Is standard arbitration clause valid in insurance contracts?

By Phil Wang and Xia Xiaoping, Boss & Young

More insurance companies are choosing to use standard arbitration clauses in their insurance contracts, allowing their preferences for confidentiality to be satisfied and giving them more efficient control over the management and resolution of insurance claim disputes.

Phil Wang Boss & Young
Phil Wang
Boss & Young

Especially after the People’s Republic of China (PRC) Supreme People’s Court issued the Interpretation of the Application of the Civil Procedure Law of the PRC on 30 January 2015, this trend could also be seen as a response to this interpretation, which grants the assured the right to select the people’s court at the place of their domicile as the competent court for personal insurance cases.

In practice, the standard arbitration clause is sometimes deemed to be an exempting clause before the court, so the insurance company is requested to remind and expressly explain the clause under the insurance law for its validity. However, such a court decision is incorrect because arbitration, as an effective and legal alternative dispute resolution other than litigation, only changes the procedure instead of any liability distribution among the parties, and does not aim to exempt insurance companies from liability in the insurance contract.

According to section 9 of the Interpretations of the Supreme People’s Court on Certain Issues Concerning the Application of the Insurance Law of the PRC (II), the exempting clauses refer to “the liability exemption clauses, deductibles, excess, proportion of claims or payment, and other clauses exempting or reducing the liability of the insurer as set out in the standard form of contract as provided by the insurer”. So the standard arbitration clause does not require reminding the insurance consumer in an appropriate manner to pay attention to the clause, or an express explanation for exempting clauses in the insurance law, due to its character of non-exemption of liability.

Xiaoping Xia Boss Young
Xiaoping Xia
Boss & Young

However, for the purpose of consumer protection, section 31 of the interpretation states that if the insurance company uses the standard arbitration clause without reminding the insurance consumer in an appropriate manner to pay attention to the clause, such clause will become null and void. Therefore, when facing insurance consumers who lack any professional knowledge and have a poor bargaining position, the insurance company must bear the obligation of reminding under the insurance law.

Pursuant to section 26.1 of the Law of the PRC on the Protection of Consumer Rights and Interests, a business operator must remind the consumer to pay attention to the standard terms in respect of the “contents in which the consumers have material interests”, otherwise the consumers have a right to claim the nullification of the contents and the claim must be supported by the people’s court. Actually, section 31 of the interpretation is indeed a logical extension and explanation of this rule. In spite of the fact that the arbitration clause does not exempt an insurance company from liability, it may substantially increase the insurance consumers’ costs to claim their rights and so could be reasonably interpreted as “the contents in which the consumers have material interests”. In other words, only if the insurance company has reminded the insurance consumer to notice the standard arbitration clause will the insurance consumer be bound by it.

The concept of “insurance consumer” has not yet been defined by any laws or official documents, so its legal scope is still in dispute. Since “insurance consumer” is a subset of consumer, the dual criteria in identifying a consumer – i.e. the subject criterion and the purpose criterion – should apply. The policyholder has to be a natural person, while the purpose for purchasing insurance must be “for living consumption”. Most debate concentrates on the identification of the purpose criterion. Some types of insurance, such as vehicle insurance, health insurance and accident insurance, can easily meet the purpose criterion, as these kinds of insurance serve for personal living and the policyholder does not purchase them for profit or commercial exchange.

However, no final conclusion has been reached on whether investment-linked insurance can be regarded as “for living consumption”. The answer to this question depends on the determination of the nature of the primary purpose of the policyholder who purchases the investment-linked insurance. In other words, it depends on whether it is a living consumption aiming at avoiding risks and improving emotional security, or actually a profit-making act focusing on the return of the investment. This issue remains to be determined through further interpretation by the Supreme People’s Court.

PHIL WANG and XIA XIAOPING are partners at Boss & Young in Shanghai.


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