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Application of Proximate Cause Doctrine in China’s 1st Time Element Insurance Dispute Arbitration

Issue date:15 Dec 2021 Author:Haifeng Li

The author’s team has recently and successfully completed representing the insured claimant in allegedly the first time element loss insurance dispute arbitration in China, which was conducted in English. The insured claimant, based in China and producing chemical materials, is a subsidiary of a medical and chemical conglomerate headquartered in France, while the insurer respondent a top tier Chinese insurance company. The award was made by the China International Economic and Arbitration Commission (“CIETAC”) at the end of October 2021, over 2 years after the arbitration was filed. This is the first known arbitration case in China over a time element loss insurance clause, involving the interpretation of the scope of coverage and application of the Proximate Cause Doctrine. It is expected to have a far-reaching impact on the formulation of insurance clauses by the Chinese insurance industry, thus worth reporting.

 

Insurance Clause in Question

The principal coverage of the insurance policy in question is property damage, with supplemental coverage of time element losses. The parent company, i.e. the conglomerate headquartered in France, procures insurance coverage for their global assets from a global insurer, which then arranges local insurers to insure those assets in jurisdictions where access by foreign insurers is restricted. The policy in question was such a case. Hence the clauses of the policy are substantially copied from the global policy formulated by the global insurer.

 

The Time Element clauses in the policy are as follows:

LOSS INSURED

This Policy insures TIME ELEMENT loss, as provided in the TIME ELEMENT COVERAGES, directly resulting from physical loss or damage of the type insured to property described elsewhere in this Policy and not otherwise excluded by this Policy or otherwise limited in the TIME ELEMENT COVERAGES below or in endorsements attached to this Policy…”

 

TIME ELEMENT COVERAGES

Insured Option

The Insured has the option to make claim based on either GROSS EARNINGS and EXTENDED PERIOD OF LIABILITY; or GROSS PROFIT, as described in the TIME ELEMENT section of this Policy and subject to the terms and conditions as may be shown elsewhere.”

 

There is an additional coverage clause of Crisis Management which reads as follows:

“This Policy covers the Actual Loss Sustained and Extra Expense incurred by the Insured during the Period of Liability if an order of civil or military authority limits, restricts or prohibits partial or total access to an insured location, provided such an order is the direct result of:

1)A violent crime, suicide, attempted suicide, or armed robbery; or

2)A death or bodily injury caused by a workplace accident;

At such insured location.”

 

Occurrence of Insured Event

After the issuance of the policy, one of the hydrogenators in the Claimant’s workshop 1 exploded on May 3, 2018 (“Explosion”), with gas blasting out of the hydrogenator (“HG1”) blowing up the pressure meter thereon and the workshop roof and killing the operator. There are 2 workshops, workshop 2 being undamaged.

 

In consequence of the Explosion the local safety authorities issued an order(“Halt Order”) to the Claimant to halt production immediately in the whole plant (2 workshops) on the same day (“Halt Day”) , dig out the root causes of the accident and formulate and implement rectification measures, which the Claimant complied with. After several rounds of examinations, the safety authorities issued a decision to permit resumption of production on July 25, 2018 (“Resumption Day”).

 

The Claimant repaired the damaged roof and HG1 before and after the Resumption Day, which took 14 days in total (“Reparation Period”).

 

The Claimant resumed production of the undamaged hydrogenators as of the Resumption Day, with HG1 being fully resumed as of August 8, 2018 (“Complete Resumption Day”). The period running from the Halt Day until the Complete Resumption Day is referred to as Halt Period.

 

Issues

The issue in the case is whether the Claimant is entitled to indemnification of profit losses over the entire Halt Period. The Claimant of course claimed it was, whereas the Respondent only accepted claim of profit losses over the Reparation Period, and could at the most concede to a claim for losses over a 30-day period under the Crisis Management Clause.

 

The difference in the parties’ positions arises from their different interpretations of the definition of loss insured, i.e. “loss directly resulting from physical loss or damage of the type insured to property”.

 

The Respondent pointed out but lightly that only the profit losses over the Reparation Period were “directly resulting from” the physical damage to the insured property whereas the extra losses beyond the Reparation Period were the result of the Halt Order, which in turn was caused by the Explosion, hence the extra losses, of which the proximate cause being the Explosion, were not indemnifiable under the Time Element clause. However, the Respondent stopped short of expounding on the causal relationship among the physical damage, Explosion and the Halt Order but merely implied they were separate events.

 

On the other hand, the Claimant advanced that the Explosion, physical damage of the hydrogenator an workshop roof, Halt Order and the halt of production were a series of events on the same chain of causation and in the natural course of affairs wherein no independent event had intervened or interposed (e.g. the act of a third party non-governmental body or an event not naturally caused by a prior event on the chain), hence there was a direct causal relationship among all the specified events in sequence (the “Direct Causation Theory”). Among all the events on the chain only the Explosion was an independent event or the cause event, while all the other events were caused by the cause event and hence not independent events with respect to each other. In this regard there is no room for the application of the Proximate Cause Doctrine as that doctrine is supposed to be invoked to attribute the insured loss to a proper cause among several possible independent causes or prior events so that the liability of insurer for indemnification can be determined. Where there is only one independent event which could be identified as the probable cause of the insured loss, the doctrine is of no avail. The Claimant submitted the opinion of a reputable jurist in support of this theory.

 

The Claimant further submitted that the doctrine of Contra Proferentum should be applied, i.e. the clause be interpreted against the Respondent, in case the tribunal should find the meaning of the clause ambiguous as the policy was a standard form contract produced by the Respondent.

 

Award

The tribunal eventually adopted the Direct Causation Theory advanced by the Claimant, but in the meantime pointed out that distinction should be made between the Explosion and physical damage, resulting that only the losses of profit may be recoverable where physical damage had occurred. In this regard the tribunal granted the losses of profit for Workshop 1 for the entire Halt Period (because HG1 in and the roof of Workshop 1 were damaged) while only granted losses of profit for a 30-day period for Workshop 2, where there had been no physical damage, citing the Crisis Management clause.

 

Reflections and Comments

There were a multitude of concepts and events such as Explosion, damage of hydrogenator, damage of roof, death of operator, Halt Order, halt of production and loss of profit during the halt in the case. In order to determine the precise scope of coverage, it is critical to accurately distinguish these events and crystalize their relations.

 

The damage of the hydrogenator and roof is indisputably physical damage, while the Explosion denotes the blasting of gas out of the hydrogenator, which resulted in two direct consequences, i.e. the physical damage and the death of the operator. Therefore, it is discerning and appropriate of the tribunal to make a distinction between the Explosion and physical damage.

 

In the practice of safe production in China, generally speaking, only an accident with human casualty would trigger an order to halt production from the safety authorities, with some exceptions where the authorities would also order halt of production when there have been significant property damages but without human casualty.

 

The Respondent pointed out but casually that the Halt Order was caused by the Explosion rather than the physical damage but stopped short of distinguishing the two consequences of the Explosion, i.e. the physical damage of hydrogenator and roof on the one hand and the death of operator on the other. They did not expound that the Halt Order should have been caused by the death rather than the physical damage, hence the subsequent halt of production did not directly result from physical damage and therefore the extra loss of profit did not meet the definition of the insured loss. Should the Respondent have done that, no one can be sure the outcome of the award would remain the same.

 

On the other hand, the Claimant deliberately and unsparingly elaborated on the proposition that the Explosion, physical damage, Halt Order and halt of production were a sequence of events on the same chain of causation, with prior events being the direct cause of subsequent events, while avoiding any mention of the death of the operator. The Claimant even took pains to equate the Explosion with physical damage. It seems, as far as the outcome is concerned, the Claimant’s tactics have worked to a large extent.

 

Interestingly, while neither the Claimant nor Respondent advanced any argument with reference to workshop 1 and workshop 2, the tribunal made a distinction between the two on its own accord and made a substantial award on that basis. The reasonableness of the distinction seems susceptible to further discussions. Before making the award, the tribunal did not seek any information on whether the two workshops were adjacent, the size of the damaged roof of workshop 1 and whether the damage would hinder production or not. As such the distinction would perhaps look a bit arbitrary, artificial and insubstantial. One cannot help wondering whether the tribunal had intentionally taken the middle way so that neither party would win or lose to the full.

 

In any case, this case should ring alarm to the insurance industry: if they are minded to exclude coverage of the extra losses, they should craft the clauses more clearly, especially those liability exclusion clauses.

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