In the Republic of Korea, the insurance industry has been ‘soft’ over the course of the past year. Economic growth from the end of 2018 to the end of 2019 has been forecast at around 2.1 per cent, with this rate varying according to different publications; and while the economy remains stable, with a relatively high insurance penetration rate of approximately 13 per cent, insurers continue to experience unexpected losses, market saturation, under-performance and regulatory compliance issues. It is expected therefore that gross written premiums and overall income will decrease for the Korean life and non-life insurance market this year. However, Korea still remains active as the seventh-largest insurance market in the world, with 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 coverage areas that are known as the ‘third area of insurance business’ in Korea. Currently, there are 24 life insurers and 30 non-life insurers that are admitted to conduct the business of insurance in Korea; the licences for three of these – Allianz Global Corporate & Specialty, Asia Capital Re and Pacific Life Re – were issued by the Korean regulatory authorities in 2016. Foreign insurers as non-admitted insurers also engage in insuring local risks in Korea through the non-admitted market and through ‘fronting arrangements’.
Over the course of the past year, insurance market participants and consumers have continued to engage in contentious matters in Korea, including insurance coverage and claims disputes, claims regarding mis-selling of insurance products, reinsurance recovery actions and compliance issues with the Korean regulators involving data protection and privacy law arising from data breaches. There was one case that the Korean Supreme Court heard in the current year involving the strict application of an insurer’s duty to explain key important terms of an insurance policy, and two other cases related to the method of calculating insurance proceeds. There was also a notable decision by the Seoul Central District Court dealing with coverage under a cyber insurance policy (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 supervised in a two-tier system for all insurance and insurance services companies, including insurers, reinsurers, producers, brokers and agents, by the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). The missions of the FSC and the FSS are to promote and ensure (1) maintenance of the stability of the financial services markets, (2) mechanisms for the financial strength and solvency of insurers, and (3) protection of consumers.
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 its subordinate regulations, decrees, guidelines, etc.
The FSS, as the ‘executive arm’ of the FSC, records the current status of insurance contracts and the financial condition of insurers, monitors business operations of insurers and sanctions insurers for non-compliance or 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, audits and supervises insurers and their employees, and also the solicitation activities of insurance producers, agents and brokers.
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.
There are some minor changes to the IBA noted in this chapter following amendments to the Enforcement Decree of the IBA in August 2018, which took effect in December 2018. In particular, the amendments extended 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.
The chapter of the KCC relevant 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. Provisions of the KCC relate to the conclusion or execution of insurance contracts and the validity of insurance contracts, including renewals, amendments, cancellation and termination.
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 the insurance contract, a risk has already occurred or cannot occur, resulting in there being no risk to insure under the insurance contract. However, this rule shall not apply if both parties to the insurance contract, including any insured, are unaware of these 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 violations 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 for violating 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 to be 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 Korean 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, that person may be subject to criminal punishment.
iii Fora and dispute resolution mechanisms
In Korea, insurance disputes are resolved by (1) civil litigation before a court of law (including mediation by the court), (2) arbitration, and (3) decision of the FSS Financial Disputes Mediation Committee (FDMC) under the Financial Consumer Protection Bureau.
Korean courts do not exclusively resolve insurance disputes, nor is there is a designated arbitral institution or procedures that exclusively deal with insurance disputes. Thus, insurance disputes must be resolved in the civil courts 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 Korea, along with the governing law.
The Korean judiciary is composed of three levels: (1) the district courts, (2) the high courts, and (3) the Supreme Court. A district court is the court of first instance involving a trial of the facts and the law. A high court is empowered to hear appeals by parties from the district courts; the high courts may review, on a de novo basis, both the facts and law applied at the district court. The Supreme Court is the highest court in Korea and hears 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 and second instances, and the decision of the Supreme Court in a dispute is final.
Generally, disputes in district courts are resolved within eight to 12 months, but proceedings 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 a high court. An appeal to the Supreme Court may run its course for two to three years until a decision 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 and as conducted by the court. Alternatively, a case may be referred to the mediation committee. Mediation decisions have the same legal effect as court judgments. In cases where parties are unable to arrive at 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, with 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.
In Korea, the insured’s rights are automatically assigned to the insurer upon payment of the insurance proceeds following a valid claim for damages or losses as provided for under an insurance contract. In other words, subrogation occurs by operation of law and does not require a contractual provision or separate contract in favour of the insurer of the subrogation rights. Thus, the insurer is assigned only those rights that the insured had against a third party and can only pursue actions against parties in its own name that could have been brought by the insured in the first place. Further, before any subrogation is pursued by the insurer, the rights arising under the operation of law do not require the insurer to first prove the liability of the third party; rather, liability will be disputed under the subrogation claim. This means that the insurer, at its discretion, will first pay the insured for any damage or losses incurred and then make a subrogation claim against the third party, and that claim will then proceed with a determination of the coverage and the quantum of damages.
The prima facie elements that give rise to a subrogation claim in favour of an insurer under an insurance contract arise when: (1) a third party exists; (2) the third party caused the insured accident, or loss or damage to an insured; (3) the insurer is contractually obligated to pay the insurance proceeds under an insurance contract; and (4) the insured has a valid claim against the third party.
III RECENT CASES
Several significant claims dispute cases were decided by the Supreme Court over the past year and half arising out of mis-selling by an insurer through breaching its duty to explain the key important provisions of the insurance contract, and the method of calculating insurance proceeds in different situations.
i Duty of an insurer to explain the key provisions of an insurance policy
The Supreme Court, in Case 2016Da277200, gave rise to a new precedent in the area of directors and officers liability insurance (D&O insurance), for which there is a dearth of case law or guidance in Korea, especially as D&O insurance is not widely purchased.
In this case, the claim by a commercial insured against its directors or officers arose under a D&O insurance policy in respect of loss sustained during the period of their wrongful act. The insurance policy defined the insured’s loss as including any legal costs incurred by the insured when bringing the claim against its directors and officers. A criminal claim was filed against the directors and officers of the insured for breaching Article 176 of the Financial Services and Capital Markets Act (FSCMA) for unfair trading activities. The insured brought a claim against its insurer to recover the attorneys’ fees incurred in bringing the claim against the directors and officers. The insurer denied payment of the insurance proceeds on the basis of a criminal-acts exclusion because of the alleged violation of the FSCMA.
The Supreme Court ruled that even if a criminal-acts exclusion exists, it shall not be incorporated as part of the insurance policy and have no legal effect if the insurer failed to explain it to the insured. Under Korean law, an insurer has an affirmative duty to explain the key important provisions of an insurance contract to a prospective policyholder or insured. Important provisions not explained by an insurer to a policyholder or insured shall not be incorporated as part of an insurance policy and will not be effective. In this case, the insured failed to explain the key important provisions to the prospective insured under the insurance policy, including the criminal-acts exclusion. Despite the fact that the insured is a large financial institution and had subscribed to the D&O insurance policy for a long time, the Supreme Court in this case strictly applied the Korean law and ordered the insurer to pay the insurance proceeds. This case demonstrates the Supreme Court’s position of strictly applying the duty to explain key important provisions of the insurance policy to strengthen customer protection, even in a commercial setting between sophisticated counterparties.
ii Calculating insurance proceeds for a victim’s death or bodily injury
In Case 2018Da248909, the defendant owned a car repair shop and the claimant was a customer. The claimant was injured while waiting for his car to be repaired at the defendant’s shop. In the process of repairs, the defendant removed a nut from an air hose and the claimant observing the repair process was struck by the nut, which was projected by the highly compressed air from the hose. The district court held that the defendant had a duty to ensure customers’ safety when carrying out repair work on his premises, and his failure to do so resulted in liability to compensate the claimant for personal injuries and related losses.
Under Korean law, insurance proceeds are determined by multiplying the claimant’s wages at the time of the accident and the number of days up until the maximum age at which the claimant is expected to be capable of working. The district court ruled that an ordinary worker in an urban area is deemed to be capable of working until the age of 60. However, following an appeal through the Supreme Court, it was ruled instead that an ordinary worker in an urban area is deemed to be capable of working until the age of 65.
This decision of the Supreme Court will increase the amount of insurance proceeds Korean insurers will have to pay in respect of death and bodily injury claims, which may also in turn increase insurance premiums. It is expected that the decision will also impact policy wording, underwriting, claims, loss ratios, etc.
iii Determining the amount of insurer’s liability in third party direct action claims
Supreme Court Case 2018Da300708 involved a direct action filed by a claimant against the automobile insurer of a reckless driver. The claimant brought the direct action claim for property damage against the driver’s liability insurer for the total loss of the claimant’s car. The driver’s insurer denied the claim on the basis that the subject wording in the insurance policy limited the insurer’s liability for compensation to merely the diminished value of the subject property ‘when the cost of repairing the car after the accident exceeds 20 per cent of the car’s purchase value prior to the accident’. In this case, the claimant’s repair costs did not exceed 20 per cent of the car’s value at the time of the accident. In the subject automobile insurance policy, various criteria and methodologies were included to provide for the calculation of insurance proceeds in addition to the foregoing limitation for compensation in liability claims.
In its ruling, the Supreme Court held that a direct action claim by a third-party claimant against a liability insurer is permitted pursuant to the KCC, and any calculation of the insurance proceeds for the direct action claim would be subject to the general laws of Korea and to the KCC. More clearly, the Supreme Court held that while criteria and methodologies for the calculation of insurance proceeds existed in the automobile insurance policy, the third-party direct action claim should be adjudicated without regard to these from the quantum perspective; however, the claim may still be subject to certain defences contained in the policy.
The Supreme Court ruled that the quantum of damages was to be calculated pursuant to general Korean laws and the KCC, and remanded the case back to the lower courts for a review of the damages to be paid by the insurer to the third-party claimant in the direct action. The importance of this case highlights the necessity of ensuring equitable and speedy claims handling and settlement for parties suffering property damage or personal injuries while adjudicating third-party claims in direct actions outside the insurance contract for the purposes of the calculation of damages and insurance proceeds.
iv Scope of coverage related to cyber insurance
Case 2018GaHap528105 in the Seoul Central District Court involved the scope of insurer liability under a cyber insurance policy. In this case, the claimant, a prominent cryptocurrency exchange in Korea, fell prey to a major cyberattack in December 2017, resulting in the theft of cryptocurrencies from its exchange wallets. The claimant was insured under a cyber insurance policy issued by a Korean insurer, which was reinsured by Korea’s largest reinsurer and a leading German reinsurer. The claimant filed a complaint against the insurer seeking payment of the insurance proceeds in the district court. The insurer denied the claim on the grounds that the insurance contract was validly terminated on 1 February 2018, when it delivered a termination notice to the claimant because of misrepresentations by the claimant during the underwriting of the cyber insurance policy. Specifically, the claimant misrepresented that it had proper security measures in place to protect against data breaches, security threats and hacking, which was a material condition precedent to the insurance contract to be issued by the insurer. Based on the evidentiary documents submitted by the insurer, the district court held that the insurance contract was validly cancelled ab initio on 1 February 2018 because of a breach of the condition precedent, and the insurer did not have any liability to pay the insurance proceeds.
This case was the first to provide the insurance industry with guidance on insurance coverage under cyber insurance policies by touching on such fundamentals as the legal character of cryptocurrencies as insurable property and the method of quantifying damages arising from cryptocurrency theft. It is expected to serve as a leading case for cyber insurance claims and in particular those involving cryptocurrency-related risks.
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 regulatory actions regarding disputes pertaining to the solicitation and sale of immediate annuity products as the FSS and the insurers’ respective policyholders allege that policyholders were not paid the expected annuity payments under the contract terms. The FSS regulatory review, which began in late 2017, resulted in a non-binding order against Samsung Life Insurance Co, Ltd declaring it liable to pay additional amounts to the annuity holders of its immediate annuity product.
The dispute was one of the main headlining legal cases for the life insurance industry in Korea last year and it is likely that the litigation and regulatory action will continue for the next few years. The potential claims facing the largest life insurer in Korea add up to approximately US$430 million; other life insurers are also facing potential claims of significant amounts for similar immediate annuity products that they sold to Korean customers.
In 2018, Samsung Life submitted a request for resolution to the Seoul Central District Court, seeking confirmation that it did not have the liabilities demanded of it by its annuity holders and argued by the FSS. First, the initial dispute involved the policy wording – as to whether deductions were provided for in the annuities. Second, disputes followed on whether terms such as the duty to explain were present, and whether this duty had been fulfilled by the life insurers. The first hearing was held at the Seoul Central District Court on 12 April 2019 with the main dispute concerning whether deductions were provided for in the policy. The life insurers continue to defend these cases in the courts, and this is expected to have a significant impact on their business in the event of adverse rulings.
ii Disputes over multiple-occurrence issues
Lithium batteries manufactured by LG Chem Ltd and installed in electronic cigarettes exploded while being used by customers in several locations in the United States. In total, more than 200 claims were filed against LG Chem and its liability insurer. There are disputes among insurers in Korea as to whether multiple claims such as these can be regarded as a single occurrence rather than as distinct separate and multiple occurrences for which there will be an equivalent number of payments made to the numerous claimants. To date, there are no precedents in Korea regarding numbers of background occurrences or whether multiple claims might be regarded as arising from the same event. The issue has not been presented to a court in Korea, but the issue of the number of occurrences for claims purposes is likely to be litigated with references to case law in other jurisdictions, such as the Larry Silverstein claims against the insurers for losses at the twin towers at the World Trade Center on 11 September 2001, and the decisions of the New York courts.
iii Global exposure for lithium battery explosion claims
In recent years, the utilisation of battery energy storage systems (BESSs) installed in factories as a means to save electricity costs have grown considerably. BESSs have largely been sold and maintained by Korean companies, including SK D&D, as business operators at project sites. Large lithium batteries from manufacturers such as Samsung SDI and LG Chem are purchased with loans secured by credit insurers, who install the BESSs without charge in factories in need of alternative energy sources. Property insurance is procured to cover the risks associated with the BESSs. A number of BESS explosions have been reported and it is expected that the business operators will lodge claims against the insurers. As with all product liability claims, coverage is dependent on identification of the source of any malfunction and any factors related to defects, irregularities, etc. leading to the explosions, as well as identifying who would be liable for these. It is expected that the insurance industry and the relevant insurers will face challenges in handling product liability claims involving BESSs. Moreover, the industry will have to be vigilant in monitoring and underwriting emerging technologies to be better prepared to address similar issues.
1 Jin-Hong Kwon is a partner, John JungKyum Kim is a senior foreign attorney and Jae-Hwan Kim and Yang-Ho Yoon are partners at Lee & Ko.