SOUTH KOREA Trends and Developments Contributed by: C J Kim and M H Lim, Choi & Kim
wise. In this regard, in principle a reinsurer would be exempt without exception if the reinsured agreed to any settlement or admitted liability without the rein - surer’s prior approval. The rationale is that parties to a reinsurance contract enjoy freedom to agree to terms which differ from those stipulated in the KCA. Accordingly, a Claims Co- Operation Clause wording that requires the reinsurer’s prior approval for any settlement or compromise is valid and effective under Korean law, and a reinsured would not be entitled to reinsurance proceeds if it has breached the Claims Co-Operation Clause by failing to obtain the reinsurer’s approval prior to making the insurance payment under the original policy. There are several lower court cases in which the Claims Co-Operation Clause was presumed to be valid and effective: Seoul Central District Court case no. 2018GaDan5227868; Seoul Central District Court case no. 2018GaHap563085; and so forth. Validity of ‘Condition Precedent’ Terms Under Korean law, a term that is a condition prec- edent to liability in insurance is generally recognised as valid and binding (Korean Supreme Court case no. 2004Da28903). Thus, reinsurance contracts are per- mitted to include provisions that put the reinsured at a disadvantage relative to how it would be under the statutory standard (ie, the KCA). Hence, if a reinsured has violated a condition precedent term, the reinsurer may be exempt from liability. Accordingly, in general terms, if fulfilment of the Claims Co-Operation Clause in a reinsurance policy is a condition precedent to the reinsurer’s liability and the reinsured breached the Claims Co-Operation Clause, in principle the reinsur- er would be relieved from liability for the reinsurance claim. For instance, if a Claims Co-Operation Clause required the reinsured to furnish the reinsurer with and keep the reinsurer informed of all information known to the cedant in respect of claims or possible claims notified and the reinsured failed to provide all known information in regard to a circumstance notice, the reinsurer may have a defence to a reinsurance claim. Whether “Prejudice” is Required The issue turns on whether a reinsurer’s non-liability requires proof that its rights were prejudiced by the
cedant’s breach of a condition precedent to liability. In other words, the question is whether the reinsured’s mere breach of a Claims Co-Operation Clause that is a condition precedent to liability is, in itself, sufficient to discharge the reinsurer, or whether the reinsurer is relieved only if the breach prejudiced the reinsurer’s interests and rights. An example would be a case where the policy requires the insured to give written notice of a claim within 30 days, and failure to do so operates as a condition precedent that exempts the insurer from liability. If the insured fails to give such timely notice, thereby relieving the insurer of liability, the issue then arises as to whether the reinsurer is automatically discharged as well, or whether the rein- surer must demonstrate that it suffered prejudice as a result of the original insured’s breach of the notifica- tion requirement under the original policy. It is understood that, in other jurisdictions, the insurer must demonstrate that it has been prejudiced by the insured’s breach of a condition precedent in order to be discharged from liability (the US case Security Mutual Casualty Co. v Century Casualty Co. , 531 F.2d 974 (10th Cir. 1976) is an example). There is sparse Korean court precedent on this point, such that case law from other jurisdictions may provide instructive guidance to Korean courts. However, the existing Korean Supreme Court decision does not require proof of prejudice (case no. 2004Da18903). Therefore, even without demonstrable prejudice, the expecta- tion is that the reinsurer can successfully defend a reinsurance claim based on the cedant’s breach of a The “Duty to Explain” in an insurance context refers to the duty imposed on the insurer to explain to the poli- cyholder the material provisions before signing a con- tract. “Material provisions” are terms and conditions that are likely to affect the policyholder’s decision to agree to the insurance policy or to the terms them- selves (eg, insurance premium rates, subject of duty to notify, bases for policy rescission, and the insurer’s exemption clauses). This Duty to Explain, which is pre- scribed in the Standardised Contracts Regulation Act of Korea, is intended to protect the policyholder from any disadvantages it may suffer due to its unaware- ness of a material provision. The significance is that, condition precedent. The “Duty to Explain”
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