Insurance Litigation In China

Monday, January 31, 2011 - 01:00

Deacons' PRC Insurance Litigation practice group has recently advised on a litigation matter between a Chinese insurer and a foreign insured in respect of a claim dispute under Chinese jurisdiction. This article reviews several key issues regarding insurance litigation in Mainland China.

Facts Of The Claim

The foreign insured rented a facility in Mainland China for manufacturing. One day a fire occurred in a building on the premises, which resulted in a significant loss of equipment as well as stock. The insured, considering that the loss should be covered under a Property All Risks policy issued by a Chinese insurer, made a claim of several millions of RMB. The insurer engaged a loss adjuster to investigate the claim and determine the extent of loss.

A series of disputes arose between the parties in respect of the claim, including i) whether the insured had an insurable interest of the damaged property; ii) whether there was any underinsurance; iii) the extent of loss; iv) documents needed to justify the claim; v) interpretation of policy wordings; vi) the capability and conduct of the adjuster and vii) the possibility of recovery, which are quite common areas of dispute in similar cases. The parties couldn't arrive at a compromise through negotiation so eventually they turned to a PRC court for a solution, reaching a settlement agreement with the intervention of the court partway through trial.

Chinese Legal System

China's four-tiered judicial system consists of i) district court, ii) intermediate court, iii) high court and iv) the national Supreme People's Court. Generally the district court is the first trial court for most cases. However, the first trial court can be the intermediate or high court if certain jurisdictional thresholds, i.e. the amount of claim, are met or if it is a high-profile case.

The threshold of the disputed amount for the cases to be tried in an intermediate or high court differs from one province to another in China due to the imbalance of economic development of different regions. For example, the intermediate court in Shanghai has a jurisdiction of any cases where the disputed amount exceeds RMB 50 million. However, Shenzhen Intermediate People's Court takes first trial of foreign-related cases with an amount over RMB 6 million or domestic cases with an amount over RMB 50 million.

China has a codified legal system based on the civil law system. In Chinese courts, judicial decisions are not legally binding on other courts. Because the law displays an unnecessary vagueness in its codified language, the Supreme People's Court issues judicial interpretations from time to time to provide interpretation and guidance to judges and legal practitioners on the application of certain laws.

General Legal Proceedings

The statute of limitations for litigation of general insurance in China is two years, commencing from when the plaintiff knew or should have known that his rights were infringed. Territorial jurisdiction is generally determined by factors such as where the defendant resides or the insured subject matter is located in the absence of an agreed forum.

Legal proceedings commence upon the filing of a complaint with the court. The burden imposed initially for the courts to accept a case is not substantial. The plaintiff only needs to establish a prima facie case. Once the case is accepted by the court, a copy of the complaint will be delivered to the defendant, and the defendant may lodge a defense within 15 days of receiving the complaint. However, it is not mandatory under the Chinese legal system for a defendant to file a written defense.

The timeline of evidence submission can be agreed by the plaintiff and defendant with the court's approval. In practice, the court designates an initial time limit for filing evidence, usually 30 days after service of complaints. The time limit can be extended subject to the court's approval if either party has difficulty collecting evidence within the timeline. The court might organise a pre-trial examination of evidence before a formal trial, given the scale of complexity of claims.

The court hearing would be conducted after the expiry of the timeline of evidence submission. Usually there is only one hearing, but there may be two or more hearings for large and complicated claims. There is no specific time limit for trial of foreign-related disputes though in practice usually it takes six months to conclude the first trial of domestic cases.

Mediation can be available and initiated at any time during the court hearing. It is a very flexible process. Either party may ask the judge hearing the case to mediate the dispute. Mediation is by far the preferred choice of Chinese judges, especially for large and complicated claims, and such process fits well with the Asian culture of compromise.

The judge may exert an unparalleled influence on parties during mediation to press them to compromise. One party's unwillingness to mediate may create difficulties for that party in subsequent litigation if the parties fail to reach an agreement. An uncompromising stance will indicate a party's intransigence and may not be viewed favourably at subsequent stages of the legal process. A successful mediation is also economical for both parties as the court fee will be reduced by 50 percent, which is intended to encourage mediation as well as lower legal expenses. A settlement order is binding and enforceable. It cannot be appealed.

If the mediation attempt fails, parties have to continue with the litigation for a judgement to be issued. Either party may lodge an appeal if it disagrees with a judgment or an order issued by the first trial court. During the appeal, the parties are only entitled to produce new evidence that is either discovered after the first trial court hearing or obtained by the court through investigation.

The judgment or order issued by the appeal court is final and binding. Parties with certain obligations under the judgment shall perform the obligations within the period stipulated in the judgment. Otherwise, the winning party has the right to apply for legal enforcement to the first trial court.

Challenges Of Litigation In China

Foreign enterprises used to be reluctant to litigate in China as they were unfamiliar with the laws and practice. As the Chinese economy becomes a more important player in the global market, we are seeing a growing number of litigation matters involving a foreign party, either voluntarily or passively, in China. Generally speaking, the major challenges for a foreign party to litigate in China in respect of insurance cases are as follows:

I. Complex procedures for foreign-related cases

All the court documents such as Power of Attorney, Company Registration Certificate, and relevant evidence submitted to the court must be notarized by the Notary Public of the country where the documents are produced and authenticated by the Chinese embassy or consulate. Meanwhile, all documents in a foreign language submitted to the court have to be translated into Chinese. Therefore, it may take several months and considerable expense to complete the documentation preparation procedures before issuing proceedings.

II. Different interpretation of insurance policies

As the insurance industry in China is still in its infancy, Chinese judges and lawyers often struggle with the finer legal concepts that some disputes comprise. Judges tend to treat insurance policies as general commercial contracts. They find it difficult to understand the implied meaning and application of insurance clauses and terminology, which may cause different interpretations of insurance policies. In property and liability claims, we sometimes see that Chinese judges do not recognise the concept of warranties. Unlike the UK, there is no legal doctrine of warranties and conditions under the PRC Insurance Law, though Chinese judges accept the concept of warranties in some marine cargo cases. For disputes arising from property and casualty policies, insurers have to rely on the doctrine of truthful disclosure instead of breach of warranty to avoid the contract in the event of any untrue statements made by the insured. Thus, it is essential to engage a lawyer who has a good understanding of policy language and its applications.

III. Potential for local influence

As is common in civil law countries, Chinese judges decide all matters of fact and law. There is a concern among some foreign enterprises that Chinese judges might be unable to exercise their own independent analysis when handling controversial foreign-related claims. It would be difficult to win or enforce judgments against local parties. For this reason, it might be preferable for foreign parties to litigate in first-tier cities or courts at higher levels as judges in such cities or courts may have more experience in international litigation and might be further removed from the potential of local influence. The Chinese judges we have encountered have shown no preference for Chinese parties over foreign parties.

IV. Conflicts of law

Foreign law may apply to contracts involving a foreign party according to the PRC Contract Law. However, it may be difficult to apply foreign law in the Chinese courts as judges may find it difficult to track or understand the contents of foreign law. In such cases, Chinese law would apply instead.

V. Recognition and enforcement of foreign judgments

A foreign judgment is not enforceable in the absence of applicable bilateral agreement between China and countries concerned. To enforce a foreign judgment, a judgment creditor has to bring a petition for recognition and enforcement in China, which will be reviewed by the intermediate court.

In spite of these challenges, it may still be preferable for foreign parties to litigate in China if other means of dispute resolution, i.e. negotiation, mediation or arbitration, are unavailable or fail. The Chinese legal environment has improved significantly in recent years. From our experience, foreign parties may expect fair treatment in Chinese courts; moreover, the litigation process is relatively quick in China. Damages and the cost of litigation are relatively low in China compared to the U.S. or UK, though costs are increasing gradually as parties become more litigious.

Michael Turnbull is the Deacons Partner responsible for the firm's China Insurance Practice. He may be contacted in Shanghai at 86 21 6340 3588 and in Hong Kong at 852 2825 9612. Helen Shen is a Legal Executive at Deacons' Shanghai office. She specialises in insurance and litigation. She may be contacted at 86 21 6340 3588.

Please email the authors at michael.turnbull@deacons.com.hk or helen.shen@deacons.com.cn with questions about this article.