On The Legal Regulation Of The Exemption Clause In Insurance Contracts

Among the contractual obligations of the insurer to an insurance contract, making eligible insurance payments is arguably the most important one. The frequent occurrence of insurance disputes in insurance practice, and the consequential phenomenon that “it is easier to pay insurance premium than to draw insurance benefits”, are to a great extent attributable to the less-than-clear provisions under insurance contract legislations regarding the exemption of insurers’ responsibilities. While application of exemption clause is a major means by which insurers are exempted from insurance liabilities, the identification and specification of exemption clause has long been a headache in the judicial practice of China. A new judicial interpretation of China promulgated in 2013 provides supplements to the definition of the exemption clause in insurance contracts; however, although this new development streamlines the identification of the exemption clause, it falls short of specifying the ground on which the exemption is assessed; in addition, the judicial interpretation does not differentiate the levels of effects of the exemption clause, nor does it include any clear provision concerning such factors as the obligation to inform and the obligation to clarify and explain, and the performance standards and legal consequences of the obligations. In view of this and for the purpose of improving the legal regulatory framework of the exemption clause in insurance contracts, the present dissertation, drawing from theories of analytic jurisprudence, legal economics, economic analysis of law, legal interpretation, and legal history, systematically reviewed and addressed legal issues arising during the operation of the insurance system; further, on the basis of a thorough review of the current institutional barriers, relevant mature overseas institutional designs, legal precedents, and theories and in the context of the development environment of China’s market economy, and the development level, and social context of China’ insurance industry, the present dissertation put forward proposals on enhancing the legal regulation of exemption clause in insurance contracts from the perspectives of theoretical guidance and institutional development. The present dissertation consists of five parts: Chapter One: The Value Orientation of the Institutional Design: Good Faith and Balance of Interests in Business. At the outset of the discussion over the approach stipulated by law for the clause on the exemption of the insurer’s liability, an issue must be clarified: what is the theoretical basis of the legal regulation over the exemption clause in insurance contracts? This question is of exceptional significance for all studies on the insurance institution underlying the exemption clause in insurance contracts in that it not only bears on the proper understanding and assessment of the current institution, but also affects the future development trends and choice of approach for the institution. The exemption clause is not designed purely for the purpose of the probability of losses arising from certain categories of risks from a technical perspective(and thus affecting the determination the rate of insurance premium and the calculation of insurance benefits); rather, it is also designed to manifest both ideological and institutional factors, including ethics, policies and laws. Necessary legal and intervention should be carried out in connection with the content, form, application, and effect of the exemption clause on the basis of the principle of good faith, and good faith must be adopted the permanent fundamental principle and values basis for the exemption clause. At the operational level, good faith should be manifested in the form of a proper balance of interests. Interests are at the core of the exemption as an institution, and therefore naturally the “golden rule” for testing how validly the institution is implemented. The testing process must conform with the following logic: on the basis of proper interests measurement, the interests of the parties to a specific case, the institutional interest and social interests are deconstructed and presented, and the effects of law application are tested empirically one by one by a trial and error mechanism, and finally the results are screened and winnowed to verify the appropriateness of the judgments.Chapter Two: Substantive Factors of the Exemption Clause in Insurance: Judgments based on Essence and Form. Article 17 and Article 19 of the Insurance Law of China are inconsistent, and Judicial Interpretation on Insurance(II) fails to specify the basis on which the coverage of the exemption clause. Therefore, it is necessary to scientifically identify the contents of "the clause exempting the insurer’s liability", provide a technical operating system for actual business operation and practice, and lay a solid foundation for future marketing innovation and improvement of rules. In this connection, explorations need to be made in two aspects, namely, the substantive factors and formal factors of the exemption clause. The former aspect consists of three parts, namely, functionality assessment, importance assessment and causality assessment. As for the latter aspect, further typological studies should be conducted into the exemption clause. Specifically, aside from the scope of “liability exemption clause, value of exempted coverage, rate of exempted coverage, clauses on exempting or reducing the insurer’s liability, including pro rata coverage or payment”, controversy in theory and practice is mostly focused on the warranty clause, procedural clause, and clauses according to which the insurer refuses to honor the claims of the policy-holder or the insured due to their breach of any obligation.Chapter Three: Procedural Rules for the Exemption Clause in Insurance: Understanding the Performance Rules of the Obligation to Inform and the Obligation to Clarify and Explain.The exemption clause in insurance contracts excludes or limits the insurer’s liability that may arise. The consent to or acceptance of the exemption clause by the policy-holder and the insured is a manifestation of their right to voluntary disposition, and therefore is mostly not subject to interference by the law, provided, however, that the policy-holder correctly understands the exemption clause. In this connection, the issues that need to be addressed mainly involve two aspects: firstly, in terms of the application of law, the relationship between the obligation to inform and the obligation to clarify and explain; second, in terms of the interpretation theory, the extent, standards and legal consequences of informing and explaining. The objective basis of the obligation to inform as a separate obligation is the legality of the unreal obligation of the policy-holder’s reading of the insurance contract; the legal basis of the obligation as such is the principle of collaborative performance, one of the principles underlying the performance of contracts, which is based on the principle of good faith. Specifically, this principle entails that the parties to a contract should not only properly perform their respective liabilities, but also should, according to the good faith principle and to a necessary extent, assist the other party(or parties) to the contract in performing its or their liabilities. In view of the status of the obligation to inform as a separate obligation, consideration of the scope of its performance must be based on the legislative spirit of relevant laws and regulations, which means that the insurer must inform the policy-holder of the clauses concerning the term of insurance, the commencement time of insurance responsibility, clauses concerning the termination or rescission of the insurance contract, and warranty clause, as well as key procedural clauses, including those on the time limit for making insurance claims and the qualification conditions of insurance claims. The objectivity doctrine should be adopted for the measurement standards of the performance of this obligation. The extent to which the obligation to clarify and explain may be assessed by two methods, namely, by formal standards and by substantive standards. The former involves the burden of proof, while the latter concerns the extent to which clarification and explanation must be provided. As for the consequences of breaching this obligation, the principle of balance of consideration should be adopted as the guideline, the declaration of will should be adopted as the logical approach and a separatist legislative model should be followed, which means that the legal consequence of a breach of this obligation is that the exemption clause will not be included into the insurance contract, and the consequence of breaching the obligation to clarify and explain is that the contract may be cancelled.Chapter Four: Hierarchy of the Validity of the Exemption Clause: A Special Assessment System Different from the Forms of Validity of Civil Conducts. The validity of the exemption clause in insurance contracts involves both the substantive and the procedural. In the former aspect, it mainly concerns the review of the contents of exemption clause, while the procedural aspect of the issue mainly concerns the review of the inclusion and entry of the exemption clause in to the contracts. Since the latter aspect of the validity issue has been analyzed in the part concerning the legal consequences of the obligation to clarify and explain, this Chapter focuses on assessing the legality and reasonableness of the contents of the exemption clause from the perspective of substantive law. According to theories on civil law, there are four states of validity of conducts under civil law: valid, invalid, validity undetermined and subject to change, and cancellable. This, however, is pertinent to a panoramic review and assessment of civil conducts. In contrast, the state of validity of the exemption clause in insurance contracts is aimed at assessing the contents, form and inclusion procedure of the standard exemption clause into the contract, and therefore does not cover all the four states of validity of civil conducts. On the basis of an analysis of the ideal state, the validity of the exemption clause in insurance contracts is hierarchical: it can be classified into four states depending on whether the clause is legal under substantive and procedural law: not included into the contract, valid, cancellable and invalid.Chapter Five: Limitations on the Interpretation of the Exemption Clause: Legal Response to Standard Contracts. Interpretation by Chinese courts of the exemption clause in insurance contracts has long been disorderly, which is directly attributable to the values orientation of Chinese judges. Therefore, a framework guiding system should be established for the values behind the interpretation of the clause, and framework system should serve as the precondition of the technical means through which the values are achieved. However, establishing a values system is systematic undertaking, in which the most fundamental question that must be addressed first is a clear orientation of the targets of the system. In view of the limitations of the constitutive elements of ordinary contracts, and the uniqueness of insurance contracts, the judges should adopt the actual state of the clause as the basis of interpretation, and take achieving a balance of interests among the parties to insurance contracts and among the parties and the public as the ultimate target, so that the result of the interpretation will conform to the requirements of the ideal state of the insurance contracts to the maximum extent possible. In terms of content, the interpretation of the exemption clause of insurance contracts involves the clarification of the contents of the clause, the elimination of defects and flaws, and the correction of any incompliance with law. The former two factors are in essence interpretation of the text and wording of the exemption clause, which is aimed at identifying the parties’ true intention behind the exemption clause. They seek to achieve contractual justice by the approach of formal justice. The last factor, namely, correction of incompliance with law, is in essence re-assessment of the values of the interpretation results. It aims at achieving substantive justice and seeks to correct the interpretation results through the legal principles which are referred to as the values foundation of interpretation, and ultimately ensures sufficient legitimacy of the interpretation results through proper correction of the results. Hence the interpretation process is divided into two steps: firstly, general principles of contract law are applied, mainly in the form of constructing interpretation rules through the underlying values in the common dimensions of the contract law. The interpretation process is essentially a process to establish an understanding of the insurance contract by a reasonable third party from the perspective of the insured. On the basis of this, the interpretation results are verified and corrected according to the principle of reasonable expectations and the principle of equilibrium between considerations, so as to ensure that they are capable of ensuring the realization of the values that reasonable expectations will be protected to the extent allowed by the insurance law, certainty of law will be enhanced and an appropriate degree of preference is given to the insured.