Chinese insurers often face the question of whether to submit subrogation cases to arbitration or litigation. This update examines the issues that should be taken into account in answering this question.
Insurance disputes and resolution channels
China has seen an increasing number of insurance disputes across a wide range of business lines, including:
- construction insurance;
- credit insurance;
- marine insurance;
- product liability insurance;
- car insurance;
- directors' and officers' liability insurance;
- environmental protection insurance;
- investment-linked insurance; and
- life insurance.
According to the assistant chief justice of the Supreme People's Court, 14,465 insurance litigations were formally accepted by the courts in 2005, while in 2010 the number of accepted cases reached 59,747. Legal experts have estimated that the number of insurance litigations in 2012 was around 1.5 times that of 2010. Insurance disputes frequently arise from disagreements on the scope of clauses limiting or excluding coverage, the insurer's obligation to explain such exclusion clauses to the applicant clearly and the disclosure obligations of the applicant and insured. The largest percentage of insurance disputes relates to automobile insurance.
Conducting insurance litigation in China is problematic for several reasons. The sale of insurance products is a relatively new phenomenon, as the government allowed the insurance industry to operate only in 1979. As a consequence, various conflicts and debates have not yet been clarified and there is a lack of experienced judges, lawyers and mediators to handle insurance disputes and dispute resolution mechanisms such as alternative dispute resolution.
Most insurers, insurance brokerage companies, insurance agencies and loss adjustors prefer arbitration. The reasons underlying this preference are obvious:
- time efficiency;
- greater flexibility and privacy; and
- better human capital, since experienced arbitrators have long been immersed in the insurance industry.
Legal fees are another essential factor, as a reasonable fee is likely to be awarded to the winning party by arbitrators but is always ignored or rejected by judges.
How should the arbitration clause be treated in subrogation cases?
If an insured executes an arbitration clause with a third party and an insured accident occurs due to the liability of this third party, the insurance policy may stipulate that the insurer will give insurance proceeds to the insured and has the right to subrogate in order to recover its loss from the third party. Thus, the question arises as to whether the insurer has the right to commence an arbitration process.
Some of those in favor of arbitration argue that, based on Article 60 of the Insurance Law, the insurer's right of subrogation is not an original right incurred by the insurer itself, but rather a right adopted from the insured. The insurer in a subrogation case will be deemed as standing in the shoes of the insured, so the arbitration clause will naturally apply to the insured. Therefore, when an insurer wishes to claim recovery against the third party under the agreement between the insured and the third party, the insurer will execute the arbitration clause binding both the insured and the third party.
Others disagree with this interpretation, referring to Article 4 of the Arbitration Law, which requires the 'free will' of parties to refer a dispute to arbitration and an arbitration agreement reached between them.
Thus, the question centers on the definition of 'arbitration agreement'. On this issue, the Supreme People's Court issued the Judicial Interpretation on Certain Issues Concerning the Application of the Arbitration Law. Article 1 of the judicial interpretation stipulates that:
"'other written agreements' shall mean those agreements on arbitration requests concluded in the form, such as a written contract, letter, or electronic data text (including telegram, telex, facsimile, electronic data interchange, and e-mail)."
According to one school of thought, the insurer and the third party do not conclude a contract containing an arbitration clause, nor do they sign any written form of agreement to submit the dispute to arbitration. Thus, the arbitration clause should not be binding on the insurer and the arbitration institution has no jurisdiction over the dispute between the insurer and the third party.
In response to such reasoning, pro-arbitration proponents quote from the same judicial interpretation to reinforce their stance. Article 9 of the judicial interpretation stipulates that:
"where all or part of the creditor's rights and/or debts are transferred, the arbitration agreement shall be binding upon the transferee unless the parties agree otherwise or the transferee explicitly objects to or is unaware of the existence of a separate arbitration agreement when the creditor's rights and/or debts are transferred thereto."
Based on this provision, an insurance subrogation right could be deemed as having been transferred from the creditor (the insured) to the transferee (the insurer) and as such, the arbitration agreement will be binding on the insurer.
In practice, judges in local courts are split over this interpretation. Some believe that since the right is transferred from the insured to the insurer, the binding force of the arbitration clause is also transferred to the insurer and the third party. Dissenters claim that Article 9 of the judicial interpretation applies to cases where parties to a contract and the transferees intentionally agree to transfer the whole contract (including their rights and obligations under it), rather than to insurance subrogation, which is a right that is transferred automatically, or to the transference of rights compelled by the Insurance Law. In such circumstances, the substantial right of the insured to claim for compensation against the third party is transferred, but as there was no agreement between the insurer and the third party to submit to arbitration, it is difficult to envision that the arbitration agreement has been transferred as well.
Due to these legal uncertainties, a third party in the subrogation process is likely to challenge the validity of the arbitration agreement in accordance with Article 20 of the Arbitration Law. The arbitration tribunal must then suspend the arbitration procedure and wait for the court's decision, which is unappealable. As a consequence, the correct insurance subrogation venue can hardly be determined in advance.
In short, competition between the courts and arbitration institutions over subrogation cases has become an exhausting and time-consuming game, and causes confusion for insurers with respect to their recovery rights.
Can an arbitral award be set aside?
After an intense and fierce trial in which the wining party comes out with the arbitral award in hand, another obstacle arises: the court's review of the arbitral award.
The court's review procedure for the arbitral award can be divided into two categories: one for domestic arbitration and one for foreign-related arbitration.
Article 58 of the Arbitration Law applies to domestic arbitration. This clause allows the court to set aside an arbitration award in the following situations:
"(1) There is no arbitration agreement; (2) The matters decided in the award exceed the scope of the arbitration agreement or are beyond the arbitral authority of the arbitration commission; (3) The formation of the arbitration tribunal or the arbitration procedure was not in conformity with the statutory procedure; (4) The evidence on which the award is based was forged; (5) The other party has withheld the evidence which is sufficient to affect the impartiality of the arbitration; or (6) The arbitrators have committed embezzlement, accepted bribes or done malpractices for personal benefits or perverted the law in the arbitration of the case.
If the court determines that the arbitration award violates the public interest, it shall also set aside the award."
Article 70 of the Arbitration Law applies to foreign-related arbitrations and establishes a similar standard.
Previously, almost every reason for setting aside an award was related to procedural issues, except for one case, which was related to public interest. Local courts sometimes set aside awards by reference to reasons irrelevant to law and judicial interpretations. For instance, if a third party loses in arbitration, it is likely to challenge the validity of the insurance contract and the insurer's position of subrogation. Even if the third party is not a party to the insurance contract, it will always challenge the award by reference to the insurance contract and question the insurable interest, premium, coverage, excluding clauses, disclosure and waiver issues in the execution of the insurance contract.
In the framework of Chinese jurisprudence, the subrogation dispute relationship between the insurer and the third party is different from the contractual relationship between the insurer and the insured. According to legal doctrine, each individual litigation must focus on a single legal relationship. Checking evidence and investigating facts that are not closely related to the relationship in question will be deemed as overstepping jurisdiction. Thus, during the review procedure, such probing not only blurs the distinction between a substantive issue and a procedural issue, but also exceeds the limits proscribed by juridical doctrine.
Since there is a lack of detailed and specific law that touches on this issue, despite the insurer's objection, some judges will review the entire case in detail – including evidence discovery, debates and loss adjuster reports in the arbitration procedure – and set aside the arbitral award.
Arbitral award enforcement procedure
Once the insurer has persevered through the burdensome review procedure without additional tumult, it may think that it is near the peak. However, the subsequent enforcement procedure will teach it a lesson: it is only halfway up the mountain.
If the third party does not execute the payment obligation according to the arbitral award, the insurer must apply to the court to enforce the award, which is governed by Article 237 of the Civil Procedure Law.
The acceptable reasons for setting aside foreign-related awards are the same as those for domestic arbitral awards – namely, that the parties had no arbitration clause in their contract and did not subsequently reach a written agreement on arbitration.
In Chinese practice, the enforcement procedure jeopardizes far more awards than the review procedure. The reason for this is simple: the issue of venue. The court that hears the claim regarding the setting aside of an arbitral award is the intermediate court with jurisdiction over the place where the arbitration commission is located. In contrast, the court in charge of arbitral award enforcement (both domestic and foreign-related awards) is the court with jurisdiction over the place where the losing party is domiciled or where its property is located.
Generally speaking, the intermediate court is hospitable towards the arbitration institution in the review procedure, but it is difficult to say the same for an enforcement court, which is friendlier towards the target entity. Taking regional protectionism into account, the enforcement procedure will sometimes render the efforts and resources expended by insurers in subrogation arbitration to be of little use. This is the main reason why the subrogation success ratio for insurers through arbitration is low.
If the insurer is defeated in the enforcement procedure, it will face another frustrating issue: if the execution of an arbitral award is disallowed by the court, the parties may, in accordance with a written agreement on arbitration reached between them, apply for arbitration again or may bring an action before a court.
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