Practical issues over insurance policy pledges

Long-term life insurance contracts can be pledged for financing for their cash value. At present, the policy pledge business is mainly undertaken by insurance companies or through bank-insurance co-operation, but the rules on pledging are scattered over a limited number of legal and regulatory provisions.

In this article, the authors analyse practical issues over policy pledges to help financial institutions effectively set policy pledges and realise pledge rights.

Property insurance

Traditionally, policy pledges have been limited to life insurance policies that can generate cash value. However, in recent years, there has been some pledging of property insurance policies such as the emergence of agricultural insurance policy pledges in many places.

The object of a policy pledge is the right to claim the return of cash value, but property insurance differs, as often a one-year short-term insurance with no cash value and the policyholder’s right to claim the return of cash value. If the object of a property insurance policy pledge is understood as claiming insurance interest upon occurrence of an insurance accident, such a claim cannot become the subject of a pledge because of its great uncertainty.

Therefore, it appears that a property insurance policy pledge is not feasible in principle. But it does not exclude the possibility that a few property insurance policies capable of generating cash value can be used for pledges.

Publicity

The Civil Code has no provision and there is no definite conclusion in practice concerning the publicity of policy pledges. From limited judicial cases retrieved, some courts appear inclined to endorse that the policy should be used as a certificate of right and be pledged upon delivery of the policy. But other courts are silent on this.

Relevant case examples include Zhang Tiecheng v Foshan Central Branch of China Life Insurance, Jincheng Central Branch of China Pacific Life Insurance v Wang Jianguo and Wang Jiahe, and Laiwu Branch of China Life Insurance v He Qingwen and Yang Guangxin.

From the regulatory perspective, the Measures for the Administration of Policy Pledge Loans of Life Insurance Companies (Draft for Comment) has chapter 4, titled Registration of Pledges, clarifying registration of policy pledges, which seems to reflect regulatory authorities’ current understanding on this issue, that is, pledge rights should be established by way of registration.

The authors understand that the publicity method of policy pledges depends on whether the policy is a rights certificate. By its nature, the policy is part of the insurance contract and written evidence of the rights and obligations between the policyholder and insurance company, rather than a rights certificate. Therefore, the publicity of policy pledge should be completed through registration on a publicly accessible system.

In the past, delivering the policy and registering the pledge in the insurance company’s internal system was more of a compromise under unclear legal provisions. The above-mentioned measures’ proposal that registration should be in the policy pledge registration platform is a desirable solution. But the registration platform should be unified to reduce the burden of inquiries, and this may also be an issue the regulator needs to consider during formulation of the measures.

Consent validity

In case the insured and policyholder are not the same person, the consent and co-operation of the insured may be required for the policy pledge.

Common situations are:

1. 1. Written consent of the insured is required for a policy pledge where the payment of insurance interest is conditional on the insured’s death; and
   2. Consent of the insured is required for changing the first beneficiary to the lender of the insurance. Article 34 of the Insurance Law does not clarify the validity of the policy pledge without the insured’s consent, where the insurance interest payment is conditional on the insured’s death.

From limited judicial cases, courts tend to deny the validity of this kind of policy pledge, as in the cases of Zhang Zhonghui v Chongqing Branch of New China Life Insurance, and Ji Baige v Jiang Meng.

Article 34.2 of the Insurance Law provides that: “The insurance policy issued under the contract where the payment of insurance interests is conditioned on the death of the insured shall not be transferred or pledged without the written consent of the insured”, aiming to protect the life of the insured and prevent moral hazard.

The purpose of article 34.2 seems the same as that of article 34.1 of the Insurance Law. Therefore, the above-mentioned kind of policy pledge should be determined invalid. Similarly, if the first beneficiary of the insurance is changed to the lender without the insured’s consent, the change should also be considered invalid.

The legal relationships of a pledge and insurance are intertwined in a policy pledge. In addition to considering whether the property can be pledged, and how the pledge is to be created, the impact of the insurance legal relationship on the pledge also needs to be taken into account.

For example, the pledge of a policy where the payment of insurance interests is conditional on the insured’s death requires the consent of the insured, and is therefore subject to more complex rules than the general property pledge.

For now, the legal provisions of policy pledges are relatively insufficient, and where the law is unclear more reliance is placed on prevailing practice. However, financial institutions are often required to assume a higher duty of care due to their professionalism, so should be more cautious when accepting policy pledges.

Yao Xiaomin is a partner and Cai Min is an associate at Lantai Partners