Civil Code Promotes Product Liability Insurance



The Civil Code of the People's Republic of China (hereinafter referred to as the "Civil Code"), adopted and promulgated at the Third Session of the 13th National People's Congress of the People's Republic of China on May 28, 2020, shall come into force as of January 1, 2021. The current Tort Law of the People's Republic of China (hereinafter referred to as the "Tort Law") has been integrated and partially amended by Part VII of the Civil Code-Tort Liability, in which Chapter IV is about the legislation on "product liability", which will play an important role in the development of product liability insurance in China.

I.Legislation of the Civil Code on Product Liability

Based on the original Tort Law, the Civil Code adds remedial measures for defective products found after circulation, stipulating that manufacturers and sellers shall first stop selling the aforesaid products with defective conditions. In addition, it is specified that the necessary expenses incurred from the recall of defective products shall be borne by producers and sellers, so as to reduce the concerns of the infringed parties, and be conducive to promoting the development and improvement of the recall system for defective products in our country.

In addition, the Civil Code further expands the system of punitive compensation for product liability based on the Tort Law, and explicitly incorporates the failure to take remedial measures such as the cessation of sales, warning and recall of defective products found after circulation into the scope of punitive compensation, in order to improve the civil compensation and protection for infringed parties and increase the costs of infringers for violating laws.

The following is a comparison table between the Civil Code and the Tort Law with respect to the legislation on product liability.

II.Development of China's Product Liability Insurance

Product liability insurance refers to a kind of liability insurance with the product liability of the manufacturer or seller of a product as the underwriting risk. Product Liability Insurance-related laws are mainly the Insurance Law, the General Rules of the Civil Law, the Product Quality Law and the Tort Law. The subjects covered by product liability insurance are generally manufacturers, exporters, importers, wholesalers, retailers, repair service providers and other persons who may be liable for the damages caused by the product accident.

In the early 1980s, in order to meet the needs of importing countries and to avoid risks in international trade, China began to develop product liability insurance, and then gradually launched a domestic product liability insurance. Taking export product liability insurance launched by Huatai P&C Insurance Co., Ltd. as an example, its mechanism could be divided into accident occurrence mechanism and claim occurrence mechanism. Export product liability insurance under the accident occurrence mechanism is based on the occurrence of a product liability accident and it is agreed that the insurers shall indemnify the insured for any legal liability for "personal injury" or "property damage" suffered by third parties as a result of "product risks" covered by the policy subject to the provisions of the policy. Export product liability insurance is based on the actual occurrence of claims. As for domestic product liability insurance, taking the domestic product liability insurance launched by Dinghe Property Insurance Co., Ltd.'s as an example, the insured is the producer or seller that lawfully produces or sells products or goods, and the description of insurance liability is that "during the period of insurance or during the retroactive period as specified in the insurance contract, if an accident occurs due to any defect in the products or goods produced or sold by the insured within the area as specified in the insurance contract, which results in personal injury or death and/or property losses of others, the victim or the agent thereof files a claim with the insured for the first time within the insurance period, the insurer shall indemnify the insured against the economic compensation liability which shall be assumed by the insured in accordance with the laws of the People's Republic of China (excluding laws of Hong Kong, Macau and Taiwan) in accordance with the insurance contract".

The scope of product liability insurance in China is mainly for manufacturing enterprises, with the focus on household appliances and food safety, and gradually developing to high-tech products and chemical machinery products. Taikang Online Property Insurance Company Limited as an example, its product liability insurance clauses are for electronic equipment and software products that are manufactured and sold by the insured. In case of PICC Property and Casualty Company Limited, the insured of the product liability insurance for high-tech enterprises are enterprises or institutions engaged in high-tech research and development and production recognized by the national authority and the insurance subject is the products processed or manufactured and sold by the above-mentioned enterprises or institutions within the territory of the People's Republic of China (excluding Hong Kong, Macao and Taiwan).

Other product liability insurance classified according to the product type also includes: Anxin Agricultural Insurance Co.., Ltd. (feed product liability insurance), Huatai P&C Insurance Co.., Ltd. (public and product liability insurance, product liability insurance for the first (set) major technical equipment, product liability insurance for new technology and new products (services)), Aig Insurance Company China Limited (aviation product liability insurance), Taiping Science and Technology Insurance Co., Ltd. (product liability insurance for technological product), Sunshine Property & Casualty Insurance Co., Ltd. and China Pacific Property Insurance Co., Ltd.(biomedical product liability insurance), Yingda Taihe Property Insurance Co., Ltd.

(automobile power battery product liability insurance), China Continent Property& Casualty Co., Ltd. (science and technology enterprise product liability insurance), Ping An Property & Casualty Insurance Company of China, Ltd. (product liability insurance for major technical equipment and core components), PICC Property and Casualty Company Limited (robot product liability insurance), China Pacific Property Insurance Co., Ltd. (life sciences product liability insurance), etc.

III.Types of Disputes and Judicial Rules for Product Liability Insurance

The total number of legal disputes related to product liability insurance is generally small. According to big data analysis, from 2011 to the end of 2019 there is a total of 533 related judicial cases, the number of cases increasing year by year.

The main legal issues and cases relevant to product liability insurance are as follows:

(I)Whether the infringed party associated with product quality accident may directly claim compensation from the insurer

According to the provisions of the Insurance Law, the infringed in a product quality liability accident, as the third party, may directly claim for insurance benefits from the insurer if the insured delays in making a claim to the insurer. The aforesaid recourse channel is a beneficial supplement to Article 1203 of the Civil Code, and it expands the recourse channel to insurance companies other than producers and sellers under special conditions, which is conducive to timely protecting the interests of consumers. Consumers will be more willing to choose goods or services with product liability insurance, which will be more conducive to the development of product liability insurance.

Under the circumstance where "the insured delays to make a claim" as stipulated in Paragraph 2 of Article 65 of the Insurance Law, the Interpretations on Several Issues concerning the Application of the Insurance Law of the People's Republic of China (IV) issued by the Supreme People's Court further gives interpretations, providing that an insured may be deemed as not making a claim, provided that "after its due compensation liability against the third party has been determined, it does not perform its compensation liability, and it has not requested the insurer to directly pay insurance benefits to the third party when the third party sues the insurer as the defendant or both the insurer and the insured as the co-defendants".

In the second instance trial of the dispute over compensation for property damage involving Anhua Agricultural Insurance Co., Ltd.., Changchun Central Sub-branch, Ding Wei, Xu Ruixia, Mao Jingxing, Liu Hongtao, Jilin Guoli Technology Co., Ltd.. [Case No. (2015) Bai Min San Zhong Zi No.166], the electric heating cushion manufactured by the insured, Jilin Guoli Technology Co., Ltd.., was insured by the insurer Anhua Insurance for product liability insurance. The product has caused property damage to a third party, Ding Wei, due to quality problems. The court held that after the due compensation liability of the insured against the third party is determined, if the insured fails to perform its compensation liability, the third party is entitled to directly claim compensation against the insurer.

(II) The issue concerning the burden of proof on whether there are defects in products

In accordance with Article 64 of the Civil Procedure Law of the People's Republic of China and Article 91 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, whoever claims that a product is qualified or has defects shall bear the burden of proof. It is necessary for producers and sellers to present evidence that the products they produce and sell conform to the relevant quality standards. If the infringed party intends to claim against the producer or consumer for compensation for infringement due to the product defect, it shall bear the corresponding burden of proof as well. Where the product tort causes losses to a third party or causes losses to the insured due to the breach of product quality, the insurer shall also bear the burden of proof for the quality problems of the product when exercising the insurance subrogation right.

In the civil judgment of second instance trial of maritime dispute of Ping An Property Insurance Company of China, Ltd., Zhejiang Branch, Zhejiang Taitong Shipyard Co., Ltd.. [Case No. (2019) Zhe Min Zhong No. 1149], Ping An Property & Casualty Insurance Company of China, Ltd. Zhejiang Branch, claimed that there was a dispute over product quality tort liability, and the quality problem of the crankshaft caused the accident of bobbin shaft and drawer of the "Gaocheng 5" wheel main engine. Therefore, it should bear the corresponding burden of proof for aforesaid claim. However, Ping An Property & Casualty Insurance Company of China, Ltd. Zhejiang Branch, failed to provide sufficient and valid evidence to prove this. When the insurer exercised the insurance subrogation right, the court found that Ping An Property & Casualty Insurance Company of China, Ltd. Zhejiang Branch failed to provide evidence to prove the potential quality defect of the crankshaft concerned, so its claim was not upheld.

(III) Scope of Indemnity of Product Liability Insurance

The Civil Code imposes an obligation on producers and sellers to take remedial measures for products found to be defective after they have been put into circulation. Producers and sellers shall promptly adopt remedial measures such as suspension of sale, warning, recall, etc, where the damages are aggravated as a result of failure to adopt remedial measures promptly or ineffective remedial measures, the producer and the seller shall also bear tort liability for aggravated damages. Where the recall measures are adopted, the producer and the seller shall bear the requisite expenses incurred by the infringed party. The Insurance Law also requires that when an insurance accident occurs, the insured shall try its best to take necessary measures to prevent or reduce losses. After an insured risk occurs, all the necessary and reasonable cost paid by the insured to prevent or mitigate the losses of the objects insured shall be covered by the insurer.

In the second instance trial over disputes on property insurance contracts between Propack Huizhou Limited and Ping An Property Insurance Company of China, Ltd.. Huizhou Central Subbranch [Case No. (2015) Hui Zhong Fa Min Er Zhong Zi No.110], the court held that the reasonable and necessary expenses incurred by the insured to solve the insurance accident involved in this case shall be identified as property damage caused by the producer of the defective product to the user thereof, and shall be deemed as direct loss, for which the insurer shall bear the corresponding liability for compensation.

IV.Impact of the Civil Code on the Development of Product Liability Insurance

The implementation of the Civil Code will have a broad and far-reaching impact on the development of Chinese insurance industry. For the product liability insurance industry, opportunities and challenges coexist. Zhang Lin, a deputy to the National People's Congress, cited the experience and data of the United States as an example, said "after the enactment of the US Tort Act, insurance companies face an increase in claims and lawsuits against liability insurance, which brings challenges to the development of liability insurance. If insurance companies fail to make preparation for any possible claims or lawsuits, it will be hard to avoid operating losses and even systemic risks. "[1]If Chinese insurance companies carefully study and understand the relevant provisions of the Civil Code on liability insurance, they will provide enterprises and individuals with more pertinent and professional insurance services, and there will be greater opportunities for the development of liability insurance.

The provisions of the Civil Code on punitive compensation liability deserve the attention of insurance companies. The compensation scope of the Civil Code has been further expanded, adding new circumstances in which effective remedial measures have not been taken in accordance with the law. Since the fundamental purpose of punitive compensation is to realize the punishment and warning against infringers, product liability insurance insurers are urged to be cautious in underwriting such insurance, grasp the extent of risk exposure, exclude punitive compensation liability in the standard policy, and limit the insurer's liability for compensation to a controllable extent. With respect to the product recall issues involved in the Civil Code, it is suggested that insurers should clarify in the design of the terms on the conditions for the bearing of such expenses, the obligations of the insured in taking recall measures when taking such measures (including but not limited to notice) to the insurers and the scope or requirements of liability exemption.

In short, the promulgation and implementation of the Civil Code will support the further development of Chinese legal system of product liability, create a more optimized legal environment, and meet the demands of different civil subjects such as product manufacturers, sellers and consumers on the transfer of legal risks. An insurer shall, in accordance with the Civil Code, timely make appropriate adjustments to its product liability insurance underwriting policy so as to guard against claims and legal actions that may arise in the tort liability domain in the future. Meanwhile, the Civil Code strengthens the legal basis for the determination of tort liability and damage compensation, and will play a positive role in the development of product liability insurance of insurance companies.


[1][Two sessions] NPC Representative Zhang Lin: Suggestion to Insurance Companies to Study the Impact of the Implementation of the Civil Code as Soon as Possible ", May 26, 2020. Source: Panoramic Network.




Harrison Jia   





Mr. Jia Hui's practice focuses on M&A and insurance. Jia Hui is a qualified lawyer from New York and China. He serves as Assistant Chairman and Secretary General of the Belt and Road Service Mechanism, Deputy Secretary General of the China New Energy International Alliance, Representative of the Insurance Association of China, and member of the Legal Compliance Committee of the Insurance Asset Management Association of China. Lawyer Jia Hui is a member of the Standing Committee of the Asia Pacific Law Association under the "One Belt, One Road" initiative, and has been selected as one of the "Nationwide Thousand Foreign-related Lawyers Talent Pool" of the Ministry of Justice and one of the "Thousand Lawyers Plan" for China's insurance industry in 2018. He has also been selected as one of the members of the Chambers Insurance Lawyers List.                        


(Sun Yujie, Wu Wenbo, Yan Yan, Ju Guang, lawyers of DeHeng Law Offices, also contributed to this paper. )


This article was written by a lawyer of DeHeng Law Offices. It represents only the opinions of the author(s) and should not in any way be considered as formal legal opinions or advice given by DeHeng Law Offices or its lawyers. If any part of this articles is reproduced or quoted, please indicate the source.

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