In a recent case published by Beijing Financial Court (the “BFC”), which was represented by AnJie Broad and classified as one of the typical financial cases for the year of 2022, the BFC pierced the veil of “co-insurance”, and confirmed that reinsurance legal relationship was established between two insurers.
The dispute arose out of the “co-insurance agreement” entered by PICC and China Life where the two insurance companies had disagreement as to the amount that PICC should pay after China Life, as the leading insurer, paid the insurance indemnities to the insured. Despite that the two insurers entered into a co-insurance agreement, the BFC pierced the veil of the “co-insurance agreement”, and held that the actual legal relationship formed between the two insurers is reinsurance instead of co-insurance.
In this case, the BFC distinguished the difference between co-insurance and reinsurance under the regime of PRC insurance law from the following aspects:
First, in terms of contractual parties, the parties to co-insurance agreement are policyholder and co-insurers, while the parties to reinsurance agreement are both insurers.
Second, in terms of contractual relationships, under co-insurance the contractual relationship is established between the policyholder and each co-insurer, while under the reinsurance, there is no direct contractual relationship between the policyholder and the reinsurer.
Third, in terms of insurance premium collection, under the co-insurance, policyholder submits its request for insurance with multiple co-insurers, and each co-insurer assumes the insurance liability and collect the insurance premium respectively. While under reinsurance, the cedant pays the reinsurance premium to the reinsurer after collecting the insurance premium from the policyholder. The reinsurer does not directly collect any premium from the policyholder.
Lastly, in terms of liability assumption, co-insurance is a type of insurance where more than two insurance companies cover the same subject matter, assume the same insurance liability for the same insurance period with the same limit of liability by using the same insurance contract, which is a horizontal assumption of liability among the co-insurers. In a reinsurance contract, the reinsurer underwrites the liability and risk under the original insurance contract. The cedant transfers part of the liability and risk of the original insurance contract to the reinsurer through reinsurance agreement, which is a vertical assumption of liability.
By applying the above criteria in the case at bar, the BFC eventually concluded that the legal relationship formed between PICC and China Life is reinsurance instead co-insurance.
Apparently, unlike reinsurance which is clearly defined by Article 28 of the PRC Insurance Law, the concept of co-insurance is not defined by law and is rarely found in other sources in China. The above analysis made by the BFC provides a standard interpretation of co-insurance from the judicial perspective, which also echos the Notice on Strengthening the Management of Property Insurance Co-insurance Business published by China Insurance Regulatory Commission, which provides that “[a] standardized co-insurance business should meet the following requirements: 1) the insured agrees to have multiple insurers to underwrite the risk; 2) the co-insurers jointly issues the policy, or the leading insurer issues the policy accompanied by a co-insurance agreement; 3) the commission charged by the leading insurer from other co-insurers should be significantly different from the average level of reinsurance commission.” This Notice provides an important source for the BFC when discerning the difference between reinsurance and co-insurance.
In the recent 20 years, reinsurance has been introduced to China and plays an important role in the financial sector. With the development of reinsurance in China, there are more and more disputes arising out of the reinsurance business and even co-insurance business. The significance of this case published by the BFC lies in its accurate distinguishment between the co-insurance and reinsurance. The court probed into the true intentions between the parties and held that reinsurance legal relationship was found notwithstanding that the parties entered into an ostensible “co-insurance” agreement.
In this case, the BFC further confirmed the principal of utmost of good faith and “follow the fortunes” in reinsurance. It is also worth mentioning that it is one of the rare cases in PRC judicial practice that the principal of “follow the fortunes” in reinsurance was recognized by a PRC court. The principal of “follow the fortunes” has been written in the PRC regulations or guidance in insurance industry, or usually is incorporated as a clause into the reinsurance agreement. However, it is uncommon for a PRC court to recognize the principal of “follow the fortunes” without the express agreement between the parties.
This case is also a good reminder for insurance companies that they should pay more attention to the agreements to be entered and be more careful to follow the standard requirements both written in PRC Insurance Law and industry regulations before the agreements are concluded.