Foreign reinsurers often find it puzzling and difficult to navigate Chinese legal frameworks regarding reinsurance contracts, especially since there are relatively few regulations to offer guidance on them compared to the extensive regulations on direct insurance.
Moreover, since the reinsurance business often involves small groups of close acquaintances, it is frequently the case that the parties neglect the wording of reinsurance contracts.
During the past five years, the Chinese courts and arbitration institutions have handled major disputes relating to reinsurance contracts. These cases prompted legislation in the reinsurance sector and drew attention to the need for more careful wording in reinsurance contracts.
This article provides an overview of several essential provisions in reinsurance contracts under Chinese law.
In some jurisdictions, a party in breach of the conditions clause of a reinsurance contract will be liable for the relevant risks caused therefrom, and the other party will have the right to cancel or terminate the contract. However, such conditions clauses are not commonly used in Chinese reinsurance practice, which means that a party's breach of the conditions clause does not necessarily mean that the other party can refuse to assume responsibility or terminate the contract, unless such a breach constitutes a fundamental breach of contract or a special remedy is stipulated for such a scenario. To avoid a potential dispute, further clarification should be made in the reinsurance contract, especially to stipulate a remedy for such a violation. An example of how a clause might operate is as follows:
The parties shall abide by the clauses hereunder. Failure of any party to comply with any of the provisions of the Conditions, regardless of the severity of the failure, constitutes a substantial breach of this reinsurance contract and the other non-breaching party has the right to terminate this reinsurance contract.
The typical wording of an addendum correspondence clause is similar to the following: "All mutually agreed alterations to the terms and conditions of this reinsurance contract shall be binding upon both parties and be deemed to form an integral part hereof."
In addition to this, all subsequent documents that form a part of the reinsurance contract should be duly signed by the reinsured and the reinsurer to avoid potential legal disputes. In Chinese practice, there were some disputes in which reinsurers refused to cover the subsequent risks because the relevant amendments and documents were not signed by the reinsurers.
Brokers play a critical role in the placement of reinsurance. Thus, the broker is mentioned in the reinsurance contract to clarify its responsibilities despite the fact that it is not a party to the contract.
According to Article 117 of the Insurance Law, an 'insurance agent' is "an organisation or individual that is entrusted by an insurer to handle insurance businesses within the scope authorised by the insurer and collects commissions from the insurer". As per Article 118, an 'insurance brokerage' is "an organisation that provides intermediary services for conclusion of an insurance contract between a policyholder and an insurer for the benefit of the policyholder, and collects commissions pursuant to the law". Thus, under Chinese law, the broker is deemed to be the representative of the reinsured instead of the reinsurer in a reinsurance relationship, unless otherwise stated.
In general, brokers handle the business under the authorisation of the reinsured or reinsurers. However, to avoid potential misunderstandings and ambiguity under Chinese law, amendments should be made to clarify the legal relations between the reinsured, the reinsurer and the broker in the reinsurance contract.
In China, most reinsurance parties prefer to select arbitration – rather than litigation – as the means to resolve disputes.
According to Article 16 of the Arbitration Law, an arbitration agreement must include:
- an expression of intent for an arbitration;
- the subject matter of arbitration; and
- the chosen arbitration institution.
The exact location of the arbitration, the arbitration rules and the arbitration language are not requisite information for the arbitration clause. In China, it is beneficial for the reinsurance parties to describe the arbitrators' background in the reinsurance contract because only a few arbitrators have reinsurance backgrounds, and this could help them to better understand the reinsurance business.
Set-off clauses are common in Chinese reinsurance contracts.
An example of a set-off clause is as follows:
Either party may at its discretion offset against any amounts advised to and due from the other party hereunder any amounts which have been previously advised and are due at that time under this or another Agreement. (Emphasis added.)
However, this clause may bring out many questions on ascertainment of basic facts if it includes the highlighted words because other agreements, other parties or other legal relationships may be involved.
Further, according to the Management Rules for Reinsurance of Property Insurance Companies, the Notice on Strengthening Financial Fund Management, the Basic Guidelines for Internal Controls in Insurance Companies and the Standards for the Financial and Accounting Work of Insurance Companies, the premium income and commissions of insurance companies will be managed in accordance with the rule of 'two lines of revenue and expenditure'. This means that when business is carried out it is necessary to calculate and manage the commission account and premium account separately. As such, the current wording and implementation of common offset clauses may breach the financial and accounting regulations of Chinese insurance companies.
A line slip is an authority given in writing by a number of underwriters which enable the leading underwriter(s) to agree to proposals for (re)insurance of risks within a prescribed class on behalf of all underwriters subscribing to the line slip provided that the proposed (re)insurance is within the scope of the terms of the authority.(1)
A line slip is seen as giving a market-delegating authority to the leading reinsurer, creating an agency relationship between the lead reinsurer and the following reinsurers. Even though a line slip is common practice in the reinsurance market, the Chinese laws and regulations have not established special rules for the relations between the lead reinsurer and the following reinsurers.
Another common source of dispute is vague language in the reinsurance contract regarding each party's role, which has resulted in litigations and arbitrations. Parties are recommended to include a clear scope of the authorisation of the leading reinsurer (eg, what kind of risks can the reinsurer underwrite and whether separate signatures of the following reinsurers are required for special risk acceptance) in reinsurance contracts governed by Chinese law.
The duty of utmost good faith is one of the most essential doctrines in Chinese insurance and reinsurance law. If there are no clear or specific legal provisions in the reinsurance contract, the reinsurer and reinsured would unsurprisingly use the duty of utmost good faith to interpret the reinsurance contract. However, to avoid any vagueness and ambiguity, it would be wise to stipulate the aforementioned provisions in the reinsurance contract.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.