The PRC Supreme Court has recently issued the Interpretations of the Supreme People's Court on Certain Issues Concerning the Application of the Insurance Law of the People's Republic of China (II) (Interpretation), which came into force on 8 June 2013. The Interpretation clarifies a number of issues relating to insurable interest, duty of disclosure and the insurer's obligations to explain insurance clauses. A summary of the key issues is set out below.
Insurable Interests of Different Parties in Property
Previously, the people's court generally did not recognise that leasees or carriers have insurable interests in property being used, leased or transported by them. Article 1 of the Interpretation provides where different parties have taken out insurances for the same property, the people's court will uphold their claim on the insurance claim to the extent of their insurable interest. The Interpretation formally clarifies that different parties, including leasees and carriers, have insurable interests in property even though they are not the legal owner and can purchase insurance for property leased or carried by them.
Contracts Signed or Sealed by Insurer or its Agent
Sometimes, an insurer or agent of the insurer may sign or seal the insurance contract purportedly on behalf of the applicant. Article 3 of the Interpretation provides that if an insurance contract is not signed or sealed by the applicant or its agent, the insurance contract is not valid unless the applicant pays the premiums.
Duty of Disclosure
Pursuant to Article 16 of the Insurance Law of the PRC, when concluding the insurance contract, the insured is required to make true representations in response to the insurer's inquiries relating to the subject matter of insurance. The Interpretation limits the insured's duty as follows:
- The insured only needs to provide information limited to the scope and content of the insurer's queries. In other words, the insured only needs to provide information specifically requested by the insurer. If the insured and the insurer have different understanding about the scope and content of the inquiry, the insurer bears the burden of proving the scope of the inquiry.
- The insured only needs to provide information that it clearly knows.
- The insurer may not terminate the insurance contract if it has received premiums when it knew or ought to have known that the insured failed to provide truthful disclosure.
Obligation of Insurer to Explain Insurance Clauses
Pursuant to the Insurance Law of PRC, the insurer is required to explain any "clauses exempting the liability of the insurer" (for example, exclusion clauses) and draw attention to these clauses in the insurance policy or certificate, otherwise such clauses are ineffective. The Interpretation confirms that "clauses exempting the liability of the insurer" includes any exemption clauses, deductibles, excess, proportion of claims or payment and other clauses exempting or reducing the liability of insurer.
The Interpretation further requires that when the insurer makes any explanation to the insured about the exemption clauses, this must be understandable to a layperson.
Recovery Against Third Parties
The Interpretation clarifies that the insurer can exercise subrogated recovery rights against third parties in his/her own name and that the time limit for taking action (generally 2 years) commences when the insurer acquires such right. In other words, the time limit begins when the insurer has paid or agreed to pay pursuant to the contract of insurance. This clarifies the controversy prior to the Interpretation where some courts took the view that the insurer is not entitled to bring any subrogated recovery against third parties if the insured's claim against the third party was already time barred.
The Interpretation provides welcome and timely clarification of a number of issues surrounding the operation of the Insurance Law of the PRC. In particular, the Interpretation is useful for insurers to ascertain the scope of inquiries when concluding the insurance contract, their obligations to explain various clauses in the policy as well as their rights of recovery against third parties.