In the Republic of Korea, the economy has developed and grown, while the insurance industry has been 'soft', with sluggish growth at 0.1 per cent in gross written premiums from 2016 to 2017. Korea still remains active as the seventh-largest insurance market in the world and is a highly regulated financial services industry. The industry sector comprises insurers conducting (1) life insurance business, (2) non-life insurance business and (3) accident and health insurance, with certain other similar coverages that are known as the 'third insurance business' in Korea. Currently, there are 24 life insurers and 31 non-life insurers that are admitted to conduct the business of insurance in Korea – three of the licences were issued by the Korean regulatory authorities in 2016, which included Allianz Global Corporate & Specialty, Asia Capital Re and Pacific Life Re. Foreign insurers as non-admitted insurers also engage in insuring local risks in Korea through the non-admitted market and through 'fronting arrangements'.
Insurance market participants and consumers continue to be engaged in contentious matters in Korea, including typical insurance coverage and claims disputes, issues related to mis-selling of insurance products, reinsurance recoveries and compliance issues with the Korean regulators including data protection and privacy law breaches, and other claims involving third-party service providers. Of notable importance, there were four contentious matters that reached the Korean Supreme Court in the past year, involving policy interpretation and disputes on requisite causal links to a compensation claim, and also a case with a conflict-of-laws issue (see Section III).
II THE LEGAL FRAMEWORK
i Sources of insurance law and regulation
In Korea, the insurance industry is regulated by two main pieces of legislation: (1) the Insurance Business Act (IBA), which sets out the statutory framework for the regulation of the insurance business in Korea; and (2) the Korean Commercial Code (KCC), which sets out the general corporate formalities and governance to be observed by all companies, including the legal requirements for insurance contracts issued in Korea.
The regulation of the insurance industry in Korea is overseen through a two-tier system for all insurance and insurance services companies including insurers, reinsurers, producers, brokers and agents through the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). The missions of the FSC and the FSS are to promote and ensure the three basic objectives, which are to (1) maintain the stability of the financial services markets, (2) provide mechanisms for the financial strength and solvency of insurers, and (3) protect consumers and their interests.
The FSC, at the executive level, prepares financial policies and systems and has quasi-legislative authority to legislate finance-related laws and regulations, and amends the development plans and regulations of insurance business; monitors, inspects and sanctions financial institutions, including insurance companies; and approves the establishment of financial institutions including insurance companies by granting licences. The FSC regulates the Korean insurance business in accordance with the IBA and the Insurance Supervision Regulations.
The FSS, as the 'executive arm' of the FSC, records the current status of insurance contracts and the financial status of insurance companies, monitors business operations of insurers and sanctions insurers for non-compliance for violations of relevant laws or regulations. It also supervises insurers and the insurance industry on a day-to-day basis, secures consumer protection, oversees other matters and enforces activities delegated by the FSC. The FSS also directly inspects and supervises insurance companies and their employees, including solicitation activities of insurance producers, agents and brokers.
The relevant chapter of the Korean Commercial Code to insurance is composed of three major sections: (1) general rules applicable to insurance contracts; (2) life insurance contracts; and (3) non-life insurance contracts. The KCC provides provisions relating to the conclusion or execution of insurance contracts, and the validity of insurance contracts including renewals, amendments, cancellation and termination.
As mentioned above, the IBA regulates the insurance business in Korea to address the requirements for obtaining an insurance business licence; insurance product filings; regulation of solicitation and marketing practices, including bank assurance and other alternative distribution channels; claims and claims handling procedures; asset management and permitted investments; prudential regulation, including capital adequacy and solvency requirements; accounting rules; examinations and prescribed fines, penalties and sanctions; permissibility of concurrent and ancillary businesses of insurers; and the closure, liquidation and policy transfers. Since its promulgation on 15 January 1962, the IBA and its subordinate regulations and enforcement decrees were revised numerous times to reflect the changes in financial environment and international regulatory trends.
There are some minor changes to the IBA noted in this chapter that involve amendments to the Enforcement Decree of the IBA in June 2018 that are to take effect in December 2018. In particular, the amendment will extend the applicable scope of an insurer's duty to confirm whether a customer has previously purchased insurance coverage that may be redundant or duplicative to be effective during concurrent or successive terms of insurance covering the same or similar risks previously purchased. This confirmation process previously existed when insurers solicited automobile insurance or fire insurance but has now been amended to cover all types of non-life insurance contracts. The amendment in effect seeks to improve the insurance system so that consumers do not inadvertently enter into insurance contracts that are redundant or duplicative, resulting in multiple payments of insurance premiums for the same risks unknown to the customer or policyholder.
Also, in recent years, the Enforcement Decree of the IBA clarified that an insurance company that has only received approval with respect to tertiary insurance business (e.g., injury in the course of employment, disease, care insurance), without the approval regarding the damage insurance business, can also deal special provisions that provide cover for death arising from disease.
ii Insurable risk
Risks that can and cannot be insured
The concept of insurance may be found in Article 2(1) of the IBA, which provides that an insurance product is a contract that is concluded for the purpose of covering a risk pursuant to an accidental occurrence, which promises payment of insurance proceeds in the form of money or other benefits set out in the contract, in exchange for consideration paid by the policyholder. 'Covering a risk' involves the concept of an 'insurable interest' and the element of an 'accidental occurrence' relates to the basic premise of insurance relating to fortuitous events. The requirement for the policyholder to provide 'consideration' means that there must be an obligation on the part of the policyholder to pay insurance premiums for there to be a binding insurance contract. Risks covered under an insurance contract that satisfy the foregoing three elements of an insurance product are viewed as insurable.
In addition to the above, the KCC prescribes certain circumstances that may render insurance contracts null and void, as explained below.
First, Article 644 of the KCC stipulates that an insurance contract will be null and void if, at the time of concluding an insurance contract, a risk has already occurred or cannot occur, resulting in no risk to be insured under the insurance contract. However, this rule shall not apply if both parties to the insurance contract including any insured are unaware of such facts.
Second, pursuant to Article 669(4) of the KCC, if the insured amount substantially exceeds the value of the risk insured (i.e., excessive insurance coverage) owing to fraud by the insurer or its agents, the insurance contract will be deemed to be null and void. The provisions of Article 669(4) apply equally to cases involving redundant or duplicative insurance in accordance with Article 672(3) of the KCC.
In addition to the exceptions above, an insurance contract may also be rendered null and void because of the violation of Article 103 of the Civil Act. A Korean court previously issued a ruling that a policyholder entering into multiple insurance contracts with the purpose to fraudulently receive multiple payments of insurance proceeds for a single loss would create a situation where fraudulent policyholders could take advantage of insurance to the detriment of insurers and other policyholders, using insurance as a bona fide manner to protect against unforeseen losses. As a result, such fraudulently concluded insurance contracts are to be declared null and void in violation of the protection of the insurance system and social order as prescribed by Article 103 of the Civil Act.
Insurance to be taken out with local insurer
Pursuant to Article 3 of the IBA, no person may conclude an insurance contract with another person who is not an insurer, and a person who is not an insurer may not act as an intermediary or on behalf of an insurer to solicit insurance. A person who is qualified to obtain a licence to conduct the business of insurance shall be limited to a stock company, a mutual company or a foreign insure, or as a branch office in Korea of a foreign insurer that is duly licensed to conduct the business of insurance pursuant to Article 4(6) of the IBA. It is noted that a foreign insurer may establish a local subsidiary or a local branch in Korea. The minimum capital to establish a subsidiary or a branch of a foreign insurer is 30 billion won and 3 billion won, respectively. Also, in the case of a local Korea branch, it will be limited to the lines of business that its home office is authorised in the foreign jurisdiction. Other than the foregoing, there is no other material difference between the requirements for setting up a local branch and a local subsidiary as an insurer in Korea.
Notwithstanding the general rule that insurance must be taken out by local admitted insurers, Article 3 of the IBA and Article 7 of the Enforcement Decree of the IBA provide exceptions as to when a person may enter into an insurance contract with a non-admitted insurer. Specifically, a person may conclude an insurance contract with a non-admitted insurer for the following lines of business:
- life insurance, export cargo, import cargo, aviation, hull, travel insurance, long-term accident and health, or reinsurance with a foreign non-admitted insurer or reinsurer;
- an insurance contract with a non-admitted foreign insurer, if the person has been rejected by three or more insurers with respect to insurance being sold in Korea;
- a contract with a non-admitted foreign insurer with respect to the types of insurance not sold in Korea; and
- an insurance contract concluded in a foreign country but the policyholder subsequently has it maintained in Korea before the policy period expires. Although non-admitted foreign insurers may conclude the foreign insurance under the exceptions, solicitation and marketing may not be conducted onshore in Korea and are limited to email, telephone, facsimile and other electronic communications on a cross-border basis.
The IBA does not regulate insurance contracts entered into with non-admitted foreign insurers and generally no case law exists explicitly addressing cross-border non-admitted insurance in Korea. However, if a person conducts the business of insurance without a licence issued by the FSC, then such person may be subject to criminal punishment.
iii Fora and dispute resolution mechanisms
In Korea, insurance disputes can be resolved by (1) civil litigation before a court of law (including mediation by the court), (2) arbitration and (3) the decision of the FSS Financial Disputes Mediation Committee (FDMC) under the Financial Consumer Protection Bureau.
Korea does not have courts exclusively designed to resolve insurance disputes, and there is no designated arbitral institution or procedures that exclusively deal with insurance disputes. Thus, insurance disputes must be resolved in the civil court or through arbitration proceedings in the same way as other general cases.
Civil litigation and mediation
A Korean court will have jurisdiction over a dispute involving a foreign party when a substantial nexus exists with Korea. More specifically under Korean law, a Korean court shall have jurisdiction to hear the case when a policyholder's residence or the insurer's principal place of business is located at the place where the Korean court has jurisdiction; however, the parties may separately agree in writing to designate jurisdiction over disputes to another court, including those outside of Korea, along with the governing law.
The Korean judiciary is composed of three levels, which are the district courts, high courts and the Supreme Court. A district court is the court of first instance involving a trial on the facts and the law. The high courts are appellate courts that are empowered to hear appeal by parties from the district court – interestingly, the high courts may review both the facts and law as applied at the district court on a de novo basis. The Supreme Court is the highest court in Korea hearing appeals from the high courts. The Supreme Court will only review the legal merits of a case to determine if the facts were properly analysed and applied in the courts below at the first instance and second instance, and the decision of the Supreme Court shall bring complete finality to a dispute.
Generally, disputes will be resolved by district courts in eight to 12 months, but may be shorter or longer depending on the complexity of each case. Appellate proceedings may take anywhere from eight to 10 months until a decision is rendered by an appellate court. An appeal to the Supreme Court may run its course for two to three years until a judgment is rendered.
As mentioned earlier, a Korean court may order the parties to proceed with mediation as requested on application by the parties, or at the court's discretion as conducted by the court. Alternatively, a case may be referred to the mediation committee to reach an agreement. Mediation decisions, once finalised, have the same legal effect as court judgments. In cases where parties are unable to come to an agreement, they can return to and continue with court proceedings.
There are both domestic and international arbitration cases that are instituted under various arbitration institutional rules with seats either in Korea or in other arbitration hubs such as Singapore, Hong Kong, London and the United States. It is common that parties assign the rules of institutions to govern arbitration proceedings such as the International Chamber of Commerce, the Singapore International Arbitration Centre, the Hong Kong International Arbitration Centre, as well as the Korean Commercial Arbitration Board, which has gained recognition as another option for arbitration by contracting parties.
Arbitration is invoked in lieu of other dispute resolution methods (e.g., litigation) when the parties have expressly or impliedly agreed to an arbitration clause. In certain situations, the arbitration may require resolution under local arbitration laws pursuant to the governing law of a contract. In Korea, if the parties have agreed to or in the absence of any applicable governing law, then cases may be subject to the Korean Arbitration Act or the Korean Act on Private International Law.
Korea is a party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). Thus, an arbitral award duly delivered by the KCAB shall be recognised and enforced in other countries that are party to the New York Convention, and foreign arbitral awards rendered in other countries that are parties to the New York Convention will be recognised and enforceable in Korea. Korean courts may also recognise arbitral awards rendered in foreign countries that are not party to the New York Convention by applying standards similar to those used to determine the enforceability of foreign judgments in Korea.
Mediation by the FSS
The FSS mediation for disputes is available to consumers who seek remedies and damages against financial institutions (e.g., insurers, banks, securities firms and asset management companies) that are subject to supervision by the FSC and the FSS.
Procedurally, consumers may request a mediation order from the FDMC on their challenges to the validity and effect of certain financial products. The FDMC will then usually request an insurer to submit a report on the position of the insurer relating to the dispute, relevant documents, and secure statements and testimony from the parties and material witnesses. After reviewing the case, the FDMC may issue a mediation order and request that the parties accept the recommendations under the order. The parties may accept the mediation order that would have the same effect as a judgment of a court of law. However, if either party rejects the mediation order, the dispute may proceed to court if a party seeks to resolve the dispute through a more legal and formal venue. If at any point, either party submits a complaint to the court with respect to the subject dispute, the FDMC mediation procedure will be terminated.
The number of insurance-related disputes in mediation at the FSS exceeded 20,000 in 2015, and by 2017 the total number of mediations neared 23,000.
III RECENT CASES
There were three significant claims dispute cases that were heard by the Supreme Court over the past year and half arising out of conflicting policy interpretations and disputes on causal links between accidents and losses. The cases demonstrate a theme that the Supreme Court will give regard to all circumstances of an insurance disputes case, in order to arrive at a definitive ruling and to ensure a conclusive outcome. The cases also demonstrated the willingness of the Supreme Court to acknowledge and consider all implied terms and circumstantial and indirect evidence to reach a ruling.
i Indirect evidence to prove the requisite causal link
The Supreme Court's judgment in the 2015Du3867 case warns Korean courts from disengaging from a full inquiry into an industrial accident or worker's compensation claim on grounds that there is no clear scientific consensus on the causes of the resulting illness or condition alleged.
The case involved an industrial accident compensation claim made by a former employee against Samsung Electronics alleging that he developed a 'demyelinating condition' from his time working at the liquid-crystal display factory of Samsung Electronics in Korea. Specifically, he claimed illnesses arising from a demyelinating condition, which is a rare condition causing damage to the protective sheath surrounding the nerve fibres, occurring at a rate of 3.5 per 100,000 people in Korea. In the absence of clear scientific understanding of the physiological causes behind his condition, the claimant could not directly establish that it was the working conditions at the Samsung Electronics factory that led to his development of the condition and his subsequent illness. The worker failed to establish the causal link at first instance at the Seoul High Court; the case was appealed.
The Supreme Court remanded the case to the lower court, stating it had failed to give sufficient regard to the indirect evidence that may have proven the requisite causal link. The opinion directed that in the absence of direct evidence, a court should nonetheless have considered indirect evidence such as the rate of occurrence in the worker's peer group against a control group. Further, the Court also suggested that where the employer has created challenges for the investigation and assessment of the causal link by way of its non-cooperation, that this would also be a factor weighing in favour of the claimant in itself.
ii Coverage by mutual agreement outside the general terms and conditions
Insurance policies often incorporate statutory policy wording pursuant to insurance laws and regulations, and standard terms and conditions for coverage. However, it is common that pre-execution discussions that indicate that there were mutual understandings between insurer and policyholder were contrary to or supplementary to the strict wording of the incorporated statutory provisions and standard terms stated to govern the insurance contract. The Supreme Court judgment in 2015Da245145 demonstrates the willingness of the Korean courts to give effect to the pre-execution discussions and imply terms of the contract, although the express wording of the statutory provisions or the standard terms may not provide for the implied term.
In this case, the claim arose under a third-party liability insurance policy with respect to the insured's forklift. The coverage was stated to be determined in accordance with the provisions of the Presidential Decree to the Guarantee of Automobile Accident Compensation Act of Korea. However, as the Decree did not provide coverage of forklifts, the insurer argued that the policy consequently did not provide coverage for claims related to forklifts.
The Supreme Court ruled that even though the incorporated Decree provisions strictly applied did not provide for coverage of liabilities arising from forklift accidents, the evidence of pre-execution circumstances and discussions made it undeniable that the insurer had sought to provide coverage for the forklift, applying the Decree as if it applied mutatis mutandis to forklifts as well. The Supreme Court also clarified that Article 4 of the Korean Act on the Regulation of Terms and Conditions applies to insurance contracts: 'if a business person and a customer agree on a matter in a manner that is different from the manner stipulated in the terms and conditions, the agreement shall prevail over such terms and conditions.'
iii Determining the beneficiaries of an insurance policy in spite of uncertain terms
Cases 2015Da236820 and 236837 of the Supreme Court involved a personal lines accident insurance policy that designated 'legally entitled inheritors' of the insured's assets as the beneficiaries of the insurance policy. The plaintiff was the spouse of the deceased insured and one of the three 'legally entitled inheritors' of the deceased insured's assets.
At the District Court in the first instance, the plaintiff made its insurance claim and was awarded the full sum of the claim without any prorating under the policy despite being only one of three 'legally entitled inheritors'.
The trial at the District Court and the subsequent appeal to the Supreme Court involved disputes on a number of issues; but notably, the Supreme Court remanded the case – ruling that the lower court had erred in ordering the payment of the full sum of the insurance proceeds to the plaintiff, which was total claim amount; rather, the lower court should have ordered only a portion of the insurance proceeds based on the plaintiff's share as stipulated in the insurance policy relating to the deceased's inheritance.
A major cause for confusion and dispute in insurance claims practice arises from the unclear wording in designating the beneficiaries and the entitlement of each beneficiary under an insurance contract. However, the Supreme Court decision directs the Korean courts to give regard to all surrounding circumstances and applicable laws, (e.g., inheritance laws) where they may be referred to in order for the court to discern the beneficiaries and the entitlement of each beneficiary.
iv The international arena
Conflict of laws: availability of third-party direct action
Under Korean law, an injured third party has a right to bring direct action against the insurer who has issued a liability insurance policy to its policyholder. A conflict of laws issue arises where an injured third party seeks to enforce its right to direct action against the insurer under Korean law, where the governing law of the insurance policy does not provide for such right to direct action and to bring insurance claims.
Case 2015Da42599 of the Supreme Court involved a marine cargo liability insurance contract and an injured third party seeking to bring a direct action claim against a Korean insurer. The insurance policy expressly provided that disputes under the insurance contract were governed by English law, which does not provide for a right of direct action by an injured third party.
The Supreme Court ruled that the right to direct action ultimately has its basis in the insurance contract and that the insurance contract and the governing law of the insurance contract are most closely connected with the question of whether a third party has a right to direct action. It accordingly ruled the governing law of the insurance contract shall govern the question of whether the third party that was injured has a right to direct action against the insured, over the statutory right to direct action under Korean laws.
IV TRENDS AND OUTLOOK
i Industry-wide dispute on immediate annuity products
The leading life insurers in Korea now face ongoing media pressure, litigation and potential litigation and regulatory implications regarding a dispute pertaining to the solicitation and sale of immediate annuity products as the FSS and their respective policyholders allege that policyholders were short-changed in their annuity payments. The FSS had begun its regulatory review and action in late 2017, resulting in a non-binding order to Samsung Life Insurance Co Ltd that it owes and must pay additional amounts to the policyholders of its immediate annuity product. Recently, the FSS made a further non-binding order to all insurers to pay their respective policyholders for the alleged shortfall. In a rare case of collective standoff against the financial regulator, no insurer has complied with the orders to date (September 2018).
The dispute on the immediate annuities is likely to be the headlining legal case for the life insurance industry of Korea in 2018 and the next four to five years. The potential claims facing the largest player add up to approximately US$430 million; other life insurers are also facing potential claims of significant amounts.
Recently, Samsung Life submitted a request for resolution to the Seoul Central District Court for confirmation that it does not have any liabilities as demanded by its annuity holders and argued by the FSS.
ii Cyber-insurance claims for hacking of cryptocurrency exchanges
Over the course of 2017 and 2018, Korea has been one of the leading jurisdictions for cryptocurrency exchanges and arbitrage, with the country being responsible for over one-third of Bitcoin trades last year. Korea does not have any explicitly applicable cryptocurrency regulations, nor has the tax authority defined it for tax purposes, which has fostered the growth of the large volume of trading with higher prices leading to what is known as the 'kimchi premium'.
However, the cryptocurrency exchanges have vulnerabilities in their security systems and have been the target of a number of hackings in Korea including Bithumb and YouBit. Cryptocurrency exchanges have faced challenges in establishing their right to claims proceeds as they find difficulties in establishing that they have satisfied conditions precedent to the insurance that proper security measures have been implemented to protect again data breaches, security threats and hackings. In addition, claimants have had issues with confirming the dates of accident given the lack of evidence, which is 'wiped out' during hackings, resulting in insurance claims being denied. Recently, a cryptocurrency exchange operator submitted an insurance claim under a cybersecurity insurance policy for insurance proceeds for losses it suffered resulting from a hacking leading to the theft of cryptocurrency, only to have it denied based on the policyholder having failed to implement such security measures and systems. More importantly, the cybersecurity insurance policies that have been offered do not cover 'theft of cryptocurrency' but for loss or leakage of personal and financial information. As cryptocurrencies continue to be traded in Korea and cybersecurity threats remain, ongoing claims disputes may also arise for insurers and their policyholders. In response, other insurers from Lloyd's of London and Hanwha General Insurance have developed new and customised insurance policies designed to protect against hacking for cryptocurrency exchanges and the financial losses resulting from the theft of cryptocurrencies.
1 Jin-Hong Kwon is co-head of the insurance and reinsurance practice group, John JungKyum Kim is co-head of the insurance and reinsurance practice group, international part, and Jae-Hwan Kim and Yang-Ho Yoon are partners at Lee & Ko.