SOUTH KOREA Trends and Developments Contributed by: C J Kim and M H Lim, Choi & Kim
Claims Co-Operation Clause A Claims Co-Operation Clause typically found in a reinsurance contract provides: “Notwithstanding anything herein contained to the contrary, it is a condition precedent to any liability under this Reinsurance that: • The Reinsured shall, upon knowledge of any cir- cumstances which may give rise to a claim hereun- der, advise the Reinsurers immediately and in any event not later than 30 days, and • The Reinsured shall co-operate with the Reinsurers and/or their Appointed Representatives subscrib- ing to this Policy in the investigation and assess- ment of any loss and/or circumstances giving rise to a loss. No settlement and/or compromises shall be made and/or no liability admitted without prior approval of the Reinsurers.” Reason for Incorporating the Claims Co-Operation Clause In the Court of Appeal case Rozanes v Bowen , 32 Lloyd’s List L. Rep. 98 (C.A., 1928), Lord Justice Scrut- ton stated:“ It has been for centuries in England the law in connection with insurance of all sorts, marine, fire, life, guarantee and every kind of policy that as the underwriter knows nothing and the man who comes to him to ask him to insure knows everything, it is the duty of the assured… to make a full disclosure to the underwriter without being asked of all the material cir - cumstances. ” Lord Justice Scrutton captured the duty of the insured to make a full disclosure to the insurer without being asked individually and how the insurer is inherently shut out from the information held by the insured. It would not be an overstatement that an insurance contract cannot properly function without the sharing of information. In the insurance market and practice, a Claims Co- Operation Clause is a mandatory and widely used provision; indeed, one is almost always included in a reinsurance contract. Reinsurers are typically bound by the “follow the for- tunes” principle, under which reinsurers follow the
claims-handling decisions of the cedant (primary insurer). However, indiscriminately applying the “fol- low the fortunes” principle would engender grave risks of unforeseen liabilities for reinsurers. Thus, the Claims Co-Operation Clause aims to provide a pro- tective mechanism for reinsurers in monitoring the actions and decisions of the cedant as a pre-emptive safeguard against such risk. If the “follow the for- tunes” principle did not exist, the reinsurance busi- ness could not operate efficiently. Yet without a Claims Co-Operation Clause, there is a risk that the “follow the fortunes” principle might operate to the unilateral disadvantage of reinsurers. Accordingly, the Claims Co-Operation Clause is a fundamental element that makes the business of reinsurance workable in the first place. Validity of the Claims Co-Operation Clause Under Korean Law The insurance chapter of the Korean Commercial Act (KCA) contains the so-called “no adverse change rule”, meaning that insurance policies cannot include provisions that adversely change the Korean insur- ance law, thereby putting the policyholder at a disad- vantage (Article 663). However, the Korean Supreme Court has recognised an exception to the principle of prohibition (Article 663 of the KCA) in cases of corpo- rate insurance contracts, including marine and rein- surance, where the insurer and policyholder negoti- ate contract terms with equal bargaining power (case no. 2005Da21531). Accordingly, an argument that the Claims Co-Operation Clause in a corporate or reinsur- ance contract is invalid on the basis of the “no adverse change rule” would not succeed. This argument – that the principle of prohibition under Article 663 of the KCA does not apply to reinsurance contracts – is critical in a context where the reinsured has failed to obtain prior approval for paying the insur- ance proceeds (which arose from the insured’s set- tlement with a third party), despite the obligation to seek the reinsurer’s prior approval under the reinsur- ance. In other words, whilst Article 723 (3) of the KCA provides that an insurer is not exempt from liability if the insured settled with a third party without the insurer’s prior approval unless such settlement was grossly unreasonable, a Claims Co-Operation Clause in a reinsurance contract may validly provide other-
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