Yu-Lai Jin December 7 2022 Qingdao Maritime Court rules on insurance subrogation right after ship sinks while carrying cargo KaiRong Law Firm | Shipping & Transport - China Yu-Lai Jin Shipping & Transport IntroductionFactsDecisionCommentIntroductionVarious unexpected risks may arise during the transport of cargo, which makes insurance indispensable. The entities involved in cargo transport usually opt for specific types of insurance, depending on their own legal position, to prevent and reduce losses caused by potential accidents.Generally, the cargo owner is the insured, while the carrier usually purchases transport liability insurance with itself as the insured. However, it is unclear what the perspective of the Chinese courts would be in a situation where:a logistics company purchases domestic waterway cargo transport insurance as the insured for cargo carried and operated by itself;the cargo suffers damage during transport;the logistics company compensates the cargo owner for the damage to the cargo; andthe insurer makes an insurance indemnity payment to the logistics company and then attempts to exercise its subrogation right.Would the Chinese courts recognise the legal effect of the domestic waterway cargo transport insurance and support the insurer's insurance subrogation right against the final liable party of the cargo damage?The Qingdao Maritime Court answered this question in a recent case, which was selected as one of the 10 exemplary cases of the Qingdao Maritime Court in 2021.FactsOn 11 November 2013, Mr Zhang, who owned a ship,(1) entered into an affiliation relationship with a shipping company, company A. The agreement confirmed that while the ship's nationality certificate indicated that the shipowner was company A, it was actually owned by Zhang.On 2 July 2019, a coal mining company entrusted a logistics company, company B, to arrange the transport of a batch of coal through the Chinese waterway. Company B and Zhang signed an agreement to dispatch Zhang's ship to transport the cargo. Before the transport started, company B bought domestic waterway cargo transport insurance, which showed that the insured was company B.On 3 October 2019, during the transport of the coal, the ship sank after accidentally colliding with a waterway renovation project, thus causing damage to the cargo. An accident investigation report issued by the Maritime Safety Administration indicated that the ship had to bear full liability for the collision.Company B fully compensated the cargo owner and the insurer made an insurance indemnity payment of about 1.35 million yuan to company B based on the domestic waterway cargo transport insurance. Thereafter, the insurer filed a lawsuit with the Qingdao Maritime Court against company A and Zhang to recover its insurance indemnity amount on the basis of the insurance subrogation right.DecisionThe Court held that there were two issues to be decided upon – namely, whether:the plaintiff (ie, the insurer) had legally obtained an insurance subrogation right from the insured, company B (ie, the logistics company); andthe two defendants should bear joint and several liability for the cargo damage.Overall, the Court ruled in favour of the plaintiff. The two defendants appealed, but the Shandong Higher People's Court upheld the first-instance court's judgment. The Qingdao Maritime Court's reasoning is set out below.Did the plaintiff legally obtain an insurance subrogation right from company B?The defendants argued that the plaintiff had not legally obtained an insurance subrogation right to claim for the cargo damage because:company B, as the contractual carrier, had no insurable interest in the cargo according to article 12 of the Insurance Law of the PRC;(2)company B was not allowed to insure or purchase the domestic waterway cargo transport insurance;as a result, the insurance contract between company B and the insurer was null and void; andthe insurer could not legally obtain the insurance subrogation right, even though it had made an insurance indemnity payment to company B.The Court decided that the cargo owner could claim the cargo loss from company B according to the principle of relativity of the contract. Once company B had agreed to pay for the damage caused by the accident, it had an insurable interest in the subject matter insured, despite not being the owner of the cargo. Further, article 14 of the Provisions of the Supreme People's Court on Several Issues about the Trial of Cases Concerning Marine Insurance Disputes stipulates as follows:The people's court that accepts a case involving any dispute over the insurer's exercise of the right of subrogation to claim for compensations shall only try the legal relationship between the third party that caused the insurance accident and the insured.In sum, the Court held that the insurer had the right to file a lawsuit as the plaintiff against company A and Zhang on the basis of the insurance subrogation right.Should the two defendants bear joint and several liability for the cargo damage?Due to the affiliate relationship between company A and Zhang, the Court held that:Zhang, as the shipowner and operator of the ship, should be liable for the cargo damage; andcompany A, as the registered shipowner, had to bear joint and several liability with Zhang to the plaintiff.CommentThis case involved a review of the logistics company's insurable interest under the domestic waterway cargo transport insurance and the corresponding insurer's insurance subrogation right. This has important guiding significance to the judicial activities of similar cases in the future.Specifically, with respect to the "insurable interest" stipulated in article 12 of the Insurance Law of the PRC, the Court gave a broad determination of the meaning and scope of the term "insurable interest". The Court explained that the so-called "insurable interest" refers to the interest of the insured in the subject matter of the insurance. The insured may suffer losses due to the occurrence of the insurance accident or profit from the non-occurrence of the insurance accident. The insurable interest of property insurance may include the existing interest, as well as the liability interest and expectation interest arising from the existing interest. Therefore, the definition of "insurable interest" should be interpreted liberally.Despite the fact that the case only involved an insurance dispute relating to the transport of cargo through the Chinese waterway, it may also have reference value for similar cases involving ocean transport cargo insurance.For further information on this topic please contact Jin Yu-Lai at KaiRong Law Firm by telephone (+86 21 5396 1065) or email ([email protected]). The KaiRong Law Firm website can be accessed at www.skrlf.com.Endnotes(1) Ship No. 5442.(2) Article 12 of the Insurance Law of the PRC: "An insurable interest means a legally recognised interest owned by an insurance applicant or insured in the subject matter insured."