Chinese Insurance Contracts

Law and Practice

Zhen Jing

• Publisher: Informa Law from Routledge
• Year: 2016
• ISBN:
  9781317802549
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Chinese Insurance Contracts: Law and Practice is the first systematic text written in English on the law of insurance in China. This book offers a critical analysis of the major principles, doctrines and concepts of insurance contract law in China. At every point the analysis discusses the principles of the Insurance Law in detail, referring where appropriate to decided cases and also drawing attention to external influences. Readers are guided through the complexities of Chinese law in a clear and comprehensive fashion, and – significantly – in a manner that is accessible and meaningful for those used to a common law system.

This book presents a comprehensive picture of Chinese insurance contract law, to facilitate a wider understanding of the relevant rules of law. Elements of insurance contract law are critically examined. In addition, this book presents rules of law on some special types of insurance contract, such as life insurance, property insurance, liability insurance, motor vehicle insurance, reinsurance, and marine insurance. The deficiencies and shortcomings of the law and practice will be identified and analysed; suggestions and recommendations on how to reform the law will be presented. Chinese Insurance Contracts also offers legal and practical advice to insurance professionals on how to draft clauses to avoid contractual pitfalls. It also uses cases to illustrate the difficulties which can arise in applying the principles in practice.

This book will be essential reading for insurance companies and legal practitioners looking to do business in China, as well as reference for Chinese lawyers practising insurance law. It will also be a useful resource for students and academics studying Chinese law.

Chapter 1

Introduction to insurance and China’s insurance industry

1.1 Introduction

The law of insurance can be divided into two distinct topics. The first is the law of insurance contracts, which governs the legal relations between the insurer and the insured. The second is insurance regulations, which can be generally defined as a mechanism used to control the behaviour of participants in an insurance market. The Insurance Law of the People’s Republic of China (hereinafter, the Insurance Law),¹ consisting of both the insurance contract law and insurance regulation, governs the activities of the insurers and the insureds and regulates the behaviour of insurance companies in China’s insurance market. This book focuses primarily on insurance contract law, with a brief introduction to insurance regulation in Chapter 3.

This book is intended to present a systematic and comprehensive analysis of the principles, doctrines and concepts of Chinese insurance contract law in a fairly conventional doctrinal manner, and to explore the ways in which these rules of law are applied in industrial and judicial practice. Most elements of insurance contract law will be examined critically, particularly the fundamental principles, such as insurable interest, utmost good faith, subrogation, etc. In addition, this book will also present rules of law on special types of insurance contracts, i.e. property insurance, life insurance, liability insurance, motor vehicle insurance, reinsurance and marine insurance. While examining and analysing the provisions of the Insurance Law and their application, deficiencies and shortcomings of the law and practice in some areas or aspects may also be identified and thus analysed; suggestions and recommendations on how to improve the law will be proposed.

The modern insurance industry and insurance legislation have a relatively short history in China. The first comprehensive insurance legislation since the foundation of the People’s Republic of China (hereinafter, the PRC) in 1949 was only enacted in 1995. When the Insurance Law 1995 was drafted, it took references from the laws in many other jurisdictions,² and incorporated major internationally accepted principles regarding insurance contracts. Comparative references will be made at the relevant points in this book to the rules of law in England and Australia, as many insurance principles such as utmost good faith, subrogation, etc. originated from English common law. The Australian Insurance Contracts Act 1984 (ICA) codifies the common law and practice and mitigates the harshness of the common law to the insureds in some areas, and is regarded as a model for insurance law reform in England.³ Approaches in some other jurisdictions may also be referred to, where appropriate and necessary. However, the nature and scope of this book limit the selection of comparative law materials, so it is not the purpose of this book to make comparative references in every aspect of insurance contract law.

1.2 The nature of insurance and insurance contracts

When you drive a car on a road, no matter how carefully you do so, it is impossible to completely eliminate the happening of a road accident. In other words, there is always a chance for a road accident to occur, which may cause damages to vehicles, or physical injury or even death to the persons who are involved in the accident. On the other hand, the house insured against loss by fire may never be burn down. So the occurrence of a road accident or a fire is an uncertain event. In contrast, some events are certain to occur but the time when the events are to occur is uncertain. For example, every human in the world is certain to die sometime in the future, but the time when a person will die is uncertain. In insurance, this uncertainty is normally described in terms of risk. In the modern world, insurance is a primary mechanism for the management of risks, by which the insured transfers the risks of some uncertain events to the insurer by paying premiums to the insurer, while the insurer promises that it will pay the insured for losses caused by the happening of the uncertain events insured against under an insurance contract. In essence, the purpose of insurance arrangements is to organise the sharing among a large number of persons (the insureds) of the cost of losses which are likely to happen only to some of them (or to happen at an earlier time to some than to others). In a sense, an insurer can be called the manager or organiser of two pools: the pool of risks and the pool of premiums. The shifting of risk from an insured to the insurer and the distribution of the cost of losses among the population of the insureds for a certain type of insurance or among a community of insureds for all different types of insurance underwritten by the insurer are the primary functions of insurance. In short, the essential characteristics of insurance are risk transfer and loss spreading.⁴

Insurance arrangements can be carried out by insurance contracts. A contract of insurance is one whereby one party (the “insurer”) promises in return for money consideration (the “premium”) to pay to the other party (the “insured”) a sum of money or provide him with some corresponding benefit, upon the occurrence of one or more specified events.⁵

The Insurance Law defines the term of “insurance” as a commercial insurance transaction whereby a proposer, in accordance with the terms and conditions of a contract, pays insurance premiums to an insurer, and the insurer assumes liability to make indemnity payments where property loss or damage is caused as a result of the occurrence of an insured event that is agreed upon in the contract, or to pay insurance benefits upon the occurrence of death, injury or illness of the insured or the attainment of a certain age or time limit agreed upon in the contract.⁶ An insurance contract is an agreement whereby the rights and obligations are agreed upon by the proposer and the insurer.⁷ A proposer (or the insured or the policyholder) is a party who enters into an insurance contract with the insurer and is obliged to pay the premium under the contract.⁸ An insurer refers to an insurance company which enters into an insurance contract with a proposer and is obliged to make indemnity payments or pay insurance benefits under the contract.⁹

1.3 Classifications of insurance

Insurance contracts can cover a variety of risks. The risks can be classified in several different ways, such as first party and third party insurance, personal and property insurance, marine and non-marine insurance, etc. It is important to distinguish one type of insurance from others for two primary reasons. First, some principles of insurance law are evolved from a certain type (or line) of insurance, and are applicable only to that type of insurance contract. For example, for a life policy to be valid, the proposer is required to have an insurable interest in the life insured at the time the policy is effected.¹⁰ But this requirement is not applicable to property insurance for which an insurable interest is required only at the time when an insured event occurs.¹¹ Second, for the sake of the statutory regulation of the insurance business, property insurance must be distinguished from personal insurance, as the Insurance Law does not permit an insurer to concurrently undertake property insurance and personal insurance, but with an exception that an insurer conducting property insurance business may undertake short-term health insurance and accident insurance business with the approval of the China Insurance Regulatory Commission (CIRC),¹² which is the statutory regulatory authority for the insurance industry in China.¹³

1.3.1 First party and third party insurance

First party insurance is to insure someone’s own life, house or car, etc. against the risk of their own loss. For example, under a building insurance policy, the insured transfers the risks of damage to the building by fire, subsidence or other events to the insurer who will pay the insured for the loss of or damage to the building caused by an insured event, such as a fire. On the other hand, third party insurance protects the insured against the risk of their potential liability in law to pay damages to a third party.¹⁴ The Insurance Law defines liability insurance as “the type of insurance of which the insured subject matter is the insured’s liability to indemnify a third party according to law.”¹⁵ Sometimes, the first and third party aspects may be combined in the same policy. A typical example is a comprehensive motor vehicle insurance policy under which the risk of damage to the insured’s own vehicle and the risk of damage to a third party’s vehicle or injury or death to a third party victim are all covered. Some liability insurance contracts are required to be effected compulsorily by legislation, while some others may be effected voluntarily. The major compulsory liability insurance is the third party liability insurance for motor vehicles. This is required by the Road Traffic Safety Law of China.¹⁶ This topic will be discussed in detail in Chapter 22.

First party insurance can be indemnity or contingency insurance, while liability insurance is always indemnity insurance. With first party property insurance there are two parties: the insurer and the insured; with first party life insurance there may be three or four relevant parties: the insurer, the insured (the proposer), the life insured¹⁷ and the beneficiary.¹⁸ Due to the fact that a beneficiary is usually nominated in a life policy, there are many rules specifically applicable to the matter of beneficiaries in Chinese law and practice; an in-depth discussion on this topic is given in Chapter 20.

On the other hand, with liability insurance there are three relevant parties: the insurer, the insured and the third party victim. Because of the involvement of a third party, liability insurance possesses special features as compared with first party insurance, such as the insured’s prior discharge of his liability to the third party as a precondition for recovering insurance payments from the insurer,¹⁹ direct payment of insurance money to the third party upon the request of the insured,²⁰ the third party’s right to claim directly against the insurer for insurance money,²¹ the insurer’s participation in determination of the insured’s liability to the third party²² and so on. These features will be considered in Chapter 21.

1.3.2 Personal insurance and property insur...