Core Tip:
The “misleading sales” determined by financial regulatory authorities is not equivalent to “fraud” under civil law. People’s courts should review whether it constitutes “fraud” in accordance with the law, based on the specific circumstances of each case, the elements of fraud, and the standard of proof, rather than merely relying on the conclusion of “misleading sales” determined by regulatory investigations to revoke an already established and effective insurance contract.
Case Background:
In disputes over “policy cancellation” between the policyholder and the insurer, policyholders often allege “improper conduct” during the sales process and file complaints with financial regulatory authorities, in an attempt to pressure the insurer into achieving a full refund. Given that some insurance institutions do indeed have flaws in their sales processes, after investigation by financial regulatory authorities, a conclusion that “misleading sales” has occurred may be reached.
After obtaining the regulatory determination conclusion, policyholders usually claim that the insurer has committed fraud and request the People’s Court to revoke the insurance contract and refund the full premium in accordance with Article 148 of the Civil Code. In the current context of the prevalence of “black market for policy cancellation,” some insurers, in order to avoid regulatory investigations, are forced to process full refunds, thereby suffering losses.
There is much controversy in judicial practice regarding whether the regulatory determination conclusion of “misleading sales” cited by policyholders can be accepted by the People’s Courts and used to determine fraud and revoke the insurance contract. Based on the authors’ experience in handling similar cases, this article will discuss from the perspective of insurance companies to provide references for their defense in lawsuits.
Discussion and Analysis:
- The Nature of the Regulatory Determination of Misleading Sales
The National Administration of Financial Regulation (NAFR), directly under the State Council, is formed on the basis of the China Banking and Insurance Regulatory Commission (CBIRC). The local regulatory bureaus function as dispatched administrative entities under the Administration. According to the Reform Plan of the Party and the State Institutions issued by the Central Committee of the Communist Party of China and the State Council in March 2023, the National Financial Regulatory Administration of China will be in charge of regulating the financial industry except the securities sector, strengthening institutional supervision, conduct supervision, functional supervision, penetrative supervision, and continuous supervision to maintain the legality and stability of the financial industry. Therefore, the National Financial Regulatory Administration of China and its local bureaus serve as administrative authorities.
Upon receipt of policyholder allegations regarding misleading sales practices during insurance contract formation, financial regulatory authorities usually issue an Investigation Opinion Letter Concerning Banking and Insurance Regulatory Violations (hereinafter referred to as the “Investigation Opinion Letter”). Such Investigation Opinion Letter routinely contains the following determination:
“Regarding the matter of misleading sales by a certain company as reflected in the letter, … after investigation, it is found that a certain company has engaged in misleading sales, in violation of Article 131(1) of the Insurance Law.”
In practice, the Opinion Letter shall include the following administrative remedy notice at the end: “If you are not satisfied with this reply, you may either apply for an administrative reconsideration to the National Financial Regulatory Administration of China within 60 days of receiving this reply letter, or file a lawsuit before the People’s Court with jurisdiction over the financial regulatory bureau’s location within six months from the date of receipt of this reply letter.”
Based on the above, in accordance with Article 18 of the Interpretation II of the Supreme People’s Court on Several Issues Concerning the Application of the Insurance Law of the People’s Republic of China, the Investigation Opinion Letter issued by local financial regulatory bureaus is a public document made by administrative authorities in accordance with the law, and the People’s Courts generally accept it, unless the insurance institution provides contrary evidence to overturn the relevant determination.
II. Whether the Regulatory Determination of Misleading Sales Can Prove Fraud and Have the Evidentiary Power to Revoke the Insurance Contract
- The Essential Difference Between Regulatory “Misleading Sales” and Civil “Fraud”
The authors hold that while the Investigation Opinion Letter determines that the insurer engaged in misleading sales practices at the time of underwriting, such regulatory investigation opinion is formulated from the perspective of industry management, in accordance with insurance industry regulatory provisions, and with the fundamental purpose of regulating the professional behavior of insurance practitioners and maintaining the order of the insurance industry. It emphasizes the improper sales language used by insurance practitioners in the process of recommending insurance products to policyholders. It should be based on the Guidelines for the Determination of Misleading Sales of Personal Insurance and Article 165 of the Insurance Law to hold insurance institutions and agency sales institutions administratively responsible, and does not involve the evaluation of the effectiveness of the insurance contract concluded by insurance practitioners.
Therefore, the authors further believe that the “misleading sales” determined in the Investigation Opinion Letter and the “fraud” determined in civil litigation differs in legislative purpose, legal basis, effectiveness level, elements of composition, and standard of proof, as well as legal consequences:
| Differences | Administrative Determination of “Misleading Sales” | Civil Litigation Determination of “Civil Fraud” |
| Legislative Purpose | To regulate the business conduct of insurance agents and brokers, protect the legitimate rights and interests of policyholders, insured persons, and beneficiaries, and maintain the order of the insurance industry. | To implement the principle of freedom of contract, allowing the right of revocation to be exercised by the party whose expression of intent is not genuine or accurate, thereby realizing the will and interests of the revoking party and eliminating the harm caused by defective expressions of intent. |
| Legal Basis | Guidelines for the Identification of Misleading Sales Behavior in Life Insurance: “If a life insurance company, insurance agency, or personnel engaged in insurance sales have any of the behaviors stipulated in Articles 5 and 6 of the Guidelines, it can be determined as the behavior of ‘deceiving policyholders, insured persons, or beneficiaries’ as stipulated in Article 116 or Article 131 of the Insurance Law.” | Civil Code: ” Where a party by fraudulent means induces the other party to perform a civil juristic act against the latter’s true intention, the defrauded party has the right to request the people’s court or an arbitration institution to revoke the act.” |
| Effectiveness Level | Departmental regulatory document | Law |
| Elements of Composition | It is sufficient to have implemented the illegal behaviors stipulated in Articles 5 and 6 of the Guidelines for the Identification of Misleading Sales Behavior in Life Insurance. | The following four elements must be present simultaneously:1. The fraudulent party has the intention to defraud;2. The fraudulent party has committed a fraudulent act;3. The defrauded party falls into an internal error due to the fraud;4. The defrauded party makes an erroneous expression of intent due to the internal error. |
| Standard of Proof | / | To reach the standard of proof that excludes reasonable doubt |
| Legal Consequences | In accordance with Article 165 of the Insurance Law, administrative responsibility is imposed on the offender. | The effectiveness of the contract concluded is negated, and the defrauded party is granted the right to revoke. |
Therefore, the determination of “misleading sales” as an administrative violation by insurance practitioners in the Investigation Opinion Letter does not equate to a determination that the insurance institution and its practitioners engaged in deceptive conducts at the time of concluding the insurance contract, nor does it establish fraud by the insurance institution.
The People’s Courts should still exercise their judicial power independently to review whether the evidence provided by the policyholder can prove that “the insurance institution and its practitioners engaged in deceptive conducts, had fraudulent intent, and the policyholder entered into the insurance contract under a material misunderstanding,” and should also review whether the evidence provided by the policyholder regarding the fraudulent facts meets the “beyond reasonable doubt” standard of proof.
- Significant Disputes in Judicial Practice on the Relationship Between “Misleading Sales” and “Civil Fraud”
There are significant disputes in judicial practice regarding the relationship between the regulatory determination of “misleading sales” and the establishment of civil fraud:
Viewpoint 1: If the financial regulatory authorities determine that “misleading sales” has occurred, it indicates that the insurance company engaged in deceptive behavior at the time of underwriting, constituting fraud. Relevant judicial cases include:
- In case (2024) YU 87 Min Zhong 1914, the Chengdu-Chongqing Financial
Court held that:
According to the facts determined in the Investigation Opinion Letter Concerning Banking and Insurance Regulatory Violations, Luo Mou indeed engaged in behaviors such as signing on behalf of others, concealing sales, failing to inform important terms, giving gifts, and fabricating the annual income of the policyholder… The National Financial Regulatory Administration of China’s Liangjiang Regulatory Bureau, which issued this evidence, is the regulatory authority of the insurance industry and has professional and authoritative judgment capabilities. Its determination based on relevant evidence is a manifestation of performing regulatory functions. In the absence of contrary evidence sufficient to overturn it, the first-instance court accepted it in accordance with the law. Accordingly, it was determined that Luo Mou, a third party, did indeed engage in concealing sales and failing to inform important terms when selling insurance products… and the Personal Insurance Contract signed between Deng Mou and a certain company was legally revoked.
- In case (2016) Shan 01 Min Zhong 8496, the Intermediate People’s Court of Xi’an, Shaanxi Province held that:
As a consumer, Yang Mou was entitled to make an informed decision on whether to purchase insurance products and which insurance products to purchase. The Shaanxi Regulatory Bureau of the China Banking and Insurance Regulatory Commission found that the staff of a certain company “exaggerated the future uncertain returns on the insurance product purchased by Yang Mou beyond the contractual guarantee,” this behavior violated Article 6(1) of Guidelines for the Determination of Misleading Sales of Personal Insurance, which stipulates that “life insurance companies, insurance agencies, and personnel engaged in insurance sales activities shall not engage in the following deceptive behaviors: (1) Exaggerating insurance liability or insurance product returns.” The staff member of a certain company engaged in deceptive conduct when selling the involved insurance product to Yang Mou.
Viewpoint 2: The regulatory determination of “misleading sales” does not equate to civil fraud, and the People’s Courts should independently review based on the elements of fraud. Relevant judicial cases include:
- In case (2023) Jing 74 Min Zhong 1338, the Beijing Financial Court held that:
Although the Investigation Opinion Letter determined that “a certain company engaged in behaviors such as exaggerating insurance liability and returns, promoting stop sales, promising to seek improper benefits for others, irregular publicity, irregular explanation, giving benefits outside the contract, poor management of service materials, and failure to provide dividend notices,” these behaviors fall within the scope of regulation by the insurance regulatory authorities. The existence of illegal behaviors does not necessarily mean that the relevant behaviors constitute fraud against Li Mou.
- In case (2023) Jing 0119 Min Chu 1013, the Yanqing District People’s Court of Beijing held that:
The Investigation Opinion Letter determined that the businessperson Sun Mou engaged in irregular or improper sales behaviors during the sale of insurance, which falls within the scope of regulation by the insurance regulatory authorities. Therefore, Li Mou’s claim that the two defendants engaged in fraudulent behavior lacks rational basis and is not accepted by this court.
- In case (2023) Lu 1002 Min Chu 5093, the Huancui District People’s Court of Weihai held that:
Despite the Investigation Opinion Letter determined that a certain company engaged in misleading sales behavior, this opinion letter is just an industry management regulation. The “misleading sales” mentioned in it is a determination made by the CBIRC as the industry’s main department from the perspective of industry management, and it does not necessarily equate to “fraud” under civil law. Fraud requires that the defrauded party, due to the fraud, falls into a mistaken belief and, as a result, makes an erroneous expression of intent. However, in this case, the court’s investigation revealed that Qu Mou entered into a personal insurance contract in June 2017 and has continuously paid premiums for 6 years. During this period, he also added insurance premiums multiple times and received dividends, which sufficiently demonstrated that his decision to enter into the contract was made voluntarily and was not induced by fraudulent conduct.
III. Key Points for Insurance Companies to Respond When Policyholders Demand Full Refunds Based on Regulatory Investigation Conclusions
Given that the Investigation Opinion Letter issued by the financial regulatory authorities carries a certain degree of probative force in proving fraud, insurance companies should actively defend themselves in lawsuits: Although there may be improper sales practices, it does not lead to the policyholder falling into an erroneous understanding and enter into the insurance contract, and the conclusion of the relevant insurance contract is the true expression of the policyholder’s intent.
Moreover, it is suggested that insurance companies refine their defense opinions and organize evidence from the following eight aspects:
- Whether the insurer or its sales have provided detailed explanations to the policyholder regarding matters closely related to the policyholder and the insured, such as the name of the insurance product, the name of the insurance company, insurance liability, exclusions, insurance amount, insurance period, payment period, loss on surrender, cooling-off period, etc.
- Whether the policyholder has signed the Insurance Contract Receipt and confirmed that the insurer has clearly explained and interpreted the contents of the insurance contract to the policyholder.
- Did the insurer conduct a follow-up call with the policyholder? During the call, did the policyholder confirm that they understood the product brochure, application tips, and contract terms, especially the insurance liability and exclusions, and confirm the insurance period, payment period, and monthly premium amount?
- In the case of multiple insurance contracts, are the types of insurance and agency sales personnel the same?
- Whether the policyholder had previous multiple insurance experiences, and whether the types of insurance purchased are the same as the involved insurance.
- Whether the irregular sales conduct was sufficiently misleading to induce the policyholder to make an erroneous decision.
- Whether the policyholder has continuously paid premiums for many years, and whether they have added insurance premiums multiple times and received dividends during this period.
- After initially concluding the insurance contract, whether the policyholder has subsequently purchased other insurance products in the same manner.
Conclusion:
In recent years, malicious complaints and the “black market for policy cancellation” have seriously disrupted the normal functioning of the insurance market and the reputation of the insurance industry. The former China Banking and Insurance Regulatory Commission, the National Financial Regulatory Administration of China, and the Insurance Association of China have repeatedly carried out special actions against “black market for policy cancellation” and issued consumer risk warnings, but it is still difficult to effectively eradicate such illegal activities.
If insurance institutions can actively and effectively defend themselves in lawsuits, it would positively influence the regulatory authorities’ efforts to combat the “black market for policy cancellation,” as well as contribute to the development of the local insurance industry and the overall order of the national insurance market.
(Declaration: This article represents the views of the authors only and should not be regarded as a formal legal opinion or suggestion issued by Beijing AnJie Broad Law Firm. If you need to reprint or quote any content of this article, please indicate the source.)
For further information, please contact:
Wang Xuelei, Partner, Anjie Broad Law
wangxuelei@anjielaw.com
