Presented by: Tran Thi Kieu Tran
Junior Associate – THE LAM LAW LLC

Introduction

Property insurance plays a crucial role in society, significantly influencing economic and financial stability. As a result, property insurance contracts are a key legal aspect of commercial insurance. Through these contracts, the parties involved in commercial insurance transactions fulfill their objectives. Insurers generate profit from the premiums agreed upon in the contract, while policyholders ensure risk transfer and financial recovery in case of loss.

The fundamental terms of property insurance contracts are regulated under the Law on Insurance Business 2022 to protect the rights and interests of both parties. These terms include: the insured subject, the sum insured or the insured value or the liability limit, the insurable interest, the insured event, and the compensation method.

1. Overview of Terms in Property Insurance Contracts

Like all other insurance contracts, a property insurance contract must include certain mandatory content as prescribed by law[1]:

• Policyholder, insured person, beneficiary (if applicable), insurance company, or foreign non-life insurance branch;
• The insured subject;
• The sum insured, insured asset value, or insurance liability limit;
• Coverage scope, insurance terms, conditions, and clauses;
• Rights and obligations of the insurer, foreign non-life insurance branch, and policyholder;
• Insurance term and effective date of the contract;
• Premium amount and payment method;
• Compensation and insurance payout methods;
• Dispute resolution mechanisms.

This paper will focus on analyzing key terms specific to property insurance contracts.

2. The Insured Subject

The primary distinction between property insurance contracts and other types of insurance contracts lies in their insured subject. In property insurance contracts, the insured subject consists of assets as defined by the Civil Code. These include objects, money, valuable papers, and property rights, covering both tangible and intangible assets.

Tangible assets include both real estate and movable property, which may be either existing or future assets. The Law On Insurance Business aligns its definition of “assets” with the Civil Code, broadening the scope of insurable property compared to the Law On Insurance Business 2000.

Since property is an inanimate object with a finite lifespan, it naturally deteriorates over time. Accordingly, insurers and foreign non-life insurance branches are not liable for losses resulting from natural wear and tear or the inherent nature of the property unless otherwise agreed in the contract. This contrasts with life insurance, which does not exclude “internal human losses” because life insurance covers human life and longevity rather than physical objects.

Additionally, property insurance covers both tangible and intangible assets. While tangible asset valuation methods are well-established, insuring intangible assets remains challenging. Insurance traditionally assesses risks based on physical damage and historical loss data. Applying the same approach to intangible assets is difficult due to unpredictable impacts and valuation issues.

Examples of intangible asset insurance include supply chain insurance and business interruption insurance, which often still involve physical damage. The challenge for risk managers is ensuring sufficient coverage for high-value intangible assets. Cyber risk insurance exemplifies this issue. In the early days of the internet, cybersecurity threats were minimal. However, with the widespread use of online platforms, cyberattacks have become a significant business risk.

Many companies rely on online systems but face challenges in securing insurance for intangible asset losses due to cyber incidents. The insurance industry struggles to manage such high losses, with few insurers offering high-limit policies, and few clients willing to pay the necessary premiums.

3. Sum Insured, Insured Value, or Insurance Liability Limit

Unlike life insurance or liability insurance, the value of a property insurance contract can be precisely determined. Consequently, compensation in property insurance contracts cannot exceed the market value of the insured property at the time and place of loss.

Insurance exists to provide financial support to those facing risk, not to create profit for policyholders. Compensation is calculated based on the market value at the time of loss, and the insured party may agree with the insurer on how to be compensated—through repair, replacement, or cash reimbursement.

The insured value must be clearly stated in the contract. It serves as the basis for determining compensation and calculating premiums. Failure to specify the insured value may lead to disputes, as parties might manipulate asset values to their advantage. Disputes over insured values can delay compensation payments, requiring court intervention for resolution.

4. Insurable Interest in Property Insurance

The LAW ON INSURANCE BUSINESS does not define “insurable interest” explicitly but lists circumstances where it exists. The policyholder has an insurable interest if they have ownership, possession, or usage rights over the insured property.

The 2022 LAW ON INSURANCE BUSINESS introduces a separate clause on insurable interest, distinguishing it from the general definition in the 2000 LAW ON INSURANCE BUSINESS. This distinction helps participants easily identify their eligibility for compensation. Essentially, insurable interest refers to the policyholder’s financial or legal relationship with the insured property. If a loss occurs, the policyholder suffers financial or emotional harm, justifying their claim.

In property insurance, insurable interests must be measurable in financial terms. Moreover, for a contract to be valid, the policyholder must have an insurable interest at the time of contract formation and at the time of the insured event. If ownership changes (e.g., through sale or transfer), the contract terminates, and the former owner loses coverage.

For instance, if Mr. A insures his house for five years but sells it to Mr. B after two years, Mr. A loses his insurable interest, and Mr. B must obtain new coverage.

5. Insured Event

Unlike other contracts where conditions are predetermined, property insurance contracts address future risks. At the time of signing, neither party knows whether a loss will occur.

Under Article 3(27) of the 2022 LAW ON INSURANCE BUSINESS, an insured event is an objective event, agreed upon in the contract or defined by law, which triggers the insurer’s obligation to compensate.

An insured event must be:

• Objective: It occurs independently of the parties’ control.
• Uncertain: The timing and severity of the event are unpredictable.

Policyholders purchase insurance to mitigate risks that they cannot control. However, not all risks qualify as insurable risks. Insurable risks are those covered under the insurance policy, requiring insurers to compensate for losses when such risks materialize.

For example, under Decree 23/2018/NĐ-CP on mandatory fire and explosion insurance, insurers must compensate for losses caused by fire or explosion within the defined coverage.

Conclusion

Property insurance contracts contain unique legal characteristics that differentiate them from other types of insurance. Key terms such as the insured subject, sum insured, insurable interest, insured event, and compensation methods are fundamental in determining rights and obligations. Understanding these terms ensures that both insurers and policyholders comply with legal requirements and effectively manage risks

[1] Article 17.1 Law on Insurance Business 2022

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