The Insurance Disputes Law Review: South Korea
In the Republic of Korea, the covid-19-induced economic recession has hit the Korean insurance market hard in the first quarter of 2020. Insurers have reported 26 per cent revenue loss from the pandemic, and surrender value has increased by 7 per cent compared to the same period in the previous year. A surge in household debt and living expenses contributed to the increase in early termination of insurance policies. However, the general insurance sector is forecast to recover in the second quarter. The automobile insurance sector is improving significantly, as the loss ratio plunged because of lockdown restrictions and the resultant decline in fraudulent claims. Although the pandemic outbreak may have had a limited impact on non-life insurers, challenges still remain for life insurers. It is expected that gross written premiums and overall income will decrease for the Korean life insurance market this year because of the ongoing covid-19 outbreak.
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 31 non-life insurers admitted to conduct the business of insurance in Korea; the licence for digital non-life insurer Carrot General Insurance was issued by the Korean regulatory authorities in 2019.
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. Recently, the Korean Supreme Court expanded the scope of coverage under casualty insurance by recognising an unborn child as an insured, and broadened its interpretation of group insurance policy, thereby moving towards protecting the insured and his or her heir in the event that the designation of beneficiary is deemed to be invalid. There were also notable cases dealing with directors and officers liability insurance policies (D&O insurance). These cases gave rise to new precedents in the area of 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.
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 minor changes to the Insurance Business Supervision Enforcement Rules following amendments to the Supervisory Regulations of the IBA in April 2020. The Supervisory Regulations permitted coinsurance in preparation for the implementation of the new accounting and solvency rules, International Financial Reporting Standard 17 (known as IFRS 17), and the new Korean Insurance Capital Standard (K-ICS). Coinsurance seeks to aid primary insurance companies in improving financial soundness as they are enabled to cede risks associated with insurance products to reinsurers. The revised Enforcement Rules prescribed detailed guidelines pertaining to the introduction of coinsurance into the Korean insurance market. They set criteria for risk-based capital calculation and liability adequacy testing of coinsurance contracts, while implementing evaluation standards for insurance risk transfer and the reporting format of coinsurance contracts.
The new legislation on consumer protection also has been promulgated. The Financial Consumer Protection Act, effective from 25 March 2021, is part of the government's measures to ensure consumer rights in the financial sector. Through this legislation, the FSC aims to strengthen regulations and penalties for violations by financial institutions, with insurance companies being no exception. One of the key aspects included in this Act is the consumer's right to terminate an unfair agreement if there is a violation of any of the six sales principles, namely the principles of suitability, adequacy, duty to explain, prohibition of unfair practices, prohibition of undue recommendation, and prohibition of false or exaggerated advertising. The burden of proof also lies with the financial institutions when liability issues arise.
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 duplicative insurance.
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 insurer, 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 which the policyholder has subsequently 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.
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.
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 the same applies to foreign arbitral awards rendered in other countries that are party to the New York Convention. 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 26,000 in 2018, and by 2019 the total number of mediation proceedings surpassed 27,000.
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 regardless of the execution of an assignment agreement. 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. 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.
Several significant claims dispute cases were decided in Korea over the past year and half in respect of D&O insurance policies, group life insurance, and cyber insurance.
i Requirements to claim for insurance proceeds under D&O insurance and the duty of an insurer to explain key provisions of D&O insurance
In Supreme Court Case 2016Da277200, decided on 17 January 2020, the D&O insurance provided that 'in respect of the claim first made against the insured during the policy period that arose out of wrongful acts of the insured's directors and officers, the insurer shall compensate the insured loss incurred by reimbursing the loss of the directors and officers due to this wrongful act; provided that the compensation shall be limited to cases where the insured compensates pursuant to law, mandatory regulations, contracts or provisions stipulating the directors' and officers' rights to compensation'.
The Supreme Court ruled that the concept of the aforementioned 'claim' shall include criminal prosecution as well as a civil claim for damages even if there is no explicit definition regarding the claim, and rejected the insurer's claim that the foregoing grounds for compensation only refer to cases in which the insured has a specific provision in its articles of association or any contract between the insured and its directors and officers. The Supreme Court therefore broadly interpreted the foregoing grounds to include general legal theory, case law or legal provisions, so that any compensation made by the insured to its directors and officers on grounds thereof would be also covered by the D&O insurance.
This case is noteworthy in that it demonstrates the Supreme Court's position of strictly applying the duty to explain key provisions of the insurance policy to strengthen customer protection. It is quite common for D&O insurance to contain provisions that the insured shall not be able to make insurance claims if the insured violates its obligation to notify the insurer, or that defence costs shall be compensated only with the insurer's prior written notice. However, since these provisions are unfavourable to the insured compared to the relevant provisions under the KCC, the Supreme Court in this case further ruled that such provisions shall only be incorporated into an insurance policy if the insurer fulfils its duty to explain key provisions of the insurance policy to a policyholder or an insured.
Overall, this is a notable case as it sets a precedent that comprehensively resolves issues that have been frequently raised in the field of D&O insurance in Korea.
ii Designation of beneficiary under group life insurance
When an employer enters into a life insurance policy on behalf of a group of employees, the employer often designates itself as a beneficiary of the group insurance. To protect the insured and his or her heirs from this kind of practice, Article 735-3(3) of the KCC stipulates that 'where the policyholder intends to designate a person who is neither the insured nor his or her heir as the beneficiary of the group insurance policy, a written consent from the insured shall be obtained unless expressly provided in the rules of the group'.
In its ruling of Case 2017Da215728 on 6 February 2020, the Supreme Court held that the terms and conditions of the group insurance policy, which states that 'the employer or the insured may be designated as a beneficiary of the insurance policy' shall not be seen as 'having been expressly provided in the rules of the group', thereby strictly interpreting the requirements for the beneficiary designation. Since it would be disadvantageous to the insured if the entire group insurance policy were invalid in the absence of written consent from the insured, the Supreme Court only invalidated the part of the group insurance policy designating the employer as a beneficiary, and the insured's heir was deemed a beneficiary in the event that the insured were to die before a beneficiary had been duly designated. This case resolves some of the ongoing contentious issues concerning group insurance that have been causing problems in the insurance practice.
iii Determining the amount of insurer's liability in third party direct action claims
In Supreme Court Case 2018Da300708, in which a judgment was rendered on 11 April 2019, the claimant brought a direct action to 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. Although there is no doubt that this ruling allows for equitable and speedy claims handling and settlement for parties suffering property damage or personal injuries, there are rising concerns among insurers that there may be an increase in the amount of insurance proceeds they will have to pay out in respect of third party property damage or bodily injury claims as a result.
iv Scope of coverage related to cyber insurance
The claimant in Case 2018GaHap528105 filed a complaint against the insurer seeking payment of the insurance proceeds under a cyber insurance policy 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. 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. On 23 April 2020, in appeal Case 2019Na2024412, the Seoul High Court affirmed the original judgment rendered by the district court.
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.
Trends and outlook
i Disputes over coverage in cancer spread cases
The FDMC decided that an insured under a cancer insurance policy who had first caught thyroid cancer and then lymphoma was entitled to receive insurance proceeds for a 'small-amount cancer' and a 'general cancer'. In recent years, many cancer insurance policies offered by insurers in Korea categorise cancer into different groups such as a 'small-amount cancer', a 'large-amount cancer' or a 'general cancer', whereby a relatively small amount of insurance proceeds is offered for a small-amount cancer, a larger amount of insurance proceeds is offered for a large-amount cancer and the insurance proceeds offered for a general cancer fall in between these amounts.
In the case at hand, the insurer argued that the insurance policy expressly stated that an insured would only be entitled to receive insurance proceeds for a primary cancer if an insured was diagnosed with both a primary cancer and a secondary cancer that was due to the spread of cancer from the primary cancer site, and the insured should only receive insurance proceeds for a small-amount claim accordingly. However, in the cancer insurance policy at issue, thyroid cancer did not fall under the definition of cancer, although it is a cancer from a medical perspective. Therefore, thyroid cancer would be deemed a stand-alone cancer (which is separate from the definition of cancer under the insurance policy) and an insured would be able to claim for insurance proceeds either on grounds of 'cancer diagnosis' or 'thyroid cancer diagnosis'. In this regard, the FSS held that the thyroid cancer could not be classified as a primary cancer and the insured should be granted insurance proceeds for the thyroid cancer (i.e., a small-amount cancer) and the lymphoma (i.e., a general cancer).
The leading life insurers in Korea now face the risk of paying insurance proceeds twice if an insured has first caught thyroid cancer and then a secondary cancer due to the spread of cancer from the primary cancer site.
ii Rise of illegal advertisements on offshore insurance
The FSS recently issued a warning notice to financial customers to ensure that they watch out for illegal advertisements regarding offshore insurance policies increasingly uploaded on social network platforms, such as Facebook and YouTube. Only certain offshore insurance policies listed in the IBA can be taken out by Korean customers, and even in the case of these listed policies, offshore insurers are not permitted to solicit or enter into an insurance contract with Korean customers via insurance brokers in Korea. Soliciting or entering into an insurance contract with Korean customers can only be done via any of the available means of telecommunications. An offshore insurer wishing to advertise its insurance to Korean customers must report the details of the advertisement to the FSS in advance, but, to date, no reports have been made to the FSS in connection with the foregoing. Further, there are concerns within the FSS that such advertisements may mislead Korean customers to think that the offshore insurance will benefit from the protections that domestic insurance usually has under the IBA or from the customer protection measures offered by the FSS. In this regard, the FSS has taken measures to delete all these advertisements and is continuing to seek preventative measures and screen all offshore insurance sold via social network services.
iii Expansion of the scope of coverage of casualty insurance
Before 28 March 2019, when the Supreme Court rendered its judgment in case 2016Da211224, an unborn child under a casualty insurance policy (or unborn child insurance) did not qualify as an insured until he or she was born and any injury suffered by the unborn child was not covered as the policy period started from the birth of the unborn child. However, the Supreme Court recently held that an unborn child may also enjoy the benefits of casualty insurance, and a casualty insurance policy taken out by the mother of an unborn child in which the unborn child is the insured is valid based on the principle of freedom of contract. It further ruled that, under such casualty insurance, the unborn child will qualify as an insured before birth if the mother of the unborn child as the policyholder has paid insurance premiums from the execution date of the insurance policy (i.e., before the birth) and that the policy period commences from that time.
This case was the first to rule that an unborn child is qualified as an insured in the life insurance sector. It has changed the way in which casualty insurance policies and products (unborn child insurance) are structured, allowing an unborn child to be covered for disease or injury that he or she suffers before birth.