Insurance subrogation is an important legal mechanism which enables insurers to reduce their losses after insurance indemnities are paid. However, opinions differ as to the application of reinsurers' right of subrogation. For example, the following questions often arise:
- Can reinsurers directly exercise subrogation against a liable third party?
- Should reinsurance indemnities be deducted from the amount claimed by a direct insurer when it exercises subrogation against a third party?
- Can a third party refuse to indemnify a direct insurer if the direct insurer has been partially or fully covered by reinsurance indemnities?
This article answers these questions from a Chinese perspective.(1)
According to the Understanding and Application of The Supreme People's Court's Judicial Interpretation (4) of Insurance Law, in insurance subrogation disputes, reinsurers cannot directly exercise their subrogation right against a third party, but will be recovered after the direct insurer exercises subrogation against the third party. This approach conforms with common international insurance practice.
The Shanghai High People's Court and the Zhejiang High People's Court share the view of the Supreme People's Court that, according to the principle of contract relativity, an insurer may exercise its right of subrogation against a third party in respect of the total amount, and the compensation from the third party will be apportioned to the reinsurer according to the reinsurance contract. In insurance subrogation disputes, because reinsurers have no right to exercise subrogation against third parties, the courts need not review the execution and performance of reinsurance contracts.
Thus, even though the legislation on the applicability of subrogation by reinsurers is unclear, the courts' views provide sufficient guidance for future cases. Nonetheless, parties should set out in detail reinsurers' right of subrogation in their reinsurance agreements in order to avoid ambiguities and uncertainties.
(1) For a discussion on the right of subrogation in an international context, please see "Applicability of right of subrogation in international reinsurance context".
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