A recent case in China decides that the limitation period of a reinsurance contract will start to run only when the original insurer has quantified its loss under the insurance contract. Mr Ik Wei Chong, Mr Leslie Shen and
In a recent CIETAC arbitration, the Tribunal was asked to determine when, under Chinese law, the time limit for claims arising from a reinsurance contract should start to run.
On the facts of the case, the insurer, pursuant to an underlying insurance contract, paid out the insurance proceeds to the insured. The insurer then sought to recover the pay-out from its reinsurer. The reinsurer asserted that the claim was time barred and that it therefore was under no responsibility to pay out.
Insurance time bar duration to apply to reinsurance contracts
While Chinese statute is clear as regards a basic insurance contract, the issue of time bar under reinsurance contracts had, until now, not arisen.
Article 26 of the Insurance Law provides that “With respect to insurance other than life insurance, the period of limitation of action for an insured or beneficiary to claim indemnification or payment of the insurance benefits against the insurer shall be two years, which shall be counted from the day when the insured or beneficiary has known or should have gained knowledge of the occurrence of the incident covered by insurance.”
The arbitrator held that Article 26 should also apply to reinsurance contracts.
Reinsurance time bar starts only when insurer’s loss is quantified
Crucially, the arbitrator went on to find that the insurable risk covered by the reinsurance (ie the event triggering a reinsurance claim) only occurred once the insurance risk in the underlying insurance contract had been ascertained.
As such, the time bar for a reinsurance claim would not begin to run until the original insurer had quantified its loss under the underlying insurance contract thus triggering the insurable risk pursuant to the reinsurance contract.
In line with English law
This decision reflects the established English law principle that, for the purposes of reinsurance, the time period shall start to run from the date that the reinsured’s liability is established either by agreement, judgment or award.
As Scrutton L.J. noted in Dougava v. Henderson (1934), how can the reinsurer be “liable to pay an amount until it has been fixed between insurer and insured?” To allow time to run against the reinsured before he knew the extent of his own liability under the original contract would seem illogical and unjust.
Scope for challenges in future
Yet there may be scope for debate and we might expect to see this arbitral decision challenged in future disputes. For starters, the decision was determined as a matter of interpretation and, given the absence of specific Chinese legislation, there is no express statutory basis or precedent for this decision.
Further, a reinsurer looking to rely on the expiry of a limitation period to avoid liability for a claim, may seek to rely on paragraph 7 of Article 16 of the Insurance Law.
That Article provides that “Insurable risks mean the risks which are contained in the coverage of risks agreed in the insurance contract.” It could well be argued that this provision should be interpreted as meaning that the ‘insurable risks’ in a reinsurance contract are those covered by the underlying or ‘original’ insurance contract and that when the time bar applies to those claims, so it should apply to reinsurance claims.
In an industry where claim quantification can take some time, getting your limitation period right is of critical importance. We expect to see challenges to this recent decision in the years to come.
Mr Ik Wei Chong is a Partner, Mr Leslie Shen is a Senior Associate and Ms Kirsty Gow is a Trainee Solicitor at Clyde & Co.