----by way of "Consequentialism"

LI Shanchuan  LI Tong

The right of subrogation in marine insurance means after the insurer indemnifies the insured for its loss caused by insured event and within the indemnification scope the insured's right to pursue against a third party for its loss transfers to the insurer. In practice, cases exist that when the insurer obtains the right of subrogation, the time bar for pursuing against the third party has expired. In such case, the insurer usually invokes Article 253 of the Maritime Code of the People's Republic of China (Maritime Code), to deduct insurance indemnity on the ground that insured fails to protect the time bar for its right of subrogation. However, there is a major debate in respect of the insured's obligations for the time bar for insurer's right of subrogation in academic and in practice. Also, there is an inadvertence and scarcity of provisions both in the existing laws and insurance contract.

To cope with the above issue, the authors want to introduce the argumentation of consequentialism to consider this issue in reverse: first, find out the value conflict between the claims involving the disputed issue, weigh the same and make the election of value, select the preferential interest, so as to make a determination in maximizing the benefits of parties concerned. Second, seeking for proper laws interpretations and reasoning to examine the determination to ensure the same in accord with the existing laws and regulations. Third, to balance the values in conflict, to give relief to the party who suffers loss, so as to maximize the integral benefits and minimize the loss.

Step one: weigh the interests. This article focuses on value conflict between insurer and insured, whose interests are of the same level and legal. From the perspective of fairness and good-faith, since it's difficult for the insured to substantively modify the insurance clause provided by the insurer unilaterally, thus the balance of interests shall be under the guidance of regaining equity, i.e. to balance the benefits distribution between both parties by limiting the interest of the insurer who is in the superior position. From the aspect of legislative purpose, the emphasis of insurance interests protection provided by the contemporary insurance law was transferred from the insurer to the insured, thus to place the insured's interests in priority is more in accord with the legislative purpose. From the aspect of social demand, by taking out insurance the insured aims at transferring its own risk to the insurer so as to restore to the situation as it does not suffer loss the soonest possible. Imposing too much obligations upon the insured is not in accord with the common knowledge by the masses on the insurance system, which is also likely to encourage the insurer to exempt itself from responsibility by making use of its advantageous position. Upon balancing, we have the conclusion that in case of value conflict, the insured's interest shall be deemed as preferential interest, i.e. the insured shall bear passive non-damnification obligation and assistance obligation for the time bar for insurer's right of subrogation.

Step two: justification of the conclusion. The authors intend to seek for legal ground for the value orientation illustrated above by means of interpreting and explaining Paragraph 2 of Article 252, Article 253 of the Maritime Code and Article 62 of the Insurance Law. First, semantic interpretation. The terms "endeavor to assist" provided in Paragraph 2 of Article 252 literally mean to provide assistance, which means the provider is passive in providing such assistance subject to the receiver's demand or request. In this paragraph, the terms "endeavor to assist" shall be interpreted as the insured shall merely effectively perform the assistance obligation as per insurer's specific and clear instruction and notification. If the insurer fails to give instruction, the insured shall not bear the liability to take the initiative to lodge an action, commence an arbitration or property preservation. Secondly, systematic interpretation. The first principle of the Insurance Law is the "indemnification principle", it is against the requirement of prompt payment under the indemnification principle for the insurer to claim, under the circumstance that it delays to perform its compensation liability, for deduction the insurance indemnification on the ground that the insured fails to pursue the third party. Thirdly, teleological interpretation. According to Article 1 of the Insurance Law, one of the purpose of enacting this law is to "protect the legitimate rights and interests of the parties involved". Here the "fairness" shall mean substantive fairness, i.e. break the fetter of fairness in form in respect of the legal status of the parties to the insurance contract, and pursue the substantively equal relationship of both parties with regard to the rights and obligations, which in practice was reflected by providing more protection for the insured in the course of legislation and justice. Given the interpretation of law, the aforesaid conclusion could be perfectly proved to be established based on sound legislative ground.

Step three: balance the interests. This article tries to provide some solutions to the disputed issues arising from the insurance practice and suggestions for legislation and judicial adjudication in respect of marine insurance based on the course of contracting and claims settlement of insurance companies. First, in the course of concluding an insurance contract, the insured's interests shall be placed in priority. It's suggested that clause in relation to the time bar under the insurance contract shall be amended as "in case the insurance event is caused due to a third party's fault, the insurer shall have the right to request the insured to take proper measures to protect the insurer's right of recourse, including property preservation measure, legal proceeding or arbitration against the liable third party. The insured has the obligation to exercise its rights of claim as per the insurer's instruction, and the proper and reasonable costs arising therefrom shall be borne by the insurer." This clause has the nature of the clause for exemption of insurer's liability under the Insurance Law, and shall not have legal effect if the insurer fails to point out the same or give clear explanation. Second, at the stage of insurance claim, emphasis shall be placed on proper consideration on the insurer's interests. 1. The insured shall be liable to immediately/promptly notify the insurer after the insurance event. Objective criteria shall be adopted to determine "immediately/promptly", i.e. whether or not the performance of the notification obligation will make it difficult to ascertain the nature, cause and damage extent of the insurance event. 2. Refer to Article 25 of the Insurance Law, it shall be regulated that the insured shall, 60 days prior to the expiry of time bar for claim against the third party at the latest, lodge its insurance claim against the insurer. Third, settlement of insurance claim, both parties' interests shall be balanced and adjusted. 1. Regulate the insurer's duty of care upon the time bar of its right of subrogation. In case the insurance event is caused by a third party's fault or involved a third party, the insured shall, before lodging the insurance claim, bear the duty of care on the time bar, which shall be transferred to the insurer after the insurance claim is brought by the insured, and the insurer shall thereafter bear the obligation to promptly give reasonable instruction to the insured to protect the time bar by lodging a lawsuit or refer to arbitration. If the claim is rejected by the insurer, such obligation will be transferred back to the insured, but the insurer shall, when rejecting the claim, give a reasonable time period for the insured to lodge a lawsuit against the third party. 2. Clarify the legal consequence which shall be borne by the insured, if it fails to fulfill its obligation. In this connection, Article 253 of the Maritime Code shall be interpreted and modified in the following aspects: 1) "negligence" shall be interpreted as "fault", limited to intention and gross negligence. 2) "Corresponding deduction" shall be construed as deduction as per the insurer's discretion after taking into consideration of the specific situation of the case and the insurer's fault, under this circumstance, it shall not be taken into consideration whether the insured's fault is an intention or gross negligence. 3) Distinguish the legal consequences caused by "insured's waiver" and "insured's fault which makes the insurer unable to exercise the right of subrogation". According to the time when the insured waive its right, the legal consequence of such act shall be determined as the insured being exempted from compensation liability or the act of waive is invalid; and the legal consequence of the loss of right of subrogation due to the insured's fault shall be regulated as the insurer may deduct or request the insured to return corresponding indemnity.

                               (By Judges of Tianjin High People's Court)