Credit insurance has become increasingly popular in China since the State Council's issuance of Several Opinions on Accelerating the Development of the Modern Insurance Service Industry on August 10 2014. However, credit insurance differs from warranties under Chinese law and questions have been raised as to its scope and function. In peer-to-peer and other transactions, it is often used to protect creditors' benefits. Creditors should be aware of certain legal points relating to credit insurance before taking out a policy.
Credit insurance is listed as an 'insurance product' under Articles 95 and 77 of the Insurance Law. The law also requires insurers to register with the administrative authority for industry and commerce by submitting their insurance business licence approved by the China Insurance Regulatory Commission (CIRC). As such, investors can check the online National Enterprise Credit Information Publicity System to ensure that an insurer is qualified to undertake credit insurance business.
Article 135 of the Insurance Law classifies credit insurance as 'other insurance products' and provides that premium and policy clauses for credit insurance should be submitted to the insurance regulatory authority for recording, rather than approval. Investors can consult the official website of the CIRC, the Insurance Association of China or the insurer itself to read the recorded policy clauses and ensure their legal compliance.
Validity of insurance contract after modification
In some cases, the policyholder and insurer may reach an agreement to modify credit insurance clauses that have already been recorded with the CIRC. This often raises the question of whether such modifications will affect the validity of the insurance contract.
Article 2 of the CIRC Circular on Issues Concerning the Implementation of the Administrative Measures for the Insurance Terms and Premium Rates of Property Insurance Companies (Bao Jian Fa [2010] 43, May 11 2012) provides:
"If an insurance company makes modifications to the insurance liabilities in the insurance clauses that have already been filed for record or makes adjustments to the premium rates beyond the scope filed for record, it shall report such modifications and adjustments to the CIRC for record-filing again. Modifications to the insurance liabilities shall refer to increase, reduction, or exemption of the liabilities of the insurer, the policy holders, the insured, or the rights of the beneficiaries, including but not limited to modifications made to the clauses on insurance liabilities and liability exemption through insurance clauses and insurance policies."
Based on this provision, modifying insurance clauses without authorisation may constitute a regulatory violation.
In contrast, Article 52 of the Contract Law provides that "[a] contract shall be null and void [if]… the mandatory provisions of the laws and administrative laws are violated". Since CIRC circulars are neither laws nor administrative rules, violation of their provisions will not invalidate the insurance contract. The CIRC addressed this issue in its Reply on Record Filing of Insurance Clauses,(1) in which it stated that "[w]hether insurance clauses are put on records at financial supervision and regulation departments or not will not influence the validity of signed insurance contracts". Therefore, modifying insurance clauses may lead to administrative penalties from the CIRC, but will not affect the validity of the insurance contract.
For risk-aversion or commercial reasons, insurers may stipulate exclusions in insurance coverage clauses to avoid liability for certain losses of the insured. Policyholders should therefore pay close attention to the coverage(2) and exclusions in the insurance contract. They should first examine the insurance liability(3) – if a loss is not stipulated within the coverage clause, the insurer will not compensate for it. They should thereafter scrutinise the stipulated exclusions, which are listed in a separate chapter and boldfaced. It is vital to determine whether the exclusions stipulated in an insurance product contract will affect the creditor's benefits.
Statutory exclusions
According to the Insurance Law, the insurer will not be liable for losses when:
- the degree of peril is greatly increased due to the assignment of the insured;
- the degree of peril of the insured is greatly increased during the term of the contract and the insured does not notify the insurer in a timely manner in accordance with the contract;
- the insured waives the right to indemnity against third parties after the occurrence of an insured incident and before the insurer pays the indemnity;
- the policyholder fails to perform its obligation of making an honest disclosure (whether intentionally or out of gross negligence) – thereby materially affecting the insurer's decision to provide the insurance or increase the premium rate – and the insurer consequently rescinds the insurance contract;
- after becoming aware of the occurrence of an incident covered by insurance, the policyholder, insured or beneficiary fails to notify the insurer in a timely manner (whether intentionally or out of gross negligence), making it difficult to ascertain the nature, cause and extent of the loss arising from the incident;
- the policyholder or insured intentionally fabricates the occurrence of an incident covered by insurance; or
- the policyholder, insured or beneficiary, following the occurrence of an incident covered by insurance, fabricates the cause of the incident or exaggerates the extent of the loss by way of forged or altered evidence.
In any of these scenarios, the insurer may fully or partially refuse payment. Therefore, it is crucial for creditors to examine the statutory exclusions closely.
Article 68 of the Insurance Law sets a minimum amount of net assets required in order to establish an insurance company. Articles 97, 100 and 103 require insurers to ensure their solvency by drawing on a guarantee fund, contributing to an insurance protection fund and arranging for reinsurance.
An insurer can also strengthen its solvency by increasing capital or issuing subordinated debt or capital supplement debt. There is no precedent of an insurer filing for bankruptcy in China. As such, insurers' solvency is generally guaranteed.
In the course of conducting business transactions, it is important to focus on the quality of the project itself and control risks accordingly. Relying on the economic strength of an insurer by way of credit insurance – as a means of enhancing credit – is a good step to take in this regard.
For further information on this topic please contact Hao Zhan, Yibin Xia, Liang Bing or Li Pei at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected], [email protected], [email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
Endnotes
(1) Bao Jian Ban Han [2002] 106.
(2) 'Coverage' refers to the scope of the insured events stipulated in the insurance contract.
(3) 'Insurance liability' refers to the insurer's liability for compensation of economic losses stipulated in the insurance contract.
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