CHINA Law and Practice Contributed by: Elsie Shi, George Yu, Eleanor Gu and Zach Xu, Jincheng Tongda & Neal Law Firm
interpreted in accordance with the purpose of the con- tract, trading habits and the principle of good faith. However, specific rules apply to standard clauses. Under Article 30 of the Insurance Law, if there is a dispute over a standard clause provided by the insurer, it shall be interpreted according to “common understanding”. If there are two or more reasonable interpretations, courts or arbitration tribunals shall adopt the interpretation that favours the insured or the beneficiary. It is worth noting that in recent judicial practice involving sophisticated commercial entities (such as large-scale reinsurance) courts are increas- ingly cautious and often view both parties as having equal bargaining power. Extraneous evidence is generally permitted and plays a vital role in ascertaining the true intent of the par- ties. Evidence regarding the negotiation history, the placement slip and the “usual practice” of the specific industry is frequently admitted. For instance, in com- plex engineering or marine insurance disputes, courts may reference international industry customs or the Basic Terminology of Insurance standards to interpret ambiguous technical terms. 8.2 Warranties The concept of “warranty” creates a distinct dichoto- my between marine and non-marine insurance under PRC law. In non-marine insurance, the Insurance Law does not explicitly use the term “warranty”. Clauses labelled as warranties are typically treated as contractual obliga- tions regarding the safety of the subject matter. Pursu- ant to Article 51 of the Insurance Law, if the insured fails to perform an obligation to maintain the safety of the insurance subject matter, the insurer has the right to increase the premium or rescind the contract. In marine insurance, pursuant to Article 235 of the Maritime Law, warranties must be strictly complied with. Express warranties must be written in the policy or contained in documents referenced therein. The consequences of breach differ significantly. In non-marine insurance, the insurer can usually only refuse liability if the breach of the obligation sig-
nificantly increased the risk and was the proximate cause of the insured event. In marine insurance, how- ever, a breach of warranty generally discharges the insurer from liability for any loss occurring after the breach, regardless of whether the breach caused the loss, unless the parties have agreed otherwise or the breach has been remedied prior to the loss. 8.3 Conditions Precedent PRC statutory law does not provide a specific defini- tion for “conditions precedent” in the context of insur- ance liability. However, parties are free to agree on such clauses based on the principle of party auton- omy. To be effective, conditions precedent must be expressly described in the contract, and, due to their nature of exempting or suspending the insurer’s liabil- ity, the insurer usually bears the obligation to draw the policyholder’s attention to these clauses pursuant to Article 17 of the Insurance Law. Common conditions precedent in the Chinese mar- ket include “payment of premium” clauses (where the policy states that liability only attaches after premium payment) or specific dispute resolution preconditions in trade credit insurance. The consequence of a breach of a condition prec- edent is that the insurer’s obligation to indemnify does not arise or is suspended until the condition is fulfilled. Unlike a breach of warranty, which may lead to termi- nation of the contract, a failure to satisfy a condition precedent typically means that the claim is not yet payable, though the contract itself often remains in force. If the condition becomes impossible to fulfil due to the insured’s fault, the insurer may be permanently relieved of liability for that specific claim. 9. Insurance Disputes 9.1 Insurance Disputes Over Coverage Disputes over coverage are typically resolved by first analysing the policy terms. Clear provisions are enforced as written, while ambiguous terms may be interpreted with reference to extrinsic evidence such as negotiation history and industry practices, as well as applicable laws. Consumer insurance contracts are subject to consumer protection laws, which include
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