Article 21 of the Insurance Law provides that:
"the policy holder, the insured or the beneficiary shall, in a timely manner, notify the insurer after being aware of the occurrence of an incident covered by insurance. Where a policy holder, insured or beneficiary fails to notify the insurer in a timely manner intentionally or out of gross negligence, making it difficult to ascertain the nature, cause, extent of the loss, etc., of the incident covered by insurance, the insurer shall not be liable for indemnification or payment of insurance benefits for the undeterminable part, unless the insurer has known or should have known the incident in a timely manner through other channels."
Due to the article's vagueness, some issues have arisen that require further consideration.
Under Article 21, insured parties have a duty to notify their insurer of an insured accident in a 'timely manner'.
However, Article 21 does not specify a time limit in which the insured must issue such notification. In practice, this time limit is determined on a case-by-case basis and is usually based on what is stipulated in the insurance contract.
Judges and arbitrators consider many factors when making such a determination, such as:
- the effect of reporting the accident;
- market practice;
- the insured's understanding of its reporting obligation; and
- the accident's urgency.
For example, in San Min Yi Zhong Zi (2013, 322), the court decided that the insured – a company that had undertaken long-distance cargo transportation for many years – should have known the importance of reporting the accident to the traffic management bureau and the insurer in a timely manner in order to allow the cause of the accident to be determined.
If the insured fails to notify the insurer in a timely manner, it will have to be determined whether the insured failed to do so intentionally or for reasons of gross negligence. In the event that an insured party fails to issue a timely notification – which makes it difficult to determine the nature or cause of the accident or the degree of damage resulting from it – the insurer will be liable to pay indemnity only to the extent to which these matters can be determined.
Under Chinese judicial practice, insurers can decline an insurance claim based on Article 21 if the following pre-conditions are satisfied:
- the insured fails to notify the insurer in a timely manner. This will be determined based on objective factors or what is stipulated in the insurance contract;
- the insured's failure to notify is intentional or due to gross negligence (but not general or slight negligence);
- the insured's failure to notify results in evidential impairment (ie, the nature or cause of the accident or the degree of damage resulting from it cannot be determined); and
- the insurer did not know and could not have known of the accident through other means.
In practice, there have been cases where courts have supported an insurer's decision to decline an insurance claim. However, in such cases, the insurer has usually borne a relatively heavy burden of proof. If all of the pre-conditions are not satisfied, insurers will still bear full liability (or at least for any determinable part thereof).
However, under Article 21 of the Insurance Law, if an insurer has or should have learned of an accident in a timely manner through other channels – such as a news report – the insurer will still be liable for paying indemnity for the undeterminable part.
In practice, a standard insurance clause provided by an insurer can stipulate that the insured must:
- notify the insurer of each insured accident or enforced liability claim without delay, but no later than a specified period; and
- submit all of the documents necessary for assessment purposes.
If the insured or one of its representatives breaches an obligation, the insurer will not be obliged to pay.
If the insured fails to notify the insurer of the insured accident within the specified period, the insurer will not be obliged to pay indemnity.
As Article 21 of the Insurance Law does not specify a time limit for notification of an insured accident, the insurance applicant and the insurer can stipulate a specific period in the insurance contract.
However, a clause stipulating that the insurer will not bear the insurance liability if the insurance event is not notified within a fixed period will likely be deemed invalid for the following reasons:
- According to the Supreme People's Court, Article 21 should be treated as mandatory. The insurance policy cannot stipulate a clause that is inferior to the legal protection for the insured under Article 21.
- Article 19 of the Insurance Law provides that a clause in an insurance contract exempting the insurer from any legal obligation or aggravating the liability of the policy holder or insured will be void. Under Article 21, insurers must pay indemnity for the determinable part of the insurance liability and Article 19 makes it clear that this obligation cannot be contracted out of. Therefore, a clause stipulating a time limit in which the insurer can decline to pay all losses if the insured does not fulfil its notification obligations within that time limit (whether intentionally, negligently or without fault) would likely be deemed invalid.
- Even if such a clause is considered to exempt the insurer from its legal obligations, under Article 17(2) of the Insurance Law, insurers must:
- give sufficient warning to policy holders of clauses in the insurance contract that exempt the insurer from liability via the insurance application form, the insurance policy and any other insurance certificate; and
- provide applicants with an express explanation (either orally or in writing) of the clauses' content.
If the insurer fails to warn policy holders of the clauses or provide an express explanation thereof, they will not be effective.
According to Article 11 of Interpretation II of the Supreme People's Court on Several Issues concerning the Application of the Insurance Law, if an insurer discloses the clauses in the insurance contract that exempt it from liability in an insurance application, insurance policy and other insurance certificates using words, fonts, symbols or other conspicuous signs in a manner sufficient to draw the insurance applicant's attention, the court will determine that the insurer has performed its obligation to provide sufficient warning as prescribed by Article 17(2). In addition, where an insurer explains to the insurance applicant in writing or verbally the concepts, content and legal consequences of the clauses exempting the insurer from liability to the extent that ordinary people can understand, the court will determine that the insurer has performed its obligation of express explanation as prescribed in Article 17(2).
Article 13 of the interpretation further provides that insurers will bear the burden of proof for their performance of the express explanation obligation. Where an insurance applicant confirms – by affixing his or her signature or seal to the relevant document or otherwise – that the insurer has performed its obligation of express explanation required by Article 11, Paragraph 2 of the interpretation, it will be determined that the insurer has performed the obligation unless there is evidence that proves otherwise.
Therefore, the clauses will be deemed invalid if the insurer cannot prove that it has warned the applicant of their inclusion in the contract and provided an express explanation regarding their content.
In Chinese judicial practice, the scope for applying Article 21 of the Insurance Law to exempt an insurer from liability is still quite limited. Unless the insured has failed to notify the insurer of an incident covered by the policy – intentionally or out of gross negligence – making it impossible to determine the nature or cause of the accident or the degree of damage resulting from it, the insurer will still bear liability as long as it did not know and could not have been expected to know of an accident.
Most Chinese insurers have adopted the wording of Article 21 pertaining to an insured party's reporting duty in their insurance policies instead of specifying a fixed reporting period. This gives the courts full discretion to decide whether notification has been fulfilled in a timely manner. On this basis, if the terms of the insured's duty to report an incident are unreasonable or harsh, they will likely be deemed invalid by the courts.
For further information on this topic please contact Hao Zhan or Zhang Wei at AnJie Law Firm by telephone (+86 10 8567 5988) or email (email@example.com or firstname.lastname@example.org). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
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