Preliminary and jurisdictional considerations in insurance litigation
In what fora are insurance disputes litigated?
Insurance disputes can be resolved by litigation before the court (including mediation at the court), or through arbitration and conciliation at the Financial Supervisory Service or the Korea Consumer Agency.
A conciliation procedure at the Financial Supervisory Service can be commenced upon application by the interested party (insured) to the Financial Supervisory Service.
Causes of action
When do insurance-related causes of action accrue?
A cause of action usually accrues when loss caused by an accident specified in an insurance policy occurs. On the other hand, regarding liability insurance under the Korean Commercial Act (KCA), the cause of action for seeking payment of insurance proceeds accrues when the insured’s liability has been confirmed through the insured’s payment of damages to a third-party victim, an admission of debt, an amicable settlement or the court’s judgment (article 723, section 1 of the KCA).
Under Korean law, a third-party victim is also entitled to file a direct action against the insurer that executed a liability insurance contract with the insured when a loss due to the insurance accident occurs to him or her (article 724, section 2 of the KCA). In other words, under the KCA, a direct action by a third party is allowed in all liability insurance.
What preliminary procedural and strategic considerations should be evaluated in insurance litigation?
Compared to cases when the insured or victim files a lawsuit in the court, an application for conciliation to the Financial Supervisory Service or Korea Consumer Agency may occasionally save time and costs. In the case of conciliation by the Financial Supervisory Service, the dispute would be considered by a committee comprising members with professional knowledge of insurance, and thus may be preferred by the insured or victim having no such professional knowledge. On the other hand, conciliation by the Financial Supervisory Service will not be binding on the parties, whereas an arbitration award will be binding.
However, because it would be difficult to deem that an application for conciliation to the Financial Supervisory Service (not conciliation by the court) will stop the time bar period, it will be safer to file a lawsuit in the court before the expiry of the three-year time bar period if it is drawing close.
Conciliation before the Financial Supervisory Service will immediately be stopped if a lawsuit is commenced during the conciliation process. Thus, a detailed survey and serious consideration of the application for conciliation to the Financial Supervisory Service or Korea Consumer Agency, and of the cause of the accident and the scope for damages, along with securing evidence in this regard, will be required.
The insurer needs to confirm whether:
- the insured has any other insurance policy covering the same risk;
- there is a third party responsible for the accident;
- the third party has any meaningful assets;
- the policyholder or insured has failed to disclose or has misrepresented material facts either intentionally or by gross negligence; and
- the policyholder or insured has notified the facts where the risk of accident has manifestly changed or increased. (In the event of failure of duty of notice or disclosure, the insurer can rescind the insurance contract within one month of the date of knowing such fact, according to articles 651 or 652, section 2 of the KCA.)
What remedies or damages may apply?
In liability insurance, in the case of direct action by a third party, monetary compensation for, inter alia, medical costs already incurred or for future treatment (including the costs of caregiver and medical accessories), property loss (including loss of business), or pain and suffering, may be claimed. Pain and suffering, in the case of liability insurance, is considered and recognised taking a variety of circumstances into account, usually up to an amount below the maximum amount of 100 million won set by the court (as from 1 March 2015). If there are aggravating circumstances, pain and suffering can be recognised up to an amount below the maximum amount of 200 million won in case of a traffic accident, up to an amount below the maximum amount of 400 million won in case of mass casualty incident, up to an amount below the maximum amount of 600 million won in case of commercial torts against customers and above 200 million won in case of defamation (as from 24 October 2016). Korea does not allow punitive damages.
Under what circumstances can extracontractual or punitive damages be awarded?
Under Korean law, extracontractual or punitive damages are not awarded.
Interpretation of insurance contracts
What rules govern interpretation of insurance policies?
For the interpretation of insurance policies, the KCA, the Act on Regulation of Terms and Conditions (ARTC), and the Korean Civil Code, etc, will apply. The ARTC is a distinctive Korean law applying to all standardised contracts, including insurance policies.
Under article 638-3 of the revised KCA, when insurers execute an insurance contract with the insured (or policyholder), the insurer shall deliver the insurance policy to the insured (policyholder) and explain the important terms of the policy to the insured (policyholder). In the event of a breach of such duty of explanation, the insured (policyholder) can cancel the insurance contract within three months of the execution of the insurance contract.
Further, under article 3, section 4 of the ARTC, in the event of the insurer’s violation of its duty to explain the important clauses (the points of which, the knowledge or the lack of knowledge can have an effect on execution of the insurance contract), in principle, such term cannot be deemed to be a part of the insurance contract.
When is an insurance policy provision ambiguous and how are such ambiguities resolved?
In Korea, ambiguities occasionally arise in relation to, inter alia, the scope of the insured, the covered risks and any exclusions in the policy terms.
When there is ambiguity in the wording of a policy, the purpose or intent of the parties in the individual insurance contract are not considered; rather, an objective interpretation according to the standard of an average person will be employed. However, when the wording can still be interpreted as having various meanings even after the objective interpretation, that wording will be interpreted favourably to the insured (according to the principle of construction against the drafter).
Notice to insurance companies
Provision of notice
What are the mechanics of providing notice?
A policyholder, insured or insurance beneficiary shall dispatch notice to the insurer as soon as he or she becomes aware of the occurrence of an accident without delay (article 657, section 1 of the KCA), and notice can be given by any means including writing, oral statement, telephone or email. Since a notice in writing may be required according to an insurance policy, it would be proper to send a notice by ‘contents-certified mail’, a kind of registered mail. A notice should be made to the insurer, not to the insurance broker, who is usually deemed to have no authority to receive notice, unless otherwise authorised. (On the other hand, an insurance agent has been deemed to have authority to receive notice, and it is explicitly stipulated in article 646-2, section 1 of the revised KCA.)
According to the standard general liability policy used in Korea, the notice obligation arises as to the time and place of occurrence of an accident; the details of the accident (victims and witnesses, etc); and when the claim is made or a lawsuit is filed by a third-party victim against the insured.
What are a policyholder’s notice obligations for a claims-made policy?
According to the ‘claims-made’ policy used in personal liability insurance, the policyholder shall notify the insurer without delay of the occurrence of an insurance accident (article 722 of the KCA). If the policyholder notifies the insurer of the accident after expiry of the policy period specified in the ‘claims-made’ policy, the insured of that policy may not be indemnified.
When is notice untimely?
Unless specified otherwise in the insurance policy, a policyholder, insured or insurance beneficiary has an obligation to provide the insurer with notice ‘without delay’ upon becoming aware of the occurrence of an accident. Unlike ‘immediately’, the phrase ‘without delay’ is construed to mean ‘as soon as practicable with reasonable care’. However, it is not clear what is considered ‘untimely’ under Korean law, and this would be determined on a case-by-case basis.
What are the consequences of late notice?
The insurer is not liable for the damages additionally incurred as a result of late notice (article 657, section 2 of the KCA). This is the same regarding late notice by the insured to the insurer of a claim by a third party against the insured in the case of liability insurance (article 722, section 2 of the revised KCA). However, the burden of proving the causal relationship between late notice and additionally incurred damages rests on the insurer.
Insurer’s duty to defend
What is the scope of an insurer’s duty to defend?
According to article 720 of the KCA and the standard liability insurance policy used in Korea, the insurer has a duty to pay the insured’s defence costs such as the court costs and lawyers’ fees that the policyholder or the insured paid. In addition, when a third-party victim seeks damages against the insured, the insurer can settle this claim, on behalf of the insured, from his or her own monies, depending on the insurer’s decision, and seek the necessary cooperation from the insured. However, the insurer does not personally bear the duty to defend.
As discussed in question 2, a third-party victim has the right to claim damages directly against the insurer (article 724, section 2 of the KCA). In such event, the insurer will defend the case for itself as well as for the insured, and the policyholder or the insured (or both) will have the duty to provide the insurer with the necessary cooperation (article 724, section 4 of the KCA).
On the other hand, according to the standard liability insurance policy used in Korea, in the event that the quantum of damages for which the insured will be legally liable to third-party victims clearly exceeds the limit of liability under the policy, or the insured fails to provide necessary assistance without justifiable reasons, the insurer may not act for the insured in respect of the procedures of settlement, arbitration or litigation.
Failure to defend
What are the consequences of an insurer’s failure to defend?
If a policy provides for an insurer’s duty to defend but the insurer fails to do so, the insurer will be liable for damages based on breach of contract. However, the insured has to prove that the damages suffered are owing to the insurer’s failure to defend.
Standard commercial general liability policies
What constitutes bodily injury under a standard CGL policy?
Bodily injury under a standard CGL policy means bodily injury, sickness or disease sustained by a person, and death resulting from any of these.
What constitutes property damage under a standard CGL policy?
Property damage under a standard CGL policy means physical injury to, or destruction of, tangible property; loss of the use of tangible property that has been physically destroyed; or loss of the use of tangible property that has not been physically destroyed.
What constitutes an occurrence under a standard CGL policy?
Occurrence under a standard CGL policy typically means not only a sudden accident, but also one of continuous, repeated or cumulative exposure to substantially the same general harmful condition that causes bodily injury or property damage.
How is the number of covered occurrences determined?
Occurrence under a standard CGL policy means an accident including continuous, repeated or cumulative exposure to substantially the same general harmful condition that causes bodily injury or property damage, regardless of the number of insureds or victims or the number of claims.
When determining an occurrence, whether there is a unity in terms of cause, locality, time and intent are important factors to be considered.
What event or events trigger insurance coverage?
The insurer shall indemnify the following losses, in accordance with the policy, sustained by the insured because of legal liability toward the victim of the insured for bodily injury or property damage due to an accident that is provided for in the policy, and that occurred during the policy period and within the territory provided in the policy:
- legal compensation for losses that the insured is liable to pay to the victim;
- suing and labour expenses incurred by the policyholder or insured in preventing or minimising the loss;
- defence costs;
- a surety bond premium within the limit of liability under the policy (however, the insurer has no duty to provide security); and
- costs incurred in complying with the insurer’s demand.
Under an occurrence policy, coverage is triggered by the occurrence of the insured accident. In a claims-made policy, coverage is triggered by a claim for losses by the victim after occurrence of the accident (or by notice by the insured to the insurer, if there is no clear evidence on the date when the victim claimed against the insured).
How is insurance coverage allocated across multiple insurance policies?
If there is another insurance that the insured is legally obligated to have, only the exceeding amount beyond the limit of liability under that obligatory insurance will be covered.
If there are more than two insurance policies covering the same risk, with neither being an obligatory policy, there will be a pro rata allocation of damages, in proportion to the ratios of coverage under each of the policies as against the sum of the entire indemnification amounts, when the sum of each indemnification calculated under each policy (on the assumption that there is no other insurance) exceeds the damages.
According to article 672, section 1 of the KCA, in the case of double insurance where the sum of each insurance coverage exceeds the insured value, each of the insurers shall be jointly and severally liable up to the amount of each insurance coverage, and each insurer’s liability for indemnification shall be pro rata to each insurance coverage.
First-party property insurance
What is the general scope of first-party property coverage?
First-party property insurance policies compensate an insured for damage to the insured’s own property. This insurance includes various kinds of cover, such as (house or movables) fire insurance, theft insurance, glass insurance and inland floater insurance, and the scope of coverage differs depending on the kind of insurance policy.
According to article 667 of the KCA, unless specified otherwise in an insurance policy, the insured’s loss of business (or earnings) due to an insured accident will not be covered. According to article 680 of the KCA, the suing and labour costs incurred by the insured in preventing or minimising such loss will be covered by the insurer even when they exceeded the limit of liability.
The costs for the assessment of a loss amount will also be paid by the insurer (article 676, section 2 of the KCA).
How is property valued under first-party insurance policies?
According to the standard fire insurance policy used in Korea, the insurer’s liability shall be the loss amount to be determined based on the insured value of the property at the time and place of the loss.
Generally, as regards buildings, machinery and furniture, etc, that are in continuous use, the value for coverage will be the costs of purchasing one of the same structure, use and character as the damaged one (replacement costs) after deducting the depreciation according to the years of use and the degree of wear and tear. If there is a separate, different agreement between the parties, the loss amount can be the costs for purchasing a new product (article 676, section 1 of the KCA).
Meanwhile, as regards exchange goods such as a commodity, raw material or product, etc, the replacement costs (costs for purchasing or reproducing) will be the value for coverage.
Is insurance available in your jurisdiction for natural disasters and, if so, how does it generally operate?
According to the Korean Storm and Flood Insurance Act (KSFIA), insurance is available to indemnify the insured for damages and losses caused by typhoon, flood, torrential rain, gale, heavy seas, tidal waves, heavy snowfall and earthquakes. The central and local governments of Korea subsidise about 52.5 to 92 per cent of the premiums (for the policy effected in 2018), and there are five insurance companies in Korea that provide a storm and flood insurance policy (DB Insurance Co Ltd, Hyundai Marine & Fire Insurance Co Ltd, Samsung Fire & Marine Insurance Co Ltd, KB Insurance Co Ltd and NH Property & Casualty Insurance Co Ltd).
Under the KSFIA, the subject matter of the insurance policies shall be limited to buildings and agricultural greenhouses (including plastic greenhouses). The period for the insurance shall be one year, which can be extended up to three years by agreement. From 2018, stores or factories owned or operated by small business and enterprises can be subsidised about 34 to 92 per cent of the premiums from the central and local governments. Storm and flood insurance policies can be taken out on the basis of fixed sums indemnification or actual loss pro rata indemnification (average).
Directors’ and officers’ insurance
What is the scope of D&O coverage?
In a standard policy of D&O insurance in Korea, the insurer shall indemnify all the loss (as defined by the policy) suffered by the insured where such loss was caused by a wrongful act of the insured.
Loss is defined under the standard policy to mean the total amount that any insured person becomes legally obligated to pay on account of each claim and for all claims in each policy period and the extended reporting period, if exercised, made against them for wrongful acts for which coverage applies, including, but not limited to, damages, judgments, settlements, costs, defence costs and legal representation expenses.
The loss does not include (i) any amount not indemnified by the insured organisation for which the insured person is absolved from payment by reason of any covenant, agreement or court order, (ii) any amount incurred by the insured organisation (including its board of directors or any committee of the board of directors) in connection with the investigation or evaluation of any claim or potential claim by or on behalf of the insured organisation, (iii) fines or penalties or aggravated or exemplary damages imposed by law or the multiple portion of any multiplied damage award outside Korea, or (iv) matters uninsurable under the law pursuant to which this policy is construed.
Also, the wrongful act is defined under the standard policy to mean any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by an insured person, individually or otherwise, in his or her insured capacity, or any matter claimed against him or her solely by reason of his or her serving in such insured capacity.
What issues are commonly litigated in the context of D&O policies?
D&O policies typically provide that defence costs such as suing and labour costs and legal costs (court costs, lawyers’ fees, etc) will be covered. However, when policies provide the requirements and scope of coverage narrowly and more strictly than the KCA, a dispute will arise as to whether the terms and conditions of the policy were clearly stated and explained. (If there was a duty to state clearly and explain the policy terms, but this was not abided by, the insurer is unable to rely on that as a part of the insurance contract and should provide coverage.)
A dispute will also arise as to whether an accident falls under an exclusion provided in the policy. In relation to an exclusion based on an intentional violation of laws, a court case held that, where a criminal case is split between a part for which the accused was found guilty and another part for which the accused was found innocent, the defence costs incurred pro rata in respect of the part for which the accused was found guilty would not be covered.
In a case where there was no exclusion based on gross negligence in the D&O policy, a dispute arose as to whether an exclusion would be available based on the general provisions of the KCA regarding the liability.
Also, there were issues in the litigation on the meaning of ‘claim’; for example, whether to cover the defence costs incurred without the insurer’s prior written consent, whether the relevant terms were subject to the insurer’s duty of explanation and the expiry of the time bar period for the policy claim.
What type of risks may be covered in cyber insurance policies?
A standard policy of cyber insurance covers, inter alia, the insured’s risk, such as:
- loss or theft of data;
- liability arising out of breach of privacy protection;
- liability arising out of breach of Payment Card Industry Data Security Standards;
- business interruption;
- cyber extortion;
- reputational risk; and
- third-party liability such as:
- confidentiality breach liability;
- privacy breach liability; and
- network security liability.
What cyber insurance issues have been litigated?
As at the time of writing, there has been no reported case with regard to cyber insurance issues. However, as there have been many incidents where hackers have stolen customers’ personal information (including names, residence registration numbers, mobile phone numbers and email addresses), an issue of criminal or civil liability may arise in relation to the risk coverable by cyber insurance. Also, as there have been several first instance judgments to hold that substantial damages shall be awarded to the victims of cyber crime, it is likely that many issues will be litigated in the near future.
Is insurance available in your jurisdiction for injury or damage caused by acts of terrorism and, if so, how does it generally operate?
In the past, terrorism insurance was operated for a limited period of time in preparation for large international events. Recently, Korea Airports Corporation has taken out a terrorism insurance policy for airports in Korea.
On the other hand, regarding travellers’ insurance policies, there was a case in which insurance money was paid for the death of four Korean travellers who had been killed by bombing in a foreign country (there was no disclaimer or exclusion on the terrorism accident in the policy).