The application and analysis of the Interpretation IV on Several Issues concerning the Application of the Insurance Law in respect of the insurance subrogated claims
The Supreme People’s Court has issued the Interpretation IV on Several Issues concerning the Application of the Insurance Law on 31 July 2018 (‘Interpretation IV’). The Interpretation IV will take effect on 1 September 2018. It gives further guidelines on the issues in respect of transfer of the subject matter insured, the rights and obligations of the parties to the insurance contract, the subrogated claims and liability insurance.
This article will introduce the relevant provisions of the Interpretation IV and their impact on the insurer’s subrogated claims
1. Jurisdiction
The Supreme People’s Court issued the Guiding Case No.25 ‘Jiangsu Branch of Ping An Property Insurance Company of China v. Jiangsu Zhenjiang Installation Group Co Ltd’ on 26 January 2014 and confirmed that in respect of the insurer’s subrogated claim, the jurisdiction shall be ascertained according to the legal relationship between the insured and the third party instead of the insurance contract.
Article 12 of the Interpretation IV confirms the decision of the above Guiding Case that in respect of the insurer’s subrogated claim against the third party, the jurisdiction shall be ascertained on basis of the legal relationship between the insured and the third party. However, whether the agreed jurisdiction clause between the insured and the third party is binding on the insurer is still arguable and uncertain in judicial practices.
According to the Civil Procedure Law, if the insured and the third party have contractual relationship, the Court at the place where the Defendant is domiciled or the Court at the place where the contract is performed shall have jurisdiction over the subrogated claim. The jurisdiction is different subject to the special type of the contract between the insured and the third party. If there is transportation relationship between the insured and the third party, the Court at the place of origin of transportation, or the Court at the place of destination of transportation, or the Court at the place where the Defendant is domiciled shall have jurisdiction.
If the insured suffered losses due to the third party’s tortious act, the Court at the place where the tortious act is carried out or the Court at the place where the Defendant is domiciled shall have jurisdiction.
2. Basis of the subrogated claim
Article 60 of the Insurance Law provides that where an insured incident occurs due to any damage caused by a third party to the subject matter insured, the insurer shall, after it pays indemnity to the insured, be subrogated with the insured's right to claim for indemnity against the third party within the extent of the indemnity amount. In the previous judicial practices, it is arguable whether any damage caused by a third party to the subject matter insured also covers the circumstances under which damage is caused by the breach of contract of a third party.
The Supreme People’s Court issued the Guiding Case No.74 ‘Jiangsu Branch of Ping An Property Insurance Company of China v. Jiangsu Zhenjiang Installation Group Co Ltd’ on 28 December 2016 and confirmed that any damage caused by the breach of contract of a third party also falls within “any damage caused by a third party to the subject matter insured” in paragraph 1 of Article 60 of the Insurance Law. The Court shall support the insurer’s exercising of the subrogation right against the third party in this regard.
Article 7 of the Interpretation IV also confirms the decision of the above Guiding Case that the Courts shall support the insurer’s subrogated claims against the third party on basis of either the latter’s tortious act or breach of contract.
3. The insured has waived or limited its right to claim for compensation from the third party before the insurance contract is entered into
The insurer may only find that there is waiver clause or limitation of liability clause in the contract between the insured and the third party when the relevant documents are available after payment of the insurance indemnity is made to the insured. Or in the course of the insurer’s subrogated claim, the third party raises that the insured has waived or limited its right to claim against them.
In the judicial practices, the Court usually considers that the insured’s waiver or limit of the right to claim against the third party is valid and effective. The insurer cannot file recourse claim against the third party or may only claim against the third party on basis of the limitation amount.
In respect of whether the insurer could deduct or request the insured to return the corresponding insurance indemnity due to the insured’s waiver or limitation of liability, the Courts may have different understandings and views.
Article 61 of the Insurance Law provides that
“Where, after an insured incident occurs and before the insurer pays the insurance indemnity, the insured waives the right to claim against the third party, the insurer shall not be liable to pay the insurance indemnity.
Where the insured waives the right to claim against the third party without the consent of the insurer after the insurer pays the insurance indemnity to the insured, the waiver shall be null and void.
Where the insurer is unable to exercise the right of subrogation due to the insured’s intention or gross negligence, the insurer may deduct or require the insured to refund the corresponding amount of insurance indemnity.”
Some Courts consider that the provisions of the Paragraph 3 of Article 61 of the Insurance Law only apply at the stage after the insured incident occurs and before the insurance indemnity is paid by the insurer. While some Courts consider that the Paragraph 3 of Article 61 of the Insurance Law does not define the time when such provisions shall apply.
In a dispute arising from damage to cargo during road transportation, the insurer filed recourse claim against the carrier after making payment of the insurance indemnity to the insured. The contractual carrier alleged that they were entitled to enjoy the limitation of liability according to the transportation contract between them and the insured. The local Court in Jiangxi Province considered that the insured waived the right to claim for the actual losses incurred against the third party before the insurance contract was entered into. The insurer cannot request the third party to compensate the actual losses and could only ask for compensation subject to the amount of the limitation of liability. The Court further made reference to the Paragraph 3 of Article 61 of the Insurance Law and considered that the insurer suffered losses due to the insured’s waiver of its right to claim for the actual losses, the insurer could ask the insured to return the corresponding insurance indemnity.
The Court obviously did not consider the condition “the insured’s intention or gross negligence” in Paragraph 3 of Article 61. At the time when the insured entered into the transportation contract, the insured did not enter into the insurance contract for the cargo in question. It is difficult to affirm the insured’s intention or gross negligence. It is worth to consider whether the Court should apply the provisions.
However, the waiver or limitation of liability clause would definitely affect the insurer’s subrogation right, whether the insured shall disclose such information at the time when the insurance contract is entered into?
The duty of disclosure in the Insurance Law is disclosure of the facts only enquired by the insurer. When the insurer enquiries about the relevant information, the insurance applicant shall truthfully disclosure the same. If not enquired, the insurance applicant is not obliged to disclose such information. In this connection, we understand that if the insurer does not enquire about the wavier or limitation of liability clause, the insured is not obliged to disclose such information.
To resolve the above uncertainties, Article 9 of the Interpretation IV provides that:
“Where, in the subrogation lawsuit filed by the insurer against the third party as the Defendant, the third party makes defense on the ground that the insured has waived the right to claim the insurance indemnity against it before the insurance contract is concluded, the Court holds that the aforesaid waiver is lawful and valid, and the insurer claims the exercise of right of subrogation on the corresponding part, the Court shall not support such a claim.
Where the insurer enquires about the aforesaid waiver circumstances when the insurance contract is concluded, but the insurance applicant fails to truthfully inform the insurer, which leads to the insurer's failure to exercise the right of subrogation, if the insurer claims for refund of the corresponding insurance indemnity, the Court shall support such claim, unless the insurer knows or should have known the aforesaid circumstances and still agrees to underwrite the insurance”.
According to the above provisions, if the insured has already waived its right to claim against the third party before the insurance contract is entered into, such waiver is valid and effective. Whether the insurer could ask the insured to return the insurance indemnity would depend on whether the insurer has made enquiries about the waiver clause. If the insurer has already made such enquiries, but the insured failed to disclose the same truthfully, the insurer could ask for refund of the insurance indemnity. If the insurer did not make such enquiries, the insurer cannot ask for refund of the insurance indemnity in due course.
It is suggested that the insurer shall make enquiries about whether the insurance applicant/insured has waived or limited the right to claim against the third party when the insurance contract is negotiated and entered into in future. This could avoid the circumstances that the insurer cannot recover their losses in the recourse claim.
Whether the Interpretation IV would apply to the marine insurance?
In respect of marine insurance, Article 253 of the Chinese Maritime Code provides that where the insured waives its right to claim against the third party without the consent of the insurer or the insurer is unable to exercise the right of subrogation due to the insured’s fault, the insurer could deduct the corresponding amount of insurance indemnity.
The Chinese Maritime Code has not ascertained the time when the insured waived the right to claim against the third party. Before the insurance contract is entered into, the insured is not able to seek insurer’s consent in this regard. The limitation of liability clause in the contract is very common clause in the commercial contract. It is difficult to say that the insured is negligent in entering into the contract with such clause before the insurance contract is entered into.
The Chinese Maritime Code requires the insured to disclose all the material facts insured voluntarily. The insured shall disclose all the material information before the insurance contract is entered into without enquiries from the insurer. There is conflict between the Interpretation IV and the duty of disclosure in the Chinese Maritime Code and it seems that it is not proper to apply such provisions of the Interpretation IV for the marine insurance at the moment.
In view of the above, in respect of the marine insurance, the insured shall voluntarily disclose the waiver clause. Otherwise, the insurer may still be entitled to ask the insured to return the insurance indemnity etc.
Liu Dan
Solicitor
Beijing Guantao (Dalian) Law firm
T: (86-411) 8282 9601
F: (86-411) 8282 9901
E：liud@guantao.com