As I learned during my recent visit to the country, just about everything about China is big. It is the world’s most populous country. China leads the world’s economic growth by size and speed. It is also one of the world’s largest and fastest-growing insurance markets. According to a June 10, 2015 Law 360 article entitled “A Primer on Insurance Underwriting in China” (here, subscription required) by Jiangxiao Hou, Qiamwei Fu and Jose Umbert of the Zelle Hoffman Voebel & Mason law firm, China not only has the world’s second largest economy by GDP, but it has the world’s fourth largest insurance market, and by 2020 it is expected to become the world’s third largest insurance market (following the U.S. and Japan).
In other words, China represents a tremendous opportunity to the global insurance industry. Those of us involve in working with policyholders on their insurance requirement find on almost a daily basis that increasing numbers of companies and firms located throughout the world operations or exposures in or related to China that require insurance solutions. For that reason, it is going to be increasingly imperative for just about everyone, regardless of geographic location, to develop some familiarity with the insurance environment in China. The insurance market in China has a number of important characteristics, with implications from a regulatory, underwriting and claims handling perspective. And as the memo’s authors note, “certain customary practices in Western countries to not necessarily have the same ramifications.”
First, the key characteristics of the Chinese market. The regulatory framework is, according to the memo’s authors, “constantly evolving.” The regulatory regime involves laws issues by the National People’s Congress, regulations issued by the State Counsel, and “a myriad of rules and guidelines issued by the Insurance Regulatory Commission [the CIRC].” The CIRC is the primary insurance regulator, and has issued voluminous insurance regulators.
A critical consideration for the global insurance industry, the Chinese insurance regulations provide a legal person or entity in China can only obtain domestic coverage from an insurer registered with the CIRC. In addition, insurance companies with a 25 percent or more of foreign shareholdings are deemed “foreign-invested” and are subject to more detailed regulations, particularly with respect to ownership, product offerings and product applications, branch approvals, reporting and disclosures.
From an underwriting perspective, the insurance regulations provide detailed requirements for the registration of insurers and for product and rate filings. Insurance forms, insurance clauses and premium rates for many insurance products must be approved by the CIRC before use. The insurance regulations also contain requirements analogous to the “plain English” requirements applicable in many states in the U.S., specifying that an insurer is required, for example, to “clearly explain” exclusion provision, with the proviso that an exclusion provision that is not properly explained will be voided.
A basic principle of Chinese Insurance law is the “good faith requirement.” This requirement applies to both insurers and policyholders. From an underwriting perspective, the good faith requirement applies to the application process and requires an applicant to “make an honest disclosure” in response to an insurers inquiry (although the principle is limited only to the specific matters about which the insurer inquires, and the burden is on the insurer to prove the scope of its inquiries). An insurer has a right to cancel a policy if an applicant intentionally or in gross negligence fails to make an honest disclosure. Where the nondisclosure is intentional, the insurer it not liable to pay indemnity; if the nondisclosure is grossly negligent and the matter not disclosed has an effect on the insured event, the insurer is not required to pay indemnity but must return the premium.
The good faith principle also applies to both the insurer and the insured in the claims handling process. The policyholder must provide claim information in a timely and truthful way, consistent with the requirements of the good faith principle. If a policyholder lodges a fraudulent claim, the insurer has the right to terminate the insurance contract. For the insurer, the insurance regulations specify a structured schedule for claims adjustment, which is also subject to the good faith principle.
The insurer must make a “timely” coverage determination, which in complex cases (and absent a provision in the policy to the contrary) is presumed to be within thirty days of completion of gathering all claims-related information. The determination of when information gathering is complete is subject to the good faith principle. The regulations also specify when payment must be made once the claims determination process is complete.
The authors note that “certain customary practices in Western countries do not necessarily have the same ramifications in China. For example, in many Western countries it is a standard practice at the outset of a claim for the insurer to issue a letter reserving its reserving its coverage defenses and in particular reserving its right to deny coverage for the claim should information uncovered in the course of claims handling reveal a basis for doing so. This practice is not a customary practice in China and “there are no legal ramifications to the issuance or nonissuance of a ROR.”
In short, China presents significant opportunities but it is critically important for those participating insurance transactions in China to understand both the requirements for disclosures in the underwriting process and the requirement for information and timeliness in the claims handling process.
D&O Liabilities in China: The potential liabilities of corporate directors and officers are of course dependent on the requirements of applicable law. That means that corporate officials’ liability exposures can vary from state to state. There are even greater variations from country to country. In a global economy, questions about the potential liability of directors and officers in non-U.S. countries arise with increasing frequency. Given China’s huge and growing role in the global economy, questions about the potential liability of directors and officers under Chinese law are increasingly frequent.
For that reason, readers may be interested in reviewing this May 8, 2015 article entitled “D&O Liability Insurance: Legal Issues under PRC Law” (here) by Jia Hui of the DeHeng Law Offices. The article provides a good overview of the basic legal duties and liability exposures of directors and officers under Chinese law. As the article points out, in light of the various accounting scandals involving Chinese companies that have arisen, these considerations are increasingly important.
EPL Risk and Applicant Background Checks: On an entirely different note, Inside Counsel has an interesting June 11, 2015 article about the rising numbers of EPL claims arising out of employer background checks (here). According to the article, “these lawsuits present an unanticipated and significant exposure for insurers.” The article, which is clearly written from the insurer perspective and has insurers in mind, says that insurers “protect themselves by including specifically targeted exclusions that should eliminate this exposure altogether.”
From my perspective, given the apparently rising importance of these types of claims, it will be very important for policyholders to ensure that the EPLI carriers do not include exclusions precluding coverage for these types of claims.