Reinsurance contracts, like insurance contracts, follow the doctrine of utmost good faith. Since the reinsurance contract is a contract concluded between commercial entities such as insurance companies, who are endowed with professional insurance knowledge and insurance business experience, it is generally not easy to generate reinsurance disputes. Even when there are disputes, they are often settled by negotiation between insurance companies in order to maintain commercial cooperation. However, with the rapid development of the Chinese reinsurance industry, various types of complex disputes have arisen in recent years. Accompanied by the economic downturn caused by the superposition of various factors including the spread of COVID-19, insurance companies no longer seem to be willing to settle reinsurance contract disputes through amicable negotiation. In China, reinsurance contract disputes are increasingly on display to the public and industry players.
The most influential reinsurance contract dispute in China’s insurance market was the facultative reinsurance dispute between two insurance companies concerning the SK Hynix conflagration case from 2014 to 2015. Due to the huge discrepancies between the parties with regard to the issue of whether the reinsurance contract was concluded, this case promoted the former China Insurance Regulatory Commission (CIRC) to issue regulatory guidelines and standards on facultative reinsurance and treaty reinsurance in the market. In general, compared to the European and American insurance markets, China’s insurance market, especially the reinsurance market, is relatively new and thus has few classic reinsurance dispute cases publicly available on China Judgments Online, a website publishing effective judgments in China. Of course, one possible reason is that some reinsurance contract disputes are resolved confidentially through arbitration. In 2020, however, one of the eight typical financial cases involving foreign affairs published by the Shanghai Financial Court was related to an application for confirmation of the validity of an arbitration agreement between two insurance companies, which was the first time the Chinese court interpreted the “Incorporated Clauses on jurisdiction” in the reinsurance contract.
The main facts of the case were that on 1 May 2009, Company A, as the insurer, issued an Open Contract of Inland Transportation Cargo Insurance (Water and Overland) with policy No. 09SH002 (SHA) to the insured (the “Open Contract”). Article 10 of the Open Contract stipulates that if any dispute arises between the Assurer and the Assured, both parties should resolve disputes through negotiation. If the dispute cannot be settled through negotiation, either party or both parties can apply for arbitration at the China Maritime Arbitration Commission (CMAC) Shanghai Sub-Commission in accordance with its Arbitration Rules. Company A subsequently issued Policy No. PB0215011416 to the insured, which stipulates that to cover the declaration under the Open Contract No. 09SH002 (SHA) from 0:00 on 1 May 2015 to 24:00 on 31 May 2015 and that the conveyance, port of departure, port of destination, insured interest and other special terms and conditions are as per the provisions of the Open Contract. If any dispute between the Company and the insured, the parties shall resolve it through negotiation. If it cannot be resolved through negotiation, both parties can apply for arbitration at the CMAC Shanghai Sub-Commission in accordance with its Arbitration Rules.
On August 13, 2015, Company B, as the reinsurer, and Company A, as the insurer, entered into a reinsurance slip with policy No. SH00150075, which stipulates that the interest, period of insurance, sum insured, premium, jurisdiction, etc. are as per the original policy (No. PB0215011416). After performing its indemnity obligations to the insured, Company A applied for arbitration with the CMAC Shanghai Sub-Commission on July 17, 2019, requesting that Company B perform its indemnity obligation as the reinsurer. Company B thereafter applied with the Shanghai Financial Court in China for a declaration that there was no arbitration clause in the reinsurance contract entered between Company A and B on August 13, 2015. Company B alleged that no arbitration clause was agreed upon in the reinsurance contract with Company A, and the arbitration clause cited by Company A was an arbitration clause under the Open Contract between Company A and its insured, which was not binding on Company B. Company A argued that the reinsurance contract signed between Company A and Company B expressly agreed that the jurisdiction would be following the original policy, and the arbitration clause was clearly stipulated in the original policy between Company A and the insured. Before the execution of the reinsurance contract involved, Company A provided the original policy to Company B, and Company B was also willing to be bound by the arbitration clause, therefore, the arbitration clause in the original policy was binding on Company B.
Shanghai Financial Court held that whether the original policy agreed in the reinsurance contract referred to policy No. PB0215011416 or the Open Contract No. 09SH002 (SHA), both of which contained an arbitration clause. The parties’ intention to arbitrate, arbitration matters and the institution for arbitration are clearly stated and legally valid. The reinsurance contract listed “Jurisdiction” and interest, period of insurance, etc. separately, and stipulated that these items are as per the original policy. Company A and Company B had discrepancies in the meaning of the term “Jurisdiction”. Both parties are foreign insurance companies and the contract was drafted in English. In the event of a dispute between the parties over the meaning of “Jurisdiction”, it should be interpreted in accordance with the common understanding of the term. In English, “Jurisdiction” does not only refer to the jurisdiction of the court specifically, but it can also be referred to litigation, arbitration and other dispute resolution methods. In this case, there is no agreement on the jurisdiction of a court in the original policy. From the purpose of the clause in the reinsurance policy, it can also be concluded that the parties’ intention is to incorporate the arbitration agreement into the reinsurance policy. The expression of intent to incorporate the arbitration clause into the reinsurance contract between Company A and Company B is clear and legally binding on both parties. Ultimately, the Shanghai Financial Court ruled to reject the application of Company B.
In the late 19th and early 20th centuries, non-professional insurers would refer to the insurance policy with the same subject matter and risks to underwrite policies. These contracts are written in typical terms such as “as per the same rates, terms and interests …”. The English courts interpreted that the subsequent policy is conditional on the original policy, i.e., the policy containing such clause maintains the same terms as the original policy. In the reinsurance market, it is common for a facultative reinsurance contract to use the term “as original” to keep its consistency with the original policy. The majority view is that the expression “as original” makes the terms of the original policy incorporated into the reinsurance contract, thus making the reinsurance contract consistent with the original policy in terms of subject matter, risks covered, insurance period, liability, exclusion of liability, etc., resulting in the legal effect of “back to back cover”.
“As original” clauses are more commonly found in proportional facultative reinsurance contracts, especially quota share reinsurance. Since the contracts of facultative reinsurance are very simple, the court can only interpret the reinsurance contract in the same way as the original insurance contract through the clause “as original”. In the case of non-proportional reinsurance treaties, the original insurer and the reinsurer usually reach a reinsurance contract before two parties agree to cede certain types of business. Reinsurance treaties are often well-drafted and differ significantly from the terms of the original insurance contract, usually without the application of “as original” clause or “back to back cover” presumptions.
Where a reinsurance contract contains the term “as original”, it is highly controversial which specific provisions of the original insurance contract can be incorporated into the reinsurance contract and bind reinsurers. For example, the often-disputed clauses include the warranty clause, insurance period clause, claims clause, choice of law or dispute resolution clause, etc.
In England, there is a judicial view that a clause should be tested from a practical point of view as to whether it can or should be incorporated into the reinsurance contract, i.e., each term of the original insurance contract should be placed in the context of reinsurance contract to consider its practicality. For example, the insured in the original insurance contract is analogous to the reinsured in the reinsurance contract, and the insurer is analogous to the reinsurer in the reinsurance contract. In this way, the court test whether the incorporation of a clause is reasonable and practical. A majority of the English courts would consider the commercial purpose of reinsurance (especially the proportional facultative reinsurance contracts) and apply the presumption of “back to back cover” as far as possible to incorporate the terms of the original insurance contract into the reinsurance contract. The judges believe that the purpose of reinsurance is to spread the risk for the original insurer, so the terms of the reinsurance contract and the original insurance contract should be consistent as far as possible in terms of their business purposes. The reinsurer, in consideration of the reinsurance premium received, should bear the same risks and liabilities as the original insurer, which is also a reflection of the principle of “follow the fortunes” in the reinsurance business. However, it is generally believed that the incorporated clause shall not contradict the express terms in the reinsurance contract, no matter whether such contradiction is literal or substantive.
The above-mentioned typical case published by the Shanghai Financial Court is the first time that a Chinese court interpreted the incorporated clause of a reinsurance contract. In this case, the scope of “as original” agreed in the reinsurance contract included interest, insurance period, sum insured, insurance premium and jurisdiction. Although there was a dispute between the parties as to whether the term “jurisdiction” specifically referred to litigation (rather than arbitration), the Shanghai Financial Court, by applying the semantic and teleological interpretation, defined the term “jurisdiction” in the English contract and found that the arbitration clause was clearly and specifically incorporated into the reinsurance agreement, taking into account the fact that the incorporation of the arbitration clause was a specific and not a general agreement.
However, if the scope of the “as original” clause stipulated in the reinsurance contract is not as specific as the one in the above case, it may be more controversial whether the jurisdiction clause in the original insurance contract can be incorporated into the reinsurance contract. It is usually believed that the jurisdiction clause in the original insurance contract cannot be incorporated into the reinsurance contract, because whether the terms of the original insurance contract can be incorporated into the reinsurance contract depends crucially on whether there is a close connection with the risks connecting the two contracts. Generally speaking, the jurisdiction clause is not closely related to the risks covered. EU law considers that jurisdiction clauses are auxiliary clauses to the substantive clauses of the contract and that the expression of incorporation can only express the incorporation of clauses linked to the subject matter of the contract and does not have the legal effect of incorporating auxiliary clauses. In the absence of a specific expression, the court has no right to infer that the parties have expressly agreed on the incorporation of the auxiliary clauses.
If the jurisdiction clause of the original insurance contract cannot be incorporated into the reinsurance contract, it is highly likely that the dispute over the original insurance contract and the dispute over the reinsurance contract will be heard by two different dispute resolution institutions. For example, one will be tried by the court and the other will be arbitrated by an arbitration institution. If the parties of a reinsurance contract have disputes over the extent of liability of the reinsurance contract and go to a court or arbitration institution, it will be inevitable that the panel or tribunal will review the content, terms, scope of liability and performance of the original insurance contract. If there was a prior final and binding judgment or arbitral award with respect to the original insurance contract, such review is relatively straightforward. However, if the parties to the original insurance contract have no dispute and there is no prior judgment or arbitral award, it is very likely for the court or arbitration institution hearing the reinsurance dispute to go beyond its jurisdiction and review the original insurance contract which does not fall within its jurisdiction. Chinese arbitration institutions are particularly cautious about such issue and try not to “cross the red line”. This situation is also likely to occur where the jurisdiction clauses in the reinsurance contract and the original insurance contract are explicitly contradictory.
If the reinsurance contract is unclear as to jurisdiction and the jurisdiction clause of the original insurance contract is not incorporated into the reinsurance contract, then how to determine the court of jurisdiction of the reinsurance contract under the frame of PRC law? According to Article 24 of the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as the “Civil Procedure Law”), a lawsuit brought on an insurance contract dispute shall be under the jurisdiction of the people’s court where the defendant is domiciled or where the object of insurance is located. According to the research on the cases published by Chinese courts, most courts hold that the subject matter of the reinsurance contract is the risks ceded from the original policy, instead of physical properties and related interests, There is no object under the reinsurance contract, which makes the place where the object of insurance is located inapplicable. The court of jurisdiction of the reinsurance contract can only be determined in accordance with the place where the defendant is domiciled.
It can be concluded from the above-mentioned cases that: first, the Chinese courts consider a reinsurance contract a type of insurance contract, and the general jurisdictional provisions of law on insurance contracts can also be applied in the context of reinsurance contracts; second, the Chinese courts hold that the reinsurance contract has subject matter, but there is no “object” under the Civil Procedure Law, thus, only the court of the defendant’s domicile can have jurisdiction.
It is also noteworthy that Article 24 of the Civil Procedure Law only provides jurisdiction rules for domestic disputes. If the insurance/reinsurance contract dispute is a foreign-related case, such as one or more parties are foreign entities or the business is underwritten outside China (reinsurance contracts usually have foreign-related elements), Chinese courts also hold different views on whether the provisions of Article 24 of the Civil Procedure Law should be applied, or the provisions of Article 272, Chapter 4 “Special Provisions on Foreign-Related Civil Procedures” of the Civil Procedure Law should be applied.
This article only draws on the interpretation of the Chinese courts in relation to the incorporation of the jurisdiction clause. The incorporation of substantive clauses of the original insurance contract will be even more complicated in practice. From the point of view of a legal practitioner, it is suggested that the parties to the reinsurance contracts should at least make an unambiguous agreement on the jurisdiction and choice of law, and also make an enumerated agreement on the scope of “as original” clause to avoid unnecessary disputes and reduce the cost of dispute resolution for all parties as far as possible.
Article 272 of the Civil Procedure Law of the People’s Republic: Where an action is instituted against a defendant which has no domicile within the territory of the People’s Republic of China for a contract dispute or any other property right or interest dispute, if the contract is signed or performed within the territory of the People’s Republic of China, the subject matter of the action is located within the territory of the People’s Republic of China, the defendant has any impoundable property within the territory of the People’s Republic of China, or the defendant has any representative office within the territory of the People’s Republic of China, the people’s court at the place where the contract is signed or performed, where the subject matter of the action is located, where the impoundable property is located, where the tort occurs or where the domicile of the representative office is located may have jurisdiction over the action.