The recent explosions in the port city of Tianjin in China, which killed more than a hundred people and left large areas of the city devastated, could generate insurance losses of up to $1.5 billion according to analysts at Credit Suisse. The blasts took place at a warehouse containing hazardous and flammable chemicals. The China Earthquake Networks Centre reported that the first explosion was equivalent to three tonnes of TNT detonating, with the second explosion equivalent to 21 tonnes and being so large it could be seen from space. It is perhaps no wonder then that a significant number of insurance claims are expected to arise from the explosions.

It is expected that the vast majority of losses will be insured by Chinese insurers, but many international reinsurers, including those in the London and Bermuda markets, will also face significant exposure to claims. The area is also home to a number of large, multinational corporations such as Coca Cola, GlaxoSmithKline and Toyota, whose global programmes as well as local covers will likely be affected.

Death & Personal Injury Claims

Officials are still investigating the cause of the blasts, but Chinese media has reported that at least one employee of Tianjin Dongjang Port Ruihai International Logistics (the owner of the warehouse) has been arrested. With significant numbers of people, including several firemen, having been killed or injured by the blasts, liability insurers underwriting the warehouse owner's and the port authority's operations could see claims in due course. It is hoped, however, that many medical and life insurance claims will be covered by Chinese government-supported schemes and individual medical and life insurance policies.

Property Claims

The port at Tianjin is the third largest in the world in terms of total cargo volume and is China's largest entry point for imported cars. It is believed that at least 8000 new cars, and possibly many more, were damaged in the blasts. With motor vehicle insurance being a somewhat specialist sector, it is envisaged that this particular market will be hit hard.

As well as damage to cars, property and marine cargo insurers will no doubt see claims arising from damage to containers, warehouses, port buildings and other real estate as well as road/rail infrastructure.  The effects of the blasts were felt several kilometres away from the port in residential areas as well.

Supply Chain Disruption / Business Interruption Claims

Business Interruption extensions to property policies will no doubt be impacted. As already noted above, a number of large multinational companies operate from Tianjin, many of which are likely to place their business interruption/supply chain covers in global markets, including London. It is probable that these companies will experience significant disruption to their supply chains as a result of many of the port's facilities having been closed.

Numerous other companies, who are not based in Tianjin but whose key suppliers and/or customers operate from the area, will also be affected and may seek to recover losses under their contingent business interruption policies. Following a number of catastrophic events back in 2011 including the major earthquake and tsunami in Japan and floods in Thailand, the importance and potential scope of this type of cover was brought into sharp focus and many insurers and reinsurers have since tightened their policy language in an effort to limit their exposure to known risks. Given this, disputes may well arise in the context of contingent BI claims as to whether the policy wording covers the loss or not.  

Analysis

It is inevitable whenever large losses result from a catastrophic event such as the explosions in Tianjin that issues will arise when claims are made under insurance and reinsurance policies. Although the vast majority of claims are expected to be made against Chinese insurers, the global programmes of large, multinationals operating out of Tianjin will also be affected. 

Importantly, much of the loss will ultimately be picked up by global reinsurers and, as is very often the case where large losses are concerned, reinsurers will be particularly careful to scrutinise the manner in which underlying claims have been assessed, adjusted and paid.  

It is a well established principle that where a reinsurance contract requires the reinsurer to follow the settlements of the reinsured the reinsurer will be bound subject to two provisos: “…[1] that the claim so recognised [by the reinsured] falls within the risks covered by the policy of reinsurance as a matter of law and [2] provided also that in settling the claim the insurers have acted honestly and have taken all proper and business-like steps in making the settlement.” (see Insurance Company of Africa v SCOR (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312).

In the present case, local insurers may come under pressure from the Chinese government to make payments to those affected quickly, to enable the repair and rebuilding of the port – this kind of speedy settlement of claims will no doubt attract increased attention from reinsurers and could give rise to them questioning the manner in which such claims were settled.

Parallels may be drawn with the position following the Thai floods in 2011, which gave rise to a significant number of insurance and reinsurance claims. One claim of note which came before the English courts was Tokio Marine Europe Insurance Limited v Novae Corporate Underwriting Limited [2014] EWHC 2105 (Comm), in which reinsurers argued that their reinsured had failed to act 'properly or in a business-like manner' in settling underlying claims arising from the floods. In that case the English Commercial Court dismissed reinsurers' defence, but the case turned very much on its own facts.   Furthermore, the case was decided by Mr Justice Field (now retired), who was perceived by some as having a tendency to find against reinsurers. It is easy to see how similar disputes may arise from the Tianjin explosions, and how the English courts could find differently in another case.  

The scope of reinsurance cover and the robustness of follow the settlement clauses may also be tested where no true "back to back" cover exists, given the likelihood of local policies being subject to Chinese law and the reinsurance policies being subject to, for example, English law (see Wasa v Lexington [2009] UKHL 40).