the proposer’s or the beneficiary’s perspective, as they expect that they will receive insurance payments when the insured event occurs. So it is suggested that the insurer should have a duty not to issue a death policy without the written consent of the life insured. The wording in art. 34 of the Insurance Law “the insurance contract shall be void without obtaining the consent of the life insured” should be replaced by “the insurer shall not underwrite such risk without obtaining the written consent of the life insured.” The implication of this proposed reform is that if the insurer has issued such a policy, he should not be allowed to refuse a claim for insurance money on the ground that the contract is void without obtaining the consent of the life insured. 20.8.2 Issues on ratification of the consent By virtue of art. 1 of the SPC Interpretation III, the life insured’s consent can be ratified after the conclusion of the contract. It seems that this provision is inconsistent with relevant provisions of the Insurance Law. Article 1 intends to clarify the ambiguity of art. 34 of the Insurance Law, which makes the insured’s consent a condition precedent to the validity of the contract. According to art. 1 of the Interpretation, the insured’s consent can be obtained at the time of contract, or a post-contract

81  This is the English approach to bypass the requirement by s. 2 of the LAA of inserting the persons’ (the lives insured/beneficiaries) names into the policy. Section 50 of the Insurance Companies Amendment Act 1973 (UK) provides that s. 2 of the LAA does not invalidate a policy for the benefit of unnamed persons from time to time falling within a specified class or description if the class or description is stated in the policy with sufficient particularity to establish the identity of all persons who at any given time are entitled to benefit under the policy. In New York, under New York Insurance Act s. 3205(3)(c), the compulsory requirement for consent of the life insured is waived in the case of a person who has entered a group life insurance. Section 3205(3)(c) provides that the requirement for consent is waived in the following cases: a person who takes out insurance on the life of his spouse; a person who has an insurable interest in the life of a minor under the age of 14 years and 6 months, or a person upon whom the minor is dependent for support and maintenance, up to a maximum amount of $25,000; and a person who has entered a group life insurance, group or blanket accident and health insurance, or family insurance. 82  See Chapter 7 for more discussion on the consequences of a void insurance contract.

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ratification of the consent is sufficient for the validity of the contract. However, by art. 31 of the Insurance Law, the life insured’s consent is also an alternative ground for establishing insurable interest which is supported by neither natural affection nor economic dependency but by consent only.83 To create an insurable interest by the insured’s consent, the consent must be obtained at the time of contract; the Law does not say that ratification would be satisfactory, because art. 31 of the Insurance Law makes a life policy void where the proposer has no insurable interest at the time when the contract is concluded.84 In addition, art. 12 of the Insurance Law provides that in life insurance, the proposer must possess an interest in the life insured at the time of contract.85 Obviously, a question may arise here, namely, does the life insured’s post-contract ratification of his consent make the policy valid if the relevant provisions are read together? Let us make a hypothetical case to explain the situation. Mark effected a death policy on his girlfriend, Kate.86 Mark signed the proposal form as the proposer and designated himself as the beneficiary and also signed it on behalf of Kate as the life insured. After conclusion of the contract, Mark told Kate about this insurance policy and Kate agreed. She also sent a letter to the insurer to ratify her consent. Thus Kate’s post-contract ratification of her consent meets the condition for the validity of the death policy as required by art. 34 of the Insurance Law, but does not meet the requirement for the existence of an insurable interest at the time of conclusion of the contract by arts 1287 and 3188 of the Insurance Law, as her consent was the only ground for establishing an insurable interest and it was not given before, but after, the conclusion of the contract. According to arts 12 and 31 of the Insurance Law, the policy is void even though Kate’s ratification satisfies art. 1 of the Interpretation III. Given that Kate’s post-contract ratification of her consent does not meet the requirement of arts 12 and 31 of the Insurance Law which require an insurable interest at the time of contract, it is submitted that the post-contract ratification in the Mark–Kate case should not be valid; the contract effected by Mark is therefore void. It is therefore suggested that the SPC should give further clarification on this point.

83 The Insurance Law, art. 31(2) provides: “In addition to the persons mentioned in the preceding paragraph, the proposer shall be deemed to have an insurable interest in another person’s life who agrees that the proposer may conclude a contract of insurance on his life.” See also Chapter 7, “Insurable interest” for detailed discussion on insurable interest in life insurance. 84  The Insurance Law, art. 31(3) provides: “The insurance contract shall be void if the proposer does not have an insurable interest at the time when the contract is entered into.” 85 The Insurance Law, art. 12(1) provides: “The proposer in life insurance shall have an insurable interest in the life insured at the time the contract is concluded.” 86  Under Insurance law, boyfriends and girlfriends have no insurable interest in each other without each other’s consent. The relationship of boyfriend and girlfriend does not fall into the list in art. 31 of the Insurance Law, but they may be deemed to have an interest in each other where they obtain consent from each other. Article 31 provides that the proposer has an insurable interest in the following persons: (1) himself/herself; (2) spouse, sons and daughters, parents; (3) other family members rather that those mentioned in (2) above or close relatives with whom the proposer has a relationship of fosterage, support or maintenance; or (3) workers with whom the proposer has a labour relationship. Notwithstanding the foregoing, where an insured consents to the proposer taking out an insurance contract on him/her, it shall be deemed that the proposer has an insurable interest in the insured. 87  The Insurance Law, art. 12(1). 88  Ibid, art. 31(2).

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In a previous paper, the author made some critical comments on the approach that the life insured’s consent alone may create an insurable interest.89 It was argued by the author that the life insured’s consent as an alternative ground for establishing an insurable interest is problematic and can sometimes give rise to wagering in the guise of insurance, and may also increase the risk of murder. This is because consent might be obtained by duress or other objectionable behaviour, particularly where the life insured is an elderly or vulnerable or young person.90 It was suggested that consent of the life insured should not be treated as equivalent to the actual possession of an insurable interest by the proposer in the life insured. Consent as an alternative ground should be abandoned and replaced by economic relationship.91 20.8.3 Withdrawal of the consent The SPC Interpretation III also gives the life insured the right to withdraw his consent after the conclusion of the contract. According to art. 2 of Interpretation III, the life insured may revoke his consent required by art. 34 of the Insurance Law by notifying the insurer and the proposer in writing. Where the life insured makes such a revocation, it is deemed that the contract is rescinded.92 Because the validity of a 89  Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] 5 JBL 337, 344. 90  For example, in Zhang v Pacific Life Insurance Co. Cichuan Branch, Mr Hu, the patient and the insured, was single, old, poor and not healthy, and Mr Zhang was a medical doctor in a village. Hu visited Dr Zhang regularly for medical treatment. Zhang persuaded Hu to give consent to him to effect life policies on Hu’s life and in return promised to offer Hu free medical treatment and free medicine in Zhang’s surgery. Zhang then effected 18 life policies on Hu’s life (in a form which looked like policies on Hu’s own life, with Hu being the “puppet” proposer) in 2003, but the beneficiary was the patient’s doctor. The insured amount was ¥10,000 for each policy and the duration of each policy was 20 years. Zhang was designated as the beneficiary for each policy and paid the premium every year. Zhang had no natural affection with Hu. Hu died of disease in 2005. On being turned down for a claim by the insurer on the ground of lack of insurable interest, Zhang sued the insurer and argued that the insurable interest was created by Hu’s consent. The Court held that (1) Hu was financially unable to pay premiums. Zhang paid the premiums and was the actual proposer; (2) Hu’s consent to the insurance was not his real intention but induced by Zhang, so his consent could not support an insurable interest. Thus the contract was void. Hu had never been married and had no children. He had no real motive and was unable to afford life insurance. His consent was given under the pressure of financial difficulty and his poor health and induced by the offer of free medical treatments and free medicine. According to art. 58 of the Civil Code, civil acts performed by a person against his true intentions as a result of cheating, coercion or exploitation of his unfavourable position by the other party shall be void; Hu’s consent was therefore invalid ( accessed 16 May 2015). English law does not take consent as an alternative way of establishing an insurable interest when a pecuniary interest or an interest based on natural affection cannot be demonstrated. In Issues Paper 4, Insurable Interest 2008, the Law Commissions proposed that consent of the life insured should provide an alternative ground for creating insurable interests, where the proposer and the life insured do not fit within the categories of natural affection or a reasonable expectation of loss (see para. 7.79 of Issues Paper 4). It was said that the creation of such an alternative would certainly reduce the difficulties arising from the limited nature of insurable interests in current English law. However, in the Joint Consultation Paper, Post-Contract Duties and Other Issues 2011, this suggestion was overwhelmingly rejected. Many consultees worried that consent might be obtained by duress or other objectionable behaviour, particularly where the life insured was elderly or very young (para. 13.60 of the Joint Consultation Paper 2011). So the Law Commissions do not make any further proposal on this issue. 91  See Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] 5 JBL 337, 345. 92  Interpretation III, art. 2 provides: “Where the life insured notifies in writing the insurer and the proposer that he revokes the consent made in accordance with article 34 of the Insurance Law, it may be determined that the insurance contract is rescinded.”

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life insurance contract with death as a condition for payment of insurance money is based on the life insured’s consent, once the life insured withdraws his consent, the whole contract becomes invalid. The Insurance Law is silent on this point; the SPC Interpretation III fills the gap in the Law. The issue of whether a life insured may withdraw his consent was discussed by the author in a previous paper.93 The author argued: “The Law requires the life insured to give consent at the time of contract, but does not mention whether the consent can be withdrawn afterwards. The Law neglects the simple fact that the life insured may wish to withdraw his consent when he feels that his life is at risk because of the existence of the death policy on him. The Law expressly entitles the proposer to terminate the contract94 but does not give such a right to the life insured. It is the life insured whose life may be at risk of a moral hazard, so he should be entitled to withdraw his consent in the situation where he feels his life [is] at such a risk.”95 In that paper, a new provision was recommended to be added into the Insurance Law: “The life insured shall be entitled to withdraw his consent to a contract under which his death is a condition for the payment of the insurance money and the contract shall be terminated accordingly.” The SPC Interpretation III takes the same approach as the author recommended. Article 2 of Interpretation III provides that where the insured notifies the insurer and the proposer in writing that he revokes his consent made in accordance with art. 34 of the Insurance Law, it may be deemed that the insurance contract is rescinded. 20.9 Suspension and reinstatement of a life insurance contract 20.9.1 Statutory provisions By virtue of art. 36 of the Insurance Law, where an insurance contract specifies payment of the premiums in instalments, the contract shall be suspended if the proposer fails to pay any instalment on time within the grace periods provided by law.96 Nevertheless, the suspended policy can be restored if the requirements specified in art. 37 of the Insurance Law are satisfied. According to art. 37 of the Insurance Law, the suspended contract can be restored if the parties have reached an agreement and the proposer has paid the outstanding premiums. However, the insurer has the right to rescind the contract if no agreement has been reached by the parties within two years from the date of the lapse of the contract. Where the insurer rescinds the contract, it shall refund the cash value of the policy to the proposer. The procedures to restore a lapsed life policy are usually provided in the policy. For example, in the life policy of the China Life Insurance Company, it is provided that within two years after the contract is suspended, if the proposer wishes to restore

93  Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] 5 JBL 337. 94  The Insurance Law, arts. 15 and 47. 95  Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] 5 JBL 337, 348. 96 The Insurance Law, art. 36 provides: “Where the contract specifies payment of the premiums in instalments and the proposer has paid the first instalment but fails to pay the current instalment over thirty days from the date when the insurer reminds about the payment or over sixty days from the date the instalment is due, the contract shall be suspended, or the insurer may reduce the sum insured in accordance with the contract, unless otherwise agreed in the contract.”

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the policy, he may complete a “policy restoration application form,” and return the completed form with other documents required by the insurer, such as a medical statement or a medical examination certificate issued by the hospital designated by the Company. The validity of the contract, upon an agreement being reached between the Company and the proposer, shall be restored from the following day after the premium arrears with corresponding interest are paid.97 In practice, an adverse selection of restoration often occurs, that is, the proposer’s applying for the restoration of a suspended policy usually happens in a situation where the degree of the insured risk increases during the suspension of the policy. More often than not, the insurer would reject such an application. It is fair and reasonable for the insurer to reject adverse selection. However, the Insurance Law requires an agreement to be reached between the proposer and the insurer for the reinstatement of a lapsed policy; if no agreement is reached, the lapsed policy is never restored. Thus the insurer is, in essence, put in a dominant position to agree or reject an application for reinstatement of a lapsed policy without any particular restriction on its rejection of an application. In other words, art. 37 of the Insurance Law does not make it clear under what circumstances the insurer may turn down an application for reinstatement. 20.9.2 The SPC’s rules for reinstatement of a suspended life policy The SPC’s Interpretation III 2015 clarifies the ambiguity of art. 37 of the Insurance Law and provides a restriction on the insurer’s rejection of application for reinstatement of a lapsed policy. In only one set of circumstances is the insurer allowed to turn down an application for reinstatement, that is, the degree of risk in respect of the life insured has significantly increased during the period of suspension. Article 8 of Interpretation III stipulates: “Where the validity of the insurance contract is suspended in accordance with art. 36 of the Insurance Law, and the proposer applies for restoration of the suspended contract and agrees to pay the outstanding premiums, if the insurer rejects the proposer’s application for restoration, the People’s Courts shall not support the insurer’s rejection, unless the degree of risk in respect of the insured has significantly increased during the period of suspension.”98 The Insurance Law does not require the proposer to pay interest on the arrears of premium. The SPC provides that the insured must pay the premium arrears and the interest thereon.99 Some scholars comment that to pay some interest is reasonable to the insurer.100 The SPC also requires the insurer to make a decision on whether or not it will accept the restoration application in a reasonable time. It rules that if the insurer does not expressly reject the proposer’s restoration application within 30 days upon receiving the application, it shall be deemed that the insurer has agreed to resume the validity of the contract.101

97  Life Insurance Policy of the China Life Insurance Company, clause 3(1). 98  Emphasis is added by the author in order to highlight the main points. 99  The SPC Interpretation III, art. 8. 100  Chongmiao Xu, Principle of the Insurance Law of China & Analysis on Difficult Cases (Law Press China 2011) p. 243. 101  The SPC Interpretation III, art. 8.

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Article 8 of the SPC Interpretation III supplements art. 37 of the Insurance Law in three aspects. First, if there is no significant increase of risk to the life insured during the period of suspension of the contract, the insurer is not allowed to reject the proposer’s application for restoration of the lapsed policy; second, if the insurer does not reject the proposer’s application for restoration within 30 days upon receiving the application, it shall be deemed that the insurer has agreed for the contract to be restored, and the contract shall be restored from the date when the proposer pays the outstanding premiums; and third, the insurer has the right to require the proposer to pay interest in addition to the payment of the outstanding premiums. The key development of art. 8 of the SPC Interpretation III to the Insurance Law is that it has imposed a restriction on the insurer’s right to reject the proposer’s application for the restoration of a suspended policy. This provision, it is submitted, has two significant contributions to the development of the law relating to the principle of good faith. First, from the perspective of the proposer, he is not allowed to make an adverse selection for the restoration of the policy, namely, if the degree of risk to the insured increases significantly,102 the insurer is entitled to reject the application for the reinstatement;103 second, from the insurer’s perspective, it is not allowed to reject the proposer’s application for the restoration of a suspended policy if there is no significant increase of the insured risk during the suspension. For example, a disease which developed or was diagnosed prior to the suspension of the contract cannot form the ground for rejection of the application for the reinstatement. This restriction can reduce the opportunity for the insurer to unreasonably reject an application for restoration, particularly in the case of a bad bargain.104 20.9.3 Disclosure for reinstatement of a life policy Neither the Insurance Law nor the SPC Interpretation III expressly provides rules on whether or not the proposer has a statutory duty to disclose material facts to the insurer at the time of reinstatement of the contract. In practice, however, the insurer usually requires the insured to disclose new information about the reinstatement. The insurer may either agree to reinstate the contract or to reject the application for reinstatement based on the information provided by the insured. It is reasonable for the insurer to request the proposer to disclose new information relating to the reinstatement of the contract, because it is often the case that after the contract is suspended, the proposer has found the life insured to have a disease and then wished to reinstate the suspended contract. If an adverse selection is not limited, it would be unfair to the insurer to have to agree to the restoration of the policy. On the other hand, the insurer should not be allowed to refuse an application for

102 To determine the meaning of “significant increase of risk,” see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) 8 JBL 842. 103  Where a life policy is suspended, it is often the case that after it is suspended, the proposer wishes to reinstate the suspended contract where the life insured’s health condition is getting worse or the life insured has developed a new disease. If an adverse selection is not limited, it would not be fair to the insurer. 104  If there is no law to govern the matter, the insurer may take the opportunity to reject the proposer’s application for the restoration of the policy on the ground of a disease which was developed or diagnosed prior to the suspension of the contract.

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reinstatement on the ground of a disease which developed or was diagnosed prior to the suspension of the contract. In practice, the insurers usually ask questions in the application form for reinstatement. In Mr Zhang v The Life Insurance Company,105 a question in the reinstatement application form asked, “From the date of formation of the original contract to this date, did you have any physical symptoms or signs which were newly found or were found before the contract was entered into?” It is submitted that this is an unfair term to ask the proposer to inform the insurer of information found before the conclusion of the contract. If the insurer is allowed to ask such a question and then refuses the application for reinstatement based on such information, it would be equivalent to giving the insurer the second opportunity to turn down the contract (particularly in case of a bad bargain) which the insurer would otherwise not have been able to reject if the contract had not been suspended. However, it is submitted that the insurer should be allowed to acquire information from the proposer about the life insured’s health condition during the period of suspension of the contract. For example, the insurer may ask, “From the beginning of suspension of the contract to this date, does the life insured have any physical symptoms or signs or diseases?” In 2014 the SPC Interpretation III (Draft for Comments) proposed rules about the disclosure for the reinstatement of a suspended life policy. It was proposed that the insurer should raise questions about relevant information of the life insured during the period of suspension of the life policy.106 Article 16 of the Draft for Comments stated: “The insurer shall raise questions for information during the suspension of the policy and the proposer shall answer them truthfully. Where the insurer wants to rescind the contract or reject a claim on the ground of non-disclosure by the proposer, the People’s Court shall make judgment in accordance with art. 16 of the Insurance Law. The two-year limitation for the insurer’s right to rescind the contract starts from the date of restoration of the contract.” Article 17 of the Draft for Comments reads: “Where the terms of the contract are changed when the policy is restored, if a party claims that the changed term is not valid on the ground that the insurer did not draw the attention to or did not explain the term to him, the People’s Court shall make a decision according to art. 17 of the Insurance Law.” However, the above two articles are not adopted by the SPC in the Interpretation III. It is submitted these rules in the Draft for Comments are reasonable and could be adopted in the future. Although the SPC Interpretation III does not adopt the above two articles, it is submitted that art. 8 of the SPC Interpretation III implies that the proposer must perform the duty of disclosure of material facts at the time when he applies for the restoration of the suspended policy. He must disclose to the insurer where the risk is materially increased during the period of the suspension of the policy in order for the insurer to make the decision whether it will agree to the restoration of the policy. 105  This case was decided by the People’s Court, Xin Hua District, Shi Jia Zhuang City, Hebei Province, Civil Court Judgment (2009) No. 28, and is reported in the Annual Report of   Typical Insurance Cases (Law Press China 2010) vol. 2, p. 173. 106  The SPC Interpretation III (Draft for Comments) 2014, arts.16 and 17.

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Certainly, the proposer’s performance of the duty should be made by way of truthfully answering the questions raised by the insurer in relation to the restoration.107 20.10 Matters of beneficiaries in life insurance Rules relating to an insurable interest in life insurance are examined in Chapter 7. Another very important aspect in life insurance is matters of beneficiaries. In China, a lot of disputes have arisen in recent years regarding life insurance beneficiaries. In addition to art. 31 of the Insurance Law which concerns the insurable interest in life insurance, arts 39–43 of the Insurance Law deal with matters of beneficiaries, which are considered below.108 20.10.1 A beneficiary in life insurance In the Insurance Law, art. 18(3) defines “beneficiary” as follows: “A beneficiary with respect to life insurance refers to the person who, designated by the life insured or the proposer, is entitled to claim for the insurance benefits. The proposer or the life insured may also be the beneficiary.”109 20.10.2 Designation of a beneficiary in a life policy There are rules provided by the Insurance Law on who may designate and how to designate a beneficiary. Article 39 of the Insurance Law states: “The beneficiary of life insurance shall be designated by the life insured or the proposer. The consent of the life insured shall be required where the proposer designates a beneficiary.”110 Accordingly, where the proposer intends to effect a policy in another person’s life for his own benefit, he can nominate himself as the beneficiary with the consent of the life insured; if he effects a policy on another person’s life for a third party’s benefit, the beneficiary can be designated either by the life insured or the proposer; where the proposer designates the beneficiary, the life insured’s consent must be obtained, and the designation shall be void without the consent of the life insured. Where a person effects a policy on his own life, he is the proposer and also the life insured, and he may nominate any other person(s) as beneficiary(ies).

107  See Zhen Jing and Ming Zhong, “Limitations on the Insured’s Duty of Disclosure: A Comparative Analysis with English, Australian and German Laws” (2015) 26(7) ICCLR 224. 108  Z. Jing, “Beneficiaries in Life Insurance in Chinese Law and Practice” [2013] 5 JBL 478. In this article the author discusses the matter of beneficiaries in life insurance in detail. 109  Insurance Law 1995, art. 21(3) and Insurance Law 2002 art. 22(3) had the same definition. It is submitted that the Insurance Law should provide the definition of life insurance beneficiary in the section of “Life Insurance Contract,” it seems in appropriate to put such a definition in the section of “General Stipulations.” 110  The same provision was provided in art. 60 of the Insurance Law 1995.

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20.10.3 The life insured’s consent must be obtained for designation of beneficiaries in a life policy As mentioned above, both proposer and life insured can designate a beneficiary(ies). The consent of the life insured must be obtained where the proposer designates the beneficiary.111 The designation by the proposer is invalid without the consent of the life insured.112 Interpretation III confirms that if the designation of beneficiary(ies) is made by the proposer without the consent of the life insured, the People’s Courts shall find the designation ineffective.113 A case can illustrate this rule.114 In October 1999, the employer, an energy-saving plant, effected a group policy for its employees with China Life Insurance Company, Yanan District Branch. Mr Shi Jia was one of the employees covered by the policy. Each insured of the group policy had an insurance card which provided the coverage. Shi Jia’s card included two personal accident policies, one was the “Personal Accident Comprehensive Policy” with China Life Insurance Company, and the other the “Personal Accident Comprehensive Policy” with China Life Insurance Company Sichuan Branch. The proposer, the energy-saving plant, designated itself as the beneficiary of the policies without the consent of Mr Shi Jia, the life insured. Mr Shi Jia died in September 2000 as a result of a medical accident. Shi’s wife, daughter and his employer all sued the insurer for insurance money. The court held that the designation of the beneficiary without the insured’s consent was invalid, and the proposer could not claim to be the beneficiary of the insurance money. Nevertheless, the insurance contract effected between the proposer and the China Life Insurer was valid, and the insurance money should be disposed as the life insured’s estate and paid to the life insured’s wife and his daughter.115 20.10.4 Designation of beneficiaries where an employer insures his employees It is noteworthy that a new rule was introduced by the Insurance Law 2009 concerning the designation of the beneficiary in the case where an employer insures

111  The same provision was provided in art. 60 of the Insurance Law 1995. 112  A question may arise here, namely whether the proposer’s consent is needed where the life insured designates or changes the beneficiary. As discussed above, the consent of the life insured is required where the proposer designates or changes a beneficiary. The law aims to protect the life insured from moral hazards. However, the Law does not provide that the proposer’s consent is needed where the life insured designates or changes the beneficiary. It might be argued that there is no moral hazard on the proposer, so his consent is not needed. However, from the other point of view, it may be unfair to the proposer. Assume that a husband effects a policy on the life of his wife and nominates their son as the beneficiary with the consent of his wife. Later, his wife adds her mother into the policy as another beneficiary without getting her husband’s consent. Is it fair to the husband who pays the premium but does not even know a new unexpected beneficiary has been added? In order to avoid disputes and unfairness to the proposer, it could be suggested that agreement between the proposer and the life insured should be reached when they nominate or change the beneficiary. Otherwise the nomination or change should be unenforceable. 113  SPC Interpretation III, art. 9(1) provides: “Where the proposer designates the beneficiary without the consent of the life insured, the designation shall be deemed invalid by the People’s Courts.” 114  China Ping An Insurance Co. Ltd, Legal and Compliance Department, Insurance Contract Law – Case Commentary (Qinghua University Press 2006) p. 499. 115  See Insurance Law 1995, art. 63(1), about the situation where no beneficiary is designated when the insurance money will be dealt with as the life insured’s estate. Now this rule is provided in the Insurance Law 2009, art. 42(1).

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its employees. Article 39(2) provides: “In life insurance, the beneficiary of a life insurance policy shall be designated by the insured or the proposer. Designation of beneficiary by the proposer is subject to the insured’s consent. Where a proposer effects a personal insurance on its worker with whom it has a labour relationship, the proposer may not designate anyone other than the life insured or the life insured’s close relatives as the beneficiary.” Accordingly, where a life insurance policy is taken out by an employer on the life of his employee, the employer is not allowed to nominate a person as a beneficiary who is not a member of the employee’s family or a close relative of the family, and the employer is not allowed to designate itself as a beneficiary of the policy even if the consent of the life insured is obtained.116 It could be argued that this provision ignores an important element where an employer can insure a key employee for the employer’s benefit. The provision is correct from the point of view that an employer takes out a group policy for its employees as welfare in order to protect its employees or the members of their families. However, it is submitted that the law fails to cover the situation where an employer takes out insurance on its employee in order to protect itself. Traditionally, an employer is deemed to have an insurable interest in its employees’ lives on two grounds: on the one hand, the employer may take out insurance on its key personnel for the benefit of the employer itself.117 And on the other, the employer may effect a policy (usually a group policy) on its employees for the benefit of the employees themselves or their family members. The second type of insurance is usually a welfare benefit stipulated in the contract of employment under which the employer promises to pay a certain amount to the employee’s dependents should that employee die. The promise to pay an amount on death of the employee is usually known as a death-in-service benefit.118 The Insurance Law art. 39(2) obviously only addresses the second type of insurance. It could be suggested that the Insurance Law should be improved to allow an employer to nominate itself as a beneficiary in a “key person” policy. 20.11 The change of a beneficiary in life insurance The Insurance Law also authorises the life insured or the proposer to change the beneficiary. Article 41 of the Insurance Law provides: “The life insured or the proposer may change the beneficiary by written notice to the insurer. Upon receiving the notice, the insurer shall endorse the change on the policy or other insurance certificates or attach an endorsement to the policy or the other insurance certificates. The change of the beneficiary by the proposer shall be made subject to the 116  The Insurance Law, art. 39(2). See also the Letter of the China Insurance Regulatory Committee to People’s Life Insurance Company of China (2010) No. 111 on “Re: Whether a company, governmental office or factory etc. may effect a policy on his individual employee.” It states: “Individual employee life insurance policies can only be effected by the individual himself, the insurers shall not accept a proposal for insurance applied by a proposer who is a company, or governmental office or factory, etc. on an individual employee.” This indicates that the above-mentioned employers can only effect group policies for their employees and the employees’ family members shall be the beneficiaries. 117  Some English cases illustrate this: Simcock v Scottish Imperial Ins. Co. (1902) 10 SLT 286; Green v Russell [1959] 2 QB 226. See also Marcel Beller Ltd v Hayden [1978] QB 694. See also some American cases: Mickleberry’s Food Products v Hauesserman 247 SW 2d 731 (Mo, 1952); Wellhouse v United Paper Co. 29 F 2d 886 (CCA 1929); Sinclair Refining Co. v Long 32 P 2d 464 (Sup Ct Kan, 1934). 118  This is defined in para. 3.61(1), UK Law Commissions Issues Paper 4, January 2008.

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consent of the life insured.” This article indicates two important aspects for the change of beneficiary. One is the procedure for the change of the beneficiary – the Law requires the insured or the proposer to give notice to the insurer in writing for the change. Second, the insurer, upon receiving the notice, shall endorse the change on the policy or other insurance certificates or attach an endorsement to the policy or to the other certificates. These two important points are stressed by the SPC from a judicial perspective. The SPC Interpretation III stipulates that if the insurer declares that the change of the beneficiary is ineffective due to the fact that the proposer or the life insured had not given notice to it, the court shall support the insurer’s declaration.119 Second, if the change of the beneficiary is done without the consent of the life insured, the change is ineffective.120 However, two questions are not mentioned in art. 41 of the Insurance Law. One is at what time the change of the beneficiary will take effect, and the other is whether the beneficiary can be changed after the insured event has occurred. These two questions are answered by the SPC Interpretation III. Article 10 of Interpretation III clarifies the issue of the point of time when the change of the beneficiary becomes effective by stating that the change of beneficiary takes effect from the time when the intention for the change is expressed.121 If the change is made by sending a letter to the insurer, the change will take effect when the letter is posted.122 The date of the letter or the stamp of the post office should be taken as the time point for the effectiveness of the change of the beneficiary. For the second question, the SPC provides that the change of the beneficiary must be made before the occurrence of the insured event, and the change shall be ineffective if it is made after the event has occurred. By virtue of art. 11 of Interpretation III, “If the proposer or the life insured changes the beneficiary after the occurrence of the insured event, where the new beneficiary claims the insurance money, the People’s Court shall not uphold the claim.” In fact, art. 41 of the Insurance Law implied the second point, namely the change of the beneficiary will be invalid after the occurrence of the insured event, because the change must be done by the insured or the proposer; if the insured dies, he cannot do it and cannot give consent if the proposer intends to change the beneficiary. In Xu Qing v China Life Insurance Shandong Branch,123 the plaintiff effected a policy on his own life in 2003, and designated his girlfriend as the beneficiary.124 In 2007, the relationship between the life insured and his girlfriend ended. The life insured wrote and signed an application letter to the insurance company to change the beneficiary of his policy. He asked his sister to submit the application letter to

119  The SPC Interpretation III, art. 10(2). 120  Ibid, art. 10(3). 121  Ibid, art. 10(1). 122 This is different from the receipt doctrine adopted in art. 26(1) of the Chinese Contract Law 1999, which provides that acceptance becomes effective when the notice of acceptance reaches the offeror. 123 This case was cited by J. X. Liu in his book, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 264. 124  In fact, a girlfriend has no legally recognised insurable interest in her boyfriend. But in the Chinese insurance law, there is no express requirement that a beneficiary must have an insurable interest in the life insured. So the insurer accepted the risk.

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the insurance company. The insurance company issued an endorsement by which the beneficiary was changed from the life insured’s ex-girlfriend to his sister. The life insured died from illness in June 2007, and both his sister and his ex-girlfriend claimed the insurance money. The ex-girlfriend claimed that she doubted that the signature was the life insured’s signature on the application letter to change the beneficiary. If it was not, the change was invalid, as the law requires that the life insured’s consent in writing must be obtained when changing the beneficiary.125 The court asked experts to check the authenticity of the signature and they confirmed that the signature was that of the life insured. So the changing of the beneficiary was valid, and the sister as the new beneficiary was entitled to recover the insurance money. In practice, the life insured or the proposer who wants to change the beneficiary is required to complete a “Beneficiary Change Form” or an “Insurance Contract Amendment Application Form” and submit it with other relevant documents126 to the insurer. The insurer, upon receiving the application and the relevant documents, must endorse the change as required. However the law does not mention the consequences of failure to follow the procedure for the change of the beneficiary. For example, it is unclear whether the change is invalid without a written notice to the insurer by the proposer or without an endorsement of the insurer on the policy. The lack of express provision on the consequences causes disputes.127 In Qingxiu Wu v China Life Insurance Company, Chengyi Branch,128 Qinghua Wu, as the proposer, effected a life policy on her own life in September 2002, and designated Qingxiu Wu as the beneficiary. In 2004, on behalf of the life insured, the life insured’s husband applied to change the beneficiary with the insurer. The husband completed the “Insurance Contract Amendment Application Form” to change the beneficiary from Qingxiu Wu to Lianfu Wu. The insurer signed the form and put a stamp on it, but the insurer neither endorsed the change on the policy nor attached an endorsement to the policy or to other insurance certificates. The issue was whether the change was valid where the insurer failed to endorse the change by following the steps required by the Insurance Law. The court held that the insurer’s failure to endorse the change on the policy or on other certificates could not make the change invalid. The change was valid as long as the claimant could prove that the life insured intended to change the beneficiary, and the insurer was notified of such an intention. 20.12 Whether the beneficiary’s name must be inserted into the policy Chinese Law is silent on the question of whether the beneficiary’s name must be inserted into the policy; an implication of this requirement may be discerned 125  The Insurance Law 1995, art. 62 or the Insurance Law 2009, art. 41. 126  Such as the copy of the policy, receipt for premium, ID card, or other relevant documents required. 127  Some practitioners have the view that although the Law requires a written notice to be given by the life insured or the proposer, an oral notice should be accepted if the real intention of the life insured to change the beneficiary can be proved. The change should be valid. See Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 77. 128  This case was decided by Jiangxi Provincial High People’s Court. See also Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 79.

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in some articles in the Insurance Law. Articles 39 and 40 stipulate that the beneficiary or beneficiaries should be designated by the life insured or the proposer (with the life insured’s consent). If there are two or more beneficiaries, the life insured or the proposer may determine the sequence in which they shall receive benefits and the amount of benefits each beneficiary may receive. It could be understood that these articles imply that the name or names of the beneficiary(ies) should be inserted into the policy.129 However, art. 42(1) provides that “where no beneficiary or beneficiaries have been designated or the designation is not clear, the insurance money shall be paid as the deceased’s estate to the deceased’s successors.” From this provision, it could be inferred that it is not a legal requirement to insert the beneficiary’s name into the policy, because even if no beneficiary is designated, the policy is still valid. Due to the fact that the Insurance Law does not expressly and strictly require the name or names of the beneficiary(ies) to be inserted into the policy, in practice it is not uncommon that the life insured or the proposer leaves, either deliberately or negligently, the beneficiary box blank and no beneficiary is designated in the policy. This gives rise to a lot of arguments among the family members of the life insured over claiming the insurance moneys when the life insured dies.130 Difficulties have been caused for the insurance companies or courts in determining who should have the insurance money under the circumstances. It is suggested that in order to avoid or reduce disputes of beneficiaries settling claims in life insurance, and in order to reflect the real intention of the life insured in nominating the beneficiary, the name or names of the beneficiary or beneficiaries should be inserted into the policy. As the life insurance is effected for the benefit of a specified person or persons, if the name or names of the specified person(s) are not inserted into the policy, the insurance proceeds may be disposed of to other members of the life insured’s family who are not expected to be the beneficiaries of the policy.131 Therefore it is suggested that where the beneficiary is an individual (not a group) the beneficiary’s name should be inserted into the policy.132 Under English law, the Life Assurance Act 1774 (LAA) requires all interested persons to have an insurance interest in the life insured at the time of contract, and requires that the names of the insured and any beneficiary must be inserted into the policy; otherwise the policy shall be illegal.133 Since the remedy is too harsh for 129  It could be understood that where there are two or more beneficiaries, the life insured or the proposer should determine the sequence in which they shall receive benefits by putting their names into the policy and the amount of benefits each beneficiary should receive. 130  A number of cases illustrate this problem. See Cai Shigen, etc. v Xiamen Life Insurance Co. [1993] Selected Cases of the People’s Court of China vol. 2, p. 132; See also Dong Qin v China Life Insurance Beijing Branch (2007) – this case was cited by J. X. Liu in his book, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 479. See also Mr Wei v The Ping An Life Insurance Co. (2009) which was cited by Zhiqiang Lie, “The natural mother and step father effected a life policy on the life of their daughter, but the daughter’s natural father became one of the beneficiaries” accessed 5 May 2011. 131  The Insurance Law, art. 42. The other person(s) here means the life insured’s legal successor(s). 132  Inserting a name into the policy takes only a few seconds while it may avoid or reduce a lot of disputes. 133  LAA, s. 2. An illegal contract is unenforceable and therefore the consequence for policyholders is that their claims under the contract will not be paid. Premiums are not repayable under an illegal contract. In practice, however, insurers do sometimes issue policies that are technically illegal for lack

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failing to insert the beneficiary’s name into the policy, it has received criticism134 and the UK Law Commissions published proposals to mitigate the harshness and stated that the law should not permit insurers to avoid policies only by reason that the names of the persons interested are not specified in the policy documents.135 This proposal was made with reference to the ICA. Section 20 of the ICA states: “An insurer under a contract of insurance is not relieved of liability under the contract by reason only that the names of the persons who may benefit under the contract are not specified in the policy document.” However, s. 20 does not give a positive solution on how to dispose insurance moneys if the name or names of the beneficiary(ies) have not been specified in the policy. The Law Commissions have recently published the Insurable Interest Bill 2016 (Draft for Comments). In the Bill, the LLA136 and other rules of law relating to the requirement of an insurable interest for the purpose of a contract of insurance137 are repealed. The repeal of the LLA means that the requirement for the beneficiary’s name to be inserted in the policy will be abolished. A life policy without the name of a beneficiary will no longer be illegal. The scope of insurable interests is expanded significantly in the Insurable Interest Bill.138 The expansion of the scope means that there could be more beneficiaries in life insurance, thus where the insured event occurs, more people as the beneficiaries would have the right to claim for insurance benefits. It is likely that disputes could arise if the beneficiaries’ names are not specified in the policy.139 Indeed, Chinese of insurance interest (most often for cohabitants, or for parents and children). While insurers would no doubt honour such policies, it is always open to them to refuse to do so. (See paras 3.56 and 3.59, Law Commissions Issues Paper 4, January 2008.) 134  See R. Merkin, “Gambling by insurance – a study of the Life Assurance Act 1774” (1980) 9 Anglo-American L Rev 331. Professor Merkin criticised the defects of s. 2 of the LAA: “it has no effect on fraudulent evasions of s.1 for s.1 itself catches such attempted evasion; where it does have effect independently of s.1 it serves to avoid perfectly legitimate insurance; it does nothing about subsequent wagers. In short, it serves no useful purpose.” Also see J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 3.6. Professor Birds commented that a strict application of s. 2 of the LAA 1774 can lead to unjust results (see Evants v Bignold (1869) LR 4 QB 622)). And he also suggests that s. 2 of the LAA is, in fact, superfluous (p. 51). 135  See para. 7.101, Law Commissions Issues Paper 4, January 2008. This was the approach of the ICA; see s. 20. 136  Insurable Interest Bill 2016, s. 7, Repeals and consequential amendments: (1) The Life Assurance Act 1772, the Marine Insurance Act 1788 and the Marine Insurance (Gambling Policies) Act 1909 are repealed. (2) The Schedule contains consequential amendments. 137  Insurable Interest Bill 2016, s. 5. 138  Insurable Interest Bill 2016, s. 2. The insured is deemed to have an insurable interest in an individual including, in particular, circumstances where – (a) the individual is the insured, (b) the individual is, or is treated as, the child or grandchild of the insured, (c) the individual is the spouse or civil partner of the insured or lives with the insured as a spouse or civil partner, (d) the individual is a member of a pension or other group scheme and the insured is a trustee of the scheme, (e) the contract is for the benefit of the individual, or a nominee of the individual, (f) there is a reasonable prospect that the insured will suffer economic loss if the insured event occurs. 139  In the UK Law Commissions Issues Paper 4 (2008), the Law Commissions proposed the repeal of s. 2 of the LAA. Most responses agreed with this proposal. However, the International Underwriting Association disagreed and commented: “To lose this requirement (of inserting the name of the person

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experience suggests that uncertainty and difficulties at the claims handling stage often occur without the beneficiary’s name being inserted into the policy. However, under the Insurance Interest Bill 2016, no rule has been provided as to the situation where the beneficiary’s name is not inserted into a life policy. 20.12.1 Problems in the situation where the beneficiary’s name is not inserted into the policy If the name of the beneficiary is not inserted into the policy, disputes may arise at the stage of claim. For example, if a person effects a policy on himself and designates his wife and his sons as beneficiaries, but he also has step-sons, it is better to put the sons’ names in the policy in order to avoid disputes. Another example can be examined here.140 An insured effected a policy in his own life, designating his wife as the beneficiary, but failed to insert her name in the policy, only putting the word “wife” in the box for the beneficiary. The insured later divorced his wife and married another woman. When the insured died, both his ex-wife and his new wife claimed for the insurance money. By Chinese Marriage Law141 and Inheritance Law,142 his new wife should be his legal successor then, thus should benefit from the insurance, and his ex-wife no longer had any legal relationship with him when the insured died, so the ex-wife had no right to recover. However, the initial purpose of the life insured taking out insurance was to benefit his ex-wife who was then his wife. Furthermore, according to art. 12 of the Insurance Law,143 an insurable interest is required at the inception of the policy,144 and it could be inferred that the determination of the beneficiary should be made in correspondence with the situation and the intention of the life insured at the time when the policy was effected. This is a really difficult case to deal with. One thing is sure – the intention of the life insured in taking out such a policy was to benefit his wife upon his death. So the important point is who his wife was when he died. In some situations, even if the name of the beneficiary is inserted in the policy, disputes may still happen. In the above example, consider if the person put “wife” and her name in the policy, but he divorced her and married another woman. When he dies, a dispute may still arise, and two wives may claim. Now the SPC Interpretation III clarifies the two issues mentioned above and provides that where the beneficiary is designated in the policy by using the relationship between the life insured and the beneficiary, such as “my wife,” the relationship should be determined at the time when the insured

who benefits into the policy) would send out a poor policy message in terms of efficient risk assessment, administration and contract clarity and may cause unnecessary complications at the claims handling stage.” See para. 13.56, the Joint Consultation Paper, 20 December 2011. 140  See Li Baoming and Ju Weihong, “The Issues about Life Insurance Beneficiaries” (1998) 7 Insurance Studies 39. 141  The Marriage Law of the People’s Republic of China 1981, art. 24. 142  The Inheritance Law of the People’s Republic of China 1985, art. 2. 143  According to arts 12 and 31 of the Insurance Law, the proposer must have an insurable interest in the life insured at the time the contract is concluded, otherwise the contract is void. 144  English law requires that an insurable interest must exist at the time of the contract. See Dalby v India and London Life Assurance Co. (1854) 15 CB 365.

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event occurs.145 Where both the relationship and the name are put in the policy, if the relationship changes when the insured event occurs, it would be deemed that no beneficiary has been nominated.146 20.13 Circumstances under which insurance money is disposed of as the life insured’s estate In China, how to distribute the insurance money is a very complex matter and it is the most disputable aspect in life insurance claims.147 Usually, the insurance money is payable to the beneficiary(ies) who is clearly specified in the policy. However, as mentioned above, there are situations in which no beneficiary is nominated in the policy or the nomination is vague. Under these circumstances the insurance money shall be disposed of as the life insured’s estate. This is dealt with by art. 42 of the Insurance Law 2009: Upon the death of the life insured, the insurance moneys shall become part of the life insured’s estate, and the insurer’s obligation to pay insurance moneys shall be performed in favour of the life insured’s successors under any of the following circumstances: (a) where no beneficiary has been designated or the designation is so vague that the beneficiary could not be determined thereby; (b) where the beneficiary(ies) dies prior to the death of the life insured and there is no other beneficiary(ies); or (c) where the beneficiary loses his beneficial right according to law or he waives his right, and there is no other beneficiary(ies). Where the life insured and the beneficiary(ies) die in the same accident, and the sequence of the death cannot be determined, it is presumed that the beneficiary(ies) dies prior to the death of the life insured.

All these circumstances are examined in the following sections. 20.13.1 No beneficiary has been designated or the designation is vague Where no beneficiary has been designated or the designation is so vague that the beneficiary could not be determined thereby, the insurance moneys will be distributed as the life insured’s estate to the life insured’s successors. The following situations may fall into this category: (1) No beneficiary is designated at the time the policy is effected.148

145  The SPC Interpretation III 2015, art. 9(2). 146  The SPC Interpretation III 2015, art. 9(3). 147  Unlike English law which renders a life policy unlawful or illegal if the interested person’s name is not inserted into the policy (LAA, s. 2), under Chinese law the validity of the policy is not affected where the name of the beneficiary is not inserted into the policy or where no beneficiary is designated or the designation is unclear. 148  A mother effected a life insurance policy on her son’s life but no beneficiary was designated in the policy when the policy was effected. The son got married after the conclusion of the policy. When the son died, his mother and his wife claimed under the policy. Because there was no beneficiary was designated in the policy, the insurance money should be disposed of as the life insured’s estate. His wife argued that she was her husband’s legal successor and thus should be allowed to benefit from the policy. The mother argued that she herself was the proposer of the policy and paid the premium for it. When the policy was effected the life insured was not married, and therefore she should be the only person to benefit from the

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(2) The designation of the beneficiary is ambiguous. For example, if in the policy the beneficiary box is filled in with the words “family members,” it is not clear which members would be the beneficiaries; or if the beneficiary box is filled in with the word “myself,” it is not clear if it is the proposer himself or the life insured himself. (3) One or more beneficiaries are designated when the policy is effected, but the life insured or proposer intends to change the beneficiary or beneficiaries during the currency of the policy149 and the original beneficiary(ies) is cancelled, but, before the death of the life insured, no new beneficiary(ies) has been designated. So, in fact, there is no beneficiary when the life insured dies. (4) The beneficiary is designated ineffectively where it is done by a person without civil act capacity or by the proposer who has not obtained the consent of the life insured.150 No matter what the situation it is, the key issue here is how to dispose of the insurance money. By art. 42 of the Insurance Law, the insurance money should be disposed of as the life insured’s estate and paid to the life insured’s legal successors according to the Chinese Inheritance Law.151 Many cases illustrate this point. In one case,152 an employee was insured under a personal accident policy taken out by his employer, but no beneficiary was designated in the policy as the beneficiary box was left blank. The employee died in an accident, and both his employer and his wife claimed the insurance proceeds. The insurance company settled this case according to art. 55(1) of the Insurance Law 1995,153 and disposed of the insurance moneys as the life insured’s estate to the life insured’s successors.154

policy. The mother also argued that according to art. 62 of the Insurance Law 1995, if the life insured had intended to change the beneficiary, he could have done so, but he had not before he died. The mother thought that the life insured’s wife should not be allowed to benefit from the policy. The court held that because no beneficiary was nominated in the policy, the insurance money should be distributed to the life insured’s legal successors as his estate. According to art. 2 of the Chinese Inheritance Law of 1985, the inheritance shall begin from the moment when the deceased dies. By virtue of this article the legal successors should be ascertained at the time when the life insured dies simply because only from that time does the insurance money become part of the insured’s estate. Therefore both the life insured’s mother and his wife were his legal successors and had the right to obtain the insurance money. (The case was reported in the China Insurance News, 1 June 1999.) 149  By the Insurance Law, art. 41, the life insured or the proposer may change the beneficiary during the currency of the policy by notifying the insurer in writing. The insurer shall endorse the change on the policy upon receipt of the notice. The change of the beneficiary by the proposer shall be made subject to the consent of the life insured. 150  See the Chinese case Cai Shigen, etc. v Xiamen Life Insurance Co. [1993] Selected Cases of the People’s Court of China, vol. 2, p. 132. 151  See ch. 2 “Legal inheritance” and ch. 4 “Estate disposal” of the Inheritance Law of the People’s Republic of China 1985. 152  See Lei Jian, “Who is the beneficiary” (1999) 8 China Insurance 23. 153 The Insurance Law 1995 was operating then. Article 55(1) provides that “the insurance moneys shall become part of the life insured’s estate . . . where no beneficiary has been designated or the designation is so ambiguous that the beneficiary could not be determined thereby.” The same provision can be found in art. 42(1), Insurance Law 2009. 154 According to art. 10 of the Inheritance Law 1985, spouse, children and parents are the first sequence of the successors. In this case, the life insured had no child and his father had died, so his wife and his mother were his legal successors. A similar case was reported in the paper, “Who is entitled to apply for the insurance money?” accessed 15 May 2015.

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The SPC Interpretation III provides rules to resolve such issues. Article 9 of Interpretation III confirms that if the designation of beneficiary(ies) is made by the proposer without the consent of the life insured, the People’s Courts shall find the designation ineffective.155 If the designation of the beneficiaries is ambiguous, except for the situation where the proposer and the life insured have another agreement outside the insurance contract, the disputes can be dealt with under the following circumstances:156 (1) Where the beneficiaries in the insurance contract are to be “determined by law” or “legal successors,” the beneficiaries shall be the legal successors determined in accordance with the Inheritance Law.157 (2) Where the beneficiaries are designated only based on the identity of the relationship, if the proposer and the life insured are the same person, the beneficiaries shall be determined by the relationship between the life insured and the beneficiary(ies) at the time of the occurrence of the insured event; if the proposer and the life insured are different persons, the beneficiary(ies) can be determined by the relationship between the life insured and the beneficiary(ies) at the time of conclusion of the contract. (3) Where the beneficiary(ies) is designated with both the name and the relationship, if the relationship has been changed at the time of the occurrence of the insured event, it shall be deemed that no beneficiaries are designated. As to circumstance (1) mentioned above, the proposer sometimes fills in the beneficiary box in the proposal form with the words “determined by law” or “legal successors.” That means that the beneficiary(ies) was not designated at the time of the contract, but should be determined by law when the insured event occurs. This situation often causes disputes when disbursing the insurance money. For example, in one case158 the mother and the stepfather effected a life policy on their daughter in 2002. In the policy no beneficiary was specified, but the two words “Fa Ding” (“determined by law”)159 were written in the beneficiary box. The life insured died in 2009, and each of her mother, stepfather and her natural father claimed for the insurance moneys. The dispute arose as the result of the two tricky words “Fa Ding,” which caused difficulty in determining who would fall into the category. Literally, “Fa Ding” means that any person who has a legal relationship 155  Article 39 of the Insurance Law provides: “the beneficiary of a life insurance policy shall be designated by the life insured or the proposer. Designation of the beneficiary by the proposer is subject to the life insured’s consent.” 156  The SPC Interpretation -III-, art. 9(1), (2) and (3). 157  See ch. 2 “Legal inheritance” and ch. 4 “Estate disposal” of the Inheritance Law of the People’s Republic of China 1985. 158  Mr Wei v Ping An Life Insurance Co. (2009) accessed 15 May 2011. The mother and stepfather effected a life policy on the life of their daughter, but the daughter’s natural father became one of the beneficiaries. See also Dong Qin v China Life Insurance Beijing Branch (2007); this case was cited by J. X. Liu in his book, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 479. 159 The phrase “Fa Ding” means the beneficiary(ies) should be determined according to law. This phrase is very vague, and there is no definition for this phrase. Zhenyu Liu and others have the same opinion and said that the words “Fading shouyiren (beneficiary is determined according to law)” do not have the same meaning of “Fading jichengren (Legal successor),” so it should be deemed that the designation of the beneficiary is vague. See Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 72.

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with the life insured could be a beneficiary in such a case. Thus, according to Chinese Inheritance Law, the girl’s mother, stepfather and her natural father all have a right to claim for the insurance money.160 However, in accordance with art. 42 of the Insurance Law, the insurance money is treated as the life insured’s estate if no beneficiary has been designated or the designation is so vague that the beneficiary could not be determined.161 The disadvantage of treating the insurance money as the life insured’s estate is that the insurance money is subject to taxes and debts of the deceased life insured.162 In an earlier paper, the author argued that “it is not appropriate to disburse insurance money as the life insured’s estate,” and suggested that “the life insured’s legal successors should be treated as the named beneficiaries in the sense that they are the persons who have right to receive the insurance money.”163 The SPC Interpretation III has now treated the legal successors of the life insured as the beneficiaries under circumstance (1) above, where the words “determined by law” or “legal successors” were put in the beneficiary box on the proposal form. Accordingly, the insurance money shall not be treated as the estate of the deceased life insured under circumstance (1). Circumstance (2) mentioned above covers two situations where the beneficiaries are determined based on the identity of the relationship: first, the proposer and life insured are the same person, and second, the proposer and the life insured are different persons. The first situation can be explained in the following case.164 A proposer effected a policy on his own life, and designated his wife as the beneficiary, but failed to insert her name in the policy, only putting the words “my wife”

160  According to art. 10 of the Chinese Inheritance Law, the spouse, children and parents have the right to inherit the deceased’s estate. The “children” referred to in this Law include legitimate children, illegitimate children and adopted children, as well as step-children who supported or were supported by the deceased. The “parents” referred to in this Law include natural parents and adoptive parents, as well as step-parents who supported or were supported by the deceased. 161 The Insurance Law, art. 42 provides: “Upon the death of the life insured, the insurance moneys shall become the life insured’s estate, and the insurer’s obligation to pay insurance moneys shall be performed in accordance with the Inheritance Law of the People’s Republic of China, under any of the following circumstances: (a) where no beneficiary has been designated or the designation is so vague that the beneficiary could not be determined thereby; (b) where the beneficiary dies prior to the death of the life insured and there is no other beneficiary; or (c) where the beneficiary loses his beneficial right according to law or he waives his right, and there is no other beneficiary.Where the life insured and the beneficiary die in the same accident, and the sequence of the death cannot be determined, it is presumed that the beneficiary dies prior to the death of the life insured.” 162 Where the insurance money is disposed of as the life insured’s estate, according to the Inheritance Law, the successors must pay the taxes and debts of the deceased. Article 33 of Chinese Inheritance Law provides: “The successor to an estate shall pay all taxes and debts payable by the deceased according to law, up to the actual value of such estate, unless the successor pays voluntarily in excess of the limit.” If the life insured’s legal successors are treated as beneficiaries, they have the right to recover insurance moneys without paying the estate taxes. As to the approach that the insurance money is to be disbursed as the life insured’s estate specified in art. 42 of the Insurance Law, the author disagreed with this approach. See Zhen Jing, “Beneficiaries in life insurance in Chinese Law and Practice” (2013) JBL 463, 478. 163  Zhen Jing, “Beneficiaries in life insurance in Chinese Law and Practice” (2013) JBL 463, 478. 164  Baoming Li and Weihong Ju, “The Issues about Life Insurance Beneficiaries” (1998) 7 Insurance Studies 39.

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in the beneficiary box. The proposer later divorced his wife and married another woman. When the life insured died, both his ex-wife and his new wife claimed the insurance money. By the Chinese Marriage Law and Inheritance Law, his new wife should be his legal successor, and thus should benefit from the insurance. His ex-wife no longer had any legal relationship after the breakdown of their marriage,165 so she had no right to recover. However, the initial purpose of the life insured taking out insurance was to benefit his ex-wife who was then his wife. Furthermore, according to art. 12 of the Insurance Law,166 an insurable interest is required at the inception of the policy;167 it could be inferred that, in theory, the determination of the beneficiary should be made in correspondence with the situation and the intention of the life insured at the time when the policy was effected. This is a really awkward situation to deal with. The SPC has now clarified this issue by providing that where the beneficiary is designated in the policy by using only the identity of the relationship between the life insured and the beneficiary, such as “my wife,” the relationship should be determined at the time when the insured event occurs.168 So in this case, the current wife (not the ex-wife) should be the beneficiary. In addition, art. 9(2) of Interpretation III mentions another situation, namely how to determine the beneficiary(ies) based on the identity of the relationship where the proposer and the life insured are different persons. The SPC takes the view that in these circumstances, the beneficiary(ies) can be determined by the relationship between the life insured and the beneficiary(ies) at the time when the contract was concluded. For insurance, if a wife effects a life policy on her husband and put the words “my sons” (they have two sons then) in the beneficiary box. When the life insured dies, the couple have three sons (the third son was born after the conclusion of the contract). According to art. 9(2) of the Interpretation, the beneficiaries shall be determined based on the relationship at the time when the contract was entered into, thus only their two older sons have the right to receive the insurance benefits. However, if the wife effects a life policy on her own life and appointed her sons to be the beneficiaries, the consequences would be quite different – the beneficiary(ies) would be determined at the time when the insured event occurs, and her three sons would be determined as the beneficiaries. This seems a strange situation, and it is unclear what the reasoning is for this provision and why the methods of determining the beneficiary in the two situations described in art. 9(2) are different. This needs further clarification by the SPC. Circumstance (3) mentioned above in art. 9 of the SPC Interpretation III concerns the situation where the beneficiary is designated with both the name of the beneficiary and the identity of the relationship with the life insured. For example, where the proposer takes out a life policy on his own life and designates his wife as the beneficiary. He inserts the words “Mary, my wife” into the policy. The life

165  See the Marriage Law of the People’s Republic of China 1981, art. 24. 166  According to arts.12 and 31 of the Insurance Law, the proposer must have an insurable interest in the life insured at the time the contract is concluded, otherwise the contract is void. 167  English law requires that an insurable interest must exist at the time of the contract. See Dalby v India and London Life Assurance Co. (1854) 15 CB 365. 168  The Interpretation III, art. 9(2).

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insured divorces his wife (Mary) and marries Sarah. When the life insured dies, it would be difficult to determine the beneficiary. If the name is used to determine the beneficiary, his ex-wife Mary should be the beneficiary, while if the relationship is used to determine the beneficiary, his wife Sarah should be the beneficiary. The SPC now treats this case as a situation where no beneficiary is designated.169 Then art. 42(1) of the Insurance Law applies in this situation, which states that where no beneficiary is designated, the insurance money shall be disbursed to his legal successors as the life insured’s estate. It is submitted that this rule is not convincing, because the designation of the beneficiary in this case was very sure and ascertained with the name and identity of the relationship when the contract was concluded. Where the relationship had been changed prior to occurrence of the insured event, the life insured could have changed the beneficiary if he wished. If he had not done so before he died (no matter what the reason was, through negligence or intention), the named person should be determined as the beneficiary.170 It might be the situation that even if the couple gets divorced, the life insured still wishes to keep his ex-wife as the beneficiary. If by negligence the life insured failed to change the beneficiary from his ex-wife (the named) to his new wife, that is his own fault, and his named ex-wife should not be deprived of her beneficial right. To summarise, art. 9 of Interpretation III provides rules for determining beneficiaries for three specific circumstances where the designation of beneficiaries is not clear-cut. Under circumstances (1) and (2), the insurance money is not treated as the life insured’s estate, and the legal successors of the life insured are determined as the beneficiaries. As compared with the treatment of insurance money as the estate of the life insured, this certainly offers a better solution to the persons for whose benefit the insurance policy was effected. However, the rule under circumstance (3) is rather arbitrary and unconvincing, as was argued above. The name of the beneficiary is the unique identity, while the relationship can sometimes be changed. It is suggested that where the beneficiary is designated with both the name and the identity of relationship, if the relationship has been changed at the time of the occurrence of the insured event, the beneficiary should be determined by name.171 20.13.2 Where the beneficiary dies before the death of the life insured Article 42(1)(2) of the Insurance Law covers the situation where the beneficiary named in the policy dies before the death of the life insured and no other beneficiary is designated by the life insured or the proposer – the insurance money would be disposed of, upon the death of the life insured, as part of the life insured’s estate.

169  Ibid, art. 9(3). 170  In a previous paper, the author gave the same suggestion: “If the ex-wife’s name had been inserted in the policy she would have had the right to claim the insurance money because she had an insurable interest at the inception of the contract and this satisfies arts 12 and 31 of the Insurance Law, but if no name is inserted in the policy, the new wife, as her husband’s legal successor, should have the right to receive the insurance money.” See Zhen Jing, “Beneficiaries in life insurance in Chinese Law and Practice” (2013) JBL 463, 477. 171 There are different opinions on this points. See Linqing Wang, The Insurance Law & Its Judicial Application – Issues on the Insurance Law (Law Press China 2013) p. 588.

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However, this provision does not mention what would happen if there are other beneficiaries. For example, a man effected a life policy on his own life for the benefit of his aunt and two uncles in 2004.172 His aunt died soon after the policy was taken out, and the life insured did not nominate another person to take his aunt’s place. In 2007 the life insured died. The two uncles claimed under the policy. However, the son of the life insured also claimed for the insurance money under the policy and argued that one of the beneficiaries had died prior to the death of the life insured (his father), so part of the insurance money should be disposed of as the life insured’s estate and he should have the right to get a share of the total amount. The court gave the judgment for the son and decided that one-third of the insurance money was to be paid to the life insured’s son and the remaining two-thirds to the two uncles separately. It is submitted that this was a wrong decision which departed from art. 64(1)(2) of the 2002 Insurance Law.173 According to art. 64(1)(2), where the beneficiary dies prior to the life insured’s death, the insurance money shall be disposed of as the life insured’s estate only where there is no other beneficiary(ies) being designated. In this case, the two uncles were the nominated beneficiaries – all the insurance money should be paid to them with an equal amount to each, and the son did not have right to claim any insurance money because there were beneficiaries in the policy and the insurance money was not treated as the life insured’s estate.174 In a similar case, the insurer paid the insurance money to other beneficiaries where one of the beneficiaries died before the life insured, according to the law.175 The SPC Interpretation III has developed some rules to supplement art. 42(1)(2) of the Insurance Law regarding the situation in which more than one beneficiary was nominated and one of the them dies before the death of the life insured. Article 12 of Interpretation III provides that where the proposer or the life insured designates more than one beneficiary and one or some of the beneficiaries die before the death of the life insured or some of them abandon the beneficial right or lose the beneficial right by operation of law, the portion of the insurance money the beneficiary

172 See The Son of the Life Insured v The Uncles of the Life Insured (2010); this case was cited by Z. F. Yang in his article, “How to dispose of the insurance money where the beneficiary dies prior to the death of the life insured?” accessed in December 2014. 173 The case was decided in 2007 before the enactment of the 2009 Insurance Law – the 2002 version of the Insurance Law operated then. Article 64(1)(2) of the 2002 Insurance Law was exactly the same provision as art. 42(1)(2) of the 2009 Insurance Law. 174  Many scholars have the same approach as the author. See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 527. 175  In this case, Mr Chen effected a life policy on his own life in July 1997, and nominated his father, wife, son and daughter as the beneficiaries; they would each get equal proportions (25%) of the insurance money on the death of the life insured. His father died as a result of illness in December 1997. When the life insured died in January 1998, his wife, son and daughter claimed. There are three different views on how to distribute the insurance money. The first is that where one of the beneficiaries died before the life insured, the other three beneficiaries can get the insurance money according to the equal proportion (one-third each); the second view is that because the life insured’s father died before the life insured, the father’s successors should be entitled to recover the 25% insurance money as the father’s successors when the life insured died; thirdly, the life insured’s successors have the right to get the 25% insurance money for the deceased beneficiary (the life insured’s father). Eventually the insurer paid the insurance money to the other three beneficiaries according to the Insurance Law 1995, art. 63. The case was cited by Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 526.

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should have recovered shall be disposed of in accordance with the agreement of the contract. If there is no agreement or the agreement is not clear, the portion of the deceased beneficiary(ies) shall be disposed of according to the rules in the following circumstances: (1) Where neither the beneficiary sequence nor the proportion of the insurance benefits for each beneficiary are specified, the deceased beneficiary’s portion of insurance money shall be shared by other beneficiaries equally. (2) Where no beneficiary sequence is specified but the proportion of the insurance benefits for each beneficiary is specified, the deceased beneficiary’s portion shall be shared by other beneficiaries according to their corresponding proportions. (3) Where the beneficiary sequence is specified but the proportion of the insurance benefits for each beneficiary is not specified, the deceased beneficiary’s portion shall be shared equally by other beneficiaries who were in the same sequence as the deceased beneficiary was. If there is no other beneficiary in the same sequence, the deceased beneficiary’s portion shall be shared equally by the beneficiaries in the next sequence. (4) Where both the beneficiary sequence and the proportion of the insurance benefits for each beneficiary are specified, the deceased beneficiary’s portion shall be shared by other beneficiaries who were in the same sequence as the deceased beneficiary was, according to their corresponding proportions. If there is no other beneficiary in the same sequence, the deceased beneficiary’s portion shall be shared by the beneficiaries in the next sequence according to their corresponding proportions. The SPC Interpretation III also provides a rule to solve the problem which is left unclear in the Insurance Law regarding the way of disbursing the insurance money where the insurance money is treated as the insured’s estate. According to art. 42 of the Insurance Law, where the insurance money is treated as the life insured’s estate, the insurer is required to pay the insurance money to the legal successor(s) of the life insured, but the Law is unclear as to whether the insurer needs to disburse the insurance money to one of the successors or to all the successors – if to all successors, is it the insurer’s obligation to ascertain all of them? Most claim handlers express the view that the insurer must identify all successors.176 However, it is very hard for an insurance company to identify and inform all successors to come to collect their share of the insurance moneys. On the other hand, it should not be the insurer’s obligation to do such a job. In practice, in order to reduce disputes, insurers adopt a variety of approaches for disposing of the insurance money to the legal successors(s) of the life insured.177 First, they may request the legal successor who claims the insurance money to provide the insurer with a declaration, which states that no other successors would claim for the insurance money and the insurer is not liable if there are any other claims. Second, they may 176 Yiding Wu, “How to pay claims in the case of no beneficiary in the insurance policy” (Insurance Newspaper, 11 November 2005). 177  See Linqing Wang, The Insurance Law & Its Judicial Application – Issues on the Insurance Law (Law Press China 2013) p. 591.

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request the representative of all successors to supply the insurer with an agreement signed by all successors, which says that the insurance money can be paid to the representative. Third, they may request the legal successor who claims the insurance money to sign an agreement with the insurer, which states that if other successors demand insurance money, the person who has received the insurance money needs to return the money, and the insurer will redistribute the insurance money. And fourth, they may request the legal successor who claims the insurance money to submit an agreement of distribution of the insurance money among all successors, and the insurer then distributes the money to all successors according to the names and proportions in the agreement. These ways of disbursing the insurance money obviously increase the insurers’ burden, and thus the running costs. These costs in the end have to be placed on the policyholders. To make it easier for the insurer to distribute insurance money in this situation, the SPC has formulated a new rule: the insurer can pay the insurance money to the legal successor who possesses the insurance policy.178 Article 14 of the SPC Interpretation III provides that “where the insurance money is disposed of as the life insured’s estate in accordance with art. 42 of the Insurance Law, the insurer may refuse the claim for insurance money by a legal successor of the life insured with the defence that the insurance money has been paid to another legal successor of the life insured who possesses the insurance policy, and the People’s Courts shall support the insurer’s defence.” This means that if the insurance money is treated as the life insured’s estate and the insurer has paid the insurance money to the legal successor of the life insured who has the insurance policy, the insurer can be deemed to have performed his duty of paying the insurance benefit. 20.13.3 Where the beneficiary loses his beneficial right according to law or he waives his right, and there is no other beneficiary Article 42(1)(3) of the Insurance Law covers two situations under which the insurance money shall be disposed of as the life insured’s estate. The first situation is where the beneficiary loses his beneficial right if he acts against the law, for instance, where he deliberately causes the death, injury, disability or illness of the life insured, or attempts to murder the life insured but fails179 and there is no other beneficiary(ies). The second situation is where the beneficiary waives his beneficial right180 and there is no other beneficiary(ies).

178  The SPC Interpretation III, art. 14. 179  The Insurance Law, art. 43(2). 180  Basically this is only a point in theory. This situation rarely happens in practice, as nobody is willing to waive his beneficial right. However, occasionally, the beneficiary might be willing to waive his beneficial right in a special circumstance. For example, in a Chinese case, Yuan Qingshan v Huang Renjie (2010), the beneficiary was willing to waive his beneficial right in order to avoid his creditor’s claim for debts by deducting the debts from the insurance money. In this case, the life insured effected a life policy on his own life and nominated his three sons as beneficiaries of the policy. The life insured died in June 2010. His three sons claimed for the insurance money. However, before the insurance money had been paid to the beneficiaries, the third son’s creditor sued the third son, the debtor, and asked the court to deduct the debt owed by the third son from the payment of the insurance money. In order to avoid the payment of the debt, the third son claimed that he would waive his beneficial right and his

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In Zhou Guang v Shanghai Life Insurance Co,181 Mr Zhou effected a life policy in 1997 on his own life for the benefit of his wife and his brother. The insured amount was ¥200,000. His wife and his brother would get an equal amount each (¥100,000) if the insured event occurred. After a quarrel with her husband (the life insured), the wife killed her husband by releasing gas and the wife herself was killed as well in the incident. Two important issues in this case arise: (1) what is the consequence where the beneficiary murders the life insured; and (2) how to distribute insurance money where both the life insured and one of the beneficiaries die in the same incident.182 Article 63(3) of the Insurance Law 1995183 dealt with the first issue and stipulates that “the beneficiary will lose his beneficial right where he deliberately causes the death, injury, disability or illness of the life insured, or attempts to murder the life insured but fails.” Accordingly, the wife lost her right to benefit from the insurance. Logically, the next question was how to dispose of the insurance money where the beneficiary’s right was lost. By virtue of art. 63(3) of the Insurance Law 1995,184 the insurance money would be disposed of as the deceased life insured’s estate and paid to the life insured’s successors if there is no other beneficiary(ies). In this case, there was another beneficiary, the life insured’s brother. His share of the insurance money would be 50% of the whole amount of ¥200,000. Now that one of the beneficiaries (the life insured’s wife) died in the incident,185 the issue was whether the brother could get the whole amount of the insurance money, or 50% of the whole amount, and the other 50% would be disposed as the life insured’s estate. According to art. 63(3) of the Insurance Law 1995, only where there are no other beneficiary(ies) shall the insurance money be disposed of as the life insured’s estate and paid to the successors of the life insured. So in this case, the brother is entitled to the whole sum of insurance money. There is another case which concerns the situation where the beneficiary murders the life insured for the insurance money.186 Mr Zhang effected several life policies in 2009 on his own life and designated his wife as the beneficiary in all the policies. The life insured was murdered by his wife for the insurance money. The court held that his wife lost her beneficial right. As there was no other beneficiary, the insurance money was disposed of as the life insured’s estate and paid to his legal successors.

two old brothers would share the insurance money. This case was cited on the China Insurance News, 16 November 2010. 181  Zhou Guang v Shanghai Life Insurance Co. (1999). This case was cited in an article written by Y. F. Lu, “Claim for Insurance Money Should Be Rejected Where the Beneficiary Murders the Life Insured” (2002) 5 Journal of Insurance Studies 50. 182  This issue will be discussed shortly. 183  Now it is art. 42(1)(3) of the Insurance Law. 184  Now it is art. 42(1)(3) of the Insurance Law. 185  Even if she had survived the incident, she would still have lost her beneficial right by committing the murder because she committed a murder according to the Criminal Law 1997 and would be sent to prison or get the death penalty. 186 This case was cited by F. R. Zhang in her article “Hong An Standard Life Insurance Settles the Claim in Life Insurance where the Beneficiary Murders the Life Insured” accessed in December 2014.

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20.13.4 The life insured and the beneficiary die in the same accident By virtue of art. 42(2) of the Insurance Law, where the beneficiary and the life insured die in the same event, and the sequence of their deaths cannot be ascertained, it is assumed that the beneficiary dies first. In Mrs Zhang v Life Insurance Company,187 Mrs Zhang effected a life policy on her own life and nominated her husband as the beneficiary. The couple were killed in the same car accident. According to art. 42 of the Insurance Law, the husband (the beneficiary) was presumed to die before the life insured. So it was held that the life insured’s successors were entitled to recover the insurance money as the life insured’s estate.188 The SPC Interpretation III confirms the approach of art. 42(2) of the Insurance Law on this point that where the beneficiary and the life insured die in the same accident, the insured is deemed to have survived the beneficiary and the insurance money shall be disposed of as the life insured’s estate.189 Interpretation III also develops art. 42(2) further in relation to the distribution of the insurance money where the life insured and the beneficiary die in the same event. It is provided that if the beneficiary and the life insured have a relationship of inheritance, and they die in the same event, the insurance money can be disposed of in accordance with relevant provisions of the Insurance Law and the SPC Interpretation III.190 Here, the relevant provision of the Insurance Law refers to art. 42(2), which treats the insurance money as the life insured’s estate where the sole beneficiary dies earlier than the life insured does; the relevant provision of the SPC Interpretation III refers to art. 12, which provides rules for disposing of insurance money in, inter alia, the case where there is more than one beneficiary, and one or more beneficiaries dies earlier than the life insured does. In this aspect, there are similar rules under American law, such as the Uniform Simultaneous Death Act (US).191 If the insured and the beneficiary under a life insurance policy die together, the insured is deemed to have survived the beneficiary unless otherwise agreed upon. Accordingly, the policy proceeds would go to the designated alternate beneficiary, if there is one. In the absence of such a secondary beneficiary, the proceeds would be inherited through the estate of the insured.192

187  See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 527. 188  The Insurance Law, art. 42(2). 189  The SPC Interpretation III, art. 15. 190  Ibid, art. 15. 191 The Uniform Simultaneous Death Act was codified in 1940 and last revised in 1993. As of 2007, 18 US states and the District of Columbia have adopted the Uniform Simultaneous Death Act to determine inheritance in case of simultaneous death: accessed in June 2016. According to the Act, if two or more individuals die within 120 hours of one another, each is deemed to have predeceased the other. However, this law will apply when either there are no wills or the wills are silent on this issue. 192  For example, Carol has a life insurance policy through her employer. Her husband Dave is the beneficiary. They are both killed in a car crash, dying at or near the same time. If Carol has named a secondary beneficiary in her policy, that person will receive the life insurance benefit. If Carol has not named a secondary beneficiary, then it is assumed that she outlived Dave, and the benefit is inherited through Carol’s estate.

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20.14 The refund of the cash value of the policy In the Insurance Law several articles mention the matter of the return of the cash value of the policy. Article 37 provides that where the life insurance is suspended, the contract may be restored after the parties have reached an agreement. The insurer has the right to rescind the contract if no agreement is reached within two years from the date of suspension of the contract. Where the insurer rescinds the contract, it shall return the cash value of the policy.193 Article 16 of the SPC Interpretation III provides that “at the time of rescinding the contract, where the proposer, the life insured and the beneficiary are not the same person, if the life insured or the beneficiary demands the cash value of the policy, the People’s Court shall not support such a demand, except as otherwise agreed by the insurance contract.”194 This means that if the proposer rescinds the contract, the cash value of the policy should be returned to the proposer who paid the premium to the insurer for the policy, not to the life insured or the beneficiary unless otherwise agreed in the insurance contract. Situations in which the insurer shall return the policy’s cash value are also mentioned in arts. 43 and 44 of the Insurance Law. Article 44 provides that if the life insured commits suicide within two years from the date of the contract being concluded or the date of the restoration of a suspended contract, the insurer is not liable for the loss and shall return the cash value. Article 43 of the Insurance Law stipulates that “where the proposer has intentionally caused the death, disability or illness of the life insured, the insurer shall not be liable for payment of the insurance benefits. Where the proposer has paid premiums for two or more years, the insurer shall, in accordance with the contract, refund the cash value of the policy to other persons entitled thereto.” The second sentence of this article does not make clear who the other persons are and what the sequence is for the other persons to receive the cash value. These ambiguities are clarified by art. 16 of the SPC Interpretation III,195 which provides that “where the proposer has intentionally caused the death, disability or illness of the life insured, and the insurer refunds the cash value of the insurance policy pursuant to art. 43 of the Insurance Law, other persons entitled to receive the cash value can be determined according to the sequence of the life insured, and then the life insured’s successors.” This means that if the proposer has intentionally caused the disability or illness of the life insured, the cash value of the policy shall be returned to the life insured; if the proposer has intentionally caused the death of the life insured, the cash value of the policy shall be returned to the life insured’s successors. 20.15 Whether the consent of the life insured or the beneficiary must be obtained where the proposer rescinds the contract In the Insurance Law, art. 15 allows the proposer to rescind a contract at any time after the conclusion of the contract, but does not mention whether the consent of

193  The Insurance Law, art. 37(2). 194  The Interpretation III, art. 16(1). 195  Ibid, art. 16(2).

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the life insured or the beneficiary must be obtained where the proposer rescinds the contract. Due to the lack of any provision in the Insurance Law on this point,196 disputes often arise in practice. For example, in Mr Liu v Life Insurance Company, Mr Liu was employed in a factory which effected a group pension insurance policy for the benefit of its employees (including Mr Liu) with the Life Insurance Company in 1988. In 2000 the factory was closed. The factory rescinded the policy without the lives insured’s consent. The insurer returned the partial premium after deducting the amount of the premium from the date of the commencement of the insurer’s liability and the date of rescission. Mr Liu sued the insurer and argued that the rescission of the policy should be invalid without the insureds’ consent. The court held that because pension insurance is a long-term policy, and the insured or the beneficiary has the expectation to recover the insurance benefits, where the proposer rescinds the contract, the insured’s or the beneficiary’s consent should be obtained. The rescission was invalid without the consent of the insured or the beneficiary.197 However, in a similar case, Lu v XY Insurance Life Company,198the court gave a different judgment and held that it is not necessary to obtain the insured’s or the beneficiary’s consent when the proposer rescinds the contract because the proposer is the party who enters into the contract with the insurer, so he has the right to rescind the contract whenever he wishes. The SPC Interpretation III gives an answer to this issue. By virtue of art. 17 of Interpretation III, where the proposer rescinds the contract, if the relevant parties claim that the rescission is invalid without the consent of the life insured or the beneficiary, the People’s Courts shall not uphold such a claim, except where the life insured or the beneficiary has paid a sum of money equivalent to the cash value of the policy and informed the insurer. Article 17 indicates that the consent of the life insured or/and the beneficiary is not needed. However, the declaration for the invalidity of the rescission of the contract can be upheld by the courts if the insured or the beneficiary has paid a sum of money equivalent to the cash value of the policy to the proposer. As to this point, it is submitted that the SPC Interpretation III (Draft for Comments) was clearer.199 According to Interpretation III (Draft for Comments), where the proposer, the life insured and the beneficiary are different persons, and the proposer rescinds the contract, the consent of the life insured and the beneficiary are not needed. However, the proposer must inform the life insured and the beneficiary when he rescinds the contract. If the life insured or the beneficiary or any person with the life insured’s consent wishes to take over the contract by paying the amount equivalent to the cash value of the policy, this shall be upheld by the courts.200

196  The old versions of the Insurance Law 1995 (art. 14) and 2002 (art. 15) gave the same provision and they did not mention whether the consent of the life insured and the beneficiary should be obtained where the proposer rescinds a life contract. 197  Jing Wang, “Discussion on the Proposer’s Rescission Right in an Altruistic Insurance Contract” (2013) 2 Law Application 15–22. 198  This case was cited by Jing Wang, “Discussion on the Proposer’s Rescission Right in an Altruistic Insurance Contract” (2013) 2 Law Application. 199  The SPC Interpretation III (Draft for Comments) was published in October 2014. 200  The SPC Interpretation III (Draft for Comments), art. 28.

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20.16 Whether a beneficiary should possess an insurable interest in the life insured The Insurance Law does not expressly require a beneficiary201 to possess an insurable interest in the life insured. Nevertheless, the law gives the right to the life insured or the proposer to designate the beneficiary.202 Article 39 provides: “The beneficiaries in life insurance shall be designated by the life insured or the proposer. Where the proposer designates the beneficiary, the consent of the life insured must be obtained.”203 By virtue of this article, it seems that the consent of the life insured is the sole requirement for a person to become a beneficiary. It is, however, not clear whether the beneficiaries designated by the proposer or the life insured must have an interest in the life insured based on natural affection or a pecuniary interest. Although the literal meaning of the article indicates that the life insured may nominate anyone to be the beneficiary, in practice, a beneficiary is usually the person who has a family relationship or a pecuniary relationship with the life insured. For example, a father or a mother insures his/her own life and nominates his/her children as the beneficiaries.204 Or a wife effects a policy on herself and nominates her husband and her children as the beneficiaries. Or a debtor insures himself and designates the creditor as a beneficiary. It is extremely unlikely that a person whose life is to be insured would designate a stranger as a beneficiary. From this point of view, a beneficiary should be deemed to have an insurable interest in the life insured. It is submitted that a beneficiary of a life policy should have an insurable interest in the life insured. It is therefore suggested that the Insurance Law should add a provision to the effect that the beneficiary must possess an insurable interest in the life insured. The insurable interest should exist at the time when the beneficiary is nominated. The contract should be void where the beneficiary has no insurable interest in the life insured. There are several reasons to support this submission. (1) In a life policy under which the insurance money is payable to the beneficiary upon the death of the life insured, the beneficiary is usually the proposer or a third person(s) other than the life insured. This type of insurance may become an inducement to the beneficiary to murder the life insured if there is no strict restriction on the qualification of the beneficiary. The requirement of insurable interest of a beneficiary becomes meaningful in such a case. So it is submitted that a beneficiary of such a policy should have

201  Emphasis added. 202  The Insurance Law, art. 39. 203 The article continues: “Where the life insured is a person without capacity for civil acts or with limited capacity for civil acts, the beneficiary may be designated by his guardian.” 204  Such a policy is normal in China. In contrast, in England a parent does not have an insurable interest in the life of a child, and a child has no insurable interest in his parents. However, by virtue of s. 11 of the Married Women’s Property Act 1882, parents can take out a policy on their own lives and declare that the benefits are payable to their children. This side-steps the need for children to insure their parent’s lives in which they have no insurable interest. A policy of insurance taken out by a husband for the benefit of his wife or children, or by a wife for the benefit of her husband or children creates a statutory trust of the policy in the hands of the executors. The proceeds therefore do not fall within the estate of the deceased person who took the policy out and the benefit can be paid directly to the beneficiary. See paras 3.36 and 3.37, Issues Paper 4, January 2008.

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an interest in the life insured based on either natural affection or a pecuniary relationship. (2) If a person who has no interest in the life insured is allowed to benefit from the insurance policy upon the death of the life insured, it amounts to the fact that the person can make a profit by the means of insurance. This is against the nature of insurance by which the beneficiary cannot recover if he has not suffered any pecuniary loss. Although in life insurance, the amount paid by the insurer cannot be exactly described as “pecuniary” loss suffered by the beneficiary, there should be a kind of financial loss as a result of the death of the life insured.205 (3) In the situation where the proposer and the beneficiary are not the same person, the requirement for an insurable interest is more important for the beneficiary than for the proposer, because under these circumstances, the beneficiary, rather than the proposer, would benefit from the insurance. The proposer, in this case, is the person who is only responsible for paying the premium. (4) In practice, it happens sometimes that a life insured is murdered by the beneficiary even if the beneficiary has an insurable interest in the life insured, e.g. a husband murders his wife or vice versa, or a parent murders his child for the insurance money,206 or even a person who has neither an affection relationship nor an insurable interest in the life insured. Although, by law, the beneficiary shall be designated by the life insured or the proposer (with the consent of the life insured),207 if the life insured’s consent is the only requirement, it might be the case that, when the policy is effected, the life insured designates one of his friends (who has no interest) as the beneficiary. It is possible that the insurance money would become a temptation to murder the life insured. As discussed earlier in Xu Qing v China Life Insurance Shandong Branch,208 the plaintiff effected a policy on his own life in 2003, and designated his girlfriend as the beneficiary.209 If the relationship of the life insured and his girlfriend ended later, there would be a moral hazard for murder.

205  For example, a grandfather may effect a life policy on his grandson (if by law the grandson has a duty to support the grandfather). It is difficult to calculate the exact value of the aliment obligation; nevertheless, the grandfather has a pecuniary interest in the grandson, so he has an insurable interest in the grandson’s life. See Insurance Law, art. 31(3). 206 This case was cited by F. R. Zhang in her article “Hongan Standard Life Insurance Settles the Claim in Life Insurance where the Beneficiary Murders the Life Insured” accessed 26 October 2015. In this case, a husband effected a policy on his own life and the beneficiary was his wife. The wife murdered the life insured, her husband, for the insurance money. There is also an American case which was reported on the website accessed 26 October 2015. In this case, a woman murdered her two sons, her husband and her stepmother, and attempted to obtain the insurance money. 207  The Insurance Law, art. 39. 208 This case was cited by J. X. Liu in his book, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press 2010) p. 264. 209  In fact, a girlfriend has no legally recognised insurable interest in her boyfriend. But in the Chinese Insurance Law, there is no express requirement that a beneficiary must have an insurable interest in the life insured. So the insurer accepted the risk.

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Based on the analysis above, it is suggested that a beneficiary should possess an insurable interest in the life insured based on natural affection or a pecuniary interest, and the consent of the life insured should be an additional requirement (as a safety net) for nominating a beneficiary. English law requires the beneficiary to have an insurable interest in the life insured. The LAA makes the insurance policy null and void if the person or persons for whose use, benefit, or on whose account the policy or policies shall be made has no interest.210 This requirement is strict. However, the Insurable Interest Bill 2016 repeals the LAA, and the question of whether the beneficiary must have an insurable interest in the life insured becomes unclear, as there is no provision in this regard in the Bill. In Australia, because the requirement of the insurable interest was abolished entirely in the 1995 reforms, the beneficiary, in law, does not need to possess an insurable interest in the life insured.211 However, it appears that even if an insurable interest is not required by law after the 1995 reforms, the courts’ time was still being taken up with trying to work out whether de facto relationships would count or whether a person was likely to suffer a pecuniary or economic loss as the result of the death of the life insured.212 This means that a family relationship or a pecuniary relationship between the life insured and the beneficiary is still an important factor that the court would consider when deciding whether the beneficiary is entitled to recover the insurance money. 20.17 Consequences for the situation where the proposer or the beneficiary murders the life insured Article 43 of the Insurance Law provides rules for dealing with cases where the proposer or the beneficiary murders the life insured. Article 43(1) states: “Where the proposer deliberately causes the death, injury, disability or illness of the life insured, the insurer shall bear no obligation to pay insurance money. In the event that the proposer has paid the premium for two years or more, the insurer shall, in accordance with the contract, return the cash value of the policy213 to other person(s) who are entitled to their rights as such.” Article 43(2) provides: “Where the beneficiary deliberately causes the death, injury, disability or illness of the life insured, or attempts to murder the life insured but fails, the beneficiary shall lose his right to claim the insurance money.” Murder is obviously a crime, and is governed by criminal law.214 Here the rules of law regarding the consequences for murder of the life 210  The LAA, s. 1. 211  See the Life Insurance (Consequential Amendments and Repeals) Act 1995; s. 18 of the ICA. 212  UK Law Commissions Issues Paper 4, 2008, para. A.11. 213  Cash value is also known as surrender value. It is the sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. 214  See Criminal Law of the PRC 1997, art. 198 of which provides: “Fraudulent insurance activities falling under any one of the following circumstances shall, for cases involving relatively large amounts be punished with imprisonment or criminal detention of less than five years, with a fine of over ¥10,000 but less than ¥100,000; for cases involving large amounts, or of a serious nature, with imprisonment of over five years but less than 10 years, with a fine of over ¥20,000 but less than ¥200,000; for cases involving

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insured will be examined from the point of view of settlement of insurance claims. It is obvious that the remedies are different for the two situations where the proposer does illegal acts mentioned in art. 43 and where the beneficiary does the same. This may cause problems in the following situations: (1) Where the proposer, the life insured and the beneficiary are all different persons, if the proposer causes the death or disability or illness of the life insured, the insurer is not liable for payment of the insurance money. The insurer shall return the cash value of the policy to the beneficiary(ies) who is entitled to his rights as such. But if the death of the life insured is caused by the beneficiary, such beneficiary loses his beneficial right. It implies that other beneficiaries (if there are any) still have the right to recover the insurance money. If there is no other beneficiary(ies), the insurance money shall be paid to the life insured’s legal successors.215 Under these circumstances, art. 43 may not cause lots of disputes because the proposer and the beneficiary are different persons, and the consequences are different for their illegal actions. (2) However, where the proposer and the beneficiary are the same person and the life insured is a different person, i.e. the proposer effects a policy on another’s life for his benefit, if the proposer who is also a beneficiary causes the death or disability or illness of the life insured, what is the remedy? The law is very confusing in this situation. The issue is whether the person should be treated as the proposer or as the beneficiary. From a proposer’s point of view, art. 43(1) is applied – the insurer is free from liability to pay the insurance money, but it shall return the cash value of the policy to other persons entitled thereto. From a beneficiary’s point of view, by virtue of art. 43(2), the beneficiary loses his right to claim, because he is the only beneficiary – the insurance money shall be disposed of as the life insured’s estate and paid to his legal successors.216 The provision is self-contradictory and should be clarified. It is more important to clarify the confusion where the proposer himself is a beneficiary and there are also other beneficiary(ies). For example, assume that a wife effects a life policy on her husband, and nominates (with the consent of her husband) herself and their two children as the beneficiaries. If the wife kills her husband (the life insured), two different remedies may be proposed, depending on the wife (the killer) being treated as a proposer or a beneficiary. If the wife is treated as a proposer, according to art. 43(1), the two children (they are beneficiaries), can get nothing if the contract had been concluded for less than two years, and they can only get the cash value of the policy if the proposer (the wife) has paid the premium for two or more years. However, if the wife is treated as a beneficiary (because she is also

extraordinarily large amounts, or of a serious nature, with imprisonment of over 10 years, with a fine of over ¥20,000 but less than ¥200,000, or with forfeiture of property: . . . (5) Proposer or the beneficiary intentionally causes the death, injury, or sickness of the insured to receive insurance money.” 215  The Insurance Law, arts. 42(1) and (3), and SPC Interpretation (III), art. 12, can be followed to distribute the insurance money. 216  The Insurance Law, art. 42(3).

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one of the beneficiaries), by virtue of art. 43(2), the two children will get the payment of the insurance money, which would be much more than the cash value of the policy.217 Which remedy should be available to the two children? In order to protect the interests of the other beneficiaries who are innocent, it is suggested that the wife should be treated as a beneficiary, and accordingly the other beneficiary(ies) should be entitled to get the payment of the insurance money. It is recommended that the law should be amended to allow the other beneficiary(ies) to get the insurance money no matter whether the person who commits the crime (as specified in article 43) is a proposer or a beneficiary, because the other beneficiary(ies) are innocent and should be protected by law.218 20.18 The life insured commits suicide Article 44 of the Insurance Law provides: “In the case of contracts in which the death of a person whose life is insured is set as the condition for payment of the insurance money, the insurer shall not be liable for payment of insurance money where the insured commits suicide within two years from the date of conclusion of the contract or from the time of restoration if the contract is suspended, except for the insured with no capacity for civil acts when he commits suicide.”219 This article aims to prevent the situation where the life insured intends to commit suicide after the conclusion of a life insurance contract with the purpose that his dependents (designated as beneficiaries) may obtain insurance money upon his death.220 The article provides a two-year limitation period to reduce cheating – if the insured’s suicide occurs within two years after the contract is formed or reinstated, the insurer shall not be liable for payment of the insurance money. The justification for setting up the limitation is said to be that if the suicide is a planned action of the life insured, it would usually occur within two years. So if the suicide occurs within two years, there might be an intended suicide for insurance money. If the suicide occurs after

217  The Insurance Law, arts. 42(1) and (3), and the SPC Interpretation (III), art. 12, can be followed to distribute the insurance money. 218  However, if other beneficiaries are involved in the murder, they would also lose their beneficial rights. 219  In most life policies, there is an exclusion clause which excludes, inter alia, the risk of the life insured’s suicide. For example, in the life policy of Three-Star Insurance Company, the exclusion clause states that “the insurer is not liable where . . . the life insured commits suicide, except in the situation that when the life insured commits suicide he/she is a person who has no capacity for civil acts” (clause 3(3)); see also Life Policy of China Life Insurance Company, clause 6(3) and Life Policy of Ping An Life Insurance Company, clause 2.4(3). The suicide exclusion in these policies basically restated art. 44 of the Insurance Law: “In the case of contracts in which the death of a person whose life is insured is set as the condition for payment of the insurance moneys, the insurer shall not be liable for payment of insurance moneys where the insured commits suicide within two years from the date of conclusion (or restoration) of the contract, except for the insured with no capacity for civil acts when he commits suicide.” 220  Under English law, the Suicide Act 1961 provides that suicide is no longer a crime, with the result that no rule of public policy prevents recovery of the policy money by the assured’s personal representative or by his assigns (see MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 14-072). However, as a matter of policy construction, suicide while sane is prima facie excepted from the risk, because there is a presumption that the promise of the insurers to pay on the happening of a specified event does not include a promise to pay when the event is directly caused by the wilful act of the assured (see MacGillivray on Insurance Law (12th edn, Sweet & Maxwell 2012) para. 14-067).

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two years, it might be presumed that the suicide is not planned by the life insured for the insurance money.221 However, the two-year limitation does not apply to the situation where the life insured has no capacity for civil acts when he commits suicide. According to the General Principle of the Civil Law of the PRC (1986), a minor under the age of 10222 or a mentally ill person who is unable to account for his own conduct shall be deemed as a person having no capacity for civil acts and shall be represented in civil activities by his agent ad litem.223 It is extremely unlikely for a minor or a person with mental illness to plan to kill himself for insurance money for the benefit of other persons. Article 44 of the Insurance Law 2009 makes the rules clearer as compared with the 1995 version of the Insurance Law in two respects. First, the old law only provided that the two-year limitation began from the date when the contract was concluded,224 but was unclear about the situation where the insured committed suicide within a two-year period after the restoration of a suspended policy. In Mr Wang v X Life Insurance Company,225 Mr Wang effected a life insurance policy on his own life in March 1997 and paid the first instalment of the premium, but the policy was suspended in May 1998 because Wang did not pay the instalment due. One year later on 1 May 1999, Wang paid the premium arrears, and the insurance was restored upon the agreement of the parties. Wang, the life insured, committed suicide on 10 October 1999. The beneficiaries claimed, but the insurer rejected the claim on the ground that the life insured committed suicide within the two-year limitation from the date of the reinstatement of the policy. The issue here was when the two-year limitation started to run, from the date of conclusion of the contract or from the date of reinstatement of the policy. In this case the life insured committed suicide beyond the two-year limitation from date of the contract, but within two years after the reinstatement of the policy. The old law only mentioned that the two-year limitation ran from the time of the contract.226 Now the 2009 version of the Insurance Law solves this problem. Article 44 expressly provides that a suicide within the two-year limitation period shall be counted from the date of the reinstatement of the policy where there is a suspension of the policy. Second, art. 44 of the Insurance Law provides that the two-year limitation period for the suicide does not apply to the case where the insured has no civil acts capacity. The SPC Interpretation III provides rules regarding the burden of proof for the life insured’s suicide. Article 21 of Interpretation III provides that where the insurer rejects a claim on the grounds of the insured’s suicide, the insurer shall bear the burden of proof. The burden of proof is on the beneficiary or the life

221  See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 548. 222  The General Principle of the Civil Law of the PRC 1986, art. 12(2). 223  Ibid, art. 13(1). 224  The Insurance Law 1995, art. 65; the Insurance Law 2002, art. 66. 225  See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 548. 226  The Insurance Law 1995, art. 65; the Insurance Law 2002, art. 66.

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insured’s legal successor if he claims that the life insured had no civil act capacity when he committed suicide. 20.19 Prohibition of insurance on a person without capacity for civil acts Article 33(1) of the Insurance Law provides: “A proposer may neither propose nor an insurer may underwrite life insurance on a person who has no capacity for civil acts where the death of such a person is set as the condition for payment of the sum insured.” This provision prohibits a death policy from being effected on a person who has no capacity for civil acts, and thus precludes the chance for any malefactor to benefit from insurance money by killing the life insured who has no capacity for civil acts. The exception to this rule is that parents can effect a death policy on their minor children but the sum insured is limited. Article 33(2) continues: “The restriction stipulated in the preceding paragraph does not apply to cases where the parents apply for personal insurance on the life of their minor children. However, the total amount of payments of insurance money shall not exceed the limit prescribed by the insurance supervision and regulation authority of the State Council.” The CIRC acts as the insurance supervision and regulation authority and sets the limit for policies effected by a parent on his child.227 The SPC Interpretation III provides rules on the application of art. 33(2) of the Insurance Law, and states that art. 33(2) only applies to the situation where a parent insures his minor child, but does not extend to the situation where the child’s legal guardian and close relatives effect a policy on the minor child. Where the legal guardian or a close relative insures the child, if the insured event occurs, they cannot make a claim based on art. 33(2) and art. 34(3), except where the child’s parents’ consent has been obtained.228 20.20 Payment of premiums for personal insurance 20.20.1  The mode of premium payment By virtue of art. 35 of the Insurance Law, in personal insurance the proposer may pay the insurer the premiums in a lump sum or in instalments in accordance with the contract. Usually, the mode of payment of the premium is agreed by the parties in the contract. The payment modes are different for different types of personal insurance. For short-term policies, such as health insurance and personal accident insurance, the premium is usually paid in a lump sum. For long-term life policies, payment by instalments is usually adopted.229

227  See Chapter 7 for detailed discussion on amount limitation set up by the CIRC. 228  The Interpretation III, art. 6. 229  In some life policies there are terms about payment of the premium by instalments. In the Life and Health Insurance Policy of China Life Insurance Company, clause 3.2 states: “The premiums can be paid at one time or by instalments. To pay the premium by instalments, the proposer can pay yearly or every half year or in any other way agreed by the Company.” See accessed in May 2016.

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In practice, there are generally two methods for payment of the premium. The proposer may pay the premium through the bank – he may transfer money through his bank account to the insurer’s bank account, or pay the premium directly to the insurer’s bank, or give his bank account to the insurer and authorise the bank and the insurer to deduct the premium from his account. This is a very popular method for payment of the premium.230 Another method of paying the premium is where the proposer pays by using a bank card; this method has been commonly used in recent years. The proposer may pay the premium by using a cash machine operated by the insurer’s bank agent.231 20.20.2 Payment of premium in the grace period and suspension of the contract Article 36 of the Insurance Law provides: “Where the contract specifies payment of the premiums in instalments and the proposer has paid the first instalment but fails to pay the current instalment for 30 days from the date when the insurer reminds about the payment or over 60 days from the date the instalment is due, the contract shall be suspended, or the insurer may reduce the sum insured in accordance with the contract, unless otherwise agreed in the contract. Where an insured event occurs within the time limit provided in the preceding paragraph, the insurer shall pay the insurance money according to the contract, but may deduct the outstanding premium.”

According to this article, where the contract specifies payment of the premiums in instalments, the proposer is usually required to pay the first instalment when the contract is concluded. He needs to pay other instalments according to the agreement in the contract. The contract shall be suspended if the proposer fails to pay an instalment for 60 days from the date when that instalment is due. If the proposer fails to pay an instalment on time, the insurer may send a reminder and urge him to pay. If the proposer still fails to pay for 30 days after the insurer’s reminder, the contract shall also be suspended. The 30-day or 60-day limitation period is known as the “grace period” for instalment payments in life insurance. If the proposer pays the instalment within the grace period, the contract remains valid. If the proposer fails to pay the instalment within the grace period, the contract will be suspended, or the insurer may reduce the sum insured in accordance with the contract, unless otherwise agreed in the contract.232 Where the contract is suspended, the insurer shall give suspension notification to the proposer within 10 days from the date of suspension, and inform him of the consequence of the suspension and the methods of reinstatement of the suspended contract.233 Because the Insurance Law gives a grace period, if the insured event occurs during the grace period, the insurer is liable for payment of the insurance proceeds upon deducting the premium arrears.

230  Zhenyu Liu, Life Insurance Law and Practice (Law Press China 2012) p. 91. 231 Ibid. 232  In some life policies, the “grace period” is provided as a policy term. See clause 2(2) of the Life Insurance Policy of the China Life Insurance Company. 233  CIRC Regulation for Life Insurance Business Service (2010) No. 4, art. 21(2).

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20.20.3 The insurer cannot sue for premiums in life insurance After the conclusion of a life insurance contract, the proposer pays the initial premium, and shall pay the instalments according to the agreement in the contract. If the proposer fails to pay the instalments on time, the consequences are provided in arts 36234 and 37235 of the Insurance Law, as mentioned above. The insurer is not allowed to sue for the instalment arrears according to art. 38 of the Insurance Law, which provides: “With respect to life insurance, the insurer shall not resort to litigation to demand payment of the insurance premiums by the proposer.” Life insurance is usually a long-term insurance – it has the element of investment. If the proposer wishes not to continue or due to financial problem delays paying the instalment due, the insurer is not allowed to sue for the payment. 20.21 Assignment of life policies Life policies are undoubtedly a valuable piece of property, normally attracting a cash value after the payment of a number of premiums. They can be sold or otherwise disposed of or used as security. Many dealings of this sort with life policies are legal assignments of the policies.236 In most countries, life policies are allowed to be assigned, but in some countries life policies can only be assigned subject to certain conditions, such as in China.237 In the UK, a life policy can be freely assigned. The assignment of a policy is in fact a change of policyholder without change of subject matter (the life insured) and the insurer. The Insurance Law allows assignment of life policies, and the written consent of the life insured must be obtained for the assignment. By virtue of art. 34 of the Insurance Law: “Policies issued for contracts in which the death of a person whose life is insured is set as the condition for payment of the insurance moneys may not be assigned or pledged without the written consent of the life insured.” Because the assignee is a new policyholder of the policy, who has the right to claim insurance proceeds, in order to avoid or reduce moral hazard and to protect the life insured, the assignment must be made with the consent of the life insured. The law does not clearly stipulate whether the assignee must have an insurable interest in the life insured. It is clear that at least two legal requirements must be met by a policyholder who intends to assign a life policy to another. First, the policyholder must get written consent from the life insured where the policy to be assigned is a death policy. Second, the policyholder must notify the insurer of the assignment of the policy and go through the related procedures.238 It is not clear whether or not a life policy is only

234  Article 36 gives 30-day or 60-day grace periods. 235  Article 37 is about the restoration of the suspended contract. The insurer has right to rescind the contract if no agreement on the restoration has been reached by the parties within two years. 236  See John Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 19.2. 237  Chinese law requires the insured’s consent for assignment of a life policy. American law requires the assignee to have an insurable interest. These will be examined shortly. 238  The Insurance Law does not provide any rule on this point. Rules in arts. 84 and 88 of the Contract Law may be followed. Article 88 states that “upon consent by the other party, one party may concurrently assign its right and delegate its obligations under a contract to a third person.” Article 84 provides: “Where the obligor delegates its obligations under a contract in whole or in part to a third person, such delegation is subject to consent by the obligee.”

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allowed to be assigned to a person who has an insurable interest in the life insured; the law is silent on this point. However, it could be inferred from some provisions of the Insurance Law that the assignee is deemed to have an interest if the life insured agrees that the policy can be assigned to him. As discussed earlier, the current law adopts the approach that the life insured’s consent is an alternative ground for establishing an insurable interest.239 If the life insured gives consent to the policyholder to assign the policy to a specified assignee, then the assignee should be deemed to have an insurable interest created by the life insured’s consent. It would be very unlikely for a life insured to give consent for a death policy to be assigned to a person who has no interest in his life. On the other hand, the insurer may also be reluctant to allow the policy to be assigned to a person who has no insurable interest, for this would increase the risk insured against. In the SPC Interpretation III (Draft for Comments) 2014, two aspects about the assignment of the life insurance policy are mentioned. First, where a policy is assigned, the insurer must be notified of the assignment. If not notified, where the insurer declares that the assignment is ineffective, the People’s Court shall uphold the insurer’s declaration.240 Second, if any party claims that the assignment of the policy or the contract is invalid on the ground that the assignee has no insurable interest in the life insured, the People’s Court shall not uphold the claim.241 That means that there is no requirement that the assignee must have an insurable interest in the life insured. However, art. 31 of the SPC Interpretation III (Draft for Comments) about the assignment of a life policy was not adopted by the SPC Interpretation III. Nevertheless, the SPC Interpretation III confirms that an insurable interest is required only at the time of contract. Where the insurer claims that the contract is void on the ground that the proposer has lost his insurable interest in the insured, the People’s Court shall not uphold such a claim. This indicates that the proposer is not required to possess an interest throughout the whole life of the policy.242 According to the provisions in the Insurance Law and the SPC Interpretation III and its Draft for Comments, it could be understood that where a death policy is assigned, the life insured’s consent must be obtained. Further evidence for showing that the assignee has an insurable interest is not required, as the life insured’s consent creates an insurable interest according to the Insurance Law. The life insured’s consent is very important in order to avoid or reduce moral hazard. American law prohibits the assignment of a life policy to a person who has no insurable interest in the life insured. The US Supreme Court once said that “the assignment of a policy to a party not having an insurable interest is as objectionable as the taking out of a policy in his name.”243

239  The Insurance Law, art. 31(2). 240  The SPC Interpretation III (Draft for Comments) 2014, art. 31(1). 241  Ibid, art. 31(2). 242 The SPC Interpretation III, art. 4, provides that after the conclusion of the contract, if the proposer has lost their insurable interest in the life insured, where the relevant party claims that the contract becomes void, the People’s Court shall not uphold the claim. 243  Warnock v Davies, 104 US 755, at 779–780, per Field J (1881-life).

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Under English law, life policies are freely assignable whether they are expressed as being payable to the assigns of the assured or not.244 It is said that the assignment of life policies is permitted by virtue of the rule that an insurable interest is required by s. 1 of the LAA at the inception of the policy only. It is legitimate to take out a policy with the general intent of assigning it, but it is unlawful to take out a policy with the intention of assigning it to a specified person who does not have an insurable interest.245 The assignment of a life policy does not require the assignee to have an insurable interest. However, the law imposes a limitation on the assignability of life policies, which is that assignment may not be used as a method of overcoming the rule in s. 1 of the LAA under which “no insurance shall be made by any person or persons on the life insured . . . wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest.”246 To this end, the courts have established the rule that a policy is void if it is taken out by a person having an insurable interest with the immediate intention of assigning the policy to a specific person without an insurable interest.247 20.22 The transfer of the beneficial right in life insurance The Insurance Law does not cover whether the beneficiary may transfer his beneficial right to another person. The SPC Interpretation III gives a provision in this regard. It is provided that if “after the occurrence of the insured event the beneficiary transfers all or part of the beneficial right corresponding to the insured event to another person(s), the courts shall support such a transfer, except where the beneficial right is not allowed to be transferred in accordance with the nature of the contract or the agreement of the parties.”248 Accordingly, the beneficiary can assign his right to another person after the occurrence of the insured event. It implies that the beneficiary is not allowed to transfer his beneficial right to another person before the occurrence of the insured event,249 because the beneficial right is only an expected right before the occurrence of the insured event which will become 244  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para.18-026. See the following cases: Williams v Thorp (1828) 2 Sim 257; Haas v Atlas Insurance [1913] 2 KB 209. 245  R. Merkin, Colinvaux’s Law of Insurance (10th edn, 2014) para. 18-007. See also the cases of M’Farlane v Royal London Friendly Society (1886) 2 TLR 755 and Brewster v National Life Insurance Society (1892) 8 TLR 648. In both cases the assured was held not to have intended at the outset to take out an own life policy for the specific benefit of a third person. 246  The LAA, s. 1. 247 In M’Farlane v Royal London Friendly Society (1886) 2 TLR 755, at 756. Pollock CB delivered the following statement: “There is nothing to prevent any person from dealing with such policies by assigning them to some-one else . . . even though at the time he effected the policies he had the intention of so dealing with them . . . But if ab initio the policy effected in the name of A is really and substantially intended for the benefit of B and B only . . . that is within the evil and mischief of the 1774 Act.” 248  The SPC Interpretation III, art. 13. 249  In the SPC Interpretation III (Draft for Comments), art. 23 provides: “Before the insured event has occurred, the beneficiary cannot transfer the beneficial right to other person(s) without the consent of the proposer and the life insured. After the occurrence of the insured event, the beneficiary may transfer all or part of the beneficial right to another person(s) except where the beneficial right is not allowed to be transferred in accordance with the nature of the contract or the agreement of the parties.” The SPC Interpretation (III) adopts on the second paragraph of art. 23 above.

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an exercisable right only after the occurrence of the insured event. And it is also because the beneficiary is designated by the proposer and the life insured – the beneficial right cannot be transferred freely without the consent of the proposer and the life insured.250 It is not clear whether the beneficiary’s right can be transferred with the consent of the proposer and the life insured prior to the occurrence of the insured event. As examined above, the assignment of a life policy is permissible with the life insured’s consent; similarly, it should be allowed for a beneficiary to transfer his beneficial right before the occurrence of the insured event with the consent of the life insured. Some scholars take the view that the right to an insurance benefit is an expected right, and it would become an actual right only after the occurrence of the insured event. This right cannot be assigned before it becomes an actual right. The beneficiary is allowed to assign his benefits only after he obtains the consent of the life insured or where there is a term in the policy which allows him to assign the insurance benefits.251 Further statutory provisions in the Insurance Law or SPC guiding rules on this point are needed. 20.23 Subrogation does not apply to life insurance An insurer is not entitled to exercise subrogation rights against a third party who causes the insured event in life insurance. Article 46 of the Insurance Law provides: “Where an insured event, such as death, disability, or illness, etc. occurs in respect of the insured as a result of a third party’s act, the insurer shall, after paying insurance benefits to the insured or the beneficiary, have no right of subrogation against the third party, and the insured or the beneficiary remains entitled to claim compensation from the third party.”252 Life insurance is usually a long-term policy, and an insurer gives a fixed amount of money to the beneficiary of the policy on the occurrence of an insured event. A person’s life cannot be measured by money. Life insurance is not indemnity insurance, so when the insured event occurs, the insurer pays the insured or the beneficiary a fixed amount of money, based on the agreement of the contract but not on the actual loss of the insured. So the principle of indemnity is not applicable to life insurance; the insurer who has paid the insurance money to the insured or the beneficiary has no right of subrogation to sue the third party who causes the insured event. The right to sue the third party for compensation remains with the insured or the beneficiary even if he has been paid by the insurer.

250  For example, in the case of Mr Liu v The Life Insurance Company (2004), Mr Liu’s father effected a life policy on his mother and nominated Mr Liu as the beneficiary. Mr Liu divorced his wife by agreement and wished to transfer his beneficial right under his father’s policy to his ex-wife, because his ex-wife lived with and fostered their only daughter. Fearing that his parents would not agree to such a transfer, he did not tell his parents and asked the insurer to transfer his right to his ex-wife. The court held that the transfer of the beneficial right to another person without the consent of the proposer and the life insured was invalid. (This case was cited in the book by Haichun Yu and Chunyan Fu, Analysis of Insurance Cases (University of International Business and Economics Press 2009) p. 189.) 251 Cheng Miao Xu, Principals of the Insurance Law of China and Analysis of Difficult Cases (Law Express China 2011) p. 216. 252 The 1995 version of the Insurance Law (art. 68) and the 2002 version (art. 67) provided the same provisions.

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The Insurance Law gives the life insured or the beneficiary the right to claim compensation from the third party who caused the insured event after the insurer has paid the money to the life insured or the beneficiary. However, the Law does not expressly say whether the life insured or the beneficiary who has already received compensation from the third party may claim against the insurer for the insurance proceeds. Article 46 of the Insurance Law implies that the insured or the beneficiary is allowed to do so. The lack of express provision on this point results in different judgments by different courts on similar cases. For example, in the case of Yang Cuixiong v China Life Insurance Company Shilin Branch,253 Mrs Yang (the insured) effected an accident insurance with cover for medical treatment for herself in 2000. The insured was injured in a car accident, and accepted medical treatment in a hospital. The accident was caused by a third party who paid the cost of the treatment. The insured then claimed against the insurer for payment of the cost under the policy, but was rejected by the insurer on the ground that medical treatment insurance is a type of insurance with the nature of indemnity; the third party had paid the cost, so the insured should not be entitled to recover from the insurer for the cost – otherwise he may get double payment. Given that the Insurance Law does not provide rules on this point, where there is no agreement between the parties, the court should interpret the law and the policy in favour of the insured. The court therefore indeed interpreted the law and the policy in favour of the insured and decided that the insurer should pay the insured the cost of the medical treatment.254 In a similar case, Mr Zhang v Pingan Insurance Co. Ltd of China, Shenzhen Branch, the court made a different decision, and held that the insurer was not liable to pay the insured because he had received compensation from the third party.255 It is not clear whether the principle of subrogation applies to other types of personal insurance, such as medical insurance or personal accident insurance. These two types of personal insurance are usually short-term policies with an element of indemnity. The Insurance Law allows insurance companies running property insurance businesses to conduct personal accident insurance and medical treatment insurance business as well, but does not allow them to conduct pure life insurance business. Article 95 of the Insurance Law provides: “An insurer shall not engage in property insurance business and personal insurance business concurrently. However, an insurance company conducting property insurance business may conduct short-term health insurance and accident insurance businesses with the approval of the insurance supervision and administration authority of the State Council.” However, it cannot be said that personal accident insurance and medical treatment insurance fall into the category of indemnity insurance, to which the principle of subrogation applies. In addition to the ambiguity of the Law and the different

253 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 564. 254  See a similar case of Mr Chen v Pingan Life Insurance Company, Nanping Branch. The case was cited in the book of Insurance Contract Law – Case Commentary, written by the China Pingan Insurance Co. Ltd Legal and Compliance Dept (Qinghua University Press 2006)p. 480. 255  The case was cited in the book Insurance Contract Law – Cases Commentary, written by the China Ping An Insurance Co. Ltd Legal and Compliance Dept (Qinghua University Press 2006) p. 485.

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judicial decisions, there are also controversial opinions from scholars, judges and industry practitioners in this respect. Some of them have the view that medical treatment insurance is an intermediate type of insurance between property insurance and life insurance, with a life insurance element and an indemnity element. The purpose of such types of insurance is to indemnify the insured for the cost of his medical treatment, so subrogation should be applied.256 Some others have the view that medical insurance is one type of personal insurance, and subrogation does not apply.257 The courts have different views on whether subrogation applies to personal accident or medical treatment insurance. In the cases of Li Sijia v China Life Insurance Company258 and Feng Yaoshun v Guangda Yongming Life Insurance,259 the courts held that personal accident insurance falls into the category of personal insurance and the indemnity principle does not apply to it, nor does the doctrine of subrogation.260 In Cui Long v Ping An Life Insurance Company of China, Beijing Branch,261 it was held that the principle of subrogation applies only to property insurance – it does not apply to any type of personal insurance, and if there is any policy term which violates this rule, the term is invalid. In the SPC Interpretation III (Draft for Comments) 2014, the SPC proposed two views for comments on the issue of whether subrogation is applicable to medical and accident insurance.262 The first view is against the application of subrogation, stating that where a third party causes the life insured’s death, injury or disease and medical treatment expenses occur therefrom, if the insurer has paid the expenses to the insured and claims against the third party by subrogation, the court shall not uphold the claim unless otherwise agreed upon. If the insured or proposer has recovered some amounts from the third party, and the insurer intends to pay the insurance money after deducting the amounts, the court shall not support the insurer’s deduction unless otherwise agreed by the parties in the contract.263 The second view supports the application of subrogation to medical and accident insurance.264 However, neither of the two reviews has been incorporated into the SPC Interpretation III, so this issue is still waiting for a solution.

256  Chaoguo Jiang, Basic Theory of Insurance Law (China Politics and Law University Press 2002) p. 83; See also Insurance Contract Law – Cases Commentary, written by the China Pingan Insurance Co. Ltd Legal and Compliance Dept (Qinghua University Press 2006) p. 483; see also Jing Wang, Insurance Cases, Rules of Judgment and Application of Laws (People’s Court Press 2003) p. 283. 257 Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 570. 258  See the Supreme People’s Court Announcement (2006) No. 7. 259  See the Supreme People’s Court Announcement (2007) No. 11. 260  See also the case of Zhang Yanyi v China Life Insurance Company, Changzhou Branch. The court made the same decision. This case was cited by Jing Wang, Insurance Cases, Rules of Judgment and Application of Laws (People’s Court Press 2003) p. 283. 261  See Yuhua Zhou, The Latest Insurance Law and Doctrines: Cases, Materials and Problems (Law Press China 2008) p. 570. 262  The SPC Interpretation III (Draft for Comments) 2014, art. 32. 263  Ibid, art. 32(1) and (2). 264  Ibid, art. 32(3) and (4).

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20.24 Conclusion Life insurance, from formation of a contract to the claim stage, is very complex. Many disputes have arisen in respect of matters of the designation or change of the beneficiary and the distribution of insurance money to beneficiaries or to the legal successors of the life insured. The SPC Interpretation III 2015 has provided many important rules for resolving the problems. Further clarifications in respect of the application of subrogation in some kinds of insurance with the element of indemnity, such as medical treatment insurance and accident insurance, are still needed.

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CHAPTER 21

Liability insurance

21.1 Introduction A liability insurance contract is a contract by which the insurer undertakes to indemnify the insured in the event of his incurring legal liability, whether in tort or in contract, to a third party. The Insurance Law defines liability insurance as “the type of insurance of which the insured subject matter is the insured’s liability to indemnify a third party according to law.”1 Under the Insurance Law, liability insurance is treated as a type of property insurance.2 However, unlike other types of property insurance, liability insurance provides cover against the insured’s potential legal liability to a third party, rather than against the risk of damage to property.3 With liability insurance there are three relevant parties: the insurer, the insured and the third party claimant. Because of the involvement of a third party, liability insurance possesses special features as compared with first party insurance, such as the insured’s prior discharge of his liability to the third party as a precondition for recovering insurance payments from the insurer,4 direct payment of insurance money to the third party upon the request of the insured,5 the third party’s right to claim directly against the insurer for insurance money,6 the insurer’s participation in determination of the insured’s liability to the third party7 and so on. This chapter will consider these features common to all liability insurance. The additional requirements and restrictions imposed in liability insurance for motor vehicles will be considered in Chapter 22. 21.2 Types of liability insurance Some liability insurance contracts are required to be effected by legislation; this type of insurance can be called compulsory liability insurance. Some others may be effected voluntarily, without being required by statute or regulations, by insureds 1 The Insurance Law, art. 65(4). The Australian Insurance Contracts Act gives the definition that “a contract of liability insurance is a contract of general insurance that provides insurance cover in respect of the insured’s liability for loss or damage caused to a person who is not the insured” (s. 11(7)). 2  Articles 65 and 66 of the Insurance Law which govern liability insurance are placed in the section “Property Insurance” in the Insurance Law. 3  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 20-006. 4  The Insurance Law, art. 65(3). 5  Ibid, art. 65(2). 6 Ibid. 7 For example, see the Employer’s Liability Policy of the People’s Insurance Company of China, clause 20.

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whose everyday activities might result in them facing legal action for losses caused, and this type can be called voluntary liability insurance. 21.2.1 Compulsory liability insurance In China, compulsory insurance is required by statute of the NPC or regulations of the State Council. The major compulsory liability insurance is the third party liability insurance for motor vehicles. This is required by the Road Traffic Safety Law of China.8 The state applies a compulsory third party liability insurance system to motor vehicles.9 This topic will be discussed in detail in Chapter 22. Another type of compulsory liability insurance is the work-related injuries insurance under the State Council’s Regulation on Work-Related Injury Insurance.10 Article 2 of the Regulation provides that “Enterprises, public institutions, social organisations, private non-enterprise entities, foundations, law firms, accounting firms, and other organisations as well as individual industrial and commercial households hiring labourers within the territory of the People’s Republic of China shall, in accordance with this Regulation, purchase work-related injury insurance, paying work-related injury insurance premiums for all their employees or hired labourers. Employees of enterprises, public institutions, social organisations, private non-enterprise entities, foundations, law firms, and other organisations as well as labourers hired by individual industrial and commercial households within the territory of the People’s Republic of China shall have the right to enjoy work-related injury insurance benefits in accordance with this Regulation.” The work-related injuries insurance is a kind of social insurance, not commercial insurance, so will not be discussed in this chapter. Another type of compulsory liability insurance is travel agency liability insurance. According to the Regulations on Administration of Travel Agencies,11 when organising tours, travel agencies shall effect travel accident insurance for the tourists and guarantee that the services provided meet the tourists’ personal and property safety requirements.12 21.2.2 Liability insurance advocated by statutes Some types of liability insurance are not mandatory, but the insureds are encouraged by statutes to effect such types of insurance. Under the Coal Law of China,13 coal mining enterprises must effect work-related insurance and pay the insurance premiums 8 The Road Traffic Safety Law of the People’s Republic of China was adopted at the 5th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on 28 October 2003, and came into force on 1 May 2004. 9  Ibid, art. 17. 10  Regulation on Work-Related Injury Insurance was promulgated by Order No. 375 of the State Council of the People’s Republic of China on 27 April 2003, and came into force on 1 January 2004. 11 The Regulations on Administration of Travel Agencies were enacted and became effective on 15 October 1996. 12  Ibid, art. 22. 13 The Coal Law of the People’s Republic of China, which was adopted at the 21st Meeting of the Standing Committee of the Eighth National People’s Congress on 29 August 1996, and came into force as of 1 December 1996.

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for the employees according to the law. The enterprises are encouraged to effect accident insurance for miners working underground and to pay the premiums.14 According to the Construction Law of China,15 construction enterprises must effect work-related insurance and pay the insurance premiums for the employees according to the law. The enterprises are also encouraged to effect accident insurance for workers engaged in dangerous operations and to pay the premiums.16 21.2.3 Voluntary liability insurance There are many different types of voluntary liability insurance, which are effected voluntarily, but not required by statutory law or regulations. These would include employer’s liability insurance, public liability insurance, product liability insurance, professional liability insurance and so on. Different types of policies cover different liabilities. Under an employer’s liability policy, the insurer will pay the amount of damages for which the insured is legally liable in respect of accidental death, disability, or bodily injury to any employed person caused during the period of insurance and arising out of and in the course of their employment by the insured in connection with the business.17 Under a professional liability policy, such as medical professional liability policy, the insurer will cover the insured for any claim and claim costs that arise from the conduct of the insured’s (such as doctors or nurses) professional business, provided that the claim is first made by a third party (such as patients or their family members) against the insured and notified to the insurer during the insurance period, and that the claim and claim costs relate to a civil liability, including liability for the claimant’s costs and expenses, arising out of a negligent breach of the insured’s professional duty.18 Under a public liability policy, the insurer will pay the amount of damages for which the insured, or any of the additional persons insured, are liable according to law and claim costs and expenses in respect of accidental death, disability or bodily injury to a third party, and loss of or damage to material property.19 With a product liability policy, the insurer will pay the amount of damages for which the insured becomes liable to pay a third party in respect of his death, personal injury or property damage caused by using or operating the goods supplied by the insured.20

14  Ibid, art. 44. 15 The Construction Law of the People’s Republic of China was adopted at the 28th Meeting of the Standing Committee of the Eighth National People’s Congress on 1 November 1997, and came into force as of 1 March 1998. 16  Ibid, art. 48. 17  See the Employer’s Liability Policy of the People’s Insurance Company of China. 18  See the Medical Professional Liability Policy of the People’s Insurance Company of China. 19  See the Public Liability Policy of the Ping An Insurance Company of China. 20  See the Product Liability Policy of the People’s Insurance Company of China.

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There are many other types of liability policies, such as accountancy firm liability insurance, law firm liability insurance, school liability insurance, exhibition liability insurance, etc.21 In summary, although compulsory insurance and voluntary liability insurance are both insurances for the insured’s legal liability to third parties, there are a number of differences between them. First, voluntary liability insurance is to protect the insured from his incurring legal liability, while a compulsory policy, in addition to the function of ordinary liability insurance, seems more for the sake of providing a safety net to protect third parties in high risk areas, such as the area of road traffic accidents. Second, voluntary liability insurance follows the doctrine of freedom of contract – the insured and the insurer are free to effect a policy – whereas in compulsory liability insurance, the insured is obliged to purchase a policy by law, and the insurer is not permitted to refuse an application for a compulsory liability policy. For example, according to art. 10 of the Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance (the Motor Regulation),22 an insured shall choose an insurance company that has the qualification for undertaking the business of compulsory motor vehicle liability insurance when purchasing the insurance, and the insurance company chosen shall not refuse to undertake or delay undertaking the insurance.23 And third, for a voluntary liability policy, the amount to be insured and premiums to be paid can be negotiated by the insured and the insurer, while for a compulsory liability policy, out of the consideration of public policy, the premium rate and the limit of the insured amount are set by the China Insurance Regulatory Commission (CIRC). For example, the current maximum insured amount is set by the CIRC at ¥110,000 for death, injury or disability for compulsory motor vehicle traffic accident liability insurance in China.24 21.3 Statutory law governing liability insurance The relevant rules of law governing liability insurance are set forth in articles 65 and 66 of the Insurance Law as follows: Article 65(1): the insurer may directly indemnify a third party for loss or damage caused by the insured of a liability insurance policy in accordance with the provisions of law or the insurance contract. Article 65(2): where the insured of a liability insurance policy causes loss or damage to a third party, and the indemnity liability of the insured to the third party is ascertained, upon a request by the insured, the insurer shall make indemnity payment to the third party directly. Where the insured neglects (daiyu) in making a request, the third party shall have the right to claim indemnity payment directly from the insurer for the portion it is entitled to.

21  See the Collection of Insurance Clauses (non-marine), the Ping An Insurance Company of China. 22 The Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance was adopted at the No. 127 executive meeting of the State Council on 1 March 2006, came into force as of 1 July 2006, and was amended for the first time on 30 March 2012 and for the second time on 17 December 2012. 23  Ibid, art. 10. 24 See the website of the CIRC, accessed in March 2016.

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Article 65(3): where the insured of a liability insurance policy causes loss or damage to a third party, and the insured does not indemnify the third party, the insurer shall not make indemnity payment to the insured. Article 65(4): liability insurance shall refer to the type of insurance of which the insured subject matter is the insured’s liability to indemnify a third party according to law. In comparison with art. 49 of the 1995 version and art. 50 of the 2002 version of the Insurance Law, the 2009 version of the Law includes two new paragraphs (art. 65(2) and (3)), with three new provisions being introduced: (1) the insurer may pay insurance money directly to a third party upon request by the insured (art. 65(2)); (2) the third party has a vested right to claim insurance payments directly against the insurer in the case of the insured’s neglect in making a request to the insurer for payment of damages to the third party (art. 65(2)); and (3) the insurer shall not make a payment to the insured prior to the insured’s discharge of his liability to the third party (art. 65(3)). It is obvious that the 2009 version of the Law improves the third party’s position in terms of claiming payment directly against the insurer. Article 66 of the Insurance Law imposes on the insurer a duty to pay for legal costs incurred by the insured, in providing that “Where an arbitration or litigation case is brought against the insured of a liability insurance due to the occurrence of an insured event which caused loss or damage to a third party, the cost of such arbitration or legal proceedings and other necessary and reasonable costs paid by the insured shall be borne by the insurer, unless specified otherwise in the insurance contract.” These provisions will be discussed in detail in the following sections. 21.4 The insured’s legal liability to the third party As a liability policy covers the risk of the insured incurring legal liability to a third party for death, personal injury, property damage or financial loss, it is important in the first place to determine whether the insured has incurred a legal liability to the third party according to law – in other words, to determine whether or not the insured event has occurred – before determination of the insurer’s liability to the insured according to the terms of the insurance policy. Several issues need to be considered in determining the insured’s legal liability to a third party. First, it is generally accepted that the main purpose of liability insurance is to protect the insured against his tortious liability to a third party.25 For example, if an insured drives negligently and injures a third person, he is in breach of the duty of care to other road users, and as a result, incurs a liability for compensating the injured person according to tort law.26 Here the insured’s liability policy does not directly cover the injury to the third person, but the insured’s legal liability for the

25  Dingfu Wu, Interpretation of the Insurance Law of the People’s Republic of China (China Finance and Economics Publishing House 2009) p. 157; Hailin Zhou, Introduction to Liability Insurance (Legal Press 1999) p. 55. 26 The Tort Law of the People’s Republic of China was adopted at the 12th session of the Standing Committee of the Eleventh National People’s Congress on 26 December 2009, and came into force on 1 July 2010. Article 48 provides: “Where a motor vehicle traffic accident causes any harm, the compensatory liability shall be assumed according to the relevant provisions of the Road Traffic Safety Law.”

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third person’s injury. A public liability or a product liability policy generally seeks to cover the insured’s tortious liability to the general public. Second, in some circumstances, liability insurance may also provide cover against the insured’s legal liability under a contract.27 For instance, in a contract of carriage of goods by road or by sea, it is the carrier’s duty to take care of the goods in his charge by contractual agreement. If the goods are damaged or lost, the carrier is liable for the loss or damage. The carrier can transfer to an insurer the risk of his incurring liability for loss of or damage to the goods in transport by effecting a carrier’s liability insurance policy. In the event that the goods are indeed damaged during the period of transport, the insured incurs legal liability for the damage. Again, the carrier’s liability policy does not directly cover the damage to the goods, but its legal liability in respect of the damage to the goods to the owner of the goods. Third, liability insurance does not cover criminal or administrative liability, nor the insured’s intentional action to cause personal injury or property damage to a third party. In liability policies, the insurer usually excludes coverage for the insured’s intentional acts. As can be seen in the Employer’s Liability Policy of the People’s Insurance Company of China, it is expressly stipulated that the insurer is not liable for death, injury or disability of the employees due to the employer’s intentional or grossly negligent action.28 The Insurance Law also entitles the insurers to rescind insurance contracts and repudiate liability in the event of the insured’s intentionally bringing about the occurrence of the insured event.29 However, in special circumstances, an intentional act of the insured may be covered in certain compulsory liability insurance. For instance, under a compulsory motor vehicle third party liability policy, if the insured intentionally causes a road accident to happen, the insurer is required to pay the third party for personal injury and then make a claim against the insured.30 This offers greater protection to the injured third party. Fourth, for the insured’s tortious liability to a third party, there should usually be a causal connection between the insured’s negligence and the personal injury or property damage to the third party. If the third party’s personal injury is not caused by the insured, the insured is then not legally liable for the injury. For some other liability policies, it is not necessary to establish a causal connection between the insured’s negligence and the personal injury or property damage to the third party. For example, an employee may injure himself during working hours, and there is no causal connection between the employer’s negligence and the employee’s personal injury, but the insurer is nevertheless liable for the employee’s injury under an employer’s liability policy. In compulsory motor vehicle traffic accident liability insurance, even if the insured driver has no fault at all for a road accident, i.e. the third party’s injury is not caused by the driver’s act, the insured is nevertheless legally liable for paying compensation for the third party’s injury and property damage,31 27  Dingfu Wu, Interpretation of the Insurance Law of the People’s Republic of China (China Finance and Economics Publishing House 2009) p. 157; Hailin Zhou, Introduction to Liability Insurance (Legal Press 1999) p. 55; Zongwei Yuan, Insurance Law (Beijing University of Economics and Finance 2000) p. 548. 28  Clause 3(5) of the policy. 29  The Insurance Law, art. 27(2). For more on the topic of fraudulent claims, see Chapter 16. 30  The Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance, art. 22. 31  In the Road Traffic Safety Law of the People’s Republic of China, art. 76(2) provides: “Where a traffic accident occurs between a motor vehicle and a non-motor vehicle driver or a pedestrian, if the

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albeit a limited amount of compensation. For example, if the insured driver is fully responsible for the accident, the maximum amount of indemnity is ¥110,000 for death or injury of the third party victim, while if the insured driver has no fault at all for the accident, the maximum amount of indemnity is ¥11,000 for death or injury for the third party victim.32 Fifth, sometimes, a third party’s injury or loss is immediately obvious and happens at about the same time, or soon after, an insured’s negligent act, for example, a motor vehicle accident caused by an insured’s negligent driving. Sometimes, a substantial amount of time can elapse before a third party suffers an injury from the insured’s negligent act or omission. This can often be observed in medical liability insurance. The patients may suffer no immediate injury due to the medical doctor’s negligence; they may make a claim for the injury against the medical doctor many months or years later. The insurer’s liability to pay the insurance money is triggered by the patient first making a claim against the insured during the insurance period. For example, in the Medical Liability Insurance Policy of the PICC,33 clause 2 states that “in the insurance period as specified in this policy, the insurer is liable for paying insurance money for the patient’s injuries caused by the negligence of the insured’s medical practitioners. The claim is first made by the patient or the patient’s family member within the insurance period.” It is also important to know the moment when the insured incurs liability to a third party for the sake of determination of the limitation period for litigation. The China Insurance Regulatory Commission (CIRC) stipulates that for liability insurance, the insured event is the third party’s request to the insured to bear legal liability. The date of the occurrence of the insured event is the date when the third party requests the insured to bear the legal responsibility.34 Once the insured’s legal liability to a third party has been established, it is then necessary to determine whether or not the insured’s legal liability is covered under the liability policies, since liability policies do not cover certain kinds of liability by exemption clauses in the policies.35 This will be considered below. 21.5 The insurer’s liability to the insured The insured’s right to indemnification under a liability policy will be regarded as arising once the insured’s liability to the third party has been ascertained, i.e. established and quantified. However, even if the insured’s liability has been ascertained, no matter whether it arises from a contractual relationship or from a

non-motor vehicle driver or the pedestrian has no fault, the motor vehicle party shall bear the liability; however, if there is evidence to prove that the non-motor vehicle driver or the pedestrian is at fault, the the motor vehicle party’s liabilities can be reduced according to the extent of the fault; if the motor vehicle party is not at fault, it shall bear no more than ten percent of the liability.” 32  See the Compulsory Traffic Accident Liability Insurance for Motor Vehicles of Ping An Insurance Company, clause 8. 33 See accessed in February 2016. 34 The CIRC’s Reply to the Questions Concerning Limitation Periods for Claims, Bao Jian Fa [1999] No. 256 (see accessed in February 2016). 35  For more on exemption clauses, see Chapter 9 of this book.

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tortious relationship with a third party, the insurer may still not be liable for the insured’s liability. Whether or not the insured’s legal liability to a third party is covered under the liability policy depends on the scope of coverage as defined by the terms of the policy. Liability policies usually exclude specifically from cover certain types of losses for which an insured might be held legally liable to a third party. It is generally accepted that damages for breach of contract are usually not covered by liability insurance. As can be seen in the case of The Travel Agent v The Insurance Company,36 a travel agency liability policy does not cover the liquidated damages for breach of the contract by the agency and damages for non-performance of contractual duty. In this case, a group of 18 persons paid the travel agency for a package tour from Changsha to the Maldives and paid the fee in the amount of ¥454,200. A clause in the travel contract stated that in the event that the agency failed to provide the travellers with accommodation, food and transport in the Maldives, the agency would bear the costs of similar accommodation, food and transport incurred by the travellers, and was also liable for paying the travellers liquidated damages of the amount equivalent to 30% of the total fee paid. The branch of the agency in the Maldives failed to provide services to the travellers, who had to spend their own money on accommodation, food and transport and sustained costs amounting to ¥49,000. The group claimed against the agent for damages of ¥49,000 and for liquidated damages of ¥136,260 (which was calculated as ¥454,200 × 30%). The agency admitted its liability, paid both the amounts to the travellers, and then turned to its insurer for the amounts paid to the travellers under a travel agency liability insurance policy. The insurer rejected the claim on the ground that according to the term of the liability contract, “the insurer is liable only for paying the insured for its liability for personal injury or property damage suffered by the travellers.” The court held that the failure of the branch of the agency in the Maldives in providing services to the travellers constituted a breach of the travel contract, so the agency was liable for paying damages to the travellers for its non-performance of the contractual obligations. However, the liability policy did not cover the insured’s liability for damages for breach of the travel contract. Thus the insurer was not liable to pay the insured for such damages. It is shown by this case that a liability policy usually does not cover the insured’s liability for breach of contract. If damages for breach of contract were to be covered, the insured would be encouraged to breach its contract with travellers, and would be unjustly enriched in the case of being paid by its liability insurer. In public liability insurance, the scope of the insured’s liability to third parties is usually limited to certain areas or locations as specified in the policy. Even if the insured’s liability for personal injury or damage to property to a third party has been ascertained, the insurer may not be liable to pay insurance money to the insured because the insurer’s liability to the insured may not fall within the scope

36 This case was decided by the People’s Court, Furong District, Changsha City, Hunan Province, Civil Court Judgment (2011) No. 1132, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2012) vol. 4, p. 758.

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of coverage. In the Internet Entertainment Shop v The Insurance Company,37 an advertising board owned by the Internet Entertainment Shop (the insured) was blown down by a strong wind and damaged two cars nearby. The court made a judgment, according to tort law, for the insured to pay the owners of the cars for the damage and the cost of renting alternative cars. Having paid the total amount of ¥75,548 to the third parties, the insured made a claim against the insurer for the amount paid under a public liability insurance policy. The trial court held the insurer liable for paying the insurance money under the policy which covered the insured’s liability to the general public for personal injury or property damage arising from the business activities of the insured. The insurer appealed, arguing that the scope of the coverage was for indoor activities, not for risk outside the shop, as specified in a clause in the policy. The damage caused by the advertising board falling on the cars was not covered by the policy. The appeal court upheld the insurer’s appeal. Unlike the situation for first party insurance, under liability insurance, it is only for the third party’s injury, death or property damage that the insurer is liable. It is thus essential that the scope of third parties must be clearly defined in the policies and determined upon the happening of the insured event. In motor vehicle third party liability insurance, many disputes arise as to the determination of the third party. According to art. 42 of the Motor Regulation, the term “insured persons” includes the insured and the drivers permitted by the insured. The insured persons cannot be treated as third parties, nor can the persons on board the vehicle.38 So the insurers are only liable to third party victims other than the insured persons or the persons on board the vehicle.39 Having said that about general situations, the insured himself can be treated as a third party in a special situation.40 According to art. 17 of the Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents,41 where the driver who is permitted to drive the insured vehicle injured the insured, the insured’s lawsuit for indemnity against the compulsory third party liability insurer within the scope of coverage should be upheld by People’s Courts, except where the insured was a person on board the vehicle. Sometimes, persons on board the vehicle may fall off the vehicle by the sudden movement or turning of the vehicle and as a result are injured or killed. These 37  This case was decided by the Second Intermediate People’s Court, Tianjin City, Civil Court Judgment (2010) No. 426, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2012) vol. 4, p. 764. 38  Article 3 of the Regulation provides: “The compulsory motor vehicle liability insurance as mentioned in the present Regulation shall refer to the compulsory liability insurance of an insurance company, which gives compensation within the limit of liability to the victims other than the persons on board the vehicles and the insured persons for their bodily injuries and death and property losses arising from the road traffic accidents caused by the insured motor vehicles.” 39 Ibid. 40  In English law, the insured can become the third party and recover as such if injured by the negligence of someone whom he permitted to drive the car (Digby v General Accident Fire and Life Assurance Corp [1943] AC 212). 41 The Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents was adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court on 17 September 2012, and came into force on 21 December 2012.

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persons are sometimes treated, or sometimes not treated, as third parties under a motor vehicle traffic accident liability policy, depending on the facts of the case. In Mr Yan v The Insurance Company,42 Mr Gao was a porter on board the vehicle; while he was unloading the goods from the truck, the insured moved the truck suddenly, Gao fell off the vehicle and was injured. The insured was fully responsible for the accident. The court held that Gao was not a third party victim under the policy, so the insurer was not liable for indemnifying him. However, in another case,43 a passenger on the insured bus fell off the bus and was killed on the road, because the door of the bus automatically opened while the bus was moving. The court held that because the victim was off the vehicle at the moment of the accident, he was not a person on board the vehicle but was a third party under the third party liability policy. Thus the insurer was liable. In public liability insurance, any person who is working for the insured cannot be treated as a third party, no matter whether the person is a permanent employee of the insured or a temporary volunteer. In The Logistics Company v The Insurance Company,44 Mr Luo was not the employee of the Logistics Company (the insured), but was sent to work for the insured temporarily by a labour company. He was killed accidentally by the hook of a crane while working for the insured in a warehouse. The insured claimed for Luo’s death payment under a public liability policy. It was held that Luo was killed while working for the insured, and he should not be regarded as a third party under the policy, so the insurer was not liable. There are many other situations where the insurer may not be held liable for the third party. This depends on the scope of coverage under terms of the insurance contracts and the construction of these terms by the courts. 21.6 Legal force of settlement agreements The insured’s liability to a third party can be determined by a court judgment, an arbitration award or a settlement agreement between the insured and the third party. Decisions by courts or arbitration are binding, while whether or not a settlement agreement between the insured and the third party has legal force largely depends on its content, its fairness and the way of reaching the agreement. 21.6.1 Settlement agreements with the mediation of the People’s Mediation Committee When an accident occurs, the parties involved are often willing to take a simple and quick way of resolving disputes, and reach a settlement agreement. A settlement agreement is often reached with the mediation of the People’s Mediation

42 This case was decided by the Intermediate People’s Court, Jinan City, Shandong Province, Civil Court Judgment (2010) No. 109, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2011) vol. 3, p. 399. 43  Mr Liu v The Insurance Company; this case was decided by the Intermediate People’s Court, Shenyang City, Liaoning Province, Civil Court Judgment (2012) No. 38, and is reported in the Annual Report of   Typical Insurance Cases (Law Press China 2012) vol. 4, p. 378. 44 This case was decided by the People’s Court, Jinan City Central District, Jinan City, Shandong Province, Civil Court Judgment (2010) No. 109, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2011) vol. 3, p. 399.

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Committee.45 This way of settlement of disputes is not only for insurance disputes, but is commonly used for all civil or commercial disputes. According to art. 1 of the Provisions of the Supreme People’s Court Concerning Trying Civil Cases Relating to People’s Mediation Agreements,46 a mediation agreement, which is reached by the parties with the mediation of the People’s Mediation Committee, and which has the content of civil rights and obligations and has been signed or sealed by the parties, has the nature of a civil contract. The parties shall fulfil their obligations according to the agreement and shall not alter or rescind the agreement unilaterally. With the agreement, tortious liability can be turned into contractual obligation. The agreement is a kind of contract and its formation and performance are governed by the Contract Law and by other relevant laws, such as the People’s Mediation Law.47 According to the People’s Mediation Law,48 a mediation agreement reached by the parties with the mediation of the People’s Mediation Committee is legally binding – the parties shall perform the obligations as agreed.49 The People’s Mediation Committee shall supervise the parties’ performance of the agreement and urge the parties to fulfil their contractual obligations.50After the mediation agreement has been reached, if there is any dispute as to the content or the performance of the agreement, a party may bring a lawsuit to the People’s Court.51 The parties may apply to People’s Courts for judicial confirmation of the agreement within 30 days from the date of the agreement becoming effective; the People’s Court shall promptly review the agreement and confirm its effectiveness according to relevant laws.52 Where the People’s Court has confirmed that the mediation agreement is valid, if one of the parties refuses to perform the duties or does not fully comply with the agreement, the other party may apply to the People’s Court for enforcement.53 Where the People’s Court has confirmed that the mediation agreement is invalid, the parties may amend the original agreement or reach a new agreement with the mediation of the People’s Mediation Committee, or otherwise file a lawsuit.54

45  Article 1 of the People’s Mediation Law of the People’s Republic of China provides that the People’s Mediation Committee is responsible for mediating civil disputes, is established by law and is a mass organisation. Villagers’ committees and neighbourhood committees shall form the people’s mediation committees. Enterprises and public institutions have the discretion to form or not form the people’s mediation committees based on their own needs. A people’s mediation committee is composed of between three and nine members. It has one director and, if necessary, two or more deputy directors. A people’s mediation committee shall have female members and, in an area of multi-ethnic population, have members from ethnic minorities. 46  The Provisions of the Supreme People’s Court Concerning Trying Civil Cases Relating to People’s Mediation Agreements was published on 5 September 2002 and became effective on 1 November 2002. 47  The People’s Mediation Law of the People’s Republic of China was adopted at the 16th meeting of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China on 28 August 2010, and came into force on 1 January 2011. 48  The People’s Mediation Law of the People’s Republic of China was adopted at the 16th meeting of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China on 28 August 2010, and came into force on 1 January 2011. 49  The People’s Mediation Law, art. 31. 50 Ibid. 51  Ibid, art. 32. 52  Ibid, art. 33. 53 Ibid. 54 Ibid.

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In Mr Xu v The Insurance Company,55 the insured injured Mr Xu in a road accident. With the mediation of the traffic police, the insured and Xu reached a settlement agreement. The insured paid Xu in accordance with the agreement, and the insurer then paid the insured. Three months later, Xu sued the insured and the insurer, demanding more money on the ground that the amount paid by the insured was not sufficient to cover all losses suffered by him. It was held that the settlement agreement between the insured and Xu had determined the amount of payment and reflected the real intentions of the two parties. The amount of compensation was not unfair. Both parties signed the agreement. It was thus valid and should be complied with by the parties. Sometimes the amount of compensation determined by the insured and the third party may not be accurate or fair to the insurer, so some High People’s Courts (HPC) provide guidance to the lower courts in respect of examining the amount of compensation determined by the insured and the third party. For example, the HPC of Shandong Province and the HPC of Zhejiang Province provide that where the amount of compensation is determined by the insured and the third party, or determined by the People’s Court civil mediation procedure, the People’s Courts shall examine the amount upon the request of the insurer.56 21.6.2 Settlement agreements without the consent of the insurers When the insured is negotiating with the third party victim over the amount of compensation to the victim, because of the existence of the liability policy, it is possible the insured may offer a generous amount to the third party with the expectation that his insurer would eventually pay the amount to the third party victim and he himself would not need to pay. The Insurance Law does not provide any rules in relation to reconciliation settlement of disputes between the insureds and the third parties in liability insurance. In practice, in order to avoid its interest being prejudiced by the insured, an insurer usually specifically sets forth a condition in the liability policy in respect of the insured’s claim to the effect that without the insurer’s written consent, the insurer is not bound to pay the amount of compensation which the insured has promised to pay or has paid to the victim. As an example, in the Public Liability Policy of the PICC, clause 17 stipulates: “When the insured has received a claim from a victim for compensation, without the insurer’s written consent, the insurer is not bound by the promises, repudiation, offer, agreement, payment or compensation that the insured has made to the victim. The insurer has the right to redetermine the amount of compensation which the insured has promised to pay or has paid. The insurer will not pay an amount which does not fall into the scope of cover or exceeds the amount that the insurer is liable for under the policy.” 55  This case was decided by the People’s Court, Bayu Quan District, Yingko City, Liaoning Province, Civil Court Judgment (2012) No. 00594, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2013) vol. 5, p. 605. 56  The Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of the HPC of Guangdong Province 2011), art. 17; the Guidance of Zhejiang Province High People’s Court Concerning Questions of How to Deal with Disputes in Property Insurance Contracts 2011 (hereinafter, the Guidance of the HPC of Guangdong Province 2009), art. 20.

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For instance, in the Trade Company v The Insurance Company Changsha City Central Branch,57 Mr Fu drove an insured truck and injured the foot of a pedestrian. He was fully responsible for the accident. Fu and the victim reached a settlement agreement with the mediation of a local mediation committee, under which Fu was liable to pay the victim a total amount of ¥49,659. A clause in the insurance policy stated that “without the insurer’s written consent, if the insured has promised to pay or has paid the third party the amount, the insurer has the right to redetermine the amount under the policy, and will not pay the amount which does not fall within the scope of cover or exceeds the amount that the insurer is liable for.” The insured refused to pay that amount claimed because the insured did not get consent from the insurer about the amount to be paid to the victim. The arbitration commission held that the settlement agreement between the insured and the victim was binding on the insured and the victim, but not binding on the insurer, because the insurer did not take part in the settlement negotiation. The insured could not claim for the amount which he promised to pay the victim without the written consent of the insurer. The insurer should have the right to determine the amount of payment according to the terms of the insurance policy. The arbitration commission held that the insurer was liable to pay the reduced amount of ¥33,056. The HPC of Guangdong Province is also of the view that when the insured event occurs under a liability contract, where the insured and the third party reach an agreement on the amount of compensation without the insurer’s written consent, the insured claims that the insurer’s liability should be determined according to the amount agreed by the insured and the third party, but the insurer does not accept this amount, the People’s Courts shall not uphold the insured’s claim.58 21.6.3 Settlement agreements between the insurer and the third party or between the insured and the insurer Sometimes, the insurer and the third party reach an agreement as to the payment to the third party without the participation of the insured tortfeasor. Such agreements do not bind the insured, nor can they settle the insured’s tortious liability to the third party, nor do they affect the contractual obligations between the insurer and the insured under the liability policy. In the Transport Company v The Insurance Company,59 the insured vehicles collided with the third party’s vehicle. The insured was fully responsible for the accident. The estimated repair cost was approximately ¥130,000. In the absence of the insured at the court, the third party and the insurer reached a settlement agreement with

57  This case was decided by Changsha Arbitration Commission, Hunan Province, Arbitration Award Letter (2011) No. 279, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2012) vol. 4, p. 519. 58 The Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of the HPC of Guangdong Province 2011), art. 21. 59 This case was decided by the People’s Court, Futian District, Shenzhen City, Guangdong Province, Civil Court Judgment (2012) No. 6363, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2013) vol. 5, p. 600.

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the mediation of the court.60 It was agreed that “the insurer will pay the third party ¥87,200 for indemnifying the loss in final settlement of the dispute, and the third party will abandon other claims.” The insurer paid the amount according to the agreement. A few months later, the third party sued the insured for the sum less the amount received from the insurer. The court ordered the insured to pay ¥45,846 to the third party, and the insured paid the amount. The insured then filed a lawsuit against the insurer for this amount. The court held that (1) the third party had neither a contractual relationship nor a tortious relationship with the insurer; its promise to give up other claims in the settlement agreement with the insurer did not necessarily mean that it abandoned its right to claim against the tortfeasor insured. Also, the agreement did not mean that the insured would abandon its right to claim against the insurer. (2) According to art. 65(2) of the Insurance Law, the insurer can make payment directly to the third party, but on two conditions: the insured’s liability to the third party has been ascertained and the insured has made a request to the insurer for a direct payment to the third party. In this case, when the agreement was made between the third party and the insurer, the insured’s liability was not then ascertained and the insured did not request the insurer to pay the third party the amount agreed. So the agreement between the third party and the insurer was neither binding on the third party and the insured under their tortious relationship, nor binding on the insured and the insurer under their contractual relationship. (iii) The insurer was liable for paying the insured the amount of ¥45,846. It can be seen from this case, in the absence of the insured, any agreement between the insurer and the third party cannot resolve disputes but makes the situation more complex. It is thus advisable that the insurer takes part in the negotiation of the settlement agreement with the insured and the third party. Where a settlement agreement between the insured and the insurer is found unjust, the insured may apply to court for cancellation of the agreement. In Mr Xing v The Insurance Company,61 Mr Xing’s car knocked Mr Wu off a bicycle, and Mr Zhou’s car then ran over Wu and killed him. Xing and Wu took the primary responsibility for the accident, and Zhou took the secondary responsibility. Xing, Zhou and Wu’s family members reached a settlement agreement with the mediation of the traffic police. Under the agreement, Xing was liable for paying compensation of ¥200,000 to Wu’s family and Zhou for paying ¥120,000. Xing failed to pay the amount. Wu’s family then sued Xing (the insured). The court mediated the dispute and requested Xing to pay ¥183,000 to Wu’s family. Xing paid the amount and then reached an agreement with the insurer under which the insurer was liable to pay Xing ¥88,531 as a final settlement between Xing and the insurer. The insurer paid the amount to Xing. Six month later, Xing sued the insurer on the ground that the amount (¥88,531 yuan) in the agreement was unjust, so the agreement should be cancelled. The court examined the agreement and held that the amount was unjustly estimated and the insurer should pay ¥22,641 more to Xing.

60  In China, courts have a function of mediation of disputes. 61 This case was decided by the Intermediate People’s Court, Juijiang City, Jiangxi Province, Civil Court Judgment (2012) No. 618, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2013) vol. 5, p. 602.

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21.7  The prior discharge of the insured’s liability to the third party In the 1995 and 2002 versions of the Insurance Law, there was no such precondition for the insured to receive insurance money as provided in art. 65(3) of the Insurance Law 2009, that if the insured does not indemnify the third party, the insurer shall not make indemnity payments to the insured.62 The lack of such a precondition sometimes gave rise to prejudice to the victim’s interest and unjust enrichment of the insured. In Mr Cheng v The Insurance Company,63 Cheng effected a liability policy to cover the persons on board the vehicle. One of his drivers was killed in a road accident in November 2001. The accident was fully caused by the fault of the driver. Cheng did not pay any compensation to the family of the dead driver. He claimed against the insurer for the amount of ¥40,000. The insurer paid him the amount under the liability policy. However, the insured did not pay anything to the family members of the dead driver after receiving the insurance money. In another case,64 the insured had not paid compensation to the victims of a road accident but the insurer paid the insured. The insured then failed to pay the money to the victims, so the victims sued the insured and the insurer. The courts held that according to the Property Law,65 the victims were entitled to request the insured to transmit the money had and received to the victims. In order to protect a third party’s interest, the 2009 version of the Insurance Law introduced a new provision into the Law to the effect that the insurer shall not make indemnity payments to the insured under a liability policy before the insured has discharged his liability to the third party.66 In Mr Qi v The Property Insurance Company Beijing Branch,67 Mr Qi effected a compulsory third party liability policy for his vehicle. The insured vehicle injured two persons on a motorcycle. The two victims sued the insured and the court held that the insured was liable to pay the victims the amount of ¥103,254. The insured then sued the insurer for the amount under the policy. The insured did not show evidence that he had already paid the victims,

62  Under English law, there is no need for the insured to show that he has actually made payment to the third party. Wording ousting this principle is rarely found in non-marine or marine policies, although the rules of P&I Clubs offering liability cover frequently contain “pay to be paid” clauses under which the Club is not liable to the member until the member has made full payment to the third party. These clauses are replied upon primarily in relation to cargo claims against carriers and are not used where the claim against the member is for damages in respect of death or personal injury (for more, see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 20-049). 63  This case was cited in the book by Xiaoming Xi, Interpretation and Application of the Provisions of the Insurance Law of the People’s Republic of China (China Legal Publishing House 2010) p. 423. 64  Mr Dong v The Insurance Company; this case was decided by the People’s Court, Zhaoyang County, Liaoning Province, Civil Court Judgment (2011) No. 687, and is reported in the Annual Report of   Typical Insurance Cases (Law Press China 2012) vol. 4, p. 583. 65 The Property Law of the People’s Republic of China was adopted at the 5th Session of the Tenth National People’s Congress of the People’s Republic of China on 16 March 2007, and came into effect as of 1 October 2007. Article 245 provides: “Where the immovables or movables in a person’s possession are encroached upon, the person shall have the right to request the return of the original property. In the event of trespass to the possession of another, the possessor shall have the right to request elimination of such trespass or hazard. If damage is caused by encroachment or the trespass, the possessor shall have the right to request compensation.” 66  The Insurance Law, art. 65(3). 67 This case was cited in the book by Jianxun Liu, Typical Cases and Adjudgment Considerations of Insurance Law (Law Press China 2012) p. 383.

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so his claim against the insurer was rejected by the court according to art. 65(3) of the Insurance Law. By virtue of art. 65(3) of the Insurance Law, the insurer must not make indemnity payments to the insured where the insured has not paid the third party for the loss or damage. One issue may arise, that is, in the event that before the insured indemnifies the third party, the insurer has made indemnity payments to the insured, the insured does not transmit the money to the third party, and the third party then claims directly against the insurer for the insurance payment, what shall the insurer do? The insurer should not be allowed to refuse to pay the third party on the grounds that he has already paid the money to the insured. In Mr Zhu v The Ping An Property Insurance Company of China Haining Branch,68 while driving his car, the insured had a road accident and injured Zhu, who was on an electric bicycle in February 2011. The traffic police reported that the insured was primarily responsible for the road accident and Zhu took secondary responsibility. The insured and the third party reached an agreement in the insurance company, under which the insured was bound to pay the total loss of ¥4,443 to Zhu. Having paid Zhu ¥2,000, the insured claimed against the insurer for insurance payment and the insurer paid him ¥3,843 under the compulsory third party liability policy. The insured, however, failed to pay Zhu the remaining ¥2,443 in accordance with the agreement. In March 2012, Zhu sued the insurer and the insured for the amount of ¥2,443. The insurer argued that because it paid the insured the insurance money of ¥3,843, the claim had been settled. Zhu’s request for an insurance payment should be turned down by the court. The focus of argument in this case was whether the insurer was still liable for paying the third party after having paid the insured under the compulsory third party liability policy. The court held that according to art. 76 of the Road Traffic Safety Law69 and art. 21 of the Regulation on Compulsory Motor Vehicles Accident Liability Insurance,70 the victim had the legitimate right to make a claim directly against the insurer. The insurer had a legal obligation to the victim in a road accident under the compulsory third party liability insurance. Thus Zhu had the right to claim directly from the insurer for the unpaid loss. Although the insurer had paid the insured, its obligation to Zhu should not be released. It was liable to pay Zhu ¥2,443. It is advisable that before making a payment to the insured under a liability policy, the insurer should ensure that the insured has already paid the third party; otherwise, the insurer would have to take the adverse consequences.

68 This case was decided by the Intermediate People’s Court, Jiaxing City, Zhejiang Province, Civil Court Judgment (2012) No. 355 (see accessed in March 2016). 69  Article 76 provides that “where a motor vehicle traffic accident occurs and causes personal injury, or property damage, the insurance company shall make compensation within the policy limit under the compulsory third party liability insurance for motor vehicles.” 70  Article 21 provides: “Where a road traffic accident caused by the insured motor vehicle gives rise to personal injuries, or property damage to the victims other than those persons carried in or upon the vehicle and the insured, the insurance company shall make compensation according to the law within the limit of the amount under the compulsory traffic accident liability insurance for the motor vehicle.”

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21.8 The insurer’s direct payment to the third party According to art. 65(3) of the Insurance Law, the insured can pay the third party first, and then the insurer will pay the insured. This has just been considered above. The insurer may also pay the third party directly by virtue of art. 65(2) of the Insurance Law in two ways. The first way is that the insurer can pay the insurance money directly to the third party, provided that the insured’s liability to the third party has been ascertained and the insured has made a request for the insurer to pay the insurance money directly to the third party. The second one is that the third party sues the insurer directly where the insured neglects (daiyu) to request the insurer to make an insurance payment to the third party. The first way is considered here, and the second one will be considered in the next section. Two conditions must be met for the insurer to pay the third party directly. The first one is that the insured’s liability to the third party has been ascertained. This can be done in one of the three ways: the insured has been sued to a judgment; there is a binding arbitration award against the insured; and the insured has entered into a settlement with the third party. The courts usually determine the insured’s legal liability to a third party by tort law, contract law and other related laws and then quantify, in terms of money, the insured’s liability for paying compensation to the third party. After that, the courts will determine the scope of coverage under the liability policy. Where the insured’s liability to the third party exceeds the amount insured under the policy, the insurer is liable only for paying the amount within the limit of coverage, and the insured has to pay the amount himself which is not covered. In Huai County Anshun Transport Company Ltd v China Pacific Insurance Company BangbuVentral Branch,71 the insured vehicle had a road accident and killed a cyclist, Mr Han. The insured was fully responsible for the accident and was thus liable to pay compensation of ¥386,221 to Han’s family. The insured requested the insurer to pay ¥300,000 (which was the amount covered) to Han’s family under the liability policy. The insurer refused on the ground that the brake system of the insured vehicle was defective – the insurer’s liability was excluded by the terms of the policy. The court held that the insurer did not clearly explain to the insured the exclusion clause in the policy prior to the conclusion of the contract, so the exclusion clause was ineffective.72 According to art. 65(2) of the Insurance Law, the insurer was liable to directly pay Han’s family ¥300,000. In this case, the insured’s tortious liability to the third party was determined by tort law and other relevant laws and the extent of the liability was quantified as the amount of ¥386,221. The insurer’s liability to the insured was determined by the insurance contract to the maximum limit of coverage, so the insured himself had to pay the victim the difference between the amount of his liability to the victim and the amount covered under the liability policy.

71 This case was decided by People’s Court, Xiacheng District, Hangzhou City, Zhejiang Province, Civil Court Judgment (2010) No. 626 (see accessed in March 2016). 72 The Insurance Law, art. 17. For more on the topic of the insurer’s duty to clearly explain the exemption clause to the insured at the time of the contract, see Chapter 9.

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The second condition for the insurer to pay the third party directly is that the insured has requested the insurer do so. If the insured has not made such a request, the insurer should not pay the third party directly. In Wang v The Insurance Company,73 while the insured truck was being repaired at the side of the road by Mr Tang and the driver, one tyre suddenly burst and killed Tang. Tang’s successor sued the insured for compensation. It was held that the insured was liable to pay Tang’s successor the amount of ¥261,109. The insured paid ¥77,004 to Tang’s successor and then sued the insurer for the amount of ¥261,109 under a third party policy. The court held that the insured had paid the third party ¥77,004, and according to art. 65(3) of the Insurance Law the insured had no right to request the insurer pay him more than he had paid to the third party, so the insurer was liable for paying the insured only ¥77,004. The insured then filed another lawsuit against the insurer, requesting the insurer to pay ¥184,105 (which was the difference between ¥261,109 and ¥77,004) directly to Tang’s successor, and the court upheld the insured’s request this time in accordance with art. 65(2) of the Insurance Law. 21.9 The third party’s right to sue the insurer for indemnity payments 21.9.1 The Chinese position Article 65(2) of the Insurance Law vests in a third party the right to sue the insurer for indemnity payments, and also sets forth two conditions and one restriction for the third party’s exercising of the right. The first condition is that the insured’s liability to the third party has been ascertained. The second one is that the insured neglects to request the insurer to pay the insurance money directly to the third party. The restriction is that the third party can claim indemnity payments directly from the insurer only for the portion he is entitled to,74 and within the limit of the insured amount under the insurance policy. The first condition has just been considered above. The second condition is considered here. It is important to understand the meaning of “the insured neglects (daiyu) making a request,” as this is the condition for the third party to exercise his right to sue the insurer for indemnity payments. The Chinese word “daiyu” means “neglect,” “delay” and “being reluctant and lazy in doing things.” If the insured knows that he has the obligation of requesting the insurer to indemnify the third party directly, and he is able to perform the obligation, but fails to do so within a reasonable period of time from the date when the insured’s liability to the third party has been ascertained, it can be said that the insured “daiyu” in requesting the insurer to pay the insurance money directly to the third party. There have been no clear rules in defining the circumstances under which the insured can be deemed as “daiyu” in making a request. Some HPCs formulated guiding rules in this regard. The HPC of Guangdong Province stipulates that if at the time when the third party takes action against the insurer for insurance payments, the insured has still not made a written request for the insurer to pay the

73 This case was cited in the book by Xian Xie and Yougen Li, One Hundred Selected Insurance Cases (Law Press China 2012) p. 331. 74  The Insurance Law, art. 65(2).

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third party directly, the insured can be deemed as “daiyu” in requesting the insurer pay the insurance money directly to the third party, and the People’s Courts shall uphold the third party’s action.75 This provision essentially entitles the third party to take action against the insurer at any time so long as the insured has not made a formal request for the insurer to pay the third party directly. Similarly, the HPC of Shandong Province provides that where the insured’s liability to the third party has been ascertained, the insured fails to make compensation to the third party, nor makes a request for the insurer to indemnify the third party, and the third party then sues the insurer for indemnification, the People’s Courts shall uphold the third party’s action.76 But neither of them sets out a time limit within which the insured should make a request for the insurer to indemnify the third party. In Mr Ma v People’s Insurance Company of ChinaYizheng Branch,77 Mr and Mrs Ma were killed in a road accident. Their son made an agreement with the insured tortfeasor under which the insured promised to pay the amount of ¥460,000 to the son as compensation. For about one year after the date of the agreement, the insured still did not request his liability insurer make payment to the son. So the son sued the liability insurer directly. The court held that according to art. 65(2) of the Insurance Law, the insured neglected requesting his insurer to make the payment to the son under the third party liability insurance policy, so the son was entitled to claim directly from the insurer. In this case, the third party waited for about one year before he sued the insurer. It can certainly be said that the insured neglected in requesting the insurer pay the insurance money directly to the third party, but one year is perhaps too long. In order to avoid or reduce disputes as to the interpretation of the meaning of “daiyu,” it would be necessary to set out a time limit within which the insured must make a request for the insurer to pay the third party. It is suggested that one month may be appropriate, i.e. within one month from the date when the insured’s liability to the third party has been ascertained, the insured must request the insurer pay the insurance money directly to the third party – otherwise, the insured can be deemed as having failed to comply with his duty, and the third party can claim indemnity directly against the insurer. Sometimes, however, the insured may become bankrupt or go into liquidation after his liability to the third party has been ascertained. In this situation, if the insured is a natural person, he can still request the insurer to pay insurance money to the third party; if the insured is a legal person (such as a company or an institution, etc.), there would be no one to make such a request for the insurer to pay the third party. Then the question arises as to whether the third party has the right to sue the insurer for indemnity payments under the insured’s liability policy in these

75  The Guidance of the HPC of Guangdong Province 2011, art. 19. 76  The Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter the Guidance of the HPC of Shandong Province 2011), art. 33. 77 This case was decided by the People’s Court, Yizheng City, Jiangsu Province, Civil Court Judgment (2011) No. 228, and reported in China Courts 2013 Annual Cases (China Legal Publishing House 2013) p. 238.

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circumstances. The Insurance Law is silent on this issue. It would be beneficial and helpful to have a look at how other jurisdictions approach this question. 21.9.2 The positions in other jurisdictions (a) In England At common law, where an insured became liable to a third party in damages, but had gone bankrupt or had gone into liquidation before having received the insurance moneys from the insurer for transmission to the third party, any payment by the insurer to the trustee in bankruptcy or liquidator was deemed to form part of the insured’s general assets for distribution to creditors.78 Consequently, the third party for whom the money had in reality been earmarked was confined to proving as an unsecured creditor in the bankruptcy or liquidation for his loss, and inevitably would recover at best only a small dividend.79 This position was clearly unjust and in 1930, the Third Parties (Rights against Insurers) Act was passed to remedy the situation. The broad effect of the Act is to effect a statutory subrogation, by virtue of which the third party is entitled to exercise the rights of the insured as against the insurer; in this way the insurance money will not become part of insolvent insured’s assets.80 However, the transfer of the insured’s rights against the insurer under the 1930 Act only occurs “upon the insured’s liability to the claimant third party being ascertained and determined to exist at law, either by judgment of the court, or by an award in an arbitration, or by agreement.”81 One consequence of this rule is that, if the third party claimant is unable to establish an insured company’s liability to him, because the insured company has been dissolved and cannot be resurrected for the purpose of establishing that liability, the third party simply has no remedy.82 The obstacle under the 1930 Act that the transfer of the insured’s rights against the insurer only occurs upon the insured’s liability to the claimant third party being ascertained has been removed by the Third Parties (Rights against Insurers) Act 2010. By virtue of s. 1(1) of the 2010 Act, once rights have been transferred, the third party may bring an action against the insurer without having established the insured’s liability. However, the insured’s liability must be established before those rights can actually be enforced; this can be achieved by a declaration of the court, as well as by a judgment, arbitration award or settlement.83 Under s. 2 of the 2010 Act, the third party only has to issue one set of proceedings against the insurer (and, optionally, the insured), asking the court to make declarations both as to the insured’s liability to the third party and the insurer’s liability under the policy. It is to be emphasised that the 2010 Act applies only in the case of insolvency. If the insured

78  Hood’s Trustees v Southern Union General Insurance Co. of Australasia [1928] Ch 734; Re Harrington Motor Co. [1928] Ch 105. 79  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 21-001. 80  Ibid, para. 21-002. 81  Post Office v Norwich Union Fire Insurance Soc. Ltd [1967] 2 QB 363, at 374, per Lord Denning, MR. The House of Lords confirmed this test in Bradley v Eagle Star Insurance Co. Ltd [1989] AC 957. 82  As the House of Lords also determined in Bradley v Eagle Star. 83  The Third Parties (Rights against Insurers) Act 2010, s. 1(4).

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has not become insolvent, the victim is most unlikely to have a direct claim against the insurers. Such an action is precluded by the doctrine of privity of contract.84 (b) In the US Under New York Insurance Law,85 any person who has obtained a judgment against the insured for damages for injury sustained or loss or damage occasioned in the insurance period can sue the insurer to recover the amount of such judgment against the insured, but not exceeding the amount of the applicable limit of coverage under the liability policy. In the State of Wisconsin, any policy of insurance covering liability to others for negligence makes the insurer liable, up to the amounts stated in the policy, to the persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.86 (c) In Germany Under s. 115 of the German Insurance Contract Act 2008, the third party has the right to claim for compensation directly against the insurer in three circumstances: (1) the liability insurance is effected for the purpose of complying with the duty to take out insurance in accordance with the Compulsory Insurance Act; (2) where insolvency proceedings have been opened in respect of the assets of the policyholder or an application for such opening has been dismissed on account of a lack of insolvency estate or a provisional insolvency administrator has been appointed; or (3) where the policyholder’s whereabouts are unknown. (d) In Taiwan Article 94 of the Insurance Act 2010 provides: “Where the insured has been determined liable to indemnify a third party for loss, the third party may claim for payment of indemnification, within the scope of the insured amount and based on the ratio to which the third party is entitled, directly from the insurer.” This article vests in the third party the right to claim against the insurer directly for indemnity payments where the insured’s liability has been ascertained. For Compulsory Automobile Liability Insurance, the third party or his family member has the right to claim insurance benefits directly from the insurer. This is provided in arts 787 and 1188 of the Compulsory Automobile Liability Insurance Act 2010.

84  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) paras 20-011 and 20-012. 85  New York Insurance Law (2013), s. 3420(a)(2) and (b)(1). 86  Insurance Contracts in Specific Lines, chapter 632, s. 632.24 “Direct action against insurer.” 87  Article 7: Where an injured party suffers injury or loss of life as the result of an automobile traffic accident, regardless of whether the injuring party is at fault, a claimant may claim insurance benefits from an insurer or compensation from the Motor Vehicle Accident Compensation Fund (“the Compensation Fund”) in accordance with the provisions of this Act. 88  Article 11: In this Act, “claimant” means any of the following persons that may claim insurance benefits from an insurer or compensation from the Compensation Fund:

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21.9.3 Suggestions for improving the Chinese position Having considered various approaches to the third party’s right to sue the insurer, it is appropriate here to make some suggestions for the sake of improving the Chinese law in respect of the third party’s right to sue the insurer as follows. For compulsory liability insurance, the third party (or his family member) has the right to claim compensation directly against the insurer.89 For non-compulsory liability insurance: (1) where the insured’s liability to the third party has been ascertained by a judgment, arbitration award or enforceable agreement, the third party can sue the insurer for indemnity payments, but not exceeding the amount of the applicable limit of coverage under the liability policy.90 (2) Where the insured becomes insolvent, the rights of the insured under the contract against the insurer in respect of the liability are transferred to and vest in the third party to whom the liability is or was incurred; the third party may bring proceedings to enforce the rights against the insurer without having established the relevant person’s liability, but the third party may not enforce those rights without having established that liability.91 Where the liability of an insured to a third party is less than the liability of the insurer to the insured, no rights are transferred in respect of the difference.92 (3) Where the insured is dead, disappeared, lost ability to act or neglects to act, or the insured’s whereabouts is unknown,93 the third party has the right to claim directly against the insurer for compensation. 21.10 The insurer’s liability for other costs Article 66 of the Insurance Law imposes on the insurer a duty to bear the costs incurred by the insured for determination of his liability to the third party by 1.

In the case of a person who has suffered injury as the result of an automobile traffic accident, it shall be the injured party himself. 2. In the case of a person who has suffered loss of life as the result of an automobile traffic accident, it shall be the survivors of the injured party, in the following order: (1) parents, children, and spouse; (2) grandparents; (3) grandchildren; (4) siblings. When there are several persons at the same position in the order, insurance benefits or compensation will be distributed equally among them according to their number. When, upon the death of an injured party, there are no claimants as provided in paragraph 1, subparagraph 2, persons paying the funeral and interment expenses of the deceased may, within the limit of [actual] funeral and interment expenses, claim benefits from an insurer or compensation from the Compensation Fund. Any sum remaining after deduction of the funeral and interment expenses from the insurance benefits shall belong to the Compensation Fund. When, upon the death of an injured party, there are neither claimants as provided in paragraph 1, subparagraph 2 nor persons paying for the funeral and interment expenses, insurance benefits shall be returned to the ownership of the Compensation Fund. Items included under funeral and interment expenses under the preceding paragraph, and their amounts, will be prescribed and announced by the competent authority. 89 The German Insurance Contract Act 2008, s. 115; the Compulsory Automobile Liability Insurance Act 2010 (Taiwan), arts 7 and 11. 90  The New York Insurance Law (2013), s. 3420(a)(2) and (b)(1). 91  The Third Parties (Rights against Insurances) Act, s. 1. 92  Ibid, s. 8. 93  The German Insurance Contract Act 2008, s. 115.

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litigation or arbitration, in providing: “Where an arbitration or litigation case is brought against the insured of a liability insurance policy due to the occurrence of an insured event which caused loss or damage to a third party, the cost of such arbitration or legal proceedings and other necessary and reasonable costs paid by the insured shall be borne by the insurer, unless specified otherwise in the insurance contract.” The insurers are also obliged to bear other necessary and reasonable costs. This would include solicitor’s fees and costs for travelling to attend the court or arbitration, etc. The insurers are permitted to contract out of this statutory obligation by contractual terms. If there is a clause in the policy to the effect that the insurer is not liable for any costs incurred by the insured for determination of the insured’s liability to the third party by litigation or arbitration, the insurer may not pay the insured for such costs. As an example of contracting out of this statutory obligation, in the Compulsory Motor Vehicle Traffic Accident Liability Policy of Ping An Insurance Company of China, clause 10(4) clearly stipulates that the insurer is not liable for the costs of litigation or arbitration and other relevant costs. The same clause can also be seen in the Compulsory Motor Vehicle Traffic Accident Liability Policy of the People’s Insurance Company of China. In Mr Jizhong Meng v China Property Insurance Company Beijing Branch,94 the insured car collided with another vehicle parked along the side of the road and damaged that vehicle in September 2005. The owner of the damaged vehicle (the third party) sued the insured for damage to the vehicle. The court made the judgment that the insured was liable to pay the third party ¥53,200 for the damage to the vehicle and the litigation cost of ¥4,755. The insured then claimed for the amount, but the insurer disputed the amount of damages and refused to pay the litigation cost on the ground that there was a clause in the contract to the effect that the insurer was not liable for any indirect costs arising from the occurrence of the insured event. Litigation cost was an indirect cost. The insured then sued the insurer. The court held, inter alia, that although there was a clause in the contract which excluded the insurer’s liability for any indirect costs, there was no clear definition of what would be regarded as indirect costs; the litigation cost should not be treated as an indirect cost. According to art. 51 of the Insurance Law 2002,95 the insurer was statutorily obliged to pay the litigation cost incurred by the insured, so the insurer was liable for such cost. 21.11 The insurer’s right of participation and duty of defending the insured The insurer’s right of participation means that when the insured incurs legal liability to the third party, the insurer has the right to take part in the process of determining the insured’s liability to the third party by way of agreement between the parties, litigation or arbitration. And at the same time, the insurers may have a duty to defend any proceedings which may be brought and to approve any settlement with the third party on the insured’s behalf. 94 This case was cited in the book by Jianxun Liu, Resolutions to the Classical and Difficult Cases of Insurance Law (Law Press China 2010) p. 447. 95  Article 51 of the 2002 version is essentially the same as art. 66 of the 2009 version of the Insurance Law.

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In liability insurance, the insured’s liability to the third party is transferred to the insurer through the contract. Any agreement between the insured and the third party in respect of admission or rejection of the insured’s liability and the amount of compensation to be paid to the third party is closely related to the insurer’s liability to the third party. As far as the amount of compensation is concerned, if the amount demanded by the third party is well within the limit of coverage under the policy, it may be possible that because of the existence of the policy, the insured may not particularly care about the amount to be paid to the third party, and consequently assumes liability which he should not assume or which is more than he should assume. This in essence exacerbates the insurer’s liability to the third party. With regard to the costs of litigation or arbitration, without the participation of the insurer, if the insured defends himself unsuccessfully, he may be defeated in the proceedings, and then he may appeal; as a result, the cost of litigation or arbitration in determining the insured’s liability to the third party may increase, which will eventually be borne by the insurer. Thus the main purpose for the insurer’s participation is to protect the insurer and to balance the interests between the insured, the insurer and the third party. The Insurance Law does not give any stipulation in respect of the insurer’s rights and duties relating to participating in negotiations and court proceedings. In practice, however, liability policies usually specifically reserve the insurer’s right to participate in negotiations with the third party and in the litigation proceedings. As mentioned earlier, in the Employer’s Liability Policy of the Ping An Insurance Company of China,96 a term stipulates that “where the insured has received a claim for compensation from its employees, the insured shall notify the insurer immediately. Without the insurer’s written consent, the insurer is not bound by the promises, repudiation, offer, agreement, payment or compensation that the insured has made to his employee. The insurer has the right to redetermine the amount of compensation which the insured has promised to pay or has paid. The insurer will not pay the amount which does not fall into the scope of cover or exceeds the amount that the insurer is liable for under the policy. In the process of handling claims, the insurer is entitled to determine and settle any claims which the insurer is eventually liable for. The insured has the duty to provide the insurer with information and assistance which the insured is able to provide.”

Thus the safe way for the insured to follow in conducting negotiation of a settlement agreement with the third party is either to keep the insurer informed of the outcome of the negotiation and seek a written consent from the insurer in respect of the amount to be paid to the third party, or to invite the insurer to join the negotiation of the settlement agreement. Sometimes a liability policy specifies that the insurer has the right to deal with, in the name of the insured, relevant matters of litigation or arbitration which may be brought against the insured by the third party; and the insured has the duty to provide relevant documents and necessary assistance to the insurer. For example, in the Employer’s Liability Policy of the Ping An Insurance Company of China,97

96  See accessed in February 2016. 97 Ibid.

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a term states that “when the insured becomes aware of the possibility of litigation or arbitration, he shall notify the insurer immediately in writing. After receiving the court summons or other legal instrument, the insured shall send a copy to the insurer promptly. The insurer is entitled to deal with relevant matters of litigation or arbitration in the insured’s name. The insured shall provide relevant documents and give necessary assistance to the insurer. Where the insured’s failure to provide such notice or necessary assistance leads to the increase of loss, the insurer is not liable for the increased loss.” Under this contractual term, the insurer has the right to stand in the insured’s shoes to conduct the defence of the claim by the third party against the insured by litigation or arbitration. Although the term does not mention who will bear the defence costs, it implies that the insurer should meet the costs of defending any claim by the third party against the insured. In some other jurisdictions, the insurer’s right of participation is provided in statutes. In Taiwan, art. 93 of the Insurance Act 2010 provides: “An insurer may stipulate in a contract that any acknowledgment, settlement, or indemnification made by the insured in connection with its liability toward a third party without the participation of the insurer is not binding on the insurer, provided that this rule does not apply where the insurer, having been requested by the proposer or insured to participate, has refused to do so without legitimate reason or has delayed its participation on a pretext.” In Germany, an agreement between the insured and the third party on the amount of payment to the third party is invalid without the insurer’s consent.98 It is suggested that a new provision in respect of the insurer’s right of participation should be introduced into the Insurance Law. The proposed provision could be phrased as follows: “Without the insurer’s participation, any agreement reached by the insured and the third party in respect of admission of the insured’s liability and the amount of compensation to be paid to the third party is not binding on the insurer, except where the insurer has been invited to participate in the negotiation of the agreement but has refused to do so without legitimate reason or has unreasonably delayed in its participation.” 21.12 Conclusion Articles 65 and 66 of the Insurance Law provide only a framework for the law relating to liability insurance. The rules of law in relation to liability insurance in China are far from complete. There is a lack of rules in many aspects of liability insurance, particularly in respect of the third party’s rights to claim directly against the insurer and the insurer’s right of participation in negotiation of settlement agreements, litigation or arbitration. Some deficiencies of the Law have been discussed and suggestions on how to improve the current positions have been set out.

98  Section 105 of the German Insurance Contract Act 2008 provides: “Agreements in accordance with which the insurer shall not be obliged to effect payment if the policyholder satisfies the third party or acknowledges his entitlement without the insurer’s consent shall be void.”

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CHAPTER 22

Motor vehicle insurance

22.1 Introduction Motor vehicle insurance is an insurance which covers the insured against a variety of different risks in the course of the use of cars, trucks, motorcycles and other motor vehicles.1 In China, motor vehicle insurance is generally classified into two branches: compulsory motor vehicle third party liability insurance and non-compulsory commercial insurance. The Road Traffic Safety Law of the People’s Republic of China requires that a scheme of compulsory motor vehicle third party liability insurance (hereinafter referred to as compulsory motor insurance) is applied nationwide in China.2 The owners or managers of the motor vehicles driven on the roads within China are obliged to purchase compulsory motor insurance policies under which the insured and the drivers permitted by the insured to use the vehicle are covered against liability to pay damages for death or personal injury or property loss to the third party victims caused by or arising from the use of the vehicle.3 Commercial motor vehicle insurance is divided into insurance of basic risks and insurance of ancillary risks. Basic risks insurance covers mainly four types of risks: the loss of or damage to the vehicle, the motor vehicle third party liability (on top of the compulsory motor insurance), the liability for persons on board the vehicle, and the theft of the vehicle. Ancillary risks insurance covers a variety of ancillary risks such as broken glass, vehicle body scratches, spontaneous fire, engine damage by water entering it, cargo liability cover and so on. As a complement to the scheme of compulsory motor insurance, China has established a scheme of social relief funds for road traffic accidents in order to provide assistance to the road accident victims in the situation where the driver responsible for an accident is uninsured or flees away after the accident – the third party victims cannot claim against any insurers, but can seek assistance from the Road Traffic Accident Social Relief Funds.

1  The definition of the term “motor vehicles” will be seen shortly. 2 The Road Traffic Safety Law of the People’s Republic of China was adopted at the 5th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on 28 October 2003, and came into force on 1 May 2004, art. 17. 3  The Regulation on Compulsory Motor Vehicles Traffic Accident Liability Insurance was adopted at the No. 127 executive meeting of the State Council on 1 March 2006, came into force as of 1 July 2006, and was amended for the first time on 30 March 2012 and for the second time on 17 December 2012; art. 2 of the Regulation.

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In this chapter, we will consider relevant rules of law and industrial and judicial practice in relation to motor vehicle insurance and contractual characteristics peculiar to this branch of insurance, with particular emphasis on compulsory motor insurance. 22.2 Compulsory motor insurance 22.2.1  Legal framework The Road Traffic Safety Law provides that the state applies a compulsory motor vehicle third party liability insurance scheme.4 Article 76 of the Road Traffic Safety Law sets forth rules in respect of the matter of compensating for loss or damage caused by traffic accidents; it provides: “Where a motor vehicle causes personal injury or death or property losses in a traffic accident,5 the insurance company shall pay indemnity within the policy limit of the compulsory motor vehicle third party liability insurance. The part in excess of the liability limit shall be indemnified according to the following provisions. (1) Where a traffic accident occurs between motor vehicles, the party at fault shall bear the liability; if both parties are at fault, they shall each bear their share of the liability according to the proportion of their respective fault. (2) Where a traffic accident occurs between a motor vehicle and a non-motor vehicle driver or a pedestrian, if the non-motor vehicle driver or the pedestrian has no fault, the party of the motor vehicle shall bear the liability; however, if there is evidence to prove that the non-motor vehicle driver or the pedestrian is at fault, the liability of the motor vehicle party can be reduced according to the extent of the fault; if the party of the motor vehicle has no fault, it shall bear no more than 10% of the liability. Where the losses of the traffic accident are caused by intentional collision by the non-motor vehicle driver or the pedestrian, the party of the motor vehicle shall bear no liability.”

The most important point in art. 76 is that under compulsory motor vehicle insurance, no matter whether or not the party of a motor vehicle is at fault, as long as the vehicle is involved in a traffic accident which caused personal injury or death or property damage to a third party victim, the insurer of the vehicle is liable to pay indemnity to the victim within the policy limit of the compulsory motor vehicle third party liability insurance, except for the situation where the losses of the traffic accident are caused by intentional collision by a non-motor vehicle driver or a pedestrian. In accordance with the Road Traffic Safety Law and the Insurance Law, for the purpose of ensuring that the victims in road motor vehicle traffic accidents may be compensated, and for promoting road traffic safety, specific measures for the scheme of compulsory motor insurance are formulated by the State Council and contained in the Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance 2006 (hereinafter, the Regulation).6 This Regulation was amended for

4  The Road Traffic Safety Law, art. 17. 5  A “traffic accident” means an incident in which a vehicle causes, when running on the road, personal injury or death or property losses due to an error or unexpected incident; see art. 119(5) of the Road Traffic Safety Law. 6 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance was adopted at the No. 127 executive meeting of the State Council on 1 March 2006, and came into force on 1 July 2006.

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the first time on 30 March 20127 and for the second time on 17 December 2012.8 It is the major legislation governing the scheme of compulsory motor insurance in China. The Regulation consists of five chapters with 47 articles: chapter one concerns general provisions; chapter two deals with purchase of compulsory insurance; chapter three is related to claims; chapter four is concerned with penalties in the case of contravention of the provisions of the Regulation; and chapter five provides definitions of the terms in the Regulation. These provisions will be discussed in the course of this chapter at appropriate stages. Motor vehicle insurance is very closely related to tort. So some of the provisions in the Tort Law will be examined as well. Chapter five of the Tort Law of the People’s Republic of China, consisting of six articles from art. 48 to art. 54, provides rules in respect of tortious liability for motor vehicle traffic accidents.9 In accordance with art. 48 of the Tort Law, where a motor vehicle traffic accident causes any harm, the compensatory liability shall be assumed according to the relevant provisions of the Road Traffic Safety Law.10 The Tort Law also provides remedies for some special circumstances, such as where the accident is caused by a stolen vehicle,11 or where the driver of a motor vehicle flees away after a traffic accident.12 These articles will be considered later. Another important source of law in relation to compensation for damage in traffic accidents is the Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents (hereinafter, the Interpretation on Compensation for Damage).13 The Interpretation on Compensation for Damage was formulated in accordance with the Tort Law, the Contract Law, the Road Traffic Safety Law, the Insurance Law, the Civil Procedure Law and other relevant laws, and taking judicial practice into consideration. The Interpretation on Compensation for Damage consists of four parts with 29 articles. The relevant articles will be referred to where necessary and appropriate.

7  Article 5 of the 2006 version of the Regulation only permitted the Chinese-funded insurance company to engage in compulsory motor vehicle liability insurance. Article 5 of the first amendment of the Regulation (30 March 2012) allows any insurance companies to undertake such business upon approval by the CIRC. 8 A new article (art. 43) was added into the second amendment of the Regulation (17 December 2012). It concerns the insurance liability between a trailer and the tractor. The trailer is not required to be covered under a compulsory motor policy. Where a road accident causes losses to a third party, the insurance for the tractor shall be liable for the loss. 9 The Tort Law of the People’s Republic of China was adopted at the 12th session of the Standing Committee of the Eleventh National People’s Congress on 26 December 2009 and became effective on 1 July 2010 ( accessed in March 2016). 10  The most relevant provisions are included in art. 76 of the Road Traffic Safety Law. 11  Ibid, art. 52. 12  Ibid, art. 53. 13 The Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents was adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court on 17 September 2012, and came into force on 21 December 2012.

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It is, however, necessary and convenient to see the definitions of the terms “personal injury or death” and “property losses” in a road accident that are in the Interpretation on Compensation for Damage. According to art. 14 of the Interpretation, the term “personal injury or death” as mentioned in art. 76 of the Road Traffic Safety Law means the damage caused by the infringement to the victim’s right to life, right to health or other personal rights and benefits by motor vehicle traffic accidents, including those as provided for in arts 16 and 22 of the Tort Law. The term “property losses” as mentioned in art. 76 of the Road Traffic Safety Law means the losses caused by the infringement of the victim’s rights to and benefits of property by motor vehicle traffic accidents. Article16 of the Tort Law provides: “Where a tort causes any personal injury to another person, the tortfeasor shall compensate the victim for the reasonable costs and expenses for treatment and rehabilitation, such as medical treatment expenses, nursing fees and travel expenses, as well as the lost wages. If the victim suffers any disability, the tortfeasor shall also pay the costs of disability assistance equipment for the day-to-day life of the victim and the disability indemnity. If it causes the death of the victim, the tortfeasor shall also pay the funeral service fees and the death compensation.” Article 22 of the Tort Law is concerned with infliction of mental distress, which provides that where any harm caused by a tort to a personal right or interest of another person inflicts serious mental distress on the victim of the tort, the victim of the tort may require compensation for the infliction of mental distress. Article15 of the Interpretation on Compensation for Damage sets forth a list of “property losses” for which the injured party can make a claim and the People’s Court will uphold the claim: (1) the costs of repairing the damaged vehicles, loss of items carried in or upon the vehicle, and rescue costs for the vehicles; (2) the costs of purchasing a similar vehicle with equivalent value to the damaged vehicle in the case where the damaged vehicle is a total loss or beyond repair; (3) the reasonable outage loss of income due to inability to engage in the corresponding operating activities for the vehicles which are lawfully used for the business of cargo or passenger transport; and (4) the reasonable costs of renting a replacement vehicle for normal day-to-day travel in the case where a private vehicle cannot be used. 22.2.2 Persons required to insure Article 2 of the Regulation requires the owners or managers of the motor vehicles driven on the roads within the People’s Republic of China to effect compulsory motor vehicle traffic accident liability insurance (hereinafter, compulsory motor insurance) in accordance with the Road Traffic Safety Law.14 The consequences of failure to comply with the obligation to insure under art. 2 of the Regulation are potentially threefold. First, according to art. 19 of the Interpretation on Compensation for Damage, where a motor vehicle which is not covered by a compulsory motor insurance policy is involved in a traffic accident, and the injured 14 The Regulation, art. 2. It must be noted that the Road Traffic Safety Law uses the term “compulsory motor vehicle third party liability insurance,” while the Regulation uses the term “compulsory motor vehicle traffic accident liability insurance.” In fact, they refer to the same scheme of compulsory motor insurance.

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party claims against the person who is obliged to purchase a compulsory policy to make compensation within the scope of compulsory cover, the people’s court shall uphold such a claim. Where the person who is obliged to insure the vehicle and the driver (the tortfeasor) is not the same person, the injured party can sue both the person and the driver for joint liability for the accident, and the People’s Court shall uphold such a lawsuit.15 Second, the road traffic administration of the public security organs will detain the vehicle, request the owner or the manager of the vehicle to effect a compulsory motor insurance, and impose a fine of the amount equivalent to two times the premium to be paid for the minimum limit of cover.16 The vehicle detained will be returned to the owner or manager of the vehicle as soon as a compulsory policy is effected.17 Third, in accordance with art. 4 of the Regulation, the administrative department of motor vehicles will not register those motor vehicles if they are found to be without compulsory motor insurance and the motor vehicle safety technical inspection institution shall not make an inspection of those vehicles. Failure to insure is a breach of statutory duty,18 and anyone who suffers loss as a result can sue in tort for damages. The importance of this is not against the negligent driver, who would be liable in negligence anyway, but against the owner or the manager of the uninsured vehicle who permitted the driver to use the vehicle.19 As mention above, art. 19 of the Interpretation on Compensation for Damage makes the person who has failed to purchase a compulsory policy for his motor vehicle liable to compensate the victim within the scope of compulsory cover. Under the situation where a road accident occurs and causes injury or death of the victim by several vehicles, of which some are insured under compulsory motor policies and some are not, art. 21(3) of the Interpretation on Compensation for Damage provides rules to deal with this situation. The victim can claim against the insurers to pay compensation within the scope of cover under the policies, and the People’s Court shall uphold such a claim. The insurers which have paid compensation accordingly are entitled to recoup the amount of money which exceeds their respective share of liability from the owners or the tortfeasors of the uninsured vehicle, and the People’s Court shall uphold such actions. 22.2.3 The insurer’s obligation to underwrite The insurance companies which are qualified to undertake the business of compulsory motor insurance must be approved by the China Insurance Regulatory Commission (CIRC). The CIRC is empowered to request insurance companies to undertake the business of compulsory motor insurance in order to ensure the implementation of the statutory scheme of compulsory motor insurance, and is obliged to notify the general public of the insurance companies which are qualified to carry

15  The Interpretation on Compensation for Damage, art. 19. 16  The Regulation, art. 39. 17 Ibid. 18  The Road Traffic Safety Law, art. 17; the Regulation, art. 2. 19  For the English position in this respect, see Monk v Warbey [1935] 1 KB 75. For more, see J. Birds, Birds’ Modern Insurance Law (9th edn, Sweet & Maxwell 2013) para. 21.2.5.

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out compulsory motor insurance business.20 No entity or individual may undertake compulsory motor insurance without the approval of CIRC.21 By virtue of art. 10 of the Regulation, an insured is entitled, when purchasing the insurance, to choose an insurer that has the qualification to undertake the business of compulsory motor insurance.22 The insurer chosen by the insured is not allowed to refuse underwriting or to delay in underwriting the insurance.23 If a qualified insurance company refuses an intending insured’s application for or delays in effecting a compulsory motor insurance policy, or illegally rescinds the contract, the insured who has paid compensation to a third party victim can request the insurance company to assume the corresponding liability within the limits of cover under the compulsory motor policy, and the People’s Courts shall uphold such a request.24 In addition, where a qualified insurance company refuses to underwrite or delays in underwriting compulsory motor insurance, the insurer will have imposed on it fine, a restriction on the scope of business, or even a revocation of the business licence.25 22.2.4 The definition of motor vehicles Article 119 of the Road Traffic Safety Law defines the meaning of a “motor vehicle” and also other terms used in the Law. A “motor vehicle” means a wheeled vehicle which is driven or drawn by a power device, running on the road for people to ride in, or for carrying goods, or for carrying out special engineering operations. It is suggested that a motor vehicle with a maximum speed of less than 20 km/hr should not be regarded as a “motor vehicle.”26 A “non-motor vehicle” means a means of transportation which is driven by manpower or domestic animal power to run on the road, or a motor wheelchair vehicle of a disabled person, an electric bicycle or any other means of transportation which is driven by a power device but the designed maximum speed per hour, the weight of empty vehicle and the external size conform to the relevant national standards. Only motor vehicles are required to be insured compulsorily, while non-motor vehicles are not.27 20  The Regulation, art. 10. 21  Ibid, art. 5. 22 There are 25 insurance companies which are qualified and approved by the CIRC to carry out compulsory motor insurance business in China. For the names and addresses of these companies, see the CIRC’s website accessed in March 2016. 23 Article 10 of the Regulation provides: “An insured is entitled to choose an insurance company that has the qualification to undertake the business of compulsory motor vehicle traffic accident liability insurance when purchasing the insurance. The insurance company chosen by the insured is prohibited to refuse underwriting or to delay underwriting the insurance. The CIRC shall notify the general public of the insurance companies which are qualified to carry out business of compulsory motor vehicle traffic accident liability insurance.” 24 The Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents was adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court on 17 September 2012, and came into force on 21 December 2012. See art. 20 of the Interpretation. 25  The Regulation, art. 38. 26  See art. 85 of the recommended draft of the Judicial Interpretation of the Tort Law of the People’s Republic of China by the Research Centre of Civil and Commercial Law, Renmin University of China ( accessed in March 2016). 27  The Regulation, art. 2.

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22.2.5 Road or other public place The meaning of a “road” is defined by art. 119 of the Road Traffic Safety Law as a highway, an urban road or an area which, although within the scope of management by an entity, allows public motor vehicles to pass, including the places used for passage of the general public such as squares and public car parks, etc. Compulsory insurance is required for motor vehicles which are driven on a road.28 Article 43 of the Regulation provides: “Where a traffic accident occurs at place other than a road, and causes death, bodily injury, or property damage, the Regulation can also be applied.” Similarly, art. 28 of the Interpretation on Compensation for Damage also stipulates that where a motor vehicle is running at a place other than a road and causes accidents, this Interpretation can be referred to in dealing with cases in respect of compensation for damage.29 In essence, by virtue of art. 43 of the Regulation and art. 28 of the Interpretation on Compensation for Damage, if a traffic accident occurs at place other than a road, and causes death, bodily injury or property damage, the case will be dealt with in a similar way as for the case of a “road” traffic accident. Thus it seems not particularly necessary to differentiate a “road” traffic accident from a non-road traffic accident. 22.2.6 The scope of the insured persons Article 42 of the Regulation defines the term “the insured persons” as the insured and the lawful drivers permitted by the insured.30 The term “lawful driver” may mean: (1) the driver must have passed a driving test and possess a valid driving licence. In the case of a learner driver, he must be accompanied by the driving instructor when driving the vehicle. (2) The driver must get permission from the owner or the manager of the vehicle to drive the vehicle. And (3) the driver must not use the vehicle for illegal purposes. Whether or not the insurer permits another to use a vehicle is a question of fact. The word “permit” denotes an express or implied licence to use a vehicle. In the situation where the insured permits a person to drive the vehicle, and this person in turn gives permission to a third person to drive the vehicle, a question may arise as to whether this third person is deemed to be permitted by the insured. The answer to the question depends on the fact of the case.31 In the case where the insured expressly permits a person to use the vehicle and also authorises the person to give permission to any other persons, these other persons can be deemed to be permitted by the insured. If the insured permits a person to use the vehicle but makes it clear that the person cannot let other persons use the vehicle, these other persons cannot

28 Ibid. 29 The Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents was adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court on 17 September 2012, and came into force on 21 December 2012. 30  The Regulation, art. 42(2). 31  See F. C. Ding, Motor Vehicle Traffic Accidents Tortious Liability Compulsory Insurance Scheme (Press of China University of Public Security 2007) p. 138.

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be deemed to be permitted by the insured. If the insured permits a person to use the vehicle at his disposal and control, but does not expressly permit or prohibit the person to give permission to other persons to use the vehicle, the other persons may be taken as being permitted by the insured.32 There is no dispute as to the point that where a person is permitted to use the insured vehicle, the insurer should be liable to indemnify the victim’s loss or injury caused by the person in driving the vehicle. However, what would happen if an accident is caused by a person who has not got permission to drive the vehicle? Article 2 of the Interpretation on Compensation for Damage gives an answer to this question, in providing that “where a driver drives another person’s motor vehicle without permission, and causes any damage in a traffic accident, if the relevant party requests the driver of the motor vehicle to be held liable for paying compensation according to the provisions of art. 49 of the Tort Law, the People’s Court shall uphold such a request. If the owner or manager of the motor vehicle is at fault, he shall assume corresponding liability for compensation, except under the circumstances as provided for in art. 52 of the Tort Law.”33 Article 49 of the Tort Law provides: “Where the owner and the user of a motor vehicle are not the same person due to the relationship of a lease, a loan or other reason and the liability of a traffic accident is attributed to the motor vehicle, the insurance company shall pay compensation within the liability limit of the compulsory motor vehicle insurance. The user of the motor vehicle shall make up any deficit in the compensation; and if the owner of the motor vehicle is at fault as to the harm, he shall assume the corresponding compensatory liability.” It is clear that the owner of the vehicle permits another person to use the insured vehicle if the owner lets the vehicle to the person by a lease or the person borrows the vehicle from the owner. But it is unclear what the term “other reason” means. It seems that the “other reason” would mean, by virtue of art. 2 of the Interpretation on Compensation for Damage, the situation where a driver drives another person’s vehicle without permission. By this analysis, it can be said that where a person drives an insured vehicle without the insured’s permission and causes a road accident, the insurer is still liable for compensation under the compulsory motor policy. By virtue of art. 42 of the Regulation, art. 49 of the Tort Law and art. 2 of the Interpretation on Compensation for Damage, the insured persons would include the insured, the lawful drivers permitted by the insured, and the drivers without permission of the insured. Even if the accident is caused by the insured vehicle driven by a unlawful driver, with or without the permission of the insured, such as those who have no valid driving licence, drive when intoxicated by alcohol, drive a stolen vehicle or deliberately cause the accident to occur, the insurer is liable, by art. 52 of the Tort Law,34

32 Ibid. 33  Article 52 of the Tort Law provides: “Where a traffic accident occurs to a motor vehicle that has been obtained by theft, robbery or snatch and causes harm, the thief, robber or snatcher shall assume the compensatory liability. The insurance company that makes advances for rescue expenses within the liability limit of the compulsory motor vehicle insurance shall be entitled to be reimbursed by the person liable for the traffic accident.” 34 Ibid.

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art. 22 of the Regulation35 and art. 19 of the Interpretation on Compensation for Damage,36 to advance rescue costs for personal injury within the limit of cover under the compulsory motor policy, but is entitled to recoup this money from the unlawful driver. To expand the scope of the insured persons so as to afford cover to any lawful driver driving the insured vehicle with or without the consent of the insured, it is suggested that art. 42 of the Regulation should be amended to redefine “insured persons” as those who are the insured and other lawful drivers (with or without permission from the insured) driving the vehicle covered under a compulsory motor policy. 22.2.7 The limits of the amount covered and determination of damages (a) The limits set by the CIRC The compulsory motor insurance applies uniform liability limits to the amount covered countrywide in China,37 which are set by the CIRC in conjunction with the public security department, health department, and the agricultural department of the State Council.38 The limits are different for liability with fault of the driver of the insured vehicle and for that with no fault of the driver. In the situation where the driver is at fault in the accident, the maximum amount of cover for liability is currently ¥122,000 for each traffic accident under a compulsory motor policy, divided into three parts: part one being ¥110,000 for liability in respect of death, injury or disability of the victim (or victims), part two being ¥10,000 for liability in respect of medical expenses, and part three being ¥2,000 for liability in respect of property damage.39 In the event that the driver has no fault in the accident, the maximum amount of cover for liabilities is currently ¥12,100, with part one being ¥11,000, part two ¥1,000, and part three ¥100. The amount earmarked for one part cannot be used for another part.40 The compulsory motor insurance not only requires the civil liability of the owner of the vehicle to a third party to be covered by insurance, but also affects, to certain 35  Article 22 of the Regulation provides: “Under any of the following circumstances, the insurance company shall advance rescue costs within the limit of cover under the compulsory motor vehicle liability insurance and has the right to recoup the money from the tortfeasor: (1) the driver had no valid driving licence or was intoxicated by alcohol; (2) the accident was caused by a stolen motor vehicle; and (3) the driver intentionally caused the traffic accident to occur. Under any of the circumstances listed here the insurance company is not liable for victim’s property loss caused by the traffic accident.” 36  Article 19 of the Interpretation on Compensation for Damage stipulates: “Under any of the circumstances as follows, the injured party requests the insurance company to make compensation within the limit of cover under the compulsory motor vehicle liability insurance, the People’s Court shall uphold such a request: (1) the driver has not obtained a qualification for driving or the driving licence is not for that type of vehicle; (2) the driver drives the vehicle after being drunk or taking drugs and causes a traffic accident; and (3) the driver intentionally causes the traffic accident to occur. Where the insurance company claims the right of subrogation within the scope of payment against the tortfeasor, the People’s Court shall uphold such a claim. The limitation period for the subrogation starts from the date when the insurance company has made a compensation payment.” 37  The Regulation, art. 23. 38 Ibid. 39  The limits became effective from 1 February 2008. See the website of the CIRC, accessed in March 2016. 40 Ibid.

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extent, the nature of the liability, in the sense that the liability is no longer strictly based on fault. Even if the driver has no fault at all for the road accident, the insured (and the insurer) is, nevertheless, liable to the third party victim, to the extent of the no-fault limits of cover under the compulsory motor policy. The Insurance Association of China (IAC),41 a self-regulatory body of insurance companies, formulated some guiding rules in respect of practical procedures in underwriting and claim-handling for compulsory motor insurance for the members to follow.42 These rules are indorsed by the CIRC, and the CIRC supervises compulsory motor insurance business on the basis of these rules.43 Some of the guiding rules are concerned with calculation of the amount to be paid within the limits of the compulsory motor insurance in two situations: where only one third party victim was involved in an accident, and where more than one victim was involved in an accident.44 These situations are considered below. (b) Compensation for one victim in an accident Where a motor vehicle accident caused injury to one victim, the vehicle’s insurer should compensate the victim according to its responsibility for the accident within the limits of cover under the compulsory motor policy. If the determined loss exceeds the limit of each part of cover under the compulsory policy, the insurer is liable only for paying the amount up to, but no more than, the limit. For example, if the property damage to a vehicle is determined to be ¥8,000, the insurer is liable to pay the maximum of ¥2,000 which is the limit for property damage. The difference (¥8,000 − ¥2,000 = ¥6,000) is to be paid by the tortfeasor driver or his employer. In the case where a non-compulsory motor vehicle third party liability policy is in place, the difference is to be paid by the liability insurer within the limit of cover under the policy. The following case is used as an explanation for how to calculate the amount to be paid. Case 1: Car A and Car B had an accident in which one person on board Car B was injured and disabled. Each car was found to be 50% to blame for the accident. The damage to Car A and Car B was determined to be ¥2,000 and ¥5,000, respectively. The medical costs and the amount of compensation for the disability of the victim amounted to ¥7,000 and ¥60,000, respectively. In addition, the loss of

41 Insurance Association of China (IAC) was established 23 February 2001; it is a national selfregulatory of insurance companies. As of 1 March 2016, the IAC has a total of 360 members, the composition of which is as follows: 11 group companies; 72 property insurance companies; 75 life insurance companies; 8 reinsurers; 13 asset management companies; 49 professional insurance brokers; 39 insurance assessment companies; 44 professional insurance agencies; 43 local insurance associations (including intermediary associations); and 16 insurance-related agencies (see the website of IAC, accessed in March 2016). 42 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa [2006] No. 8. These Practical Procedures were updated and republished in 2009, Zhong Bao Xie Xie [2009] No. 216 (see accessed in April 2016). 43 The Reply by the Department of Property Insurance, the CIRC, to the IAC’s Report of “Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance,” Chan Xian Bu Han [2006] No. 78 (see accessed in April 2016). 44 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa [2009] No. 216.

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property to the road (damage to the fence on the side of the road) was estimated to be ¥1,000. The amounts to be paid under the compulsory policy are calculated as follows:45 Car A: the total amount to be paid under the compulsory policy = victim’s disability compensation + victim’s medical costs + Car B’s property loss + road property loss = determined amount for disability of the victim on Car B + determined amount for medical costs of the victim on Car B + determined amount for property loss, of which (1) determined amount for disability of the victim on Car B = ¥60,000 ÷ (2−1) = ¥60,000; (2) determined amount for medical costs of the victim on Car B = ¥7,000 ÷ (2−1) = ¥7,000; and (3) determined amount for property loss = determined Car B property loss + determined road property loss = ¥5,000 ÷ (2−1) + ¥1,000 ÷ 2 = ¥5,500, which exceeds the limit of ¥2,000 in respect of property damage under the compulsory policy, thus the maximum amount payable is ¥2,000. The total amount to be paid by Car A’s insurer under the compulsory policy = ¥60,000 + ¥7,000 + ¥2,000 = ¥69,000. Car B: the total amount to be paid under the compulsory policy = determined Car A property loss + determined road property loss = ¥2,000 ÷ (2−1) + ¥1,000 ÷ 2 = ¥2,500, which exceeds the limit of ¥2,000 in respect of property damage under the compulsory policy, thus the maximum amount payable by Car B’s insurer under the compulsory policy is ¥2,000. Case 2: Car A and Car B had an accident. Car A was found fully responsible for the accident. The damage to Car A and Car B was determined to be ¥2,000 and ¥5,000, respectively. In addition, the loss of property to the road (damage to the fence on the side of the road) was estimated to be ¥1,000. The amounts to be paid under the compulsory policy are calculated as follows:46 Car A: the total amount to be paid under the compulsory policy = determined Car B property loss + determined road property loss = ¥5,000 + ¥1,000 = ¥6,000, which exceeds the limit of ¥2,000 in respect of property damage under the compulsory policy, thus the maximum amount payable by Car A’s insurer under the compulsory policy is ¥2,000. Car B: the total amount to be paid under the compulsory policy = determined Car A property loss = ¥2,000, which exceeds the limit of ¥100 in respect of property damage under the compulsory policy in the event that the driver had no fault in the accident, thus the maximum amount payable by Car B’s insurer under the compulsory policy is ¥100.

45 Ibid. 46 Ibid.

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(c) Compensation for two or more victims in an accident Where an accident caused injury or death or property damage to two or more victims, the sum of the compensation to these victims under the compulsory policy shall not exceed the limit of each part of cover as set by the CIRC (i.e. the part for injury or death, the part for medical costs and the part for property damage).47 If the sum of the determined amount of loss for all the victims is more than the limit of each part of cover, the amount payable to each victim can be calculated by the equation: the amount payable under each part of the compulsory policy for each victim = the limit of cover for that part × (the determined amount for the victim for that part ÷ the sum of the determined amount for all the victims for that part).48 The following case is used to illustrate the calculation. A car injured two people in a road accident. The medical costs sustained were ¥7,500 and ¥5,000 for person one and person two, respectively. The limit for the part in respect of medical costs under the compulsory policy was ¥10,000. The amount payable for person one was ¥10,000 × ¥7,500 ÷ (¥7,500 + ¥5,000) = ¥6,000. The amount payable for person two was ¥10,000 × ¥5,000 ÷ (¥7,500 + ¥5,000) = ¥4,000. The limit of cover under a compulsory motor policy is for each accident, no matter how many victims in the accident, in accordance with clause 8 of the standard clauses of compulsory motor vehicle traffic accident policy. If two or more victims are involved in a road accident, the actual amount of loss suffered by these victims can often exceed the limit of cover under the compulsory policy; the insurer is, however, only liable to pay within the limit of cover for these victims (the limited amount has to be shared by them), so the protection for each victim will be greatly reduced. This is not in line with the purpose of the scheme of compulsory motor insurance. It is suggested that the limit of cover under the compulsory insurance should be for each third party victim in one accident. This needs to be clearly spelt out in a future amendment of the Regulation. 22.2.8 The scope of third party victims A compulsory motor policy is for the benefit of third party victims. Articles 3 and 21 of the Regulation define the scope of third party victims as those persons other than the insured persons and persons on board the insured motor vehicles.49 Under a compulsory motor policy, the insurer is to be liable to indemnify the third party victims within the scope of compulsory cover for their bodily injuries, death and property damage arising from road traffic accidents involving insured motor vehicles.50 It must be noted that according to art. 21 of the Regulation, the insurer is not liable to indemnify a third party victim for any loss arising from a road accident intentionally caused by the third party victim.

47 Ibid. 48 Ibid. 49  In English law, according to s. 145(4A) of the Road Traffic Act 1988, persons carried in or upon a vehicle, or entering or getting on to, or alighting from, a vehicle are treated as third parties. See Mac Gillivray (12th edn, 2012) para.30-002. 50  The Regulation, art. 21.

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In accordance with arts 3 and 21 of the Regulation, clause 5 of the standard compulsory motor vehicle traffic accident liability insurance policy, which was formulated by the IAC and approved by the CIRC in 2006,51 stipulates that the victims mentioned in the contract of a compulsory motor insurance means those persons who suffer bodily injury, death, or property damage in an accident involving the insured motor vehicle. Those persons do not include the insured persons and the persons on board the insured vehicle.52 Insurance companies offer a commercial (non-compulsory) third party liability cover for persons on the insured vehicles,53 which will be considered later. According to art. 17 of the Interpretation on Compensation for Damage, the insured can be treated as a victim in the situation where the driver who is permitted to drive the insured vehicle injured the insured, and the insured’s lawsuit for indemnity against the insurer within the scope of cover under the compulsory motor policy shall be upheld by People’s Courts, except where the insured was a person on board the insured vehicle. There have been lots of disputes as to the determination of whether a victim is a person on board the insured vehicle. If he is such a person, he is not to be treated as a third party, thus is not covered under the compulsory motor policy. Some High People’s Courts (HPC) have developed rules for determining whether a victim can be treated as a person on board the insured vehicle. For example, the HPC of Shandong Province provides that at the moment when a passenger of a motor vehicle is off the vehicle and injured on the road by the vehicle, the passenger cannot be treated as a person on board the insured vehicle, but as a third party victim. The insurer is then liable to make compensation to the person under the compulsory motor policy, except as provided otherwise in the policy.54 When a passenger of a motor vehicle is thrown out of the vehicle at the time of the accident and this gives rise to injury or death of the passenger, and the insured or the victim claims for indemnity payments under the compulsory motor policy, the People’s Court shall not uphold such a claim, except as provided otherwise in the policy.55 However, when a passenger of a motor vehicle is thrown out of the vehicle at the time of the accident and collides with the vehicle, resulting in injury or death of the person, the insurer is then liable to make compensation under the compulsory motor policy, except as provided otherwise in the policy.56

51  See the standard contract and base premium rate of the compulsory motor vehicle traffic accident liability insurance formulated by the IAC and approved by the CIRC, Bao Jian Chan Xian [2006] No. 638 (see accessed in March 2016). 52 Ibid. 53  See the Comprehensive Commercial Motor Vehicle Insurance Clauses of the Ping An Insurance Company of China (2014 version) accessed in February 2016. 54  The Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (hereinafter, the Guidance of the HPC of Guangdong Province 2011) art. 26. 55 Ibid. 56 Ibid.

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The HPC of Shanghai takes a similar view as to the determination of whether a victim can be treated as a person on board the insured vehicle.57 According to the motor vehicle insurance contract, the “third party” in motor vehicle third party liability insurance means the victim of a traffic accident who suffers injury, death or property damage, except those who are the policyholder, the insured persons or the insurer. “The persons on board the vehicle” refer to those who are on board at the moment of the accident. Accordingly, to determine whether a victim of the accident is a “third party” or “a person on board the vehicle,” it must be based on whether at the particular moment when the accident occurs the person is on board the vehicle. If he is, he is a “person on board the vehicle” (including those who are thrown out of the vehicle); if he is not, he is a “third party.”58 Since the motor vehicle is a means of transportation, no one can permanently be on board the motor vehicle – the temporary identity of a “third party” and “a person on board the vehicle” is changeable and can be converted under specific conditions of time and space. In judicial practice, persons who are carried in or on a vehicle, or thrown out of a vehicle, or alighting from or getting on to a vehicle, are usually treated as persons on board the vehicle. If they are injured or killed, or suffer property damage in a traffic accident caused by the vehicle, they are not entitled to insurance compensation under a compulsory motor policy, because they do not fall into the category of “third parties.” In one case,59 Mr Xue and Mr Wang were thrown out of a vehicle when the vehicle was turning at a high speed and they were injured. They were held to be persons on board the vehicle, so the insurer was not liable under the compulsory motor policy. In the case of Mr Zhao v The Insurance Company,60 Mr Wu was unloading bales of cement from a truck, and the vehicle suddenly moved backwards; Wu’s head was hit on a standing pillar and he was killed instantly. He was held to be a person on board the vehicle, thus was not covered under the compulsory motor policy. In another case,61 Mr Hu was alighting from a bus at a bus stop, and before his feet touched the ground, the door of the bus suddenly shut. He fell off the bus onto the road and was injured. It was held that he was a person on board the vehicle. However, sometimes, the court makes a different judgment in a similar case,62 such as where a passenger on the insured bus fell off the bus and was killed on the road, because the door of the bus automatically opened while the bus was moving. The court held that the victim was off the vehicle at the moment of the accident – he 57  The Memorandum of the Seminar Concerning Difficult Issues in Roads Traffic Accident Disputes by the First Civil Court of the High People’s Court of Shanghai, 31 December 2011 (see accessed in April 2016). 58  Ibid, para. 11. 59  This case was decided by the People’s Court, Fancheng District, Xiangyang City, Hunan Province, Civil Court Judgment (2012) No. 00612, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2013) vol. 5, p. 367. 60 This case was decided by the Intermediate People’s Court, Foshan City, Guangdong Province, Civil Court Judgment (2011) No. 177, and is reported in the Annual Report of Typical Insurance Cases (Law Press China 2013) vol. 5, p. 371. 61  This case was decided by the People’s Court, Songjiang District, Shanghai (2012) No. 7345, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2013) vol. 5, p. 364. 62  Mr Liu v The Insurance Company; this case was decided by the Intermediate People’s Court, Shenyang City, Liaoning Province, Civil Court Judgment (2012) No. 38, and is reported in the Annual Report of  Typical Insurance Cases (Law Press China 2012) vol. 4, p. 378.

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was not a person on board the vehicle, but was a third party under the third party liability policy. Thus the insurer was liable under the policy. It is submitted that it is rather arbitrary to exclude “the persons on board the vehicle” from the cover under a compulsory motor policy.63 Also, there has been inconsistency in courts’ decisions as to determination of “the persons on board the vehicle.” It is suggested that persons other than the “insured persons” (the insured and the drivers permitted by the insured) should be treated as third parties under the scheme of compulsory motor insurance. 22.2.9 The premium In China, uniform insurance clauses and a basic premium rate are applied to compulsory motor insurance nationwide;64 they were formulated by the IAC, and approved by the CIRC in 2006.65 According to art. 6 of the Regulation, it is the duty of the CIRC to examine and approve the premium rates in light of the principle of “no profit, no loss” for the business of compulsory motor insurance; in doing so, the CIRC may engage the relevant professional institutions to make assessments, and may hold hearings to solicit public opinion.66 The qualified insurance companies are required to transact the business of compulsory motor insurance and other insurance businesses separately, and carry out business accounting on them independently.67 The CIRC shall, on a yearly basis, check the business of compulsory motor insurance of the insurance companies, and release the results to the public.68 The CIRC may request or allow the insurance companies to adjust the premium rates accordingly on the basis of the overall profits or losses of the business of compulsory motor insurance. In the case of any major adjustment of the premium rates, the CIRC shall hold hearings.69 In the case where there is no record on an insured motor vehicle for unlawful road traffic conduct or road traffic accidents in the previous year, the insurance company shall reduce the premium rate for the vehicle in the next year. If, in the following years, the insured motor vehicle still has no unlawful road traffic conduct or road traffic accidents, the insurance company shall continue reducing its premium rate, down to the minimum premium standard. If the insured motor vehicle has any unlawful road traffic conduct or road traffic accidents, the insurance company shall raise its premium rate in the next year. If the unlawful road traffic conduct or road traffic accidents occur many times, or any serious traffic accident occurs, the insurance company shall raise the premium rate to a larger extent. If the insured has no

63  The Regulation, art. 3. 64  Ibid, art. 6. For instance, the base premium rate is ¥1,050 per year for a motor vehicle with six or less seats for private use, but ¥1,100 per year for a motor vehicle with six or more seats for private use ( accessed in March 2016). 65  See the standard contract and base premium rate of the compulsory motor vehicle traffic accident liability insurance formulated by the IAC and approved by the CIRC, Bai Jian Chan Xian [2006] No. 638 (see accessed in March 2016). 66  The Regulation, art. 6. 67  Ibid, art. 7. 68 Ibid. 69 Ibid.

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fault in road traffic accidents, the premium rate shall not be raised. The standards for reducing or raising the premium rate are formulated by the CIRC jointly with the public security department of the State Council.70 In implementing art. 8 of the Regulation in respect of premium rate floating, the CIRC published the Interim Measures of Premium Rate Floating for Compulsory Motor Vehicle Traffic Accident Liability Insurance in July 2007,71 by which the premium rate floats up or down on the basis of whether there were any traffic accidents in the previous year, with the maximum increase or decrease of 30% of the base premium rate for three consecutive years.72 The above-mentioned is concerned with the premium to be charged or adjusted by the insurance companies in accordance with the Regulation. The requirement on the part of the insured by the Regulation is that the insured must pay all the insurance premiums in one lump sum at the time when he signs the contract of compulsory motor insurance.73 22.2.10 The insured’s pre-contractual duty of disclosure For compulsory motor insurance, as is the case for all other branches of insurance, the insured is under a duty to disclose material information to the insurers before entering into the contract. Article 11 of the Regulation provides: “A proposer shall, when purchasing the insurance, truthfully disclose to the insurance company the material facts.” The Regulation also specifically sets out a list of material facts, which includes: the type of the motor vehicle, factory brand and model, identification number, registration number of the vehicle, the nature of use of the vehicle (for private or business use), and the names (titles) of the owners or managers of the vehicles, sex, age, residential address, number of identity card or driving licence (organisation code), information on the occurrence of accidents to the motor vehicle prior to renewal of the policy, and other facts prescribed by the CIRC.74 These material facts are specifically requested in the proposal form for motor insurance. The insured is required to truthfully answer the questions in the proposal form.75 The consequence for the insured’s failure to comply with the duty of disclosure is that the insurer is entitled to rescind the contract pursuant to art. 14 of the Regulation.76 But prior to the rescission of the contract, the insurer is obliged to notify the

70  Ibid, art. 8. 71  Bao Jian Fa [2007] No. 52 (see accessed in March 2016). 72 Ibid. 73  The Regulation, art. 12. 74  Ibid, art. 11. 75  For example, see the Proposal Form for Motor Vehicle Insurance of Ping An Insurance Company ( accessed in March 2016). 76  Article 14 of the Regulation provides: “An insurance company shall not rescind the compulsory motor vehicle traffic accident liability insurance contract, except where the proposer fails to comply with the duty of disclosure of material facts. Where the proposer fails to fulfil the obligation of truthful disclosure of material facts, the insurance

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insured in writing. If the insured fulfils the obligation of disclosure within five days from the date of receiving the notice, the insurer shall not rescind the contract.77 As compared with the insurer’s right of rescission of the contract in other branches of insurance, an additional limitation in respect of rescission of the contract is imposed on the insurers in compulsory motor insurance – serving a notice of rescission to the insured. The insured is thus given an opportunity to disclose material information to the insurer within five days. This seems to offer a better position to the insured than is provided for in art. 16(2) of the Insurance Law for other branches of insurance, which is that the insurer is entitled to rescind the contract where the insured fails intentionally or by gross negligence to fulfil the obligation of truthful disclosure of material facts which sufficiently influence the insurer’s decision on whether to accept the insurance or raise the premium rate.78 However, the Regulation does not relate the insurer’s right of rescission to the insured’s state of mind in failing to perform the duty of disclosure intentionally or by gross negligence.79 In practice, some compulsory motor policies explicitly stipulate that the insurer is entitled to rescind the contract where the insured intentionally fails to comply with the duty of disclosure. In the Compulsory Motor Vehicle Road Traffic Liability Policy of Ping An Insurance Company, clause 25 states that “where the proposer or the insured intentionally fails to fulfil the obligation of truthful disclosure, the insurance company shall have the right to rescind the contract, and shall not be liable for paying insurance moneys in respect of an insured event occurring before the rescission of the contract and does not refund the premium paid.” There is no such clause in the Compulsory Motor Vehicle Road Traffic Liability Policy of the PICC. It must be noted that there is a serious deficiency of the Regulation in respect of the consequence of the insured’s failure to comply with the duty of disclosure. On the one hand, by virtue of art. 10 of the Regulation, an insured is entitled to choose an insurer that has the qualification to undertake the business of compulsory motor insurance when purchasing the insurance.80 The insurer chosen by the insured is not allowed to refuse underwriting or to delay in underwriting the insurance.81 This means that the insurers must not refuse any application for compulsory motor insurance, even if the insured withholds any material information. So the test of materiality that the insurer would not have entered into the contract had the insurer known the undisclosed fact should not be applicable to compulsory motor insurance. Instead, company shall notify the proposer in writing prior to the rescission of the contract; the proposer shall fulfil the obligation of truthful disclosure within 5 days from the date of receiving of the notice; the insurance company shall not rescind the contract where the proposer has performed the obligation of truthful disclosure within that period.” 77 Ibid. 78  Insurance Law, art. 16(2). For more on the insured’s duty of disclosure, see Chapter 8. 79  The Regulation, art. 14. 80 There are 25 insurance companies which are qualified and approved by the CIRC to carry out compulsory motor insurance business in China. For the names and addresses of these companies, see the CIRC’s website accessed in March 2016. 81  Article 10 of the Regulation provides: “An insured is entitled to choose an insurance company that has the qualification of undertaking the business of compulsory motor vehicle traffic accident liability insurance when purchasing the insurance. The insurance company chosen by the insured is prohibited to refuse underwriting or to delay in underwriting the insurance.” The CIRC should notify the general public of the insurance companies which are qualified to carry out business of compulsory motor vehicle traffic accident liability insurance.

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the test for compulsory motor insurance should be that the insurer would still have entered into the contract but on a different premium rate had the insurer known the undisclosed fact. In other words, the non-disclosure of material facts should only affect the premium to be charged, not affect the insurer’s decision on whether to enter into the contract. In fact, in the Compulsory Motor Vehicle Road Traffic Liability Policy of the PICC, clause 12 states that “where the undisclosed fact affects the calculation of premium, the insurer can re-calculate the premium.” On the other hand, art. 14 of the Regulation vests in the insurer the right to rescind the contract in the case of the insured’s failure to comply with the duty of disclosure. So art. 14 is inconsistent with art. 10 of the Regulation. It is suggested that an insurer should not be entitled to rescind the contract in the case of non-disclosure of material facts, but can charge a higher premium corresponding to the undisclosed material facts. Accordingly, art. 14 of the Regulation would be amended to the effect that the insurer should not be permitted to rescind the contract where the insured fails to disclose material facts, but to charge a higher premium. This would bring the rule in line with the nature of compulsory motor insurance – to protect the victim of the road accident in the situation where the insured tortfeasor is financially unable to indemnify the victim. Article 14 of the Regulation does not provide any rule as to a loss which occurred before the insurer rescinds the contract by reason of the insured’s failure to comply with the duty of disclosure. However, as a general rule for pre-rescission loss, the insurer must assume liability under the compulsory motor policy before rescinding the contract.82 In practice, some insurers may refuse to indemnify the insured for pre-rescission loss. For instance, in the Compulsory Motor Vehicle Road Traffic Liability Policy of Ping An Insurance Company, clause 25 states that “where the proposer or the insured intentionally fails to fulfil the obligation of truthful disclosure, the insurance company shall have the right to rescind the contract, and shall not be liable for paying insurance moneys in respect of an insured event occurring before the rescission of the contract and does not refund the premium paid.” This is the approach as provided in art. 16(4) of the Insurance Law.83 As mentioned above, the insurer should not be allowed to rescind the contract by reason of intentional non-disclosure of material facts; it should then be liable for paying insurance moneys in respect of the insured loss, but entitled to raise the premium to that which would have been charged had the insurer known the undisclosed material facts. 22.2.11 The insurer’s pre-contractual duty to explain the content of the contract According to art. 17 of the Insurance Law, when concluding an insurance contract, the insurers are obliged to explain the content of the contract to the insured, make notes on exemption clauses to draw the insured’s attention to the clauses, and also

82  Article 17 of the Regulation provides: “Before a compulsory motor vehicle traffic accident liability contract is rescinded, the insurer shall assume the liability covered in accordance with the contract.” 83 Article 16(4) provides that “where a proposer fails to fulfil the obligation of truthful disclosure intentionally, the insurer shall not be liable for making indemnity payments or paying insurance benefits in respect of an insured event occurring before the rescission of the contract and does not refund the premium paid.”

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make clear explanation of the exemption clauses, otherwise they are not effective.84 Although the Regulation does not mention the insurers’ duty of explanation of the content of the contract, art. 17 of the Insurance Law should apply to compulsory motor insurance contracts. The IAC formulated some guiding rules in respect of the insurers’ duty of explanation of insurance clauses to the insureds for its members to follow.85 First, the insurer shall explain to the insured the clauses in the policy, including risks covered, exemptions, the insured’s duties, the insurer’s duties, claims handing and so on. The insurer shall take particular care to clearly explain the exemption clauses. The insurer shall provide the insured with a copy of the insurance clauses before concluding the contract. Second, the insurer shall clearly explain to the insured the maximum amounts of compensation covered for injury, disability or death (¥110,000); for medical costs (¥10,000); or for property damage (¥2,000). Third, the insurer shall clearly explain to the insured that the insurer shall determine the medical expenses according to clinical practice guidelines for treating persons injured in traffic accidents and the national basic medical insurance standards formulated by the Health Department of the State Council. Fourth, the insurer shall clearly explain to the insured that the insurance company adopts a system of premium rate floating in accordance with the Interim Measures of Premium Rate Floating for Compulsory Motor Vehicle Traffic Accident Liability Insurance.86 Fifth, the insurer shall inform the insured that he needs to purchase only one compulsory policy for each motor vehicle, and the insured will only recover from one policy even if he has effected more than one policy for the same vehicle.87 Usually a reminder is printed at the beginning of the standard contract of compulsory motor insurance that “only one compulsory motor policy is needed for each vehicle, please do not effect more than one policy.”88 Sixth, the insurer shall remind the insured to stick the symbol of compulsory insurance on the top right corner of the windscreen, or carry the symbol by the drivers of the vehicles without a windscreen. Seventh, the insurer shall inform the insured how to make an inquiry as to his record of traffic accidents or occasions of violation of traffic safety laws. Finally, the insurer shall remind the insured of his duty of truthful disclosure of material facts when concluding the contract.89

84  This topic is considered in Chapter 9 of this book. 85 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa [2009] No. 216 (see accessed in April 2016. 86  Bao Jian Fa [2007] No. 52 (see accessed in March 2016). 87  In China, the doctrine of double insurance and contribution is not applicable to compulsory motor vehicle traffic accident liability insurance. In the event that the insured effects more than one policy, only the one with the earliest starting time of the insurance period is effective. Other policies are not effective (see Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 1, Practical procedure in underwriting, s. 1(1)(4), and s. 5(2)(6), Zhong Bao Xie Fa [2009] No. 216). 88  For example, see the Compulsory Motor Vehicle Traffic Accidents Insurance Policy of the PICC on the website of the PICC ( accessed in March 2016). 89 Ibid.

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22.2.12 The contents of the proposal form There is no proposal form specifically for compulsory motor insurance. It is the general practice that compulsory cover is included in the proposal form of motor vehicle insurance. The terms of the proposal form may vary from company to company, but the contents are essentially the same. A typical proposal form may contain the following information.90 First, the proposer is required to give his name, address and telephone number, date of birth, sex and ID number. If the person to be insured is different from the proposer, this person’s details are required as well. The details of the owner of the vehicle are required, such as his name, address, ID number, date of birth and sex. Second, the particulars of the vehicle to be insured are required, such as the type of motor vehicle, factory brand and model, engine number, registration number of the vehicle, the seating capacity and the nature of the use of the vehicle (for private or business use). Third, if commercial insurance cover is proposed, the proposer is required to provide information about insurance cover, such as first party damage to the vehicle, theft of the vehicle, third party liability cover and other types of cover. Fourth, the limits on the maximum amount of cover and the premiums to be charged for different parts of the compulsory cover are shown in the proposal form. The proposer is asked to provide information in respect of the time when the cover will start. Fifth, there is a column to be filled with special agreements. For example, an agreement may state that the policy takes effect instantly at the time when the proposer has paid the premium. It is the usual practice that the policy becomes effective at 0:00 the next day. Sixth, there is a column filled with importance notices. For example, a notice may state that you need to read the clauses carefully with particular attention to the exclusion clauses. Finally, the proposer then has to sign a declaration stating that the answers he has given are true, the insurer has explained the terms of the contract to him and he has fully understood the exception clauses, and so on. 22.2.13 The contents of a compulsory motor insurance contract As mentioned above, compulsory motor insurance applies uniform insurance clauses,91 which were formulated by the IAC in accordance with the Regulation and

90  As an example, see the proposal form of motor vehicle insurance of the Huatai Insurance Group ( accessed in April 2016). 91  The Regulation, art. 6.

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approved by the CIRC.92 All the insurance companies93 use the standard clauses, although some companies may change the wording slightly. The standard clauses consist of 27 clauses, including general provisions (clauses 1 to 3), definitions (clauses 4 to 7), liability covered (clause 8), advance of rescue costs and recovery from the tortfeasor (clause 9), exemptions (clause 10), insurance period (clause 11), obligations of the insured (clauses 12 to 17), claims (clauses 18 to 21), amendment and recession of the contract (clauses 22 to 24) and supplementary clauses (clauses 25 to 27). (a) Liability covered The insurer undertakes to indemnify the insured or the third party victims in respect of the amount which the insured may become legally liable to pay for the victim’s bodily injury, death or property losses caused by a traffic accident in the course of the use of the insured motor vehicle. The insurer will pay the insurance money in accordance with the contract for each accident within the following limits: (1) death, injury or disability compensation limit of ¥110,000; (2) medical expenses compensation limit of ¥10,000; (3) property loss compensation limit of ¥2,000; and (4) where the insured has no fault for the accident, death, injury or disability compensation limit of ¥11,000, medical expenses compensation limit of ¥1,000 and property loss compensation limit of ¥100. The amount earmarked for death, injury and disability compensation is for funeral service expenses, death compensation, the cost of travel to attend the funeral sustained by the relatives of the victim, disability compensation, disability aids, nursing care, rehabilitation costs, transportation costs, living expenses for the dependents of the deceased victim, accommodation, lost income, and solatium in accordance with the court’s decision or mediation. The amount of medical expenses is earmarked for medical expenses, hospital expenses, hospital food subsidies, necessary and reasonable costs of follow-up treatment, and cosmetic surgery costs. (b) Advance of rescue costs and recovery from the tortfeasor In accordance with art. 22 of the Regulation, clause 9 of the standard clauses deals with the matter of advance of rescue costs. The insurance company is obliged to advance rescue costs for the injured victim who is in need of rescue within the limit of the amount earmarked for medical expenses and has the right to recoup the amount paid from the tortfeasor under the following situations: (1) the driver did not acquire a driver’s qualification; (2) the driver was drunk; (3) the accident involved an insured vehicle which was stolen; or (4) the insured deliberately caused the traffic accident. The insurer is not liable for any other losses and expenses in these circumstances.

92  See the standard contract and base premium rate of the compulsory motor vehicle traffic accident liability insurance formulated by the IAC and approved by the CIRC, Bao Jian Chan Xian [2006] No. 638 ( accessed in March 2016). 93 There are 25 insurance companies which are qualified and approved by the CIRC to carry out compulsory motor insurance business in China. For the names and addresses of these companies, see the CIRC’s website accessed in March 2016.

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Article 22 of the Regulation and clause 9 of the standard clauses use the word “advance” (dian fu), which means that the insurer is not obliged to pay the rescue costs, but obliged to pay first on behalf of the tortfeasor and then recoup the money paid from the tortfeasor. The SPC takes the view that where the injured party requests the insurance company to pay compensation within the limits of the compulsory motor policy, under any of the following situations, the People’s Court shall uphold such a request. (1) The driver did not acquire a driver’s qualification or did not have an appropriate driving licence for driving the vehicle. (2) The driver drove after being drunk or taking state-controlled psychotropic drugs or narcotics, and the traffic accident occurred. And (3) the driver deliberately caused the traffic accident. Where the insurance company claims recovery of the amount paid from the tortfeasor, the People’s Court shall uphold the claim.94 (c) Exemptions to (b) The insurer is not liable to pay compensation or advance rescue costs in the following circumstances: (1) the loss due to a traffic accident caused intentionally by the victim;95 (2) the loss of the insured’s property and the property on the insured vehicle; (3) the indirect loss arising from the accident involving the insured vehicle, such as the interruption of the business, suspension of the use of the vehicle, suspension of supplies of electricity or water or gas or communication or Internet network, the loss of data, the loss caused by the voltage change, the loss by devaluation of the property after being repaired or due to the change of market price, and any other indirect loss; and (4) arbitration or litigation costs and other related expenses arising from the traffic accident.96 (d) The obligations of the insured The insured is obliged to disclose material information to the insurer at the time of the contract.97 When concluding the contract, the insured shall not require the insurer to attach additional conditions, except to the insurance clauses and premium rates.98 At the time of renewal of the policy, the insured shall provide a copy of the previous year’s insurance policy.99 During the insurance period, if the degree of the risk increases due to the modification or the change of the use of the vehicle or an other change, the insured shall promptly notify the insurer, and seek approval from the insurer. Additionally, the insurer has the right to recalculate the premium.100 Where the insured motor vehicle has a traffic accident, the insured shall take reasonable and necessary steps in a timely manner to protect and rescue, and promptly notify the insurer of the

94  The Interpretation on Compensation for Damage, art. 18. 95  This is as provided for in art. 21 of the Regulation. 96  According to art. 66 of the Insurance Law, the insurer is allowed to contract out of its statutory liability to bear the costs of litigation or arbitration incurred by the insured. For more, see Chapter 21. 97  The standard clauses, clause 12. 98  Ibid, clause 13. 99  Ibid, clause 14. 100  Ibid, clause 15.

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occurrence of the accident.101 When an insured event occurs, the insured shall actively assist the insurer in the process of site survey and accident investigation. If arbitration or litigation in relation to the insurance claim is to happen, the insured shall notify the insurer in writing in a timely manner.102 (e) Claims Where a motor vehicle has a traffic accident, the insured shall make a claim for insurance money103 and supply to the insurer the following documents: (1) the compulsory motor insurance policy; (2) the claim application form completed by the insured; (3) the valid identification of the insured and the victim, and the motor vehicle road licence and the driver’s driving licence; (4) the proof of accident issued by the road traffic administration department of the public security bureau, or the relevant legal instruments and other documents issued by the People’s Court or other institutions; (5) where the insured and the injured party settle the matter in relation to the accident by negotiation and agreement according to the relevant law and regulation, the insured shall supply to the insurer the settlement agreement in accordance with the provisions in the Procedural Requirements in Dealing with Traffic Accidents;104 (6) the proof of the extent of property damage sustained by the victim, or the proof of the extent of disability of the victim, the relevant medical proof, and a list of losses and receipts for expenses; (7) other relevant evidence and documents in relation to the nature and cause of the accident, and the extent of the loss.105 When an insured event occurs, the insurer shall determine the amount of payment within the limit for death or injury or disability of the victim under the compulsory motor policy, in accordance with the standard and the scope of compensation as provided for by relevant laws and regulations, contractual agreements, and the guidelines for clinical practice for persons injured by traffic accidents and the national basic medical treatment insurance standards which are established by the health authorities under the State Council.106 In the case where the insured event has caused bodily injury or death of the victim, and without the written consent of the insurer, the insured has promised to pay or has paid an amount of compensation, the insurer is entitled to redetermine the amount of payment within the limit of cover under the compulsory policy. Where the property damaged by the accident is in need of repair, the insured shall determine and negotiate with the insurer in respect of the items to be repaired or replaced and the costs. Otherwise, the insurer is entitled to redetermine within the limit of cover under the compulsory policy.107 Some matters in relation to claims are not covered in the standard clauses of the compulsory motor policy. According to clause 27 of the standard clauses, any

101  Ibid, clause 16. 102  Ibid, clause 17. 103  The Regulation, art. 28. 104 The Procedural Requirements in Dealing with Traffic Accidents was enacted by China Public Security Ministry on 11 July 2008 and became effective on 1 January 2009 (see accessed in April 2016). 105  The standard clauses, clause 18. 106  Ibid, clause 19. 107  Ibid, clause 20.

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matters which are not provided for in the contract shall be dealt with by the Regulation. It is convenient to consider the relevant provisions of the Regulation here. First, the insured or the victim has the duty to notify the insurer of the occurrence of the insured event. Article 27 of the Regulation provides: “When an insured motor vehicle has a road accident, the insured or the victim shall notify the insurance company. The insurance company shall reply immediately, informing the insured or the victim of the detailed procedure for paying compensation and other relevant matters.” Second, the insurer is required to inform the insured of what proofs and documents are needed for the claim. Article 28 of the Regulation provides: “Where an insured motor vehicle has a traffic accident, it is for the insured to make a claim to the insurance company for insurance money. The insurance company shall, within one day of receiving the application of the claim, inform the insured in writing of the relevant proofs and documents in relation to the claim to be supplied to the insurance company.” The IAC formulated rules in respect of time limits in paying the insurance moneys in the following circumstances:108 (1) for a case which involves property loss of no more than ¥2,000, if all the required documents have been received, the insurer will pay the insurance money on the same day as receiving the documents; (2) for a case which involves death or bodily injury with an amount to be paid of no more than ¥10,000, if all the required documents have been received, the insurer will pay the insurance money within three days of receiving the documents; (3) for a case which involves death or bodily injury with an amount to be paid of no more than ¥50,000, if all the required documents have been received, the insurer will pay the insurance money within five days of receiving the documents; and (4) for other cases for which the insurer is liable under the compulsory policy, if all the required documents have been received, the insurer will pay the insurance money within seven days of receiving the insured’s application of claim. Third, the insurer is required to handle claims promptly. Article 29 of the Regulation stipulates: “Within five days after receiving the insured’s proofs and documents, the insurance company shall determine whether or not the loss is covered by the policy and notify the insured of its decision. If the loss is not covered, the reason must be explained in writing. If the loss is covered the insurance company shall pay the insurance money within 10 days after reaching a payment agreement with the insured.” Fourth, according to art. 32 of the Regulation, the insurance company may pay the insurance money to the insured, or directly to the victim. However, where the insurance company is required to advance or pay rescue costs in the case of rescuing the injured victim, it must advance or pay the rescue costs to the relevant medical institution upon receiving the notice from the traffic administration department of the public security bureau.109

108 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa [2009] No. 216 (see accessed in April 2016). 109 The traffic administration department of public security bureau has the duty to notify the insurance company to advance or pay the rescue costs to the hospital for medical treatment of the injured third party victim, or to notify the Road Traffic Accidents Social Relief Fund to advance rescue costs,

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(f) The transfer and rescission of the contract During the insurance period, where the ownership of the insured vehicle has changed, the insured shall promptly notify the insurer of the change and go through the procedure for transfer of the compulsory motor contract to the new owner of the vehicle.110 The insured may demand a rescission of the compulsory motor contract in the following three situations:111 (1) the registration of the insured motor vehicle has been legally written off; (2) the use of the insured motor vehicle has been suspended; or (3) the insured motor vehicle has been confirmed missing by the public security organs. After the rescission of the contract, the insured shall promptly return to the insurer the insurance policy and the compulsory motor insurance symbol. If the insured cannot return the symbol, he should explain the situation to the insurer and acquire the insurer’s consent.112 In the case where the insured has purchased two or more compulsory policies for the same vehicle, the insured has the right to rescind the contracts other than the earliest one effected; and the insurer shall refund the full premium to the insured for the rescinded contracts.113 By virtue of art. 14 of the Regulation, the insurance company is prohibited from rescinding a compulsory motor vehicle traffic accident liability insurance contract, except where the insured failed to comply with the duty of disclosure of material facts. In the event that the compulsory motor contract has been rescinded, the remaining premium calculated on a daily basis for the period from the date of rescission to the end of the one-year insurance period shall be returned to the insured.114 Any other matters which are not provided for in the contract shall be dealt with by the Regulation.115 22.2.14 Third party rights against insurers In the event that a third party is injured in a traffic accident by the insured vehicle, he may bring an action against the insured, and if he is successful, the damages will in effect be payable by the insurer within the limit of cover under the compulsory policy. Sometimes, however, the insured himself is killed in the accident or disappears after the accident, or he is unable to pay and goes bankrupt, and

according to art. 90 of the Regulation for Implementing the Road Traffic Safety Law of the People’s Republic of China, which was enacted by the State Council on 28 April 2004 and came into force on 1 May 2004. 110  The standard clauses, clause 22. 111 According to art. 16 of the Regulation, the insured is not allowed to rescind the compulsory motor insurance contract, except in three situations: (1) the registration of the insured motor vehicle has been legally written off; (2) the use of the insured motor vehicle has been suspended; or (3) the insured motor vehicle has been confirmed missing by the public security organs. 112  The standard clauses, clause 23. 113 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 1, Practical procedure in underwriting, s. 5(2)(6), Zhong Bao Xie Fa [2009] No. 216 (see accessed in April 2016). 114  Ibid, clause 24. 115  Clause 27 of the standard clauses.

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the question arises as to whether the third party victim has any rights against the insurer for compensation in these circumstances. The following legislation, along with judicial and industry practice, can be considered to apply to the circumstances mentioned above. (a) The Insurance Law Article 65(2) of the Insurance Law provides: “Where the insured of a liability insurance policy causes loss or damage to a third party, and the indemnity liability of the insured to the third party is ascertained, upon a request by the insured, the insurer shall make indemnity payment to the third party directly. Where the insured neglects in making a request, the third party shall have the right to claim indemnity payment directly from the insurer for the portion it is entitled to.” This article vests in a third party the right against the insurer for indemnity payment, but subject to two conditions: (1) the insured’s liability to the third party has been ascertained; and (2) the insured neglects to request the insurer to pay the insurance money directly to the third party. Difficulties may arise for the third party victim in exercising his right against the insurers under art. 65(2) of the Insurance Law. The first difficulty is in the case where the insured was killed in the accident or disappeared, or went into liquidation (in the case of a corporation) before his liability to the third party has been ascertained. The victim may not be able to bring an action against the insured for ascertaining the insured’s liability and for payment of damages. Consequently, the victim cannot exercise his right against the insurers because condition (1) has not been met. Second, even if the insured’s liability to the third party victim has been ascertained, the victim can bring an action against the insurer only where the insured has neglected to request the insurer to pay the victim under the liability policy (condition (2)). In short, art. 65(2) gives the third party victim a conditional right to sue the insurers. In light of the difficulties the third party victim may face and for the sake of protecting the victims in traffic accidents, it has been suggested in Chapter 21 of this book that the third party victim should be vested with an unconditional right to sue the insurer for insurance money under a compulsory motor policy. (b) The Road Traffic Safety Law Article 76 of the Road Traffic Safety Law provides: “Where a motor vehicle causes personal injury or death or property losses in a traffic accident, the insurance company shall pay indemnity within the policy limit of the compulsory motor vehicle third party liability insurance.” This provision does not give a clear answer as to the question of whether a third party victim is entitled to claim against the insurer directly. (c) The Regulation116 It is clearly set out in art. 28 of the Regulation that after the occurrence of a traffic accident, it is the insured, rather than the third party victim, who shall make a claim against the insurance company for insurance money. If the insured and the insurance

116  The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance, 2006.

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company have a dispute over the claim, it is still the insured who can bring an action, either litigation or arbitration, against the insurer under art. 29 of the Regulation. Article 31 of the Regulation provides that the insurance company may pay the insurance money to the insured or to the third party victim. So it is up to the insurance company to choose the party to whom the insurance money will be paid. However, the Regulation does not set out circumstances under which the insurance company should pay the money to the insured or to the victim, nor vests in the third party the right to sue the insurance company. It can be said that the Regulation does not seem to vest in the third party the right to sue the insurer for compensation. (d) Judicial practice The SPC sets out rules in respect of the third party’s right against the insurers. Article 25(1) of the Interpretation on Compensation for Damage provides: “When hearing a case of a traffic accident, the People’s Court shall summon the insurance company as a co-defendant, except where the insurance company has made insurance payments within the limit of the compulsory motor vehicle liability insurance and the relevant party117 has no objection as to the amount of payment.” Article 25(2) continues by providing: “When hearing a case of a traffic accident, if the relevant party requests the insurance company to be tried as a co-defendant, the People’s Court shall permit such a request.” Thus, by virtue of art. 25 of the Interpretation on Compensation for Damage, the SPC effectively gives the third party victim the right against the insurance company to receive insurance money under the compulsory motor insurance. This will avoid repeated lawsuits arising from the same accident and offers greater protection to the third party victim. (e) Rules of the Insurance Association of China The IAC provides some guiding rules in respect of the circumstances under which the insurer can deal with the victim’s claim directly.118 When a victim is injured or killed in a road accident by the insured vehicle, the insurer may deal with the victim’s claim in the following circumstances: (1) where the insured has authorised the victim in writing to make a claim to the insurer; (2) where the People’s Court has made a judgment or order; (3) where the insured has died or run away, or disappeared, or has lost the ability to make a claim, or abandoned his right to claim; and (4) other circumstances according to law.119 The rules are, albeit of no legal force, usually followed by the members of IAC. Thus it can be said that, practically, the third party victim (or his family member) may bring an action against the insurer directly for compensation.

117  Here the relevant party may mean the third party victim, or the victim’s family member if the victim was killed in the accident. 118  Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa [2009] No. 216. 119  Ibid, s. 8.

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22.3 The Road Traffic Accident Social Relief Fund Where the driver responsible for an accident involving a third party is uninsured or cannot be traced, the third party cannot claim against any insurers, but he may seek assistance from the Road Traffic Accident Social Relief Fund (hereinafter, the SRF). The SRF is a new scheme established in accordance with art. 17 of the Road Traffic Safety Law. It is complementary to the scheme of compulsory motor insurance. The purpose of establishing the SRF is to ensure that a road accident victim who cannot be compensated by compulsory motor insurance can be assisted by the SRF so as to receive timely medical treatment. Article 17 of the Road Traffic Safety Law provides: “The state applies a scheme of compulsory motor vehicle third party liability insurance, and establishes social relief fund for road traffic accidents. The specific measures shall be formulated by the State Council.” Accordingly, the State Council formulated the specific measures for the SRF in arts 24 to 26 of the Regulation, art. 24 setting out the function of the SRF, art. 25 listing the financial resources of the SRF and art. 26 relating to administration of the SRF. 22.3.1 The function of the SRF The function of the SRF is described in three pieces of legislation. Under the Road Traffic Safety Law, art. 75 provides: “Where the vehicle causing the traffic accident has bought the compulsory third party liability insurance, the insurance company shall pay the rescue expenses within the scope of the liability limit; where the rescue expenses exceed the liability limit, or the vehicle causing the traffic accident has not bought the compulsory third party liability insurance or flees away from the scene after causing the traffic accident, part or all of the rescue expenses shall be paid in advance from the social relief fund for road traffic accidents, and the institution managing the social relief fund for road traffic accidents shall be entitled to recoup such expenses from the party liable for the traffic accident.” Under the Tort Law, where the driver of a motor vehicle flees after a motor vehicle traffic accident occurs, if the motor vehicle is covered by the compulsory motor insurance, the insurance company shall pay compensation within the liability limit of the compulsory motor insurance; or if the motor vehicle cannot be identified or is not covered by the compulsory insurance, and the expenses for the death of or personal injury to the victim, such as rescue and funeral fees, need to be paid, the advances shall be made out of the social relief fund for road traffic accidents. After advances are made out of the social relief fund for road traffic accidents, the governing body of the fund shall be entitled to be reimbursed by the person liable for the traffic accident.120 In accordance with the Road Traffic Safety Law and the Tort Law, the State Council sets forth similar but more detailed provisions in art. 24 of the Regulation

120  The Tort Law, art. 53.

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in respect of the function of the SRF. It provides: “The state shall establish a social relief fund for road traffic accidents. Under any of the following circumstances, the funeral service expenses and part or all of the rescue costs for personal injury or death of the victims of road traffic accidents shall be paid in advance by the social relief fund, and the institution managing the fund shall be entitled to recoup such expenses from the party liable for the traffic accident: (1) the rescue costs exceed the limit of the compulsory motor vehicle traffic accident liability insurance; (2) the motor vehicle involved in the accident is not insured under the compulsory motor vehicle traffic accident liability insurance; and (3) the motor vehicle involved in the accident flees away after the accident.” 22.3.2 The financial sources of the SRF Article 25 of the Regulation lists the sources where the funds of the SRF come from, including: (1) a certain percentage of the insurance premiums from the compulsory motor insurance;121 (2) the penalty fines from the owner or the manager of the motor vehicle for failing to insure the vehicle with compulsory motor insurance;122 (3) the money recovered by the institution managing the fund from the party responsible for the accident;123 (4) the yields from the social relief fund, such as bank interest and investment yields; and (5) other sources. In addition, the local government will subsidise the SRF through the tax paid by the insurance companies in undertaking the business of compulsory motor insurance. Donations from the public or private bodies also contribute to the SRF.124 22.3.3 Administration of the SRF Article 26 of the Regulation provides that the specific management measures for the SRF shall be formulated and implemented by the financial department of the State Council in conjunction with the CIRC, Ministry of Public Security, Ministry of Health and Ministry of Agriculture. In accordance with this provision, the Pilot Scheme of Management for the Road Traffic Accidents Social Relief Fund (hereinafter, the Pilot Scheme) was published jointly by the Ministry of Finance, the CIRC, the Ministry of Public Security, the Ministry of Health and the Ministry of Agriculture in October 2009, and became effective on 1 January 2010. The Pilot Scheme consists of 40 articles in six chapters: chapter 1, general provisions (arts1 to 5); chapter 2, the raising of the fund (arts 6 to 11); chapter 3, the use of the fund (arts 12 to 19); chapter 4, the management of the fund (arts 20 to

121 About 1% of the premium will go to the SRF; see accessed in April 2016. 122  According to art. 39 of the Regulation, the fine is two times the premium which should have been paid for the compulsory motor insurance for the vehicle. 123  By virtue of art. 24 of the Regulation, the institution managing the social relief fund is entitled to recover from the tortfeasor the amount advanced by the SRF for rescue costs of the victim. 124  Article 6 of the Pilot Scheme of Management for the Road Traffic Accidents Social Relief Fund, which was published jointly by the Ministry of Finance, the CIRC, the Ministry of Public Security, the Ministry of Health, and the Ministry of Agriculture in October 2009, and became effective on 1 January 2010.

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30); chapter 5, the legal liabilities (arts 31 to 34); and chapter 6, the supplementary provisions (arts 35 to 40). The most relevant part of the Pilot Scheme is the use of the fund and will be considered below. 22.3.4 Procedure for advancing funds The SRF is usually used for the rescue costs of the first 72 hours of medical treatment. In a special situation where the rescue costs are still needed for medical treatment after 72 hours, the medical institution must explain the reason in writing to the institution managing the SRF.125 Where any of the three situations mentioned in art. 24 of the Regulation occurs, and the SRF is needed for part or all of the rescue costs, the traffic administration department of the public security shall inform the institution managing the SRF in writing within three working days from the time of the medical treatment.126 Where the medical treatment for the injured victim has been completed, the medical institution may make an application, together with the evidence and proof of the rescue costs, to the institution managing the SRF for an advance of rescue costs.127 Upon receiving the notice for an advance of rescue costs from the traffic administration department of the public security or the application from the medical institution, the institution managing the SRF must examine the following matters within five working days: (1) whether the application is for the situations provided for in art. 24 of the Regulation; (2) whether the rescue costs are correct and reasonable; and (3) other matters which the institution managing the SRF deems necessary to examine. If the application has satisfied the requirements, the institution managing the SRF will advance the money to the account of the medical institution.128 In the case where funds are needed for the funeral of the victim, the family member or relatives of the victim shall make an application in writing with relevant documents to the institution managing the SRF.129 Upon receiving the application and the relevant documents, where the application has satisfied the requirements, the institution managing the SRF shall advance the funeral costs within three working days and also inform the traffic administration department of the public security of such an advance of the funeral costs.130 The institution managing the SRF is obliged to recover the money advanced to the medical institutions or to the family member of the victim for the funeral service from the tortfeasors.131

125  The Pilot Scheme, art. 12. 126  Ibid, art. 13. 127  Ibid, art. 14. 128  Ibid, art. 15. 129  Ibid, art. 17. 130  Ibid, art. 18 131  Ibid, art. 17.

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22.3.5 The fund is in essence “sleeping” It has been reported by the newspaper that the SRF is in essence “sleeping.”132 In Shandong Province, the amount of the SRF reached ¥664 million in 2014, but the money spent was only ¥17 million for 846 road accidents in that year.133 In Guangdong Province, the SRF amounted to ¥2,000 million in 2014, but the money spent was only about ¥0.1 million for a few cases in that year.134 A recent case brought the SRF into public view. Mrs Liu Laixiang, an old lady, was hit by a car whose driver ran away after the accident. She was taken to hospital for treatment and has been in hospital for the last three years. The medical costs in arrears were more than ¥0.2 million. It was revealed that it was difficult to apply for the fund. In some cases, it took up to 10 months for the application to be approved. Successful applications accounted for only about 10% of all the applications. Even if the application was successful, it took several months for the money to be advanced by the institution managing the SRF.135 So far, the SRF is not playing an important role in protecting the victims of road accidents. It is certainly in need of improvement in many aspects. The sleeping fund must be wakened and put into use. 22.4 Non-compulsory commercial insurance Compulsory motor insurance has been considered above, and the following sections will consider commercial insurance, which is non-compulsory, including motor vehicle damage insurance, motor vehicle third party liability insurance, persons on board the motor vehicle liability insurance, theft of the whole vehicle insurance, and other types of cover. The IAC formulated Model Clauses of the Comprehensive Commercial Motor Vehicle Insurance in 2014 (hereinafter, Model Clauses).136 The insurance companies have followed these Model Clauses to formulate their own clauses. Some insurance companies have adopted the Model Clause as their own clauses. For example, the Comprehensive Commercial Motor Vehicle Insurance Clauses of the Ping An Insurance Company adopts the Model Clauses in a wholesale manner. The Model Clauses include motor vehicle damage cover, motor vehicle third party liability cover, motor vehicle liability cover for persons on board the vehicle, cover for theft of the motor vehicle, and ancillary cover. These types of cover are considered below. 22.4.1 Damage to motor vehicles A typical type of cover in commercial motor vehicle insurance is the first party cover for damage to motor vehicles. In the Model Clauses, chapter one is concerned with

132 See the website of Xinhua News Agent, accessed in January 2016. 133 Ibid. 134 Ibid. 135 Ibid. 136 For a copy of the Model Clauses, see accessed in April 2016.

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the insurance against damage to motor vehicles. It sets out stipulations in respect of the risks covered, the risks excluded, the deductible ratios and excess, the amount covered, and claims handling and settlement. Some of these aspects are considered below. (a) The risks covered During the insurance period, the insurer shall be liable to indemnify the insured, in accordance with the terms of the policy, for direct losses to the insured vehicle which do not fall within the exemptions, in the course of using the insured vehicle by the insured or driver permitted by the insured, through the following causes: collision, overturning, or falling; fire or explosion; fall or collapse of external objects; lightning, strong winds, storms, floods, tornadoes, hail, typhoons, or tropical storms; (5) subsidence, cliff collapse, landslides, mudslides, avalanches, ice trap, snow, ice, or dust storms; (6) accidental blows by the cargo on the insured vehicle or the persons on board the vehicle; or (7) natural disasters suffered by a ferry carrying the insured vehicle (with the driver on board the ferry). (1) (2) (3) (4)

When the insured event occurs, if the insured or the driver permitted by the insured takes reasonable and necessary steps to prevent or mitigate the loss of the insured vehicle, the insurer shall bear the necessary and reasonable costs sustained by the insured. The amount of such costs shall be calculated separately from the indemnity for loss of or damage to the vehicle, and the maximum amount shall not exceed the sum insured.137 (b) The exemptions The policy usually sets out a number of exemptions. In the Model Clauses, clauses 8 to 10 list the circumstances under which the insurer is not liable, causes of the insured events for which the insurer is not liable and certain property loss or expenses for which the insurer is not liable. Within the scope of the risks covered, the insurer is not liable to indemnify the insured for any losses and expenses sustained by the insured vehicle by any reason whatsoever under the following circumstances:138 (1) after the occurrence of the accident the insured or the driver permitted by the insured intentionally destroys or fabricates the accident site or destroys evidence; (2) the driver is in any of the following circumstances: (i) after the occurrence of the accident, the driver abandons the vehicle or drives the vehicle to flee away from the accident site without taking any measurement required 137  The Insurance Law, art. 57(2). For more on the topic of mitigation, see Chapter 13 of this book. 138  The Model Clauses, clause 8.

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by law; (ii) intoxicated by alcohol, affected by prohibited drugs, or used state-controlled psychotropic drugs or narcotics; (iii) no driving licence, or the driving licence being lawfully detained, suspended, revoked or cancelled; (iv) drives the vehicle which is not inconformity with the driving licence; (v) during the period of learning to drive, drives a public bus, police car or a vehicle carrying dangerous goods or one with a trailer; (vi) drives a taxi or other commercial vehicle without a valid permit issued by the road traffic administration department or other necessary certificates; (vii) when learning to drive, drives without being accompanied by a driving instructor; or (viii) drives the vehicle without the insured’s consent; (3) the insured vehicle is in any of the following circumstances: (i) when the accident occurs, the road licence or the registration plate of the vehicle is cancelled, or the vehicle has not been inspected or failed to pass the inspection; (ii) is in a period of the vehicle being detained, seized, confiscated or expropriated by the government; (iii) racing, testing, or is in a period of repair, maintenance or modification in operational commercial premises (such as a garage); or (iv) due to the intentional act or gross negligence of the insured or the driver permitted by the insured, the insured vehicle is used for criminal conduct. The insurer is not liable to indemnify the insured for any losses and expenses sustained by the insured vehicle caused by the following reasons:139 (1) earthquake and secondary disasters; (2) war, military conflicts, terrorist activities, riot, pollution, nuclear reaction or nuclear radiation; (3) fire caused by artificial direct oil supply, high temperature baking, spontaneous combustion or an unexplained reason; (4) in violation of the relevant provisions relating to safe loading; (5) where the insured vehicle is modified or transferred to another person or the use of the vehicle is changed, the insured fails to notify the insurer in a timely manner, and the risk to the vehicle is materially increased due to the modification, the transfer or the change of its use; or (6) intentional conduct by the insured or the driver permitted by the insured. The insurer is not liable to indemnify the following losses and expenses:140 (1) devaluation of the property after being repaired or due to the change of market price; (2) natural wear and tear, rust, corrosion, failure or defect of the vehicle; (3) the part of the increased loss which results from the continued use of the vehicle after it is damaged, but without being repaired and inspected; (4) where the insured or the driver permitted by the insured knows the occurrence of an insured event, he shall notify the insurer thereof in a timely manner. If the notice is not sent in a timely manner intentionally or due

139  Ibid, clause 9. 140  Ibid, clause 10.

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(5)

(6) (7) (8)

to gross negligence, and as a result, the nature, cause and extent of loss of the insured event are hard to ascertain, the insurer shall not be liable for making indemnity payments in respect of the portion that cannot be ascertained, but with the exception that the insurer has known in time or should have known in time the occurrence of the insured event through other channels;141 the loss which cannot be ascertained due to the breach of a clause which states that where the vehicle is damaged by an insured event, it should be repaired; prior to repairing, the insured shall, jointly with the insurer, inspect the vehicle to determine the parts to be repaired and the way and cost for repairing it; if the insured fails to do so, the insurer can redetermine those matters; any loss arising from the theft of the vehicle; wheel damage, broken glass, body scratches without obvious traces of collision, or the loss of newly installed equipment; or damage to the engine caused by water entering it.

(c) The deductible ratios and excess It is the usual practice for the insurer to deduct a certain percentage of its total payment according to the extent of the insured’s fault for the accident. The deductible ratio can be 5%, 10%, 15% or 20% of the determined loss, corresponding to the insured’s secondary, equal, principal or full responsibility for the accident, respectively.142 Where the damage to or loss of the vehicle is caused by a third party and this third party cannot be traced, the absolute deductible ratio shall be 30%. Where the vehicle is in violation of the safe loading stipulations but the loss is not directly caused by overloading, the absolute deductible ratio is 10%. Where the excess was determined by the insured and the insurer when concluding the contract, the excess shall be applied for each accident.143 (d) The calculation of the amount to be paid under the policy For the total loss of the vehicle, the amount to be paid is calculated by the following equation: the amount to be paid = (the amount insured − the amount obtained by the insured from the third party) × (1 − deductible ratio) × (1 − the sum of the absolute deductible ratios) − the excess.144 To illustration this calculation, a hypothetical case is used here. John drove his car on the road and collided with the car driven by Peter. John’s car was completely destroyed. It was determined by the road traffic administration department that John was principally responsible for the accident. There was a ¥500 excess in the policy. The deductible ratio for principal responsibility was 15%. The amount insured was ¥200,000. Peter paid John ¥60,000 for the loss of the car. The amount to be

141  The Insurance Law, art. 21. 142  The Model Clauses, clause 11. 143 Ibid. 144  Ibid, clause 19.

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paid by the insurer to John under the policy = (200,000 − 60,000) × (1− 15%) × (1 − 0) − 500 = ¥118,500. Where the insured vehicle sustains a partial loss, the amount to be paid is calculated on the basis of the repair cost within the limit of the amount covered under the policy by the following equation: the amount to be paid = (the actual cost for repair − the amount obtained by the insured from the third party) × (1 − deductible ratio) × (1 − the sum of the absolute deductible ratios) − the excess. Where there are uninsured properties among all the properties rescued, the expenditure incurred for the rescue operation shall be apportioned according to the ratio of the actual value of the rescued insured properties to the total value of all rescued properties.145 22.4.2 Motor vehicle third party liability The compulsory motor insurance covers only a limited amount of liability, with the total insured amount of ¥122,000, which is divided into three parts with each part being earmarked solely for that part of the loss. In the case of the death of the victim, this amount is far less than that needed for adequate compensation. In order to increase the amount of cover, some insureds may purchase commercial motor vehicle third party liability insurance on top of the compulsory motor vehicle liability insurance. (a) The liability covered In the course of the insured motor vehicle being used by the insured or the drivers permitted by the insured, if an accident occurs and results in the death, personal injury or direct property damage of a third party victim,146 the insurer shall, in accordance with the terms of contract, make insurance payments for the part of the insured’s legal liability to compensate the third party victim, which exceeds the limits under any part of the compulsory motor policy.147 In other words, the insurance company undertaking the compulsory insurance shall first make payments within the limits of cover under the compulsory policy, and the insurance company undertaking the commercial third party liability insurance shall pay for the part which exceeds the limits of the compulsory policy. The insurer shall bear the liability of payment according to the percentage of the insured’s fault for the accident. In the event that the insured’s liability is determined by litigation or arbitration, the insurer shall pay the amount as determined by the court’s judgment or arbitration award. Where the insured’s liability is determined by negotiation of the parties involved or by the road traffic administration department of

145 Ibid. 146 “Third parties” means the persons who are injured or killed or suffer property loss by a road accident of the insured vehicle; these persons do not include the persons on board the insured vehicle and the insured persons. The persons on board the insured vehicle means those persons who are carried in or upon the vehicle, or entering or getting on to or alighting from the vehicle at the moment of occurrence of the accident. The terms of “third parties” and “persons on board the vehicle” are defined in clause 3 and 4 of the Comprehensive Commercial Motor Vehicle Insurance Model Clauses of the China Insurance Association (2014 version). 147  The Model Clauses, clause 22.

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the public security, the insurer shall take liability for payment at three levels of 70%, 50% and 30% of the total liability, corresponding to the principal, the equal and the secondary responsibility of the insured vehicle for the accident.148 For example, if it was determined by the agreement that the insured should take principal responsibility for the accident, then the insurer is liable to pay 70% of the determined loss. (b) The exemptions In the Model Clauses, clauses 24 to 26 list the circumstances under which the insurer is not liable, the causes of the insured events for which the insurer is not liable and the death or injury of certain persons or certain property loss or expenses for which the insurer is not liable. Compared to the exemptions as provided for the first party insurance against damage to the vehicles, as mentioned above, the commercial motor vehicle third party liability insurance has additional exemptions. The insurer is not liable to pay compensation for death, bodily injury, property loss or other costs for the following persons and under the following circumstances: (1) the indirect loss arising from the accident which involves the insured vehicle, such as the interruption of the business, suspension of the use of the vehicle, suspension of supplies of electricity or water or gas or communication or Internet network, the loss of data, the loss caused by the voltage change, and other indirect loss; (2) the damage to or loss of the property on the insured vehicle, or the damage to or loss of the property owned or used or under the control of the insured and his family members, or the drivers permitted by the insured and his family members; (3) the death or bodily injury of the insured, or the drivers permitted by the insured, or the persons on board the insured vehicle; (4) parking fees, custodial fees, fines for detention of the vehicle, other fines, penalties or punitive reparations; (5) medical expenses which exceed the standards according to the clinical practice guidelines for treatment of patients injured by road traffic accidents and the standards of the national basic medical insurance for similar types of treatment; (6) solicitor’s fees, arbitration or litigation costs without obtaining the insurer’s written consent; (7) mental distress;149 and (8) losses and expenses which should be borne under the compulsory motor policy. When an accident occurs, if the insured failed to take out a compulsory motor policy, or that policy is no longer valid, the insurer is not liable for losses and expenses under the compulsory policy.150 Under a commercial motor vehicle third party liability policy, the insurer is not liable to pay compensation for death, bodily injury, property loss or other costs caused by intentional or criminal acts by the third party, the insured or the driver permitted by the insured, or the conduct of malicious collusion between the third party and the insured or other tortfeasor.151 In comparison, under the compulsory liability policy, the insurer is liable to advance rescue costs for the injury of a third party caused in the accident by the intentional act of the insured or the driver

148  Ibid, clause 23. 149  Ibid, clause 26. 150 Ibid. 151  Ibid, clause 25.

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permitted by the insured. The insurer is not liable for loss caused by the intentional act of the third party victim.152 As compared to the compulsory insurance, the commercial third party liability insurance has a lot more exemptions. (c) The deductible ratios As with the insurance against damage to a motor vehicle, the insurer shall deduct a certain percentage of its total paymentage according to the extent of the insured’s fault for the accident. The deductible ratio can be 5%, 10%, 15% or 20% of the determined loss, corresponding to the insured’s secondary, equal, principal or full responsibility for the accident respectively. Where the vehicle is in violation of the safe loading stipulations, the deductible ratio is usually 10%.153 In comparison, however, there are no such deductibles in compulsory motor insurance. (d) The liability limit The liability for each accident is determined by negotiation between the insured and the insurer when concluding the contract.154 It varies usually in the range of ¥200,000 to ¥800,000, but there is no limit on the amount to be insured. The principal vehicle and the trailer are deemed as the same vehicle when they are linked and used together. Upon the occurrence of the insured event, the insurer for the principal vehicle and the insurer for the trailer shall be liable to pay the amount within their respective liability limits according to the ratio of the liability limits of the third party liability cover stipulated in the insurance policies. However, the total payment shall not exceed the liability limit of the principal vehicle.155 (e) Determination of liability Article 16 of the Interpretation on Compensation for Damage provides that where a motor vehicle covered by both a compulsory motor vehicle traffic accident liability policy and a voluntary motor vehicle third party liability policy is involved in a road accident, and the injured party brings a lawsuit against the driver of the vehicle and the insurance companies, the People’s Court shall determine compensatory liability according to the following order: (1) the insurance company undertaking the compulsory insurance shall make payment within the limits of the amount under the compulsory motor policy; (2) the remaining part of compensatory liability shall be paid by the insurance company undertaking the voluntary motor vehicle third party liability insurance within the limit of coverage; and (3) where the loss is still not fully compensated by the insurance companies under the two insurance policies, the tortfeasor shall pay the remaining amount in accordance with the relevant provisions of the Road Traffic Safety Law and the Tort Law. Where the victim or his family members or relatives request the insurance company undertaking the compulsory

152  This is as provided for in art. 21 of the Regulation. 153  The Model Clauses, clause 27. 154  Ibid, clause 28. 155  Ibid, clause 29.

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insurance to pay mental distress in preference to other payments under the policy, the People’s Court shall uphold such a request.156 (f) The insured’s right of rescission of the contract Under commercial motor vehicle third party liability insurance, the insured is entitled to rescind the contract at any time during the insurance period.157 However, under the compulsory motor insurance, the insured is not allowed to rescind the contract except for the situations where the registration of the insured motor vehicle has been legally written off, the use of the insured motor vehicle has been suspended or the insured motor vehicle has been confirmed missing by the public security organs.158 22.4.3 The liability for persons on board insured vehicles As mentioned earlier, under a compulsory motor insurance policy, the insurer is liable to compensate third party victims within the scope of cover for their bodily injuries, death or property loss arising from a road accident involving the insured vehicle.159 However, persons on board the insured vehicle are excluded from the scope of third parties by arts 3 and 21 of the Regulation. In other words, the persons on board the insured vehicle will not receive any compensation for their injury or death or property loss under the compulsory motor policy purchased by the owner of the vehicle. To fill this gap of insurance cover, the insurance companies specifically design and offer a commercial liability cover for persons on board the insured vehicle.160 Clause 38 of the Model Clauses states that during the insurance period, where the insured or the driver permitted by the insured has a road accident in the course of using the insured motor vehicle, resulting in bodily injury or death of the persons on board the insured motor vehicle, if the insured is legally liable for compensating the persons on board the vehicle, the insurer shall be liable for paying such compensation within the scope of cover in accordance with the terms of the insurance contract. Clauses 39 to 43 spell out exemptions of the policy which are similar to those for motor vehicle third party liability insurance. 22.4.4 The theft of the whole vehicle Insurance companies offer cover for the theft of the whole vehicle. Clause 51 of the Model Clause stipulates that during the insurance period, the insurer shall be liable to indemnify the insured, in accordance with the terms of the policy, for the

156  The Interpretation on Compensation for Damage, art. 16. 157  The Insurance Law, art. 15. 158  The Regulation, art. 16. 159  Ibid, art. 21. 160 See the Comprehensive Commercial Motor Vehicle Insurance Clauses of the Ping An Insurance Company of China (2014 version) accessed in February 2016.

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following losses and expenses suffered by the insured motor vehicle, which do not fall within the scope of the exemptions specified in the policy. (1) Where the insured motor vehicle was stolen and has not been found after 60 days from the date when the local public security authority initiated a criminal investigation, the insurer shall pay for the loss of the vehicle. (2) Where any parts or ancillary equipment of the stolen vehicle are damaged or lost after the vehicle is stolen, the insurer shall pay the reasonable costs for repairing or restoring them. (3) Where the vehicle was damaged in the course of being stolen, the insurer shall pay the reasonable costs for repairing or restoring it. 22.4.5 Other kinds of cover In addition to insurance cover for the primary risks as mentioned above, insurance companies also offer cover for a variety of ancillary (or additional) risks, of which a brief account is appropriate. Under the cover for broken glass alone, the insurer will indemnify the insured for the actual loss if the windscreen or window glass is broken. For insurance, if a car is parked in a public car park, and the windscreen is broken by someone, the insurer will pay for the cost of installing a new windscreen. The insurance for spontaneous fire covers the risk of spontaneous fire damage to the vehicle – in the absence of an external ignition source, due to its own cause, such as electronics, wiring, fuel supply system, gas supply system and so on, or due to a cause of the cargo carried by the vehicle, the insured vehicle catches fire and is damaged. The insurance for newly added equipment loss covers the risk for the loss of any newly installed equipment in the insured vehicle when any risk covered in the scope of the policy of damage to the motor vehicle occurs. The insurance for vehicle body scratches covers the risk of the body of the vehicle being scratched by someone or something but there is no clear sign of collision. The insurance for engine damage by water covers the risk of water entering the engine and causing damage to the engine. When the insured vehicle is damaged and is being repaired in a garage, the insurer will indemnify the insured for the cost of travel or income loss for the period of suspension of the use of the vehicle by cover for loss compensation during the period when the vehicle is being repaired. Under the cargo liability insurance, if the insured vehicle has an accident and caused direct damage to the cargo carried on the vehicle, the insurer is liable to pay for the loss. As mentioned above, in insurance for primary risks, there are usually deductible ratios in the policy by which the insurer will deduct from the actual loss a certain amount calculated using the deductible ratios. If the insured has purchased the insurance cover with no deductible, the insurer will pay the full actual loss without any deduction. The insurance for designating a repair shop entitles the insured to choose his preferred garage to repair the insured vehicle.

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22.5 Conclusion Having considered compulsory motor insurance, commercial insurance and the SRF, it is appropriate to make some suggestions and recommendations for a number of aspects: (1) It is suggested that the scope of the person covered under a compulsory policy should be expanded to include all those persons who are the insured and other lawful drivers (with or without permission from the insured) driving the vehicle covered under a compulsory motor policy. (2) The compulsory motor insurance adopts a capped maximum amount of cover. The initial limits of cover enacted by the CIRC in 2006 were ¥60,000 for liability with fault of the driver of the insured vehicle and ¥12,000 for liability with no fault of the driver.161 These limits were increased to ¥122,000 for liability with fault of the driver and ¥12,100 for liability with no fault of the driver in 2008.162 In the light of the inflation every year and relatively low amount covered, it is suggested that the limits should be doubled to ¥244,000 for liability with fault of the driver and ¥24,200 for liability with no fault of the driver. (3) It is suggested that the scope of “third party” should be expanded. The current position is that the persons on board the vehicle are arbitrarily excluded from the scope of being a third party under a compulsory motor policy.163 It is suggested that persons other than the “insured persons” (the insured and the lawfully drivers) should be treated as third parties under the scheme of compulsory motor insurance. (4) It is suggested that an insurer should be prohibited from rescinding the contract in the event of a material non-disclosure, but can charge a higher premium corresponding to the undisclosed facts. Accordingly, art. 14 of the Regulation would be amended to the effect that the insurer should not be permitted to rescind the contract where the insured fails to disclose material facts, but may charge a higher premium corresponding to the undisclosed facts. (5) It is suggested that third party victims should be vested in the right to bring actions against insurers directly for compensation under compulsory motor policies, and insurers should be barred from using certain conditions restricting cover to defend against the third party’s claim. However, the insurer may defend against the third party’s claim by invoking the reasons or circumstances which the insured may use to reject or alleviate his liability to the third party. (6) The current law and regulations in China do not provide any rules in relation to the restriction on the insurer’s defence against the insured’s claim in respect of his liability to a third party. It is suggested that the insurer should

161 The liability limits of the amount covered under motor vehicle traffic accident liability insurance were set up by the CIRC on 19 June 2006. 162 The limits became effective from 1 February 2008. See the website of the CIRC, accessed in March 2016. 163  The Regulation, arts 3 and 22.

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be prohibited from invoking certain conditions restricting cover as defence against the insured’s claim in respect of his liability to a third party under a motor vehicle third party liability policy.164 (7) The rules as to the scheme of Road Traffic Accidents Social Relief Fund are far from complete. The scheme is in need of improvement in many aspects in order to get it to be practically useful. (8) The first party insurance for damage to motor vehicles covers only damage to or losses of the vehicles, but not the injury or death of the driver of the insured vehicle. It is suggested that the scope of cover for this type of insurance could be expanded to include the injury or death of the driver of the insured vehicle.

164  Under English law, s. 148(2) of the Road Traffic Act 1988 prohibits the insurer’s use of certain conditions by way of defence where the claim by the insured is in respect of his liability to a third party, namely: (a) the age or physical or mental condition of persons driving the vehicle; (b) the condition of the vehicle; (c) the number of persons that the vehicle carries; (d) the weight or physical characteristics of the goods that the vehicle carries; (e) the time at which or the areas within which the vehicle is used; (f) the horsepower or cylinder capacity or value of the vehicle; (g) the carrying on the vehicle of any particular apparatus; or (h) the carrying on the vehicle of any particular means of identification other than any means of identification required to be carried by or under the Vehicle Excise and Registration Act 1994. For more on this topic see R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 22-135.

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CHAPTER 23

Reinsurance

23.1 Introduction A reinsurance contract is a contract under which an insurer transfers a portion of its written insurance business to another insurer (or insurers) by way of cession; the transaction is reinsurance.1 Reinsurance is a means whereby the original insurer can spread the risks covered among other insurers both national and international, thereby reducing his own exposure and losses on business written. The concept of reinsurance plays an essential role in the insurance industry, is used in every class of insurance business and operates across national boundaries.2 This chapter covers two main parts: the reinsurance contract and reinsurance regulation. There is a lack of statutory rules in China governing the parties’ rights and obligations in a reinsurance contract, and some rules in other jurisdictions and international customary practice are sometimes referred to. Because reinsurance business in its nature is an international business which operates across national boundaries,3 some rules are applicable universally. To a large extent, these international customary practices are treated as law.4 Especially in China, due to the lack of rules of law for reinsurance contracts, the international customary practice is particularly useful and plays a very important role in its reinsurance market. In addition, foreign reinsurance companies accounted for a larger market share of reinsurance business in China,5 so to a large extent the international customary practice is followed for the transaction of reinsurance business in China, and some of the customary practices are incorporated into the CIRC Regulations. As to the regulation of reinsurance business, although no detailed statutory rules are provided in the Insurance Law, the CIRC has set up many rules to regulate the reinsurance business in China. This chapter considers the following aspects: China’s reinsurance market; legislation on reinsurance in China; functions of reinsurance; types of reinsurance; reinsurance and co-insurance; and regulations on reinsurance business in China.

1  The Insurance law, art. 28. 2  R. Merkin, Colinvaux’s Law of Insurance (10th edn, Sweet & Maxwell 2014) para. 17-001. 3 Ibid. 4  M. Zhong, Reinsurance (Shanghai University of Finance and Economics Press 2003) p. 57. 5 In 2014, 64.8% of the total reinsurance premium income across the country came from foreign-funded reinsurance companies; see the CIRC Annual Report of the Chinese Insurance Market 2015, p. 48.

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23.2 China’s reinsurance market China’s reinsurance market has great potential to develop.6 It has lagged behind its direct insurance market and lagged behind other developed reinsurance markets.7 In the late 20th century and earlier 21st century (1997–2002), the reinsurance business was basically statutory reinsurance – that means that the reinsurance business was carried out compulsorily by law but not in accordance with the agreement of the parties. There was a lack of freedom in the transaction of reinsurance business. Since 2005, the statutory reinsurance business has been reduced gradually;8 more reinsurance companies have appeared in the market. By the end of 2013, China had one reinsurance group and nine reinsurance companies;9 they are China Reinsurance (Group) Corporation,10 China Property & Casualty Reinsurance Company Ltd, China Life Reinsurance Company Ltd, Taiping Reinsurance Company Limited, the German General Reinsurance Corporation Shanghai Branch, the French Reinsurance Company Beijing Branch, Beijing Branch Swiss Reinsurance Co., Hannover Reinsurance Corporation Shanghai Branch, Munich Reinsurance Company Beijing Branch and Lloyd’s (China) Co. Ltd.11 In addition, there are also some insurance companies which have reinsurance departments transacting reinsurance business and some insurance intermediaries transacting reinsurance business.12 It is clear that China’s current reinsurance market is composed of three types of reinsurers: the state-owned reinsurance group, shareholding reinsurance companies and foreignfunded reinsurance companies.

  6  For example, in 2012, in China, the premium of reinsurance was ¥73.4 billion, the premium of direct insurance was ¥1548.8 billion. Reinsurance premiums accounted for 4.7% of the direct insurance premiums, while the international average for reinsurance premiums as a percentage of direct insurance premiums was 20% in 2012. See Zhiguo Xing, Development and Regulation of China’s Reinsurance Market (China Finance and Economy Press 2014) p. 220.   7  Such as those in the UK, Germany, the US, France and Switzerland. The reinsurance industry has been well developed in these countries.   8  Juan Du and Ling Chen, Reinsurance (2nd edn, Shanghai University of Finance and Economics Press 2015) p. 197.  9 Zhiguo Xing, Development and Regulation of China’s Reinsurance Market (China Finance and Economy Press 2014) p. 6. See also accessed 1 January 2015. 10 China Reinsurance (Group) Corporation is the biggest state-owned reinsurance group; it was co-founded by the Ministry of Finance of the People’s Republic of China and the Central Huijin Investment Company Limited with a registered capital of ¥36,407,611,085. As at the end of 2014, China Reinsurance Group had consolidated total assets of ¥189.675 billion, total liabilities of ¥135.04 billion, and net assets of ¥54.635 billion. China Reinsurance Group originated from the People’s Insurance Company of China, which was founded in October 1949. In October 2007, it was restructured as a joint-stock limited company. By the end of 2014, China Reinsurance Group held controlling stakes in six domestic subsidiaries, namely, China Property & Casualty Reinsurance Company Ltd, China Life Reinsurance Company Ltd, China Continent Property & Casualty Insurance Company Ltd, China Reinsurance Asset Management Company Ltd, China Insurance Media Company Ltd, and Huatai Insurance Agency & Consulting Service Ltd. It has five overseas subsidiaries, namely, China Re UK Limited, China Reinsurance Underwriting Agency Co., Ltd, New York Representative Office, London Representative Office and Hong Kong Representative Office (see China Reinsurance Group Report 2014 accessed 20 January 2015). For more information about the origin and evolution of China Re, see Meixian Song and Yiqing Yang in Chapter 1: Introduction to Chinese Insurance Law, Johanna Hjalmarsson and Dingjing Huang (eds), Insurance Law in China (Informa 2015) p. 8. 11  Zhiguo Xing, Development and Regulation of China’s Reinsurance Market (China Finance and Economy Press 2014) p. 219. 12  There are 57 insurance companies with reinsurance departments and 17 insurance intermediaries are carrying out direct insurance business and reinsurance business (ibid).

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The latest Annual Report of the Chinese Insurance Market 2015 by the CIRC shows that China’s reinsurance market has been growing rapidly in the last few years.13 (1) Reinsurance business continued to grow. In 2014, premiums amounting to ¥173.78 billion were ceded to reinsurers, 52% higher than in 2013, of which ¥92.94 billion was from non-life insurers, and ¥80.84 billion was from life insurers. The rapid increase of the ceded life business was due to a large scale of facultative reinsurance arrangements of some life insurers to ease their solvency pressure. (2) Reinsurance companies maintained stable growth. In 2014, reinsurers collected premium income of ¥151.85 billion (55.7% more than 2013) and made claim payments of ¥39.3 billion. They realised underwriting profit of ¥1.17 billion and net profit of ¥5.88 billion. (3) Faster expansion of the overseas market. In 2014, premiums of RMB-settled cross-boundary reinsurance business reached ¥9.54 billion, with seven entities expanding to four markets, namely Hong Kong, Macao, Singapore and Chinese Taipei. (4) Reinsurance capacity increased rapidly. As of the end of 2014, there were nine professional reinsurance companies and one reinsurance group company. Supported by the Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry and China Risk Oriented Solvency System (C-ROSS),14 many large insurance companies intended to set up professional reinsurance companies, many off-shore reinsurers actively sought to set up branches in the Chinese market, and social capital expressed great interest in the reinsurance market. (5) Foreign-funded reinsurance companies. In 2014, foreign-funded reinsurance companies collected premium income of ¥98.35 billion (104.1% more than 2013), accounting for 64.8% of the total reinsurance premium income across the country, and made claim payments of ¥22.75 billion. Total profit was ¥1.82 billion (72.8% more than 2013).15 23.3 Legal framework for reinsurance Because reinsurance business in China has lagged behind the direct insurance business, there are fewer rules of law regarding reinsurance in the Insurance Law, and only a few cases on reinsurance have been reported. Matters on reinsurance are governed by the Insurance Law and the CIRC regulations. In the Insurance Law, arts 28 and 29 are related to reinsurance contracts, and arts 102, 103 and 105 are concerned with the management of reinsurance business. The Insurance Law authorises the CIRC to formulate regulations to regulate the operation of reinsurance business. Article 105 of the Insurance Law provides that 13  The CIRC Annual Report of the Chinese Insurance Market 2015, p. 45