South Korea as a Civil Law Jurisdiction
As a preface to this article, South Korea is based on a civil law system and is not a common law jurisdiction. In the 20th century, the legal framework and aspects of South Korean law were developed by a number of West European countries, such as Germany, the civil spirit of which appears in relevant laws, such as the Commercial Act and the Insurance Business Act of South Korea. However, in recent times the South Korean legislature has looked to other countries for reference, such as the United States and other nearby countries such as Japan.
In the disputes setting as a civil law jurisdiction, the primary authority for the South Korean courts is the codified statutes and the legal framework; however, there is reliance on court precedents in reviewing disputes caused by litigation and in the absence of clear application of the law and/or any legal precedent in South Korea, the litigants will cite and argue precedents of other jurisdictions. These include Germany, as well as the United Kingdom and the United States, where there is deeper insurance law jurisprudence for guidance in the South Korean courts, which the judges will consider as relevant but not dispositive for the purposes of rendering its decisions.
Litigation of Insurance Claims in the Civil Courts
The most commonly used dispute resolution method in South Korea for insurance disputes is civil litigation in the judicial courts. Litigation is an adversarial process which is overseen by a single judge in cases involving amounts in dispute of up to KRW200 million, or by a panel of three judges comprised of a presiding judge and two associate judges for disputes involving amounts over KRW200 million. The litigation process is inquisitorial with active participation by the judge(s) who may inquire of the parties on issues of procedural matters and substantive facts, clarifications on legal arguments and defences, the value and appropriateness of evidence being put into the record, legal considerations such as apportionment of fault and contributory negligence, the rationale on the quantum of damages and so forth, as the court deems appropriate and necessary. Investigation into facts surrounding an insurance claim will be overseen by the court while damages may be reviewed, calculated and assessed by independent third parties but it is customary for the court to commission and oversee an appraisal process by the court itself. The foregoing aspects are found in the Civil Procedure Act of South Korea, which provides the rules, qualifications, requirements and formalities of litigation in the South Korean courts.
Arbitration of Insurance Disputes
Alternative dispute resolution has become more common, especially with parties invoking arbitration rights agreed to in their contract; and in many cases, it involves foreign counterparties where arbitration is administered by an arbitration institution in accordance with the respective international institutional rules being applied to the arbitration proceedings. There are also instances where no specific institution and its rules have been stipulated by the parties to an arbitration agreement, in which case, the arbitration will proceed on an ad hoc basis and may default to the local rules as stated in the Arbitration Act of South Korea. The use of arbitration has become more progressive and in some cases is preferred by the parties, including South Korean companies, due to:
Mediation of Consumer and Commercial Disputes
Insurance disputes may be subject to mediation as per contract terms or as administered by the South Korean courts. Lastly, insurance disputes involving consumers may be resolved through administrative proceedings by review by the Financial Supervisory Service, which acts as the “executive arm” of the Financial Services Commission, handling day-to-day oversight of the insurance industry.
The South Korean judiciary is based on a three-tier system comprising a district court in the first instance, a high court in the second instance, and the Supreme Court as the court of last resort.
Initiation of a Claim
Litigation commences with the filing of a complaint by the plaintiff to the district court which must be answered by the defendant, otherwise, the court may issue a default judgment against the defendant. The trial comprises submissions of briefs on procedure as well as the substantive merits of the claims and defences, a series of court hearings that occur every four to six weeks as scheduled by the court where parties may raise key issues, arguments, defences as well as matters involving the quantum of damages. Closing statements by way of a “presentation” may be made by the parties at the final hearing of the court proceeding.
There are no formal or evidentiary rules in statute; however, the judges hearing the case will review the admissibility and probative value, and make a final decision on whether the evidence as submitted will be considered in making a ruling on the dispute. Fact and expert witnesses may submit written statements but may also be called to and/or be subject to both direct examinations and cross-examinations to support or rebut any of the claims or defences being made by the litigants.
The Decision of a Court and Appellate Practice
A decision will be rendered by the court after deliberation and an appeal may be made to the high court within 14 days from the date of receipt of the judgment. The timeline for litigation in the court of first instance will vary based upon the issues and complexity of the facts and legal arguments being made by the parties and can range from approximately nine to 24 months, but of course can be extended in even more complicated disputes.
On appeal, the high court may hear the case again de novo meaning that the facts as well as the procedural and substantive arguments may be presented and heard without regard for the lower court’s review and ruling. The procedures are the same as with the district court, involving the submission of briefs, convening of hearings, and introduction of evidence with final closing statements, leading to a decision affirming or reversing the lower court’s decision. The decision of the high court may be challenged by either party by making a final appeal to the Supreme Court. Even where the case on appeal is reviewed de novo, the expected time from appeal to judgment generally ranges from six to 12 months.
At the Supreme Court, hearings are generally not convened by the court while written submissions are made for review by the court. The period of time for the Supreme Court to render its final decision can take from 12 to 24 months. Again, all timeline estimates are subject to shortened or lengthened periods pursuant to caseload with the court, the number of parties involved, issues raised along with the arguments and defences, and the complexity of the overall case at hand.
Limitations on Insurance Claims
The general statute of limitations for breach-of-contract cases is five years for most commercial contractual disputes, but ten years for ordinary contracts. However, insurance claims are subject to a limitation period of three years from the date on which the claimant had knowledge of the loss or damage (ie, the date of the loss). It is noted that the parties cannot agree by contract to waive a prescriptive period of the statute of limitations nor can it be relied on as a defence.
Alternative dispute resolution is becoming more prevalent in insurance disputes, especially when these involve foreign parties doing business with South Korean companies and South Korean companies engaged in offshore transactions. Consequently, parties now look to mediation as well as arbitration as alternative options to resolve disputes, while insurers and reinsurers more frequently negotiate and agree to arbitration agreements and clauses in their insurance, reinsurance and other related agreements due to the certainty of the rules to be applied to a dispute resolution method. Mediation by contract or through the administration of the court has also become more common, as the South Korean courts also recommend that contentious matters be resolved through alternative dispute resolution for efficiency, speed and cost.
Jurisdiction and governing law clauses in insurance, reinsurance and other related agreements are commonly used to fix not only the jurisdiction but also the venue and the choice of law.
South Korean courts will respect and enforce agreements as to where disputes under a contract are to be heard. However, exclusive jurisdiction clauses in foreign courts may still be reviewed for validity where the subject matter in controversy is unrelated to the jurisdiction. Similarly, an agreement that designates the choice of law will be enforced by the South Korean courts in accordance with Article 25 of the Conflict of Laws Act, which respects the agreement of parties to a contract to apply the law of South Korea as well as those of foreign jurisdictions. However, although the governing law as agreed by the parties is of a foreign jurisdiction, certain laws in Korea are mandatory and will trump the application of any governing law of a foreign jurisdiction per Article 7 of the Conflict of Laws Act.
Notwithstanding the foregoing, enquiries for consumer-facing arrangements may be made under the Standardised Contracts Regulation Act for fairness, reasonableness and appropriateness of the contractual provision, and review can also be made by the Korea Fair Trade Commission to determine if jurisdiction and choice-of-law clauses were freely and mutually agreed by the parties.
The courts in South Korea generally recognise, uphold and enforce foreign judgments. In doing so, a number of conditions will be reviewed by a South Korean court to ensure that the foreign judgment was arrived at pursuant to due process principles along with other fairness considerations, such as those set out below:
There are a number of aspects related to litigation in South Korea which must be acknowledged and considered by litigants, as many of these are unique to South Korea or uncommon or varied in other jurisdictions.
Court Costs and Good Faith Requirements
At the onset of a foreign party seeking to bring a claim against a local South Korean party, the claimant must pay stamp duty taxes and other court fees for the administration of litigation in the South Korean courts, which is paid to the clerk of the court. In addition to stamp tax, the plaintiff must also post security costs, if the defendant requests and the court is prepared to issue an order to effectuate such a request, as a type of bond to ensure that claims are made in good faith. This requirement highlights that South Korea is a quasi “loser pays” jurisdiction where the loser must pay a percentage of the prevailing party’s legal costs, to which the court may look to the security costs posted with the court and calculate the amount of attorney’s fees to be paid against the stated claim amount.
Procedural Aspects of Class Actions and Multiple Litigants
There is no procedural mechanism that is the equivalent of a class action with multiple litigants in the Civil Procedure Act. However, there are limited situations under specific bodies of law that provide for a collective style action, such as securities-related claims and health-related tobacco use claims. In such cases, there are “representatives” which act on behalf of the collective group of claimants but the rules are not substantiated to manage large numbers of litigants from the procedural perspective. One peculiar example of how the Civil Procedure Act is not well equipped to deal with insurance and reinsurance claims involves a large number of defendants, which requires the claimant to formally serve process and notify each and every defendant at its registered and/or legal address. In a reinsurance claim dispute that involves many participants (eg, a reinsurance pool or Lloyd’s syndicates, which could be numerous) requiring formal service of the notice of claim to each and every reinsurer at its registered business address or legal address, which can create extreme challenges to a plaintiff to properly bring all the defendants in the litigation case.
No Pre-trial Discovery Procedures
Unlike other jurisdictions and in particular, the United States, there is no pre-trial discovery procedure available under the Civil Procedure Act or other law. Rather, evidence is submitted directly to the court where the judges will make the determination on admissibility and its value. Litigants may make requests for certain information or documents, or even set out interrogatory-style questions for the other party; however, any such requests must be delivered to the court for review, to be followed by instructions to the adversarial party by way of a court order.
Annual Rotation of the Judges
As mentioned earlier, cases are heard either by a sole judge presiding over a case or by a judicial panel of three judges. In South Korea, regardless of the progress and the status of the litigation, in an effort to ensure fairness and neutrality in the review by the court, the judge(s) may be replaced in February of each year. As a result, a case that has been litigated for a period of time with a set of judges may be heard and decided by another set of judges as officially transitioned in to the matter during March after the rotation. The incoming judge(s) will continue the case in litigation relying on the record of all submissions, including the court’s notes into the case file to ensure continuity of the case being heard. Therefore, proper litigation strategy, timelines and objectives must be considered by a party with their legal counsel in litigation for disputes that are expected to run the course of one or more years until a decision is rendered by the court.
Arbitration provisions are valid and enforceable agreements and are typically enforced in the South Korean courts if they satisfy the general requirements within the Arbitration Act. However, enforcement is predicated on the clear intention of the parties to resolve disputes through arbitration as set out in the arbitration agreement. Even in the case of a “pathological” arbitration agreement or clause which, as interpreted, would disrupt the smooth and proper administration of arbitration to a dispute, a South Korean court has upheld such a “pathological” arbitration clause in order to uphold the intent and spirit of the parties to resolve any disputes under a commercial property insurance contract by arbitration, dismissing the case in the Seoul Central District Court for improper venue. Nevertheless, arbitration agreements should be clear and unequivocal as to the designation of the seat of arbitration, language of arbitration proceedings, arbitral institution (if any), and the manner in which the arbitral tribunal will be constituted, including the number, qualifications and expertise of the arbitrators. In the absence of such clarity, the parties may challenge, in part or in whole, the manner in which the arbitration will be administered, which can lead to the issue being resolved in the courts (eg, a South Korean court).
The courts in South Korea will enforce both a standalone arbitration agreement as well as arbitration clauses in commercial agreements, such as a reinsurance contract, broker agreement, claims administration agreement and so forth; the latter being more common than standalone agreements.
On 8 February 1973, South Korea became a contracting state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards also known as the “New York Convention” with membership effective from 9 May 1973. As a contracting state, South Korean courts will enforce arbitral awards of other foreign jurisdictions that are member states with reciprocal arrangements for arbitral awards that are rendered in South Korea. It is noted that South Korea has made it a priority to consider arbitral awards as being subject to the New York Convention to benefit from the reciprocal treatment by other contracting states. Under exceptional circumstances, arbitral awards rendered outside of South Korea in non-contracting states to the New York Convention may still be enforced in South Korea pursuant to the Arbitration Act of South Korea.
Arbitration as a form of dispute resolution in South Korea is not as prevalent in insurance disputes as compared to other jurisdictions, especially between insureds and insurers, where the preferred venue remains the civil courts of South Korea. This is also true for disputes between original insurers and foreign reinsurers even where the risk retained by the original insurer is much less than that which has been ceded to the reinsurer, given that the onshore risk in South Korea is on the original insurer’s paper.
However, as reinsurance and retrocession arrangements are more frequently arranged on a cross-border basis for the original insurance market in South Korea, arbitration agreements do exist in some reinsurance contracts, treaties, closing slips and related agreements where a foreign party (which in most cases is a reinsurer) seeks to resolve disputes through arbitration, with the arbitration proceedings being administered by a recognised international arbitration institution applying its international institutional rules. Historically such proceedings were administered by the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA), while in recent times this has shifted to the Singapore International Arbitration Centre (SIAC), Hong Kong International Arbitration Centre (HKIAC) and the Korean Commercial Arbitration Board (KCAB). The South Korean courts are fully equipped and experienced in handling insurance disputes; however, there are instances where the parties enter into an arbitration agreement for certainty purposes, such as, to fix the language of the proceedings, seek to form an arbitration panel of industry experts, and apply precedents of other jurisdictions which can be more easily interpreted and applied in arbitration as opposed to litigation in South Korea, which is a civil law jurisdiction.
A number of terms and conditions are implied by statute pursuant to the Commercial Act. Especially if the insured is a consumer, the terms and conditions implied by the Commercial Act cannot be changed or modified to the detriment of the insured by an insurance contract. The Financial Consumer Protection Act and the Standardised Contracts Regulation Act are also important sources of insurance law that impose various obligations on the insurer for fairness in the execution and application of the contractual terms and conditions of an insurance contract.
Acceptance or Rejection of Risk
An insurer must decide to accept or reject the risk within 30 days from receipt of an application made by a potential policyholder, with full or partial payment of the insurance premium, otherwise, the risk will be deemed to have been accepted and the insurance contract will be binding on both the insurer and the potential policyholder in the absence of a written refusal.
Payment of Insurance Premiums
At the inception of the insurance contract, the insurance premium must be paid in accordance with the payment terms as set out in the insurance contract and without delay; however, if the policyholder fails to make the premium payment and it remains unpaid beyond two months from the policy inception date, then the insurance contract will be cancelled by operation of the law at the election of the insurer.
Duty to Disclose
As in other jurisdictions, the applicant to an insurance contract is bound by a duty to disclose all facts and circumstances that are material to the underwriting of the insurance risk. In the event that the insurer discovers any non-disclosure or misrepresentation, then the insurer will have the implied right to terminate the insurance contract up to 30 days from the date the insurer had knowledge of the same. Once the insurance contract is in force, the policyholder and/or the insured have a continuing duty to notify the insurer of any material changes to the risk as originally underwritten. Failure to do so may result in the termination of the insurance contract at the election of the insurer, within 30 days of discovering such material changes to the subject insured.
Duty to Explain
At the inception of the insurance contract, the insurer is obliged to explain important clauses in the insurance policy to the insured, such as insuring clauses, applicable exclusions, and termination provisions. Otherwise, such important clauses may not be incorporated in the insurance contract and will be unenforceable. Even where the insured is a company or an individual consumer, the same obligation is imposed on the insurer.
The rule of contra proferentem is widely applied by the South Korean courts in many litigation disputes against the insurer, when the policy wording in the insurance contract is ambiguous.
The “Good Faith” Principle in Insurance Contracts
The legal concept of “good faith” also applies to the performance of all duties and obligations arising under an insurance contract by the insurer and the policyholder/insured, pursuant to the Civil Act.
In accordance with the Commercial Act, certain insurance contracts are void ab initio.
An insurance contract will be invalidated if there is no “insurable risk”, which is fundamental to any insurance contract. Accordingly, if the insurance contract purportedly insures against a “risk” which will never materialise as a fortuitous event in the future, then the insurance contract will be nullified and will not be enforceable by any party. Furthermore, if an insured loss has occurred prior to the commencement date of the insurance contract, the insurance contract will be invalid as to that loss. Since the above law is applied on a mandatory basis, a “lost or not lost” clause related to “insurable interests” in the insurance contract that is contrary to the above law, will be invalid.
In recent years, a number of large claims due to fires, explosions, natural disasters, product recalls and other serious accidents have led to a number of issues which continue to be negotiated or are in formal dispute procedures. A list of such trending issues, including those that commonly arise but have been particularly prevalent in recent times are:
A number of high-profile claims involving a variety of the issues above are being handled by insurers and reinsurers, including their defence counsel, which will likely lead to meaningful court precedents in South Korea.
As mentioned above, insurance coverage disputes will be dealt with by the insurer and the insureds as a starting point in the claim-handling process which often requires a coverage opinion to confirm coverage or the absence thereof. This is most often commissioned by the insurer but may also be sought by insureds or other interested parties. As explained in 1.1 Statutory and Procedural Regime, in the event of a dispute, civil litigation is the usual course of action except in cases where an arbitration agreement has been agreed by the parties. It is noted that a law firm or an attorney may issue a coverage opinion on behalf of the insurer and may also represent the insured, despite the inherent conflict between the insurer and the insured, and there is no ethical prohibition under South Korean law.
As for reinsurance contractual disputes, most cases are litigated in the South Korean courts. In recent times, there has been a tendency to include arbitration agreements and clauses in reinsurance contracts, treaties and slips involving foreign parties (ie, foreign non-admitted insurers and reinsurers), which is expected to lead to disputes being resolved through the administration of leading international arbitration institutions, such as previously described in 3.3 The Use of Arbitration for Insurance Dispute Resolution.
South Korea has built significant consumer protections into the law, including those for the sale of financial services and insurance products. Consumers may rely not only on the insurance contract when they believe they have a meritorious claim against an insurer – there are specific laws which provide other actionable grounds, such as under the Standardised Contracts Regulation Act, which speaks to the fairness and appropriateness of the standard insurance contracts and the recent Financial Consumer Protection Act, which is discussed further in 9.1 Developments Affecting Insurance Coverage and Insurance Litigation.
Individuals who have purchased personal lines insurance policies such as life insurance, automobile insurance, certain health insurance, etc, have the right to seek a remedy under the insurance contract in the civil courts of South Korea. However, they may also file grievances and claims directly to the Financial Supervisory Service for mediation, while insurers also have standing to bring claims against insureds, including by lodging complaints with the Korea Fair Trade Commission.
A third party has a statutory right of direct action against an insurer without making a claim against the insured, pursuant to the Commercial Act. However, the quantum of damages to be calculated in a direct action claim by a third party shall be made without regard to the insurance contract between the insurer and the insured. In other words, according to the Supreme Court of Korea, an insurer may still raise and avail itself of any defences against the third-party claimant that it may have had with respect to the insurance contract against the insured.
This third party right of action against insurers seeks fairness, speediness and convenience for those who have suffered property damage or personal injuries inflicted by insureds of the insurer. This will be a statutory and procedural tool for parties who have suffered damages or have personal injuries to take advantage of, which can also result in greater numbers of third-party direct action claims against insurers.
In South Korea, there is no concept of “bad faith”. Conversely, there is a concept of “good faith” as set out in the Civil Act of South Korea, which is undefined, but insureds and insurers are guided by the strict interpretation of the terms and conditions of the insurance contract. Article 658 of the Commercial Act provides that “(a)n insurer shall pay the insured amount to the insured or beneficiary, if there is an agreed period for such payment, within the agreed period, or if not, within ten days after determination of the insured amount payable without delay upon receipt of notification”. In any event, the remedy afforded to an insured is one that is based on a breach of contract which the insured may pursue against the insurer in a civil court of law in South Korea.
The late payment of claims by insurers is not subject to any penalties by statute or other grounds in law. However, statutory interest will be applied to claim payments that are not immediately paid by the insurer. An insurer will be subject to paying interest on a claim at 5% per annum for the number of days that the insurance claim remains unpaid from the date the claim was made to the insurer to the date that the claim was in fact paid. Thereafter, if the claim remains unpaid, the late payment interest rate increases to 12% from the date that a complaint made by an insured or a third party against the insurer is submitted to a court and duly served on the insurer to the date that it is paid in full.
In South Korea, the broker is generally appointed by an insured seeking insurance for its business and there is a duty of loyalty that is owed by the broker to the insured as its client. The representations in the insured-broker relationship will be governed by the subject broker agreement. In the event that the representations were false, mistaken, incorrect or inaccurate, it is uncommon for the insured to seek any remedy against the broker that was responsible for procuring the insurance on its behalf. Interestingly, in South Korea, the concept of errors and omissions in the insurance broker context is not prevalent and disputes between brokers and insureds are rare to non-existent.
In principle, claims handling is a “core function” that must be exercised solely by an insurer or reinsurer authorised to conduct the business of insurance by the Financial Services Commission pursuant to the Insurance Business Act and its subordinate regulations and shall not be delegated to a third party. Therefore, underwriting cannot be delegated to a third party but in the event that certain aspects or functions of underwriting are delegated, then the insurer or reinsurer must retain the final authority to make the decision to accept or reject the insurance risk.
In relation to claims handling, again, this is a “core function” of the insurer which it must conduct as part of its business under a licence; however, claims handling may be assigned to an attorney who is duly licensed in South Korea. Therefore, third-party claims handlers are prohibited from engaging in the handling of claims, as this will be in violation of the Insurance Business Act and the Attorney Act of Korea for the unlawful practice of law. However, certain functions of the handling and/or adjustment of claims may still be delegated only if the insurer or reinsurer makes the final decision to pay or deny, in full or in part, an insurance claim to an insured or third-party claimant. Lastly, insurers routinely commission the alleged loss adjusters to engage in the investigation, the cause of the accident and loss, as well as a review of the applicable insurance contract terms and conditions, such as breach of warranties, applicable exclusions and advice on the extent to which coverage exists or is excluded from the claim. A report is prepared and submitted with recommendations to the insurer but again, the final decision on an insurance claim will remain with the insurer itself.
The duty to defend in the insurance defence context arises under Article 720 of the Commercial Act, in accordance with the terms and conditions of the liability insurance policy which is triggered upon the delivery of a notice of a claim by an insured or a third-party claimant to the insurer. As legislated, the insurer has a duty to pay the costs of defence of the third-party claimant’s claim against the insured, including attorneys’ fees and applicable court costs, stamp taxes, security costs, and so forth. Since the liability insurer’s duty to defend is implied by the Commercial Act, if the insurer is negligent in its duty to defend, an insured will have a cause of action against the insurer for breach of contract. As in other jurisdictions, the issue related to a duty to defend an insured commonly arises in the context of property damage claims and personal injury claims.
The duty to defend in South Korea is well grounded in the Commercial Act and there are no legislative or regulatory efforts to alter the current concept as set out in the law. South Korean insurers will continue to shift and lower their claim handling and defence costs through higher deductibles, increased self-retention amounts, reducing limits of liability as well as narrowing policy wording for coverage terms and exclusions. Defence costs endorsements are also used in South Korean commercial insurance policies where, in the event there was no duty to defend, the insurer has the right to recover and receive reimbursement of defence costs previously tendered.
Against this backdrop, the insurance market will continue to evolve in terms of how insurers package and draft their insurance contracts, while insureds along with their risk managers will need to deal with risks not only from the insurance perspective, but also the financial cost perspective, and the legal ramifications in terms of coverage and claims.
There is no change in claims litigation costs, which are generally driven by the cost of attorneys, investigations, experts, appraisers, etc.
However, there has been an increasing number of disputes between insurers and reinsurers, which challenges the fundamental principle of “follow the fortunes” and which has also broadened the forum to cross-border disputes with foreign insurers and reinsurers with local insurers, as well as first-party and third-party claimants. Reinsurers continue to seek greater co-operation with original insurers when handling claims not only to ensure that insurance proceeds are paid in accordance with the terms and conditions of the original insurance contract, but also to achieve cost-containment objectives without resorting to formal disputes.
The concept of protection for defence costs, legal expenses, and similar costs is permitted in South Korea. A German insurer was previously licensed to sell “Legal Expense Insurance” for cover related not only to attorneys’ fees but also disbursements, court costs, witness fees, and adverse costs. However, the concept has not been widely accepted in South Korea.
In the event that an insurer pays insurance proceeds to the insured pursuant to a valid insurance claim, in accordance with the underlying insurance contract, the insurer’s right of action against third parties by way of subrogation arises automatically by operation of law in favour of the insurer, even without an assignment of such rights to the insurer. The insurer is not obliged to pay the insurance claim in full to avail itself of the foregoing subrogation rights against the third party.In the event that the claim is not paid in full by the insurer to the insured, then any rights that the insured has against the third party will prevail over the insurer’s subrogation rights against the third party.
The statutory subrogation right is codified in Article 682 of the Commercial Act as set out below:
"Article 682 (Subrogation by Insurer against Third Parties)
If any loss has occurred due to actions by a third party, an insurer which has paid the insured amount shall acquire, to the extent of the amount paid, the rights of the insured against such a third party; provided, however, that if the insurer has paid part of the insured amount, it may exercise such rights in so far as the rights of the insured are not prejudiced."
The impact of the COVID-19 global pandemic in relation to insurance litigation has not had a material impact on insurers, given that most commercial policies include a pandemic exclusion that unequivocally excludes coverage for losses related to pandemic situations and, in many cases, the policy wording expressly excludes the risks of pandemics as declared by the World Health Organization. Nevertheless, commercial stakeholders have urged the insurance industry and financial regulators to find ways to respond to losses directly resulting from pandemics. The financial regulators have also requested insurers to honour insurance claims that are related to COVID-19 to the fullest extent possible.
However, the Korean Insurance Research Institute (KIRI) has reported that there are ongoing discussions to add coverage for risks related to infectious diseases such as COVID-19 under business interruption policies. At the same time, there is criticism and scepticism that any such changes will be implemented due to competing commercial and legal interests which will also result in the inconsistency of insurance agreements on a global level. It was also noted by KIRI in its “Study on RISK Management of Business Interruption due to the Pandemic”, that business interruption cover amounts to approximately 1.32% of gross insurance premiums related to commercial risks and any change to the policy wording to the “Commercial Package Insurance Policy” which is the standard commercial property and liability policy in South Korea, will not be meaningful for the policyholders and insureds. The KIRI study has not disclosed any statistics which directly affect insurance litigation and coverage cases related to COVID-19, nor are there any court precedents of significance based on COVID-19 pandemic-related losses that are reportable.
As mentioned in 7.1 Type and Amount of Litigation, KIRI reported that the impact of COVID-19 on the insurance industry has been limited as of the end of the first half of 2020, remaining consistent throughout 2021.The absence of any negative impact was seen in the increase of premiums from 2020 to 2021 by 4.5% and 2.5% respectively for life insurers and non-life insurers leading to net profits of up to 228.3% and 91.5% for the two insurance types, according to the Financial Supervisory Service. According to interviews of insurance company CEOs in South Korea conducted by KIRI, the consensus was that face-to-face solicitation both in the personal lines and commercial lines context was reduced significantly during the COVID-19 pandemic; however, with brokers and agents taking advantage of alternative insurance distribution channels, including innovative insurance tools through InsureTech, websites, mobile applications, and other electronic and digital platforms – the insurance industry has generally withstood the potential negative impact of COVID-19 in the marketplace to cause serious issues to the overall written premium in South Korea. It is notable that while the net premiums for both life and non-life insurers decreased over the course of the pandemic, profitability has increased as of the end of 2020.
As the COVID-19 pandemic progressed after its onset in December 2019, the South Korean courts did hear disputes based on force majeure defences in the indemnity context; however, no novel arguments by litigants nor decisions by the South Korean courts were made, unlike in other jurisdictions. The Supreme Court of South Korea has defined force majeure as “an event that is beyond one’s control, which is unforeseeable or could not be prevented despite the complete exercise of reasonable measures” to prevent such an event occurring in the future. A party asserting force majeure must demonstrate that (i) the event was outside of the party’s control, and (ii) the party had exercised reasonable care and measure yet could not foresee nor prevent the occurrence of the event. In this vein, South Korean courts apply a strict standard for force majeure, given the draconian commercial and financial consequences to the party for which the defence is being asserted to avoid performance under a contract. As a result, there are currently no significant business interruption or other commercial claims worth reporting that relate to force majeure; however, the courts may see disputes with the ongoing waves of COVID-19 variants which have caused lockdowns in Seoul and throughout other regions of the country and which put even greater strain on a commercial sector that is already in dire straits. It is, however, noted that many manufacturing industries in South Korea have struggled to keep pace with output demands, including the leading semiconductor chip manufacturers, automobile parts suppliers along with others, which could lead to defences being raised based on force majeure.
In terms of personal lines insurance and in the case of a death due to having been infected by COVID-19, life insurance policies in South Korea will likely provide death benefits to the designated beneficiaries. However, certain accident insurance policies will not provide cover for injuries caused by COVID-19, as a court in Daegu Province of South Korea recently ruled that accidental death was not an “injury” caused by a “sudden” event, but was the result of a “disease”, leading to a denial of the insurance proceeds to the family of the deceased person.
Realisation of the Need for Pandemic Cover
The South Korean insurance market quickly responded to the COVID-19 pandemic probably as a result of a series of other pandemics in recent times, including the Severe Acute Respiratory Syndrome (SARS) in 2003 and the Middle East Respiratory Syndrome (MERS) in 2015, which has become a risk that the insurance industry continues to focus on in search of solutions. Existing insurance products have remained the same in scope, while certain insurance brokers in the marketplace, responding to client concerns, have considered new insurance offerings to augment coverage for the commercial risks related to pandemics by way of special endorsements to commercial policies for an additional premium. However, such proposals have been met with insurance industry opposition, commercial criticism as well as legal and regulatory obstacles.
The following are some examples of how the insurance market has responded to COVID-19-related risks.
Standalone COVID-19 insurance policies
The non-life insurance sector, especially driven by foreign insurers and reinsurers and brokers, has considered the introduction of standalone COVID-19 insurance policies given the exclusion of the pandemic from most commercial lines insurance contracts, including business interruption gap insurance. However, the Korean insurance market from the perspective of the policyholder has not responded, given the current pandemic situation. As the market continues to respond to COVID-19 issues and gaps, some insurers will soon offer travel insurance with pandemic coverage along with other policies for specific risks.
COVID-19 vaccination insurance
On a global scale, as governments rush to vaccinate their citizens with the COVID-19 vaccine, there continues to be resistance and fear on the part of the population in South Korea as to the vaccination's efficacy and risks. Insurers have developed vaccination cover for individuals, related to the administration of and potential side effects from the COVID-19 vaccine, but such cover is limited to extreme and remote contingencies such as anaphylactic shock, and will not cover side effects that are common and temporary in nature.
Pandemic repatriation insurance
Lastly, as South Korean multinational companies continue to deal with the COVID-19 pandemic, some insurers in South Korea have offered repatriation-related insurance for those businesses with expatriates in other countries with more serious COVID-19 situations, including more infections, lack of government management, shortage of vaccines and other considerations. The insurance cover provides insurance for health-focused services, travel costs and related expenses for the safe return of expatriates to South Korea.
South Korea and Climate Change
In line with the crisis that South Korea and most other countries around the world have experienced, discussions continue between the insurance industry, non-government organisations and the South Korean government itself on ways to address the increased frequency of disaster risks including worldwide pandemics, cyber-attacks as well as climate change, forcing insurers to be more aligned with the need and the demand to cover unforeseen risks and gaps in insurance.
Currently, South Korea is ranked within the top ten list of countries who are leaving a carbon footprint based on carbon dioxide emissions. In response to government mandates, Environmental Impairment Liability insurance has been compulsory for all applicable businesses since 1 July 2016. The cover extends to most pollution-related risks but has not been tested when it comes to commercial activities that may be tied to carbon emissions and the greenhouse effect, especially given the absence of conclusive scientific evidence and fault attributable to a particular insured. As on the global stage, the debate will continue as to “global warming” and it is expected that there will be eventual claims made against large companies who appear to be contributing to the negative turn of climate change especially in light of the “net zero” commitments South Korea has made to achieve global status by 2050 in accordance with the Framework Act on Low Carbon Green Growth.
ESG Response by South Korean Insurers
As part of South Korea's environmental and social governance agenda, also commonly referred to as ESG, insurers in South Korea have taken preliminary steps to address climate control issues from the boardroom to their underwriters for many years. Insurers who have actively participated in the United Nations “Environmental Programme Financial Initiatives" since the 1990s have supported the Carbon Disclosure Project on the voluntary disclosure of carbon emissions of business activities.
A number of insurers have in place or recently mobilised ESG committees and initiatives to address global warming, carbon emissions, water stress and other geographical erosion issues. Market participants, especially the leading reinsurers in South Korea, have also identified that climate change will impact virtually all industries, from utilities having to respond to abnormal weather temperatures and conditions requiring a greater supply of energy, to construction where delays in the delivery of equipment and materials cause project milestones to be missed, to agriculture where crops and animals are suffering as a result of extreme weather conditions, as well as manufacturing problems due to supply chain disruptions.
Moreover, many insurers and reinsurers, as financial institutions, have also implemented investment strategies towards ESG-focused investments. According to market reports, leading non-life insurers in South Korea have made business decisions to discontinue or limit their commercial coverage offerings involving coal-related projects. Automobile insurers have also responded to climate change concerns by offering discounts to those who drive less based on miles/kilometres, as well as those who have purchased electric vehicles.
Climate Change Impact on Litigation in the Insurance Market
South Korea has not experienced any insurance litigation based on climate change, such as claims against companies who have not addressed any climate change responses or allegations that a company in South Korea disregards any corporate or social responsibility with respect to their business operations. There have been movements, especially among the youth in South Korea, that have demanded the South Korean government take more aggressive measures to reduce carbon emissions for the future of the South Korean people and all citizens of the planet, including a group of young high school student activists who lodged a complaint against the government in a South Korean court stating that existing efforts are weak, while seeking implementation of even more aggressive and drastic measures to reach a carbon-free emissions status. As the discussions and debates continue on a global scale, the insurance industry will monitor climate change claims that emerge in other jurisdictions, including those where South Korea has commercial interests.
There does not appear to be any significant legislation from a regulatory or legislative perspective that will change insurance coverage, insurance litigation or claims in the commercial insurance sphere.
In terms of personal lines insurance, the Financial Consumer Protection Act of South Korea (FCPA) came into effect on 25 March 2021 with an enforcement moratorium through 25 September 2021. The new law will further enhance consumer protection in favour of customers purchasing financial services products, including insurance. The law as implemented fills gaps that previously left consumers without a remedy in the event of certain business practices in South Korea and brings under one general law the consumer protection regime for financial services in the FCPA. The provisions under the FCPA include stricter standards to be applied to consumer rights with respect to the following:
The FCPA now requires that insurers engage in the following measures as from 25 September 2021:
As a consequence, it is expected that there will be a greater number of consumer-based complaints and litigation, with claimants alleging violations of the FCPA.