An Innovative Liability Insurance Solution to Evolving Legal Challenges in China
May 25, 2016| By Frank Wang
The insurance market in China experienced robust growth in the last decade and has emerged as one of the largest in the world, with its Property/Casualty premium growing from USD 9 billion in 2000 to a staggering USD 140 billion at the end of 2015. Now China has become the third largest P/C market in the world, and the largest liability insurance market among emerging Asian economies. Even so, China's insurance market still has a very high growth potential, considering that the liability insurance penetration ratio is still only 0.05%.
The Chinese legal infrastructure has been evolving rapidly in recent years, with new laws and regulations being issued or amended, especially the Tort Law in 2009, the New Consumer Rights Protection Law in 2013, the New Environmental Protection Law in 2014, and the New Food Safety Law in 2015. The advancement of the legal system is coupled with rising levels of compensation and an increased public claims awareness, which ultimately results in a more litigious legal environment.
At the same time, the evolving legal system and regulatory changes contributed to the rapid growth of liability insurance, which is not only the fastest growing (increasing at an average rate of more than 20% annually since 2007) but also the most innovative line of business in the China P/C market. This is further facilitated by the central government’s increasing promotion of liability insurance as a new means of social governance and harmony. Insurance companies are making use of this dynamic environment to develop new liability products. Litigation Property Preservation Liability Insurance (LPPL) is a good example of this innovation - a liability product that we have not come across anywhere else in the world.
Chinese courts require a plaintiff to submit a guarantee to the courts when the plaintiff requests the court to preserve certain properties of the defendant before or during the trials. This is in order to ensure effective rulings in civil proceedings in case the plaintiff wins the lawsuit against the defendant. While bonds were used in the past, nowadays LPPL is being accepted by more and more local courts as a valid prerequisite to approve the property preservation application from the plaintiff. LPPL covers the countersuit of the original defendant against the original plaintiff in case of wrongful preservation. According to the typical LPPL policy, the insurer agrees to pay the damages for which the insured is legally liable, provided that all of the following four prerequisites are satisfied at the same time:
1. The existence of actual loss of the respondent
2. The existence of a “mistake” in the insured’s property preservation application
3. A cause-and-effect relationship between the loss of the respondent and the “mistake”
4. The court's recognition, according to the judgment, of the specific amount of loss of the respondent
Undoubtedly, LPPL brings another new growth opportunity for local insurers. It has also attracted the extensive attention from international insurers and reinsurers who are doing business in China. However, underwriters should not ignore the fact that there are several legal and underwriting issues that need to be addressed carefully. These issues may include:
1. The complicated legal nature and judicial practices of LPPL. Although the Civil Procedure Law and its judicial explanation of The Supreme Court have some clauses related to wrongful property preservation, courts have different understandings and judicial practices.
2. The complexity in estimating the outcome of legal disputes as well as the understanding of risks in applying certain property types for preservation. This means underwriters must assess the complex legal exposure in order to decide their risk appetite and appropriate premium for the exposure.
3. The conflict between the LPPL policy and the letter of guarantee submitted to the court. The letter of guarantee issued by the insurer must state the “incontestable and joint liability” of the insurer as a guarantor. However, insurers may deny coverage based on the insurance policy terms and conditions.
4. The choice between liability insurance and bond insurance. The biggest difference between these two solutions is whether the insurer can subrogate against the plaintiff after he pays the claims to the defendant. The liability insurer cannot do this because it is not entitled to subrogate against the insured of a liability policy. However, the bond insurer can do this according to the typical terms and conditions of a bond policy.
5. The moral hazard of the insured and the morale hazard of the judges.
The above issues, among many others, were discussed at Gen Re’s China Liability Seminar 2016, which was held in April in Beijing and themed "Legal & Underwriting Issues of Litigation Property Preservation Liability Insurance." One common takeaway from the seminar was that legal risk management is crucial to the healthy development of property preservation insurance products in the future.
More than 100 attendees from about 50 insurance companies joined the discussion with Gen Re liability experts, and our guest speakers included a law professor, judge and litigation lawyers. This further enhanced Gen Re’s position as the “Liability Thought Leader” in China. For more details regarding the legal and underwriting issues of LPPL, you may refer to my recent publication
Gen Re works with our clients on complex liability risks in several jurisdictions around the world. To find out more about LPPL or to seek expert advice for your business, don’t hesitate to get in touch with your local account executives.