Gross negligence is a familiar concept in insurance policies sold in the Chinese market, particularly property policies. The all-risk policy issued by the People’s Insurance Company of China and the contractual liability insurance provided by newcomers to the industry, including the policies offered by foreign insurers, exclude accidents resulting from the insured’s gross negligence. Although this position seems clear in principle, it can be harder to determine in practice, as the fire at China Central Television (CCTV) has demonstrated.
In February 2009 members of staff at CCTV accidentally started a fire that engulfed their headquarters. The Beijing Fire Control Bureau reported that employees had illegally set off several hundred large fireworks near one of the company’s new buildings, which was under construction and nearing completion. The disaster resulted from the fireworks being aimed at the roof of the 30-storey cultural centre, which was close to the iconic CCTV Tower.
The resulting fire burned for almost six hours. It caused the death of one firefighter, hospitalized seven others and destroyed broadcast facilities costing billions of yuan. The total cost of the disaster has yet to be calculated.
Regulations state that large fireworks cannot be set off without the municipal government’s approval, which had not been obtained. Police officers tried to intervene when the fireworks were set off, but CCTV employees ignored their warnings.
CCTV had purchased an insurance policy from a Chinese insurance company before the fire. The policy included a gross negligence exclusion clause. Therefore, the questions now at issue are whether the insured’s behaviour can be said to have amounted to gross negligence and whether Chinese courts or arbitral institutions can accept gross negligence as grounds for rejecting an insurance claim.
Although the phrase ‘gross negligence’ is familiar in policy terminology, the provisions of the Insurance Law that contain this wording did not come into force until October 1 2009. The amended legislation includes the term in many of its clauses, whereas the old equivalent provisions referred simply to ‘negligence’.
Unfortunately, the new provisions do not clearly define the new term within the meaning of the law. Therefore, the greatest difficulty in such a dispute is in distinguishing between gross negligence and negligence. Three factors may prove significant:
• The insured would prefer its faults to be treated as negligent, rather than grossly negligent. However, every accident involves an element of negligence. If insurers were permitted to disclaim liability whenever an element of negligence was present, this would conflict with the parties’ intentions in agreeing to the insurance contract. Yet without a precise definition of gross negligence, insurers are unlikely to succeed when ‘gross negligence’ issues are disputed.
• Chinese courts are inclined to allow insurers to assume responsibility. Most Chinese judges share the view that insurance companies have substantial financial reserves, and that it is in the interests of social stability and order that insurance companies concede more ground on this issue.
• Chinese civil law theory provides that the difference between gross negligence and negligence relates to the level of due care to be exercised by the various parties in their various positions. In general, the theory is too abstract to be defined in such a way and this scenario gives judges and arbitrators more discretion. However, if pursued too far, this line of interpretation would deny insurers the protection of even the most carefully drafted gross negligence clauses.
It remains to be seen whether CCTV will succeed, but the dispute highlights the need to define the term ‘gross negligence’ clearly and accurately.