8 December, 2018
China adopts a civil law system and there is no concept of binding case precedent. Judicial Interpretations, in particular those made by the Chinese Supreme Court, are important legal documents which must be referred by all lower Courts in adjudicating cases.
On 1 September 2018, the Interpretation IV on Several Issues concerning the Application of the Chinese Insurance Law took effect and provides important guidelines when applying the Insurance Law to various scenarios (especially on the exercising of subrogation rights). The main rules and our comments are set out below.
I. Article 9 – waiver of subrogation
"Where, in the lawsuit on subrogation filed by the insurer against the third party as the defendant, the third party makes a defence on the ground that the insured has waived the right to claim against it before the insurance contract is concluded, the People's Court holds that the aforesaid waiver is lawful and valid, and if the insurer claims the exercise of subrogation on the corresponding part, the People's Court shall not support such a claim."
Comments: In marine cargo insurance, it is not unusual for the policy to contain a Waiver of Subrogation clause which aims to waive the claim against certain carriers / logistics companies. Such clause would be regarded by the Courts as being valid so that the insurer would no longer be able to pursue a claim against the carrier stated in the policy.
However, where the Waiver of Subrogation clause is unclear on the identity of certain carriers, e.g. "waiver of subrogation against Company A and its subcontractors", it would be subject to the agreement between the insurer and the insured (but not the third party carrier) on the interpretation of such clause (e.g. the definition of “subcontractors”). Alternatively, the insurer and insured may reach an agreement at a later stage to the effect that the waiver of claim against certain parties is withdrawn so that a subrogation claim against those parties would still be possible.
The main difficulty is that if the insured / insurer had earlier made it clear to the carrier that no claim will be lodged against it, the insurer may then be “estopped” from reneging on its promise by lodging a claim against the carrier at a later stage.
II. Article 12 – jurisdiction in subrogation claims
"Where the insurer files a lawsuit on subrogation against the third party causing the insured incident as the defendant, the Court having jurisdiction shall be determined according to the legal relationship between the insured and the third party."
Comments: Based on the above provision and earlier Judicial Interpretation, below is a summary explaining whether the insurer should be bound by the jurisdiction clause or arbitration clause stated in the contract between the insured and third party:
| Contract between the insured and third party | Legal consequence |
| Domestic Court jurisdiction clause | Effective |
| Foreign Court jurisdiction clause | Chinese Court can still exercise jurisdiction |
| Arbitration clause (domestic claims) | Effective |
| Arbitration clause (foreign-related claims) | Not binding on the subrogated insurer |
III. Article 15 – subrogation in liability insurance
"Where the insured fails to fulfill the indemnity liability after the insured's liability for indemnity to the third party has been determined, if the insured fails to file the request with the insurer for the direct payment of indemnity to the third party when the third party files a lawsuit against the insurer as the defendant or the insurer and the insured as co-defendants, it may be determined that it falls under the circumstance that the insured is slow to make a request as prescribed in paragraph 2 of Article 65 of the Insurance Law."
(Paragraph 2, Article 65 of the Insurance Law: Where the insured in liability insurance causes any damage to a third party and the insured's liability for indemnity to the third party has been determined, at the request of the insured, the insurer shall directly pay insurance indemnity to the third party. If the insured goes slow to make a request, the third party shall have the right to directly request the insurer to pay the insurance indemnity for the damage which the third party shall be indemnified for.)
Comments: The above provision clearly indicates two things. Firstly, the Chinese Courts now firmly support a subrogation claim against both the liable third party as well as its liability insurer (such rule has been adopted by some Courts in the past but has now become universal). Secondly, after obtaining a favourable judgment against the third party and its liability insurer but the insured neither pays under the judgment nor requests the insurer to pay, the claimant may cut through the insured and request the insurer to fulfil payment under the judgment directly.
For further information, please contact:
Ik Wei Chong, Partner, Clyde & Co
ikwei.chong@clydeco.com
