Commentaries on the recent amendment of the insurance law of the People's Republic of China regarding insurance contracts from the perspective of comparative law.

• Published date: 22 December 2011
• Author: Chang, Kuan-Chun
• Date: 22 December 2011

ABSTRACT

This Article, which begins with a brief history of the insurance industry and insurance law, discusses the recent amendments to the Insurance Law of the People's Republic of China. In particular, this Article focuses on the amendments relating to insurable interest, the insured's duty of disclosure, interpretation of contractual clauses, double insurance, and insurance fraud. The Article concludes by considering areas with which the amendments have not dealt and by suggesting ways in which the legislation could improve.

I. INTRODUCTION

In February 2009, the Insurance Law of the People's Republic of China ("PRC") was amended, resulting in major changes to both substantive insurance contract law and insurance company regulations. (1) At least 80% of the original articles were amended, and the total number of articles increased from 159 to 187. (2) Compared to the last change in insurance law, which focused on regulations pertaining to China's World Trade Organization ("WTO") commitments, this amendment placed more emphasis on settling insurance contract issues arising prior to the amendment and on the prudential regulation of insurance companies. The 2009 amendment has improved various aspects of the original insurance law by enhancing the protection for consumers under an adhesion contract (incontestability clause), clarifying the insurer's right to rescind the contract due to the insured's misrepresentation, and the addition of a requirement specifying the insurer's duty to explain the contract. (3) Despite the improvements, issues and unanswered questions associated with this amendment still exist. At a minimum, the 2009 amendment fails to address the following: (1) the "real" holder of an insurable interest remains confusing, (2) the time when an insurable interest must exist, (3) the period in which the insured owes the duty of disclosure to the insurer, (4) potential obstacles in implementing the incontestability provision, (5) possible unfairness associated with the rule regarding the construction and governance of contractual terms, and (6) the moral hazard issue embedded in rules relating to double insurance. Several perplexities and insufficiencies in the old law were not tackled. (4)

The primary sources of reference for this amendment were American and British law. (5) This research not only examines most of the newly enacted articles in light of American and British common law, but also provides critiques in accordance with the general principles of both insurance theory and law, including principles of indemnity, consideration, and utmost good faith. More importantly, due to the civil law nature of the Chinese legal system, (6) this Article examines representative insurance legislation recently enacted in the civil law legal systems of Germany (7) and Japan, (8) which also deeply influence the legal system of another Chinese society, Taiwan, to corroborate some of the viewpoints expressed about the 2009 PRC Law. Part II provides a brief history of modern Chinese insurance law. Part III examines the sections of the 2009 amendment relating to insurable interest, the insured's duty of disclosure, the interpretation of contractual clauses, double insurance, and insurance fraud. Part IV explores potential issues and problems not clarified in the 2009 amendment and proposes suggestions for further amendments. Part V will conclude the discussion with a brief remark.

II. BRIEF HISTORY OF CHINESE INSURANCE LEGISLATION

China's insurance legislation dates back to 1904 in the Qing Dynasty. (9) The Qing government drafted the Qing Commercial Law, which consisted of two chapters concerning loss and life insurance. (10) The Qing Dynasty, however, collapsed before implementation of this law. (11) The Kuomintang [Goumindang] ("KMT") government drafted the Insurance Law in 1929 and revised it in 1937. In 1931, KMT also promulgated the Maritime Law, which covered marine insurance. (12) After the foundation of the PRC in 1949, the State Council promulgated a series of insurance acts and regulations consisting of rules, administrative decisions, ordinances, methods, and notices. (13) Most of these acts and regulations focused on compulsory insurance, especially for the property of state institutions and for the property of ship, train, and airplane passengers. (14)

China successfully legislated insurance in the Insurance Law of 1995, the first national legislation to also provide a framework for understanding China's insurance regulations. (15) This legislation consisted of 152 articles in eight chapters, (16) Chapter 1 covers the purpose of the law, definition of insurance, scope of the law, and principles of the insurance industry. (17) Chapter 2 pertains to insurance contracts and consists of three sections: (1) the general rules of the formation, amendment, and performance of the insurance contract; (2) property insurance; and, (3) life insurance contract. (18) Chapters 3 through 5 set forth the rules and requirements of insurance company administration and supervision, including licensing, scope of business, management of premiums, liquidation, and continuous supervision. (19) Chapter 6 provides rules for the oversight of insurance and industry-related members, such as insurance agents and brokers. (20) Finally, Chapters 7 and 8 include provisions regarding legal liabilities and sanctions. (21)

As articles pertaining to the supervision and administration of insurance companies were still in the early stages of development, the China Insurance Regulatory Commission ("CIRC") promulgated the Regulation Regarding the Administration of Insurance Companies ("Regulation") in 2000 and subsequently amended it in 2005. (22) The Regulation now has seven chapters with 105 articles, which provide more detailed rules for supervising and administering insurance companies. (23)

China's insurance industry changed drastically between 1995 and its first amendment in 2002. The number of insurance companies reached fifty-three by the end of 2002, and the total annual premium income had risen from ¥ 460 million RMB in 1995 to ¥ 226.3 billion RMB after the first three quarters of 2002. (24) This growth reflected the increasing number of insurance consumers and products, thereby generating demand for higher quality service and upgraded regulatory systems. With these changed objectives, several parts of the Insurance Law of 1995 ceased to be applicable to the market. (25) Some original provisions even became obstacles to reasonable operation in the altered environment. (26) Soon after its establishment, CIRC prioritized amending the Insurance Law of 1995. (27) Eventually, the National People's Congress granted legislative approval to CIRC's amendment on October 28, 2002. (28) The 2002 amendment was expected to accomplish four objectives: (1) to sustain the reform and development of China's insurance industry, (2) to strengthen supervision and regulation of the industry, (3) to standardize the regulation of insurance enterprises and business operations, and (4) to fulfill pledges to adopt international practices made during the WTO accession negotiations. (29)

To balance the rights and interests of both the insured and the insurer as well as facilitate prudential supervision of insurance companies, the Standing Committee of the National People's Congress adopted the long-awaited amendments to the Insurance Law on February 28, 2009 with an effective date of October 1, 2009. (30) The 2009 amendment includes both a number of new provisions and extensive changes to existing provisions. Compared to the Insurance Law of the PRC in 2002, the newly amended version expands the rights of policyholders while imposing heavier duties on insurance companies. (31)

Significant changes resulting from the 2009 Amendment affected issues related to the insurance contract, the regulation of insurance companies, and the conduct of business. The first category includes articles pertaining to the (1) insurable interest, (2) applicants' duty to disclose misrepresentations, (3) interpretation of the policy, (4) timely notice of increased risks, (5) insurance fraud, and (6) double insurance. (32) In terms of the regulations pertaining to insurance companies, the 2009 Amendment created additional licensing criteria for the establishment of a new insurance company as well as processes concerning the approval, fitness, and requirements of directors. (33) With respect to continuous supervision, the 2009 Amendment expands the list of permissible investment objects, but it also authorizes the CIRC to take prompt corrective action against insurance companies when necessary. (34) Furthermore, Provisions on the Administration of Insurance Companies were deliberated and adopted at CIRC's executive meeting on September 18, 2009 to conform with and implement the newly enacted Insurance Law. (35)

III. PRIMARY CHANGES TO INSURANCE CONTRACTS 1N THE 2009 AMENDMENT

Although the 2009 Amendment retains the structure and organization of the old law in the Insurance Law of 2002 and Insurance Law of 1995, the number of articles has increased from 158 to 187 and several chapters have been renamed. (36) The latest legislation retained the eight chapters from the old law that Part II discusses. (37) This Part reviews the law as it pertains to insurance contracts.

A. The Insurable Interest

1. The Insurable Interest Requirement

The Insurance Law of 2002 required an applicant to have an insurable interest in the insured subject matter as the prerequisite for an effective insurance contract. (38) Under the old law, therefore, if the applicant holds no insurable interest in the subject matter, the corresponding insurance contract is deemed invalid. (39) Given that the old law did not distinguish insurable interest in property insurance from insurable interest in life insurance, Article 12 of the 2009 Amendment specifies that the applicant for "personal insurance" shall have an...