An extract from The Insurance and Reinsurance Law Review, 8th Edition

Insurance and reinsurance law

i Sources of law

As China is a civil law country, the sources of law are statutory codes. The sources of insurance law mainly consist of:

  1. the Insurance Law;
  2. judicial explanations issued by the Supreme People's Court;
  3. other relevant laws promulgated by the National People's Congress; and
  4. regulations and guidelines issued by the CBIRC and other relevant government institutions.
ii Making the contract

The Insurance Law does not define a reinsurance contract. In practice, a reinsurance contract is deemed to be a special type of insurance contract concluded between the ceding insurer and the reinsurer.

Pursuant to the Law, an insurance contract is defined as an agreement in which an applicant and an insurer set out their respective rights and obligations under the insurance policy. The term 'applicant' refers to the party that concludes the insurance contract with the insurer, and who must pay the premium in accordance with the contract. The term 'insurer' refers to the insurance company that concludes the insurance contract with the applicant, and that is liable for paying insurance indemnities in accordance with the contract.

The Law classifies insurance contracts into personal insurance contracts and property insurance contracts classes. A personal insurance applicant shall have an insurable interest in the insured at the time when the insurance contract is formed, while an insured in property insurance shall have an insurable interest in the subject insured at the time when an incident covered by the insurance occurs.

An insurance contract is formed when an insurance applicant applies for insurance and the insurer accepts the application. The insurer shall issue to the insurance applicant an insurance policy or any other insurance certificate in a timely manner.

Pursuant to Article 18 of the Law, an insurance contract shall contain the following:

  1. the name and address of the insurer;
  2. the names and addresses of the insurance applicant and the insured, and the name and address of the beneficiary in the case of insurance of a person;
  3. the subject insured;
  4. insurance liability and liability exemption;
  5. the period of insurance and commencement date of insurance liability;
  6. the amount insured;
  7. the premium and payment method;
  8. the method for paying indemnity or insurance benefits;
  9. liabilities for breaches of contract and resolution of disputes; and
  10. the day, month and year of the conclusion of the contract.

The insurance applicant and the insurer may agree upon other particulars related to insurance in the insurance contract.

In concluding an insurance contract, the applicant shall make an honest disclosure when the insurer enquires about the subject insured or relevant circumstances concerning the insured. The insurer shall have the right to rescind the insurance contract if the applicant intentionally or with gross negligence fails to perform his or her obligation of making an honest disclosure, thereby materially affecting the decision of the insurer about whether to provide the insurance or whether to increase the premium rate. If an applicant intentionally fails to perform his or her obligation of making an honest disclosure, the insurer shall bear no insurance liability as regards the insured incident occurring prior to the rescission of the contract, or for returning the paid premiums. If an applicant fails to perform his or her obligation of making an honest disclosure out of gross negligence, and this has a material effect on the occurrence of an incident covered by the insurance, the insurer shall, with respect to the incidents occurring prior to the rescission of the contract, bear no insurance liability, but shall return the paid premiums. If an insurer enters into an insurance contract with an applicant knowing that the applicant has failed to disclose a material fact, the insurer shall not rescind the contract, and if an insured incident occurs, the insurer shall bear the insurance liability.

For those clauses in the insurance contract that exempt the insurer from liability, the insurer shall give sufficient warning to the applicant of those clauses in the insurance application form, the insurance policy or any other insurance certificate, and expressly explain the contents of those clauses to the applicant in writing or orally; if the insurer fails to give a warning or explicit explanation thereof, those exemption clauses shall not be effective.

iii Interpreting the contract

The provisions of the insurance contract become ambiguous when the insurer and the insurance applicant, the insured or the beneficiary, have different interpretations of the policy. If a provision is found to be ambiguous, it should be interpreted in accordance with the following interpretation methods.

Semantic interpretation

Semantic interpretation means interpreting the policy with common knowledge in accordance with the common sense of ordinary people. The interpretation cannot deviate from the wording of the policies, and other methods of interpretation can be applied only when the outcome of a semantic interpretation is still unclear. The semantic interpretation method is also the fundamental method.

Systemic interpretation

Systemic interpretation refers to interpreting the provisions based on the entire contents of the contract, and taking into consideration the connection of each provision with the other provisions in the contract.

Contract aim-based interpretation

Contract aim-based interpretation means interpreting the policy in accordance with the real intention of the parties to the insurance contract.

Good faith interpretation

Good faith interpretation is based on the utmost good faith principle, and will interpret the insurance contract by applying the waiver and estoppel rules. The good faith principle is an essential principle in the civil law system, and is similar to the utmost good faith doctrine in the common law system.

Special interpretation

Under a special interpretation, the contents of the schedule outweigh the policy clauses; the handwritten clauses outweigh the printed clauses; and a special exception is that the contents of the application form outweigh the insurance policy and schedule even if the application form is formed earlier than the latter two parts of the insurance contract.

Unfavourable interpretation

Where the insurer and applicant, insured or beneficiary have a dispute over a clause in an insurance contract concluded by using the standard clauses provided by the insurer, the clause shall be interpreted as commonly understood. If there are two or more possible interpretations of the clause, a court or arbitration institution shall interpret the clause in favour of the insured and beneficiary.

iv Insurance intermediaries

Insurance intermediaries include insurance brokerage companies, insurance agencies and insurance assessment institutions. China has adopted the Regulatory Provisions on Insurance Brokerages, the Regulatory Provisions on Professional Insurance Agencies and the Regulatory Provisions on Insurance Adjusters to regulate insurance brokerage companies, insurance agencies and insurance adjusters.

Insurance brokerage companies and insurance agencies have to be in the form of either a limited liability company or a joint-stock limited company. Brokers provide intermediary services to insurance applicants and insurance companies to execute insurance contracts based on the interests of insurance applicants, while insurance agencies are, based on authorisations by insurance companies, authorised to handle insurance business on their behalf. The two regulations on insurance brokerage companies and insurance agencies respectively provide the requirements on market access, operation rules, market exit, supervision and inspection, and legal liabilities. Further details are also provided regarding the business establishment, qualifications of personnel, scope of business and prohibited acts.

For instance, an insurance brokerage company must meet the following conditions to be established:

  1. Shareholders, promoters and sponsors must have a good reputation, and must have no record of major irregularities in the immediately preceding five years.
  2. The registered capital must reach a minimum requirement. The minimum registered capital of an insurance brokerage company must be 50 million yuan if it operates beyond a province, autonomous region, centrally administered municipality or the municipality with unilateral planning at the place of its industry and commerce registration. The minimum registered capital of an insurance brokerage company must be 10 million yuan if it operates in within a province, autonomous region, centrally administered municipality or the municipality with unilateral planning at the place of its industry and commerce registration. The registered capital of an insurance brokerage company must be paid in cash.
  3. The articles of association must comply with the relevant provisions.
  4. The chair of the board of directors, the executive director and senior management must comply with the qualifications specified in the Regulatory Provisions mentioned above.
  5. It must have a sound organisational structure and management system.
  6. It must have a fixed domicile commensurate with the scale of its business.
  7. It must have business, financial and other computer hardware and software facilities commensurate with its business.
  8. It must meet other conditions specified in laws, administrative regulations and provisions of the CBIRC.

The same conditions apply for a professional insurance agency.

An insurance brokerage company may engage in the following business:

  1. drafting insurance application proposals, selecting insurance companies and handling the insurance application formalities for insurance applicants;
  2. assisting the insured or beneficiaries in claiming compensation;
  3. reinsurance brokerage business;
  4. providing clients with disaster, loss prevention, risk assessment or management consulting services; and
  5. other business approved by the CBIRC.

To engage in insurance brokerage business, an insurance brokerage must enter into a written brokerage contract with a client agreeing to the rights and obligations of both parties and other relevant matters. A brokerage contract may not violate any laws or administrative regulations, or the provisions issued by the CBIRC.

In conducting business, an insurance brokerage company must prepare a standard client notification letter. This letter must, at minimum, include basic information about the company, such as its name, business premises, scope of business and any contact methods. If there is any affiliation between the company or its director or senior executive and an insurance company or insurance intermediary institution related to its brokerage business, this must be explained in the client notification letter.

An insurance brokerage practitioner must present the client notification and, at the request of the client, explain the manner of collection and the rate of commissions. The practitioner must also inform the clients of the insurer of an insurance product, make a full and fair analysis of any similar products recommended, and clearly alert an insurance applicant to the clauses in the insurance contract regarding, inter alia, liability exemptions or exceptions, surrender, deduction of other expenses, cash value and the cooling-off period.

A professional insurance agency may engage in the following insurance agency business:

  1. selling insurance products as an agent;
  2. collecting insurance premiums as an agent;
  3. conducting damage surveys and claim settlements for the relevant insurance business as an agent; and
  4. other business approved by the CBIRC.

To engage in insurance agency business, a professional insurance agency must enter into a written agency contract with an insurance company, agreeing on the rights and obligations of both parties and other relevant matters. An agency contract may not violate any laws or administrative regulations, or the provisions issued by the CBIRC.

A professional insurance agency must prepare a standard client notification letter and present it to the client while conducting business. The client notification letter must, at a minimum, include basic information about the full-time insurance agency and the represented insurance company, such as their names, business premises, scope of business and contact methods. If there is any affiliation between the professional insurance agency or its director or senior executive and the represented insurance company or the relevant insurance intermediary company, this must be explained in the client notification letter. A professional insurance agency must also clearly alert an insurance applicant of the clauses in the insurance contract regarding, inter alia, liability exemptions or exceptions, surrender, deduction of other expenses, cash value and the cooling-off period.

v Claims

Under the Insurance Law, the applicant, insured or beneficiary shall, in a timely manner, notify the insurer after becoming aware of the occurrence of an incident covered by the insurance. Where an applicant, insured or beneficiary fails to notify the insurer in a timely manner either intentionally or out of gross negligence, making it difficult to ascertain the nature, cause and extent of the loss of the incident covered by the insurance, the insurer will not be liable for indemnification or payment of the insurance benefits for the indeterminable part, unless the insurer has known or should have known about the incident in a timely manner through other channels. An applicant also has a duty to cooperate with the insurer that is defending a claim on its behalf. The applicant must keep the insurer informed of all major case developments, respond to the insurer's reasonable enquiries and notify the insurer.

After receiving an insured's or beneficiary's claim for indemnity payment, the insurer must assess the claim in a timely manner. If the circumstances are complex, the insurer must complete the assessment within 30 days, unless otherwise agreed upon in the insurance contract. The insurer must notify the insured or beneficiary of the assessment result. For a claim that falls within the insurance coverage, the insurer must perform the obligation of paying the indemnity within 10 days of after reaching an agreement on the payment of indemnity with the insured or beneficiary. If the insurance contract provides otherwise for the time limit for indemnity payment, the insurer must perform the obligation of paying the indemnity as agreed upon therein. If the insurer fails to perform the obligation as prescribed, it shall, in addition to paying the insurance indemnity, pay compensation for the insured's or beneficiary's loss suffered.

In cases where an insurer cannot determine the amount of indemnity to be paid within 60 days of receiving a claim for indemnity and the relevant certificates and materials, it must first pay the amount that can be determined according to the current certificates or materials, and after it finally determines the amount of indemnity to be paid, it shall pay the difference.