Hello, this is attorney Seung-hyun Oh of Cheongchul Law Firm.

Imagine you have paid your premiums faithfully, and when an accident happens, the insurer replies that it is "an accident not covered under the policy terms." The mere fact that the policy contains an exclusion clause does not by itself make the refusal to pay justified. The key issue is whether that clause was properly explained to you at the time you signed up.

What Is the Duty to Explain Insurance Policy Terms?

Commercial Act Article 638-3 (상법 제638조의3) requires an insurer to deliver the policy terms and explain their important contents when the contract is concluded. The purpose is to ensure that the policyholder signs up understanding which risks are covered and in which cases benefits will not be paid. Delivering the terms and explaining their contents must therefore be distinguished. A signature in a confirmation box alone does not automatically establish that the duty to explain was fulfilled. What was actually explained, how it was explained, and the materials used at the time must all be examined together.

Exclusion Clauses and Special Riders Must Also Be Explained

Clauses that determine whether benefits are paid or how far coverage extends are important matters subject to the duty to explain. Particular care is needed with special riders that limit coverage: merely announcing the rider's name may not be enough.

The Supreme Court Decision 98Da59842 (May 11, 1999) held that if the insurer failed to explain the paid-transport exclusion in a business-use automobile insurance policy, it could not invoke that exclusion on the ground that the accident occurred during paid transport.

The Supreme Court Decision 2003Da27054 (August 22, 2003) likewise held that a family-driver-only special rider is subject to the duty to explain. Because coverage depends on who was driving, the insurer must clearly inform the policyholder of the permitted range of drivers.

In addition, the Supreme Court Decision 2001Da14917, 2001Da14924 (September 18, 2001) held that, within the "other automobile driving coverage special rider," the clause excluding accidents that occur while driving a vehicle entrusted in the course of automobile-handling business is also an important matter that must be explained.

What Happens If the Insurer Did Not Explain?

As a rule, an insurer cannot assert a policy term it failed to explain as part of the contract. If an exclusion clause that should have been explained was not, it becomes difficult for the insurer to refuse payment on the basis of that clause. However, insufficient explanation does not mean that benefits are payable for every accident. One must specifically review whether the clause at issue was subject to the duty to explain, whether an explanation was actually given, and whether the other conditions for payment are met.

Mailing an Information Sheet May Not Be Enough

The Supreme Court Decision 98Da43342, 98Da43359 (March 9, 1999) held that, in a mail-order accident insurance policy, simply mailing an information sheet outlining the policy terms together with the application form did not satisfy the duty to explain the exclusion clauses. An abstract product introduction is different from an explanation of the specific grounds on which coverage is excluded. The same decision also held that the policyholder's failure to exercise the statutory right of cancellation within the prescribed period does not cure the defect of a breach of the duty to explain.

It Also Affects Termination for Breach of the Duty of Disclosure

The Supreme Court Decision 96Da4893 (April 12, 1996) held that where an insurer breached its duty to explain important policy terms, it also could not terminate the contract on the ground that the policyholder breached the duty of disclosure. Where the unexplained terms are connected to the ground for termination, the insurer's right to terminate for breach of the duty of disclosure is restricted as well. This decision likewise made clear that failing to exercise the right of cancellation does not cure the breach of the duty to explain.

There Are Cases Where the Duty to Explain Is Exempted

The duty to explain policy terms is not always required. Courts exempt insurers from the duty to explain in the following two situations.

① Where the Policyholder Already Knew

If the policyholder was already sufficiently aware of the relevant policy terms, those terms may be recognized as part of the contract even without a separate explanation from the insurer (Supreme Court Decision 98Da43342, 98Da43359, March 9, 1999; Supreme Court Decision 2003Da27054, August 22, 2003). For example, prior work experience in the relevant insurance field, or a past history of claiming benefits under the same policy clause, may support a finding that the policyholder already knew.

However, the fact that the policyholder "already knew" must be proven by the insurer (Supreme Court Decision 2003Da27054). Mere work experience in the field is not enough; the insurer must prove that the policyholder was aware of the specific content of that clause.

② Where the Terms Were Directly Confirmed or Communicated Through Training

If, at the time of signing up, the policyholder personally read the relevant clause and signed a confirmation, or had previously received training from the insurer on that content, performance of the duty to explain may be recognized. In particular, if there is a handwritten signature together with a confirmation that the policyholder understood the policy terms, and the content of the clause at issue is expressly stated in it, there is room to find that the duty to explain was fulfilled.

Conversely, if there is only a signature and the content of the explanation cannot be specifically confirmed, it is hard to establish that the duty was fulfilled. The key is what content was conveyed and in what manner.

③ Where the Matter Is Predictable or Already Prescribed by Law

The Supreme Court Decision 2006Da87453 (April 27, 2007) held that the duty to explain may be exempted for matters that are so general and common in transactions that they can be sufficiently anticipated without a separate explanation, or matters that merely repeat what is already prescribed by law. However, the recognized scope of predictability is interpreted narrowly, so an insurer asserting an exemption must provide specific proof.

Check the Grounds for Denial Together With Your Enrollment Materials

If a dispute arises, secure the policy clause cited as the ground for denial, the application form, the product description, and any recordings or text messages from the consultation at the time of enrollment. Materials showing what you were told are the starting point for the analysis.

• Upon receiving the denial notice, immediately check the number of the exclusion clause cited and the original text of the policy terms

• Confirm whether you received the product description when completing the application and how you signed it

• Secure recordings, text messages, and emails of the explanation given at the time of enrollment

• Check whether the period for exercising the right of cancellation (Commercial Act Article 638-3(2) (상법 제638조의3 제2항): three months) has passed — even if it has, a claim of breach of the duty to explain is still possible

Closing Remarks

A breach of the duty to explain insurance policy terms is not a mere procedural issue. If an exclusion clause was not explained, the insurer cannot rely on that clause to refuse payment, and in some cases its right to terminate the contract for breach of the duty of disclosure is restricted as well. If your claim denial cites "exclusion under the policy terms," do not give up; start by checking whether an explanation was actually given when you signed up. Please contact Cheongchul Law Firm for a free consultation.

Thank you.