[edit] Supreme Court Decision 99Da55533 delivered on July 27, 2001 [Affirmation of Absence of Liability]

【Main Issues】

[1] Whether the insured may claim that the insurance contract is effective according to the held covered clause where the insured obtains insurance for a cargo transport for a ship that fails to meet the standard specifications of the English Institute Classification Clause and the insured does not give notice of such failure or the occurrence of the causes giving rise to the application of the held covered clause (negative)

[2]Whether the insurer has an obligation to explain the terms of the standardized contract to the insured where the insured is sufficiently aware of such terms (negative) and who has the burden of proof

[3]Whether the insurer has an obligation to disclose or explain the terms of the standardized contract where such terms are generally and commonly used in the transaction context such that they may be sufficiently anticipated by the insured without a separate explanation or where such terms merely repeat or supplement statutory provisions (negative)

[4] A precedent which reversed the court below ruling which stated that the insurer does not have an obligation to explain the terms of the English Institute Classification Clause in a marine cargo insurance contract that does not designate a specific ship

【Summary of Decision】

[1] Where a marine cargo insurance contract that does not designate a specific ship is entered into according to the old English Institute Cargo Clause (F.P.A.) and contains the Institute Classification Clause, in light of the good faith principle governing an insurance contract and the terms of the foregoing Institute clauses, the insured must, as a matter of principle, give notice of a breach of warranty to the insurer and negotiate the insurance premium in the event that the identity of the carrying ship is ascertained or the minimum loading is completed and the insured comes to discover that the foregoing ship does not meet the standard vessel specifications required under the Institute Classification Clause. If the insured knew of the occurrence of the causes giving rise to held coverage, but did not promptly notify the insurer of the same, the insured may not claim that the insurance contract under the held covered clause is effective.

[2] When executing an insurance contract, the insurer has an obligation under Article 3 of the Regulation of Standardized Contracts Act to provide the insured with a detailed and particularized disclosure or explanation of the material terms of the standardized insurance contract, including the nature of the insurance product, the system of calculating insurance premium rates, any changes in items required in the insurance application, and the events giving rise to the insurer's exemption from liability. If the insurer executes an insurance contract in contravention of the foregoing obligation to disclose or explain the terms of the standardized insurance contract, the insurer may not claim that the terms of such policy are part of the insurance contract. However, where the insured or his agent is sufficiently aware of the terms of the standardized insurance contract, even if such terms are material, the standardized insurance contract becomes part of the insurance contract and is binding upon the parties. In such event, the insurer does not have an obligation to provide a separate explanation of the terms of the insurance policy, provided that the insurer has the burden of proving that the insured, or his agent, was sufficiently aware of the terms of such standardized insurance contract.

[3] The rationale behind imposing on the insurer the obligation to explain the policy terms is to prevent the insured from an unexpected harm arising from the material terms of a standardized insurance contract that became part of the insurance contract without the knowledge of the insured. Therefore, even in the case of a standardized insurance contract included in a marine insurance contract, the issue of whether the insurer has an obligation to explain terms of such standardized contract must be decided on the basis of whether the terms of such standardized contract are generally and commonly used in the transaction such that the insured could have sufficiently anticipated the terms of such standardized contract without a separate explanation and whether the terms of such standardized contract merely repeat or supplement pre-existing statutorily specified provisions.

[4] A precedent which reversed the court below ruling which stated that the insurer does not have an obligation to explain the terms of the English Institute Classification Clause in a marine cargo insurance contract that does not designate a specific ship.

【Reference Provisions】 [1] Article 33 of the Marine Insurance Act of England and Article 638 of the Commercial Act / [2] Article 638-3(1) of the Commercial Act, Article 3 of the Regulation of Standardized Contracts Act and Article 261 of the Civil Procedure Act / [3] Article 638-3(1) of the Commercial Act and Article 3 of the Regulation of Standardized Contracts Act / [4] Article 638-3(1) of the Commercial Act and Article 3 of the Regulation of Standardized Contracts Act.

Article 3 of the Regulation of Standardized Contracts Act (Obligation to Specify and Deliver Standardized Contracts):

(1) The enterprise must deliver the content of the standardized contract to the customer in a generally expected way when concluding a contract and shall, upon receiving a request from the customer, deliver a copy of the standardized contract to the customer so that the customer may understand it. Provided, that this does not apply to the standardized contract as prescribed by the Presidential Decree and authorized by the administrative agency following any other Acts.

(2) The enterprise must specify the material substance of the standardized contract so that the customer may understand it, provided that according to the nature of the contract this is significantly inappropriate.(3) When the enterprise concludes a contract violating paragraphs 1 or 2, he may not claim the standardized contract as the content of the contract.

【Reference Cases】 [2] Supreme Court Decision 97Da39308 delivered on April 14, 1998(Gong1998Sang, 1320), Supreme Court Decision 98Da32564 delivered on November 27, 1998(Gong1999Sang, 41), and Supreme Court Decision 98Da43342, 43359 delivered on March 9, 1999(Gong1999Sang, 634) / [3] Supreme Court Decision 98Da32564 delivered on November 27, 1998(Gong1999Sang, 41), Supreme Court Decision 98Da59842 delivered on May 11, 1999(Gong1999Sang, 1129), and Supreme Court Decision 98Da62909, 62916 delivered on July 4, 2000

【Plaintiff, Appellee】 Jaeil Fire & Marine Insurance Co., Ltd. (Attorneys Jung Byung-suk and 6 others, Counsel for plaintiff-appellee)

【Defendant, Appellant】 Dae Young Local Products Co., Ltd. (law Firm Sae Chang, Attorneys Kim Hyun and 6 others, Counsel for defendant-appellant)

【Court of First Instance】 Seoul District Court Judgment 94Gahap64469 delivered on March 31, 1996

【Court of Second Instance】 Seoul Hight Court Judgment 96Na26475 delivered on August 17, 1999

【Disposition】 The judgment of the court below shall be reversed and the case shall be remanded to Seoul High Court.

【Reasoning】 The grounds for appeal are examined as follows.

1. On the first ground for appeal

A. Based on admitted evidence, the court below made the following findings of fact and held as follows:

(1) Breach of the Institute Classification Clause

The defendant, an export and import trader, entered into a marine cargo insurance contract with the plaintiff, a marine insurance company, for frozen fish and shellfish imported by the defendant from China. The insurance contract did not designate the specific carrying ship, used the old Institute Cargo Clause (F.P.A.), and stated that all questions of liability arising under the insurance policy are to be governed by the law and customs of England. The first half of the Institute Classification Clause, which applies to such insurance contract, states "the marine transit rates agreed for this insurance apply only to cargoes and/or interests carried by mechanically self-propelled vessels of steel construction, carried as bellow by one of the following classification societies: Lloyd's Register, American Bureau of Shipping, Bureau Veristas, Germanischer Lloyd, Korean Register of Shipping, Nippon Kaiji kyokai, Norske Veritas, Registro Italiano, Register of Shipping of U.S.S.R., Polish Register of Shipping, provided such vessels under 1,000 G.R.T. are not over 15 years of age." Thus, the requirement that the defendant must designate a specific ship that meets the qualifications of the foregoing clause when selecting the carrying ship constitutes a warranty as set forth in Article 33 of the Marine Insurance Act.

The fish and shellfish covered by the present insurance contract was loaded onto Phoenix No. 35 at the port of Yantai, China on April 8 and 9 of 1994 and was being shipped to the port of Busan when the bonnet of the Kingston valve on the right-hand side of the engine room of the said ship opened. As a result, sea water flowed in, the ship sank, and the insured fish and shellfish were lost. The ship at issue was built in 1974 with a total weight of 194.7 tons. The defendant bought it at an auction around December 30, 1989 for the purpose of cargo transport. From then on, the defendant used the ship for marine transport and maintained and repaired it, but the defendant registered it in Honduras in the name of a separate corporation. At the time the defendant purchased it in December 1989, the ship was classified by the Korean Register of Shipping. However, since undergoing interim and final inspections at the Korean Register of Shipping from February 20, 1991 to April 16, 1991, the ship had not received the required inspections for three years and was removed from classification on March 23, 1994. Ever since, it has not been classified by any other institute.

Based on such facts, the defendant breached the warranty expressly specified in the present insurance contract and the plaintiff therefore is exempted from the obligation to make a payment of insurance proceeds to the defendant.

(2) The held covered clause

The latter half of the Institute Classification Clause states, "cargoes and/or interests carried by mechanically self-propelled vessels not falling within the scope of the above are held covered subject to a premium and on conditions to be agreed." In addition, Article 14 of the old Institute Cargo Clause states, "It is a condition of this insurance that the Assured shall act with reasonable despatch in all circumstances within their control," and cautions that "It is necessary for the Assured when they become aware of an event which is "held covered" under this insurance to give prompt notice to Underwriters and the right to such coverage is dependent upon compliance with this obligation." Therefore, if the Institute Classification Clause is included in a cargo insurance contract which does not designate the specific carrying ship, the insured, as a matter of principle, must give prompt notice of the ship upon loading and subsequently negotiate with the insurer about the insurance premium and other conditions. If an agreement is reached, the insured event shall be deemed to be held covered under the foregoing insurance contract.

However, despite the defendant having knowledge of the identity of the ship when it was loaded that the ship at issue weighed less than the required 1,000 tons under the foregoing Institute Classification Clause, was not classified by any of the foregoing institutes and was more than 15 years old, the defendant did not notify the insurer of the name of the ship and agree with the insurer on the insurance premium and other conditions or undergo such negotiation process.

Therefore, since the defendant, who is both the policyholder and insured, despite having knowledge of the causes giving rise to the held coverage, did not give prompt notice thereof to the plaintiff insurer, negotiate with the insurer on the insurance premium or other conditions, or pay a substantial insurance premium as of the date of the closing argument at the appeal hearing, the insured event cannot be deemed to be held covered and therefore the plaintiff insurer is exempted from the obligation to make a payment of insurance proceeds.

(b) The Judgment of the Supreme Court:

(1) From the foregoing findings of facts and decisions of the court below, it is clear that the court below exempted the plaintiff from the obligation to make a payment of insurance proceeds to the defendant on the grounds that the insured defendant not only did not meet the standard specification requirements of the Institute Classification clause, but also did not qualify for the held covered clause by failing to give prompt notice of such noncompliance and to agreed on insurance premium, etc. Therefore, we do not find merit in the claim of appeal, which states that the court below misinterpreted law by failing to consider the effect of the held covered clause in determining the effect of the Institute Classification Clause.

(2) As in the insurance contract at issue, where a marine cargo insurance contract that does not designate a specific ship is entered according to the old English Institute Cargo Clause (F.P.A.) and contains the Institute Classification Clause, in light of the good faith principle governing an insurance contract and the terms of the foregoing Institute clauses, the insured must, as a matter of principle, give notice of a breach of warranty to the insurer and negotiate the insurance premium in the event that the identity of the carrying ship is ascertained or the minimum loading is completed and the insured comes to discover that the foregoing ship does not meet the standard vessel specifications required under the Institute Classification Clause. If the insured knew of the occurrence of the causes giving rise to held coverage but did not promptly notify the insurer of the same, the insured may not claim that the insurance contract under the held covered clause is effective.

Therefore, in consideration of the foregoing, the court below correctly ruled that the insured event was not held covered because the defendant, despite having knowledge of the causes giving rise to the held coverage, did not give prompt notice thereof to the plaintiff insurer and subsequently failed to negotiate with the insurer on the insurance premium or other conditions. Therefore, we hold that the court below did not misinterpret law as to the held coverage clause as otherwise alleged in the appeal. The appeal with respect to the foregoing is groundless.

2. On the second ground for appeal

A. The defendant claimed that the applicable Institute Classification Clause was not in effect because, at the time the present insurance contract was entered into, the plaintiff failed to provide the defendant with any explanation of the material terms therein, such as the Institute Classification Clause. The court below dismissed such claim on the grounds that there was no evidence that the defendant lacked knowledge of the terms of such policy and that, given the nature of a marine insurance contract, the insurer has no obligation to explain to the insured in detail the terms of the Institute Classification Clause.

B. When executing an insurance contract, the insurer has an obligation under Article 3 of the Regulation of Standardized Contracts Act to provide the insured with a detailed and particularized disclosure or explanation of the material terms of the standardized insurance contract, including the nature of the standardized insurance contract, the system of insurance premium rates, any changes in items required in the insurance application, and the events giving rise to the insurer's exemption from liability. If the insurer executes an insurance contract in contravention of the foregoing obligation to disclose or explain the terms of the standardized insurance contract, the insurer may not claim that the terms of such policy is part of the insurance contract. However, where the insured or his agent is sufficiently aware of the terms of the standardized insurance contract, even if such terms are material, the standardized insurance contract becomes part of the insurance contract and is binding upon the parties. In such event, the insurer does not have an obligation to provide a separate explanation of the terms of the standardized insurance contract. (See Supreme Court Decision 97Da39308 delivered on April 14, 1998, Supreme Court Decision 98Da43342,43359 delivered on March 9, 1999, etc.) In such event, the insurer has the burden of proving that the insured, or his agent, had sufficient knowledge of the terms of such standardized contract. However, by reversing such burden of proof, the court below found that there was no evidence to support the view that the defendant insured did not know of the terms of the foregoing standardized contract. Furthermore, in its supplementary consideration of the opposing facts, the court below presumed that the defendant had knowledge of the terms of such standardized contract merely based on the fact the defendant had on several occasions entered with the plaintiff into similar marine cargo insurance contracts where the carrying ship was not designated. However, since the defendant might have repeatedly entered into such contracts without knowledge of the terms thereof, there is a logical gap to the foregoing decision of the court below. In other words, the court below, as the trier of facts, should have conducted further investigation into whether the defendant insured actually knew of the terms of the held covered clause under the Institute Classification Clause, and if the proof was unclear, it should have ruled against the plaintiff in accordance with the general principle of law which assigns the burden of proof to the plaintiff.

On the other hand, the rationale behind imposing on the insurer the obligation to explain the policy terms is to prevent the insured from an unexpected harm arising from the material terms of a standardized insurance contract that became part of the insurance contract without the knowledge of the insured. (See Supreme Court Decision 98Da62909, 62916 delivered on July 4, 2000, etc.) Therefore, even in the case of a standardized contract included in a marine insurance contract, the issue of whether the insurer has an obligation to explain terms of such standardized contract must be decided on the basis of whether the terms of such standardized contract are generally and commonly used in the transaction such that the insured could have sufficiently anticipated the terms of such standardized contract without a separate explanation and whether the terms of such standardized contract merely repeat or supplement pre-existing statutorily specified provisions. The records do not support that the foregoing applies to the Institute Classification Clause used in the present marine cargo insurance where the carrying ship is not designated. This remains the same even after considering the policy rationales cited by the court below such as the adhesiveness of a standardize contract to marine insurance contracts, the nature of corporate insurance, and international comity.

C. Despite the foregoing, the court below incorrectly dismissed the defendant's claim as to the duty to explain on the grounds that there was no evidence to support that the defendant did not know the terms of the foregoing standardized contract or that the plaintiff insurer did not have an obligation to provide the defendant insured with a detailed explanation as to the terms of the Institute Classification Clause. We hold that the court below which made such dismissal suffered from inadequate fact finding and misinterpretation of the law as to the burden of proof or the duty to explain under the Regulation of Standardized Contracts Act. Therefore, the appeal with respect to the foregoing has merit.

3. Accordingly, the court below's decision shall be reversed and the case shall be remanded to the court below for further investigation and judgment. The decision is delivered with the assent of all Justices who reviewed the appeal.

It is so ordered per Disposition.

Justices Lee Kang-kook (Presiding Justice)

Cho Moo-jeh

Lee Yong-woo(Justice in charge)

Kang Shin-wook

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