The PRC Supreme Court has recently issued the Second Judicial Interpretation of the PRC Insurance Code (the Interpretation), which came into force on 8 June 2013. It covers a number of issues relating primarily to coverage disputes and its publication is timely, since developments in the Chinese economy have reportedly brought forth a surge in insurance claims.
The key features of the Interpretation are as follows:
- If an insurance contract is not signed or executed by the applicant or its agents but rather by the insurer or its agents purportedly on behalf of the applicant, the insurance contract is not binding on the applicant, unless he ratifies the execution by paying premium under the insurance contract.
- When an insurer receives an insurance application form/ proposal from an applicant as well as the premium and an insured incident occurs before the insurer indicates its intention to insure or not, the insurer is still liable for indemnification and payment under the policy if the risk is insurable or satisfies underwriting criteria. If not, the insurer will not be liable but the premium received must be returned. The burden is on the insurer to prove the risk is not insurable or does not satisfy underwriting criteria.
- Article 16 of the Insurance Code requires an applicant to disclose information about the risk at the underwriting stage. With the exception of marine insurance, to which a general duty of disclosure still applies, the Interpretation is unequivocal in confining the duty only to those issues about which an insurer specifically inquires. The burden is on the insurer to prove the scope and content of its inquiries.
- If an insurer knew or ought to have known that the applicant did not discharge its duty of disclosure but nonetheless chose to accept the premium, the insurer will lose its right to rescind the contract for the applicant’s breach.
- Article 17 of the Insurance Code imposes upon insurers proposing to use its standard terms a duty to (a) draw attention of the applicant to “clauses exempting the insurer’s liability” and (b) clearly explain either orally or in writing the content of those clauses. Now the Interpretation provides some specific examples of “clauses exempting the insurer’s liability”.
- The time limit for insurers to pursue subrogated recovery actions from third parties starts to run only from the date they acquire such right. Prior to the Interpretation this issue had been the subject of much controversy. Some judges considered that the right of subrogation could not be superior to that enjoyed by the insured, and could not be pursued if the insured himself was already barred from pursing the claim against the third party.
This caused a lot of difficulties to insurers due to the relatively short limitation periods applicable under PRC law – generally two years for claims by an insured against an insurer and claims against third parties. The Interpretation seeks to address these difficulties.