——Beijing Branch of China Life Property and Casualty Insurance Company Limited vs. Business Department of Shenyang Branch of PICC Property and Casualty Company Limited on Dispute over Reinsurance Contract

[Principle of Adjudication]

To distinguish coinsurance from reinsurance, emphasis shall be placed on determining the effectiveness of a contract that is in essence a “reinsurance” under the name of “coinsurance” based on contractual terms and public interests and in combination with the participants, rights and obligations, collection of insurance premiums, allocation of liabilities and other factors. However, for the specific allocation of reinsurance compensation, whether the cedant has fulfilled the principle of utmost good faith and the obligation of determining losses with due diligence shall be the focus of the review in combination with the contract performance of both parties, and the “follow-the-fortunes” principle of reinsurance and the exclusion clauses thereof shall be accurately applied in adjudication.

[Implications]

Reinsurance originated from foreign financial markets and is still new in our country. But as the “insurance for insurers”, it plays an important role in the insurance industry as an economic “shock absorber” and social “stabilizer”. This case is selected as a typical case, as it adopted a look-through trial thinking to clarify the nature of the “coinsurance” contract that is in essence a “reinsurance”, identify the factors that distinguish coinsurance from reinsurance, and examine the effectiveness of the contract from the perspectives of financial security, market order, national macro policies, etc. The “follow-the-fortunes” principle of reinsurance and the exclusion clauses thereof are accurately applied in adjudication, which strengthens the judicial service and guarantees for the reform and innovation in the financial field, and are conducive to further regulating the reinsurance industry, preventing financial risks in the reinsurance field and promoting the high-quality development of the financial industry of the capital.

[Basic Facts]

In May 2017, the Life Insurance Company underwrote the mobile phone screen shattering protection liability insurance for a mobile phone company. Later on, the Life Insurance Company and the People’s Insurance Company entered into a Coinsurance Agreement, agreeing to become common providers of the above insurance at 50:50. After the Life Insurance Company paid insurance compensation to the mobile phone company, it claimed loss allocation from the People’s Insurance Company. Two parties had disputes and such disputes were later brought to the court. The first-instance court did not determine the reinsurance nature of the case, but determined the allocation ratio between the parties based on 90% of the premiums actually collected. The Beijing Financial Court determined that the case involved a reinsurance dispute and changed the original judgment by applying the “follow-the-fortunes” principle and the exclusion clauses thereof.

[Judge Comments]

In judicial practice, cases involving reinsurance disputes are rare. If the nature of the contract is simply and mechanically determined on the basis of the “coinsurance” title in the contract of the parties concerned, the determination of the nature of the case will be a violation of the existing regulatory requirements. On the contrary, only by seeing the essence through the phenomenon, adhering to the principle of “substance over form”, and combining with the performance of the contract and the content agreed in the contract can the reinsurance factors of the insurance contract in question be identified. When determining the effectiveness of the reinsurance contract, we should not pay too much attention to the parties’ violation of management regulations but consider the issues from the perspective of financial security and other aspects. Meanwhile, for the purpose of clarifying the “follow-the-fortunes” clauses and their exceptional application, in this case, we sorted out more than 100,000 insurance claim records, conducted calculations regarding dozens of policy batches one by one for indicators such as earned loss ratio and risk probability, strictly exercised discretion, solidified the basis for the judgment, and finally made a judgment to change the original one.

[Expert Comments]

Expert: Han Changyin, Distinguished Professor, KoGuan School of Law, Shanghai Jiao Tong University

Reinsurance and coinsurance are both business methods to diversify risks and enhance the ability to withstand risks among insurance companies, but they are apparently different in the assumption of rights and obligations. Reinsurance contracts must abide by the principle of “relativity of contracts”, and in accordance with the regulatory requirements, insurance companies shall also follow the principles of prudence and utmost good faith when handling reinsurance business with each other. If the nature of a reinsurance contract is considered coinsurance, it not only may trigger the policy owner of the original insurance to exercise a direct claim against the reinsurer, but can also confuse the relationship of rights and obligations among insurance companies in reinsurance, including the circumvention of relevant regulatory rules. Through the “look-through” determination of reinsurance, the Beijing Financial Court sets a benchmark for the fact-finding and the application of law in such cases, which can help insurance institutions to improve their product design and promote the healthy and well-regulated development of the reinsurance market of our country.