Electric Vehicles Spark Issues in South Korean Insurance Law

By the end of June 2022, more than 25.2 million vehicles were registered in the Republic of Korea (“South Korea”). Of these, 298,000 (ie, 1.18%) were electric. Most electric vehicles (EVs) in South Korea are believed to be new cars that first hit the road no more than three years ago.

The South Korean automobile industry expects that 3.62 million EVs will be on the road in the country by 2030. Enamoured both by the distinctive designs and performance of EVs (in comparison with their traditional counterparts) and their relatively low fuel costs (in light of the surging oil prices), consumers are deciding to go electric.

But which is more economical ‒ driving an EV or driving a more traditional internal combustion engine vehicle (ICEV)? A comparison between the otherwise identical all-electric and hybrid Kia Niro cars currently on the market in South Korea reveals that the retail price of the former is USD8,600 more than its hybrid counterpart. However, if they both run 20,000 km per year for seven years and eight months or more, the total costs for the hybrid vehicle (including the fuel costs, insurance premiums and car taxes) begin to exceed those for the EV by more than the difference in their retail prices.

The battery pack is an essential component in an EV and accounts for 40% of the car price. The popularisation of EVs depends on lowering the price of battery packs. The South Korean government is actively seeking to introduce a battery subscription system in order to reduce the price burden on consumers. In a battery subscription programme, the lessor owns the batteries and the lessee owns the vehicles. When a consumer buys an EV, they pay the vehicle price minus the price of the battery pack, which will be paid in the form of a monthly rent.

The advent of the battery subscription may more than halve EV purchase prices and the average EV owner will pay roughly USD250 in monthly rent for the battery pack. The South Korean government is currently preparing for statutory and regulatory amendments in order to make the battery subscription available and affordable. The amendments, which the government planned to enforce by the end of 2022, will enable separate registration on the vehicle register for EV owners with leased battery packs and those who own their battery packs.

Residual value of used EV batteries ‒ what is it worth?

In order to understand the insurance issues that have emerged along with EVs, one first needs to understand the issues surrounding used electric car batteries. Although the battery pack is the most expensive part of an EV, used batteries are reusable and recyclable resources; therefore, a used battery can drastically slash the purchase price of an EV. Tesla replaces battery packs at a 20%–40% lower cost than Korean automobile companies do, for example, but with one condition ‒ that the US automaker retrieves the used batteries in exchange for providing new ones at a discounted price. Used batteries can be recycled into new resources, thereby filling the pocket of the EV manufacturer with more than the discounts.

Depending on their performance, used batteries can be used in three ways.

• Reproduced – If a used battery is found to perform 80%–90% as well as a new one, the battery goes through a reproduction process to get a second life as EV battery. As the pie of EVs grows, a battery replacement market will likely appear. Reproduced batteries will represent a non-negligible share of said market.
• Reused ‒ If the performance level of a used battery is 60%–70% of that of a new one, the battery can be reused for energy storage systems (ESS) and the like at charging stations. Such batteries cannot function well enough to drive EVs but are good enough for ESS.
• Recycled ‒ Raw materials (eg, nickel or cobalt) can be recovered from batteries whose performance level has dropped 40% or more and used to make new batteries.

Some expect that the used battery recycling industry will emerge as a goose that lays golden eggs. A survey by a market research institute predicts that the used battery market will grow 26% on annual average from 2025 until the market value reaches USD72 billion by 2040. Hence South Korean battery and materials companies (including LG Energy Solution, SK On and Samsung SDI) are scrambling to jump on the used battery wagon and seize leadership of the fledgling market from automobile companies such as Hyundai Motor Company and Kia Corporation.

Uncertainty surrounding the supply and demand of raw materials is the biggest reason that South Korean companies are interested in used batteries. Behind this uncertainty lies the interworking of the inflation surge fuelled by the transition to a greener economy and Russia’s invasion of Ukraine with the supply chain disruption caused by COVID-19.

Nations around the world are eager to reduce their dependence on a single country for each important raw material. The four big battery materials markets (cathodes, anodes, separators and electrolytes) were dominated in 2020 by China, whose market shares ranged between 54% and 71%.

However, with governments across the globe imposing ESG policy on industries, the recycling of used batteries looks set to become inevitable. As part of the aptly dubbed “urban mines”, used batteries represent a source of raw materials free from geopolitical shackles.

Do EVs have higher accident rates and repair costs?

The accident rate and the loss ratio matter when it comes to insurance. Electric vehicles are generally believed to be more prone to accidents and more costly to repair than ICEVs, thereby leading to higher premiums. A survey by the Korea Insurance Development Institute (KIDI) reports that in 2021:

• the accident rate for EVs was 18.1%, which is 2.1 percentage points higher than 16% for ICEVs; and
• the average repair costs for EVs (in claims for “damage to your auto”) were USD2,000, which is about 30% higher than USD1,550 for ICEVs.

According to South Korea’s Financial Supervisory Service, the percentage of long-distance drivers who drive at least 15,000 km per year was higher among the EV drivers (24.2%) than the drivers of ICEVs (10.3%). Electric vehicles are expensive but less costly to fuel, so they are economically more beneficial than gas guzzlers for frequent drivers. The greater amount of time that EV drivers spend on the road explains their higher incidence of accidents.

Some believe these accidents are frequently caused by the instant acceleration that is unique to EVs. Most accidents involving EVs are reportedly collisions with concrete pillars in parking lots and can be attributed to the characteristically fast acceleration from low to high speed.

It has also been claimed that EVs tend to hit more pedestrians, presumably because the former are quiet or noise-free. In Norway, between 2011 and 2018, the European Transport Research Review reports that:

• 10.4% of all ICEV accidents involved pedestrians (9.9% involved bicycles); and
• 17.8 percent of all EV accidents involved pedestrians (13.7% involved bicycles).

Expensive parts such as the battery, electronic control unit (ECU) and sensor are cited as the major factors that contribute to the high average repair costs for EVs. Once an EV sustains an accident, it is not easy to repair the battery and replacing it is costly. When it comes to high-voltage batteries, there are not enough specialised repair shops; therefore, it is difficult to get them repaired. Even more unfortunately, manufacturers’ replacement policies encourage replacement even if the damage is minor.

However, others argue that EVs should not be so readily equated with higher accident rates and repair costs. They argue that the heightened incidence of accidents and cost of repairs for these vehicles are largely because they are new and cutting-edge, rather than solely because they are electric-powered.

The majority of EVs featured in the current statistics are estimated to be three years old at most. Given that new cars are more expensive, have longer ranges, and are equipped with more costly high-tech parts in general, the higher accident rate and average repair costs for EVs are not down to their electric power and should instead be attributed to the fact that they are newer cars with more innovative parts.

Indeed, comparisons between EVs and ICEVs of up to three years old reveal that the accident rate and the loss ratio are higher in the latter. Additionally, the 2020 statistics produced by the Highway Loss Data Institute (HLDI) in the US indicate that ‒ when compared with the same model of ICEV ‒ EVs had fewer accidents and demonstrated lower loss ratios both for property damage liability coverage and coverage for damage to your auto.

Should insurance coverage consider depreciation of batteries?

In the past, the terms and conditions did not clearly stipulate whether to deduct depreciation when compensating for batteries, so there was a risk of disputes. As a consequence, the General Insurance Association of Korea revised the automobile insurance terms and conditions in 2021 in order to deduct depreciation of the EV batteries as per the engines of ICEVs. Moreover, taking into account a possible shortfall in compensation for replacement costs due to the deduction of depreciation, the association had all insurers introduce a rider that fully compensates for battery replacement if an additional premium is paid.

One technical issue with assessing the residual value of batteries and applying their depreciation is a lack of commonly used technologies and standards to determine the residual value. Data-driven battery diagnosis technology that can assess the present condition of ‒ and predict the future residual value of ‒ a battery is essential but not yet available. The flagship products of the Big Three in the Korean battery industry vary not only in shape (ie, prismatic, pouch-shaped or cylindrical) but also in performance and functions. There is therefore a great need to develop standardised diagnostic criteria in order to officially diagnose batteries, the characteristics of which may vary depending on the manufacturer.

Unique risks call for unique riders

Electric vehicles come with unique risk factors, including battery damage, accidents while charging, high repair costs, and lack of infrastructure such as charging stations and repair shops. In response to these risks, insurers are debuting new riders that cover new battery prices, accidents during charging, or excess repair costs, as well as a rider to provide emergency roadside service for EVs. Some examples are outlined here.

A rider to cover the price of a new battery

The batteries of EVs frequently sustain damage when involved in an accident and, despite their high prices, are replaced more often than not in such cases because they are difficult to repair. Unfortunately, depreciation is not compensated for by coverage for damage to your auto when the battery is replaced. Hence the launch of a rider to cover the amount of depreciation.

A rider to cover accidents during charging

This rider compensates for the insured’s injury or death due to a fire, explosion, or electric shock while charging the insured vehicle at a charging station.

A rider to cover excess repair costs

In the case of coverage for damage to your auto, compensation may be given within the limit of the insurance value; however, EVs are more expensive to repair. Hence the repair costs of a vehicle sustained in an accident may easily exceed the vehicle’s value at the time of accident. This rider compensates up to 130% of the vehicle value.

A rider to provide emergency roadside service for EVs

In light of the shortage of charging stations, this rider provides towing service to EVs for longer distances (eg, 60, 100, and 150 km) than the towing service for ICEVs.

Is there a conflict between the core charge policy and the right of subrogation?

There is controversy over who has the right to the residual value of an EV’s used battery. Is it the insurer who paid the insurance money, given the right of subrogation, or is it the manufacturer of the automobile?

In South Korea, this conflict between the insurer and manufacturer has escalated into litigation. The South Korean damage insurance industry filed a lawsuit against Tesla over its core charge policy.

The US automaker charges around USD13,000 for battery pack replacement – that is, between 20% and 40% less than its Korean competitors, which charge more than USD18,000. The difference is down to the USD5,000 compensation Tesla pays for the recovery of the damaged battery, based on its so-called core charge programme. Core charge is a policy that provides certain discount on a new part in order to receive the used part back. The policy was first introduced by Ford Motor Company back in 2003 and has since been adopted by major US automakers for key parts such as aluminum wheels, bumpers, and lighting assemblies.

Before the Tesla began to collect used batteries, the damage insurance industry in South Korea used to replace the batteries of EVs on behalf of the vehicle owners and sold the used batteries for profit. The insurers, who pay out insurance money in full for EV batteries that are totally destroyed, went to court ‒ asserting that they may subrogate themselves to the insured’s right to their used batteries under Article 681 of the Commercial Act of South Korea, which provides for the insurer’s right of subrogation.

This issue concerns the legal interpretation of insurance laws and vehicle sales agreements. According to the principle of subrogation, if an EV maker has transferred its ownership of the battery to a vehicle owner who has purchased comprehensive and collision coverage, thenthe insurer legitimately has the right to the used battery ‒ provided the insurer has paid insurance money to compensate the vehicle owner for damage to said battery.

In such case, given that the vehicle owner only receives a price discount on the new battery if they return the used battery to the manufacturer, they would need to buy back the right to the used battery from the insurer. Once the vehicle owner repurchases their right to the used battery, they can return it to the manufacturer and get a discount on the new battery.

However, if the EV manufacturer did not transfer its right to the battery when it sold the automobile to the vehicle owner, the right to the battery remains with the manufacturer. Therefore, the vehicle owner and their insurer cannot exercise any right to the used battery. Even if the two inked an agreement on the battery, the agreement would not be a binding contract in this case because the vehicle owner has no insured interest regarding the battery.

Ultimately, the extent to which there is conflict between the right of subrogation and the core charge policy depends on:

• the terms and conditions of the EV sales agreement; and
• whether or not the insurer and the insured entered into a used battery repurchase agreement.

Dealers of imported cars in South Korea are reportedly preparing to amend their contract polices in order to expressly provide for collection of used batteries in their sales agreements. The conflict between the core charge policy and the right of subrogation is not expected to subside in the near future.