Understanding and Application of the “Ship After Knowing the Risk” Clause Under Short-Term Export Credit Insurance

China’s current short-term export credit insurance is to reduce the risk of domestic exporters collecting foreign exchange from accounts receivable to overseas buyers, and the credit term of its underwriting business is generally within one year, and the longest will not exceed two years. With the expansion of China’s export trade, the short-term export credit insurance business has also developed rapidly, providing great support for the export business of China’s enterprises, especially small and micro enterprises.

Based on the insurer’s understanding of the subject matter of the insurance and the limited control of the underwriting risk of export credit insurance, the insurer has higher requirements for the information provided by the policyholder than other types of insurance, so the insurer has set up different systems in the underwriting, claim settlement and recovery links to control the underwriting risk and reduce the moral hazard that may be induced by the failure of the policyholder or the insured to report the risk in a timely manner. For example, the credit limit approval system, the exemption system for shipping after knowing the risk, and the system for reducing the amount of compensation for losses caused by late declaration. This paper focuses on the exemption system for shipping after knowing the risk, starting from the characteristics of short-term export credit insurance, combined with relevant cases in judicial practice, and discusses the key issues that should be paid attention to in the practical application of the “ship after knowing the risk” clause.

The clause of “shipping after knowing the risk” means that the insurer does not need to be liable for the loss of the insured if the insured knows or should know that the agreed risk has occurred, but the insured continues to export goods or provide services to the buyer^[1]。 On this basis, the fact that the insured knew or should have known that the buyer was in fundamental breach of contract or expected breach of the trade contract is usually also included in the insurer’s exclusion. Based on the author’s experience in handling cases and the judicial cases retrieved, the author summarizes the following issues that insurers need to focus on in claims settlement and judicial practice:

1. The validity of the clause “shipping after knowing the risk”.

The Reply of the Supreme People’s Court on Issues Concerning the Application of Relevant Laws in the Trial of Cases Involving Disputes over Export Credit Insurance Contracts (Fa Shi [2013] No. 13) stipulates that “the Insurance Law does not make clear provisions on the application of law to export credit insurance contracts. In view of the particularity of export credit insurance, the people’s courts may refer to the relevant provisions of the Insurance Law when hearing export credit insurance contract dispute cases; If there is a separate agreement in the export credit insurance contract, such agreement shall prevail. Therefore, when the court hears an export credit insurance dispute, it shall conduct the trial in accordance with the provisions of the export credit insurance contract, and may refer to the relevant provisions of the Insurance Law.

The “ship after knowing the risk” clause is a clause that exempts the insurer from liability. In accordance with paragraph 2 of Article 17 of the Insurance Law^[2]The insurer shall perform the obligation of reminder and clear explanation to the policyholder when entering into the contract, otherwise the clause shall not be effective. According to the author, the clause of “shipping after knowing the insurance” in the insurance clause usually uses special marks such as black and bold fonts to attract the attention of the policyholder, and the statement and warranty items of the first year insurance policy usually state that “the policyholder has read the insurance clause in detail, and the insurer has made clear reminders and explanations on the insurance clause, especially the content involving the exemption or limitation of the insurer’s liability” and other similar contents, and requires the policyholder to seal and confirm. If the insurer complies with the above requirements every time it underwrites, the court will usually rely on the first paragraph of Article 11 of the Judicial Interpretation (II) of the Insurance Law^[3]Article 13, paragraph 2^[4]It stipulates that if the insurer is deemed to have fulfilled the obligation of reminder and clear explanation as stipulated in the Insurance Law, the relevant clause shall be valid.

However, due to the huge annual export volume in China and the large number of exporters involved, some insurers have simplified the procedures for renewing insurance to a certain extent, and mostly make renewal offers with the insurer issuing a stamped renewal approval form to the policyholder in advance, and at the same time stating on the renewal approval form that “the policyholder’s full payment of premiums is deemed to be a clear reminder and explanation of the insurer’s entire content of the insurance policy, especially the content of exempting or limiting the insurer’s liability”, and the policyholder’s payment of insurance premiums and other behaviors are regarded as renewal commitments. This process is not the same as the normal insurance application process, and when the insurer issues a renewal offer, in addition to explaining the changes in the insurance clauses, it usually does not remind and clearly explain the exemption clauses that are still used, which is a highly controversial method in judicial practice.

First of all, the courts in different places have different attitudes as to whether the insurer still needs to perform the obligation to remind and clearly explain to the policyholder the exemption clause that is still in use. Some courts have held that if the same policyholder has signed the same type of insurance contract for two or more times, and the insurer can prove that it has fulfilled its obligation to remind and clearly explain to the policyholder on the same type of exemption clause, the insurer’s obligation to remind and clearly explain can be appropriately reduced. For example, Article 5 of the Minutes of Discussion of the Jiangsu Provincial High People’s Court on Several Issues Concerning the Trial of Insurance Contract Dispute Cases (Su Gao Fa Ju Ju Ju Wei [2011] No. 1) provides that if the same policyholder signs two or more insurance contracts of the same type, the insurer’s obligation to make a clear explanation may be appropriately reduced, and Article 6 further stipulates that: “If the policyholder, the insured or the beneficiary claims that the relevant exemption clauses are not effective under the following circumstances on the grounds that the insurer has not fulfilled the obligation to make a clear explanation, the people’s court shall not support it…… (2) the same policyholder has signed two or more insurance contracts of the same type, and the insurer has evidence to prove that it has performed the obligation to clearly explain to the policyholder the same type of exemption clause”, the Jiangsu court also followed this view in judicial rulings^[5]。 Article 9 of the original Guiding Opinions of the High People’s Court of Guangdong Province on Several Issues Concerning the Trial of Insurance Contract Dispute Cases (Yue Gao Fa Fa Fa (2011) No. 44) also stipulates that “if the policyholder or the insured has repeatedly insured the same insurer for the same subject matter and the same type of insurance, and there is evidence to prove that the insurer has performed the obligation to make a clear explanation, and the insured claims that the insurer’s liability exemption clause is invalid on the ground that the insurer has not fulfilled the obligation to make a clear explanation in this insurance, the people’s court shall not support it”. Although the Guangdong Provincial High People’s Court repealed the document on January 1, 2021 in order to implement the Civil Code and ensure the uniform and correct application of national laws, it did not negate the above-mentioned guiding spirit, Article 4 of the Guidelines for the Adjudication of Property Insurance Contract Disputes by the Shenzhen Intermediate People’s Court^[6]The above provisions are still retained, and the Zhejiang Provincial High Court also holds this view^[7]。 However, some courts have held that the insurer should still perform the obligation to remind and clearly explain the exemption clause when renewing the insurance, and cannot be exempted, such as Article 1 of the Minutes of the Meeting of the Yunnan Provincial High People’s Court on Unifying the Adjudication Standards for Insurance Contract Dispute Cases in the Province, which stipulates that: “…… (5) …… When the insurer signs another or more similar insurance contracts with the same policyholder, the insurer shall still perform the obligation of clear explanation as stipulated in Article 17 of the Insurance Law of the People’s Republic of China”. The Beijing Higher People’s Court held that the insurer’s obligation to explain in this case could be appropriately reduced, but it still needed to fulfill the obligation to explain clearly under the Insurance Law^[8]。

Second, some courts have held that renewing the insurance policy only in the form of a renewal approval document cannot fulfill the insurer’s obligation to prompt and clearly explain. For example, in two export credit insurance disputes heard by the Chongqing High Court, because the insurer only signed the Renewal Approval Form or the Short-term Export Credit Insurance Renewal Insurance Policy Schedule at the time of renewal, and did not sign the Policyholder’s Declaration every year, the court held that the insurer had not fulfilled its obligation to prompt and clearly explain the clauses exempting or limiting the insurer’s liability when signing the insurance contract every year, and the court held that the insurer had not fulfilled its obligation to prompt and clearly explain the exemption clauses as prescribed by law. The disclaimer is not valid^[9]。

Therefore, from the perspective of risk control, the author suggests that even if the insurer continues to use the insurance clauses of previous years, it should deliver the insurance clauses to the policyholder at the time of annual renewal, and fulfill the statutory obligation to prompt and clearly explain the exemption clauses, for example, the policyholder may be required to sign a simplified version of the policyholder’s statement when renewing the policy, stating that “the policyholder has received the insurance clause and the insurer has fulfilled the obligation to prompt and clearly explain the clause exempting the insurer from liability”.

2. Accurately identify the “risk” in the “shipping after knowing the risk” stipulated in the insurance policy

In a narrow sense, the applicable conditions of the “ship after knowing the risk” clause only point out that the insurer is not liable for the loss caused by the insured’s continued export to the buyer even though the insured knows or should have known that the agreed risk has occurred, as stipulated in the credit insurance clause. Combined with the insurance contract, the “risk” here includes commercial risk and political risk, and in practice, commercial risks such as the buyer’s default on payment, the buyer’s bankruptcy or insolvency are more common.

In order to control the underwriting risk, some insurers will also stipulate in the insurance clause that the insurer shall not be liable for the losses caused by the insured’s continued export in the event of the buyer’s fundamental breach or anticipation of the breach, the insured knows or should know the buyer’s negative information, and the insured has the right to refuse to perform or suspend the performance of the delivery obligation. Since such clauses do not involve making judgments on whether “risks” occur, and are set by the insurer according to their business conditions and risk control needs, this article will not further discuss this issue.

1. The stipulation of the sales contract shall be used as the basis for determining the occurrence of risks

Accurately judging the risks agreed in the policy is the premise for the insurer to assert the “ship after knowing the risk” clause. The terms of export credit insurance will define the various risks underwritten by the insurer, and the insurer shall accurately determine the date of occurrence of the risk in combination with the provisions of the sales contract and the insurance clause when making a claim, which is the premise for judging whether the insured has been shipped after knowing the risk. The risk of default by the buyer is one of the most common risks, and the short-term export credit insurance clause will stipulate that the risk of default will occur when the buyer exceeds a certain period of time due date, usually 30 days. According to the agreement of the sales contract, the buyer’s payment date can be determined, and then combined with the insurance contract to determine whether the risk has occurred.

However, in practice, the insured (seller) and the buyer may adjust the payment agreement according to the actual situation after the sales contract is signed, resulting in the actual payment operation being inconsistent with the contract. However, due to the existence of poor information, the insurer may not be aware of the situation until the insured claims the claim. In such a case, the insurer usually has the right to reduce the compensation ratio or refuse to bear the liability on the grounds that the insured has not fulfilled the agreed notification obligation. If there is a dispute between the insurer and the insured over the date of payment due by the buyer under the sales contract, the court is inclined to make a determination based on the provisions of the sales contract^[10]。

2. In the case of installment payment, there is a dispute as to the determination of the time when the risk occurred

In practice, it is also very common for the insured and the buyer to agree to pay in installments, in which case the date of occurrence of the risk should be calculated in installments. Or is it better to consider the transaction as a whole to determine when the risk occurred? In this regard, there is considerable controversy in judicial practice.

Proceeding from the characteristics of export credit insurance, the People’s Court of Shenzhen Qianhai Cooperation Zone held that: “(1) Export credit insurance takes the accounts receivable formed by the insured in export trade as the subject matter of insurance, and the source of credit risk is the overseas buyer rather than a single transaction. In the case of successive tranches of transactions, the credit risk is also in a state of continuous accumulation and amplification, and does not stop at a single transaction. (2) The creditworthiness of the overseas buyer has a significant impact on the insurer’s decision on whether to underwrite, determine the insurance rate and the credit line, and whether the overseas buyer defaults on the payment also plays a decisive role in the insurer’s decision to change or revoke its credit limit. (3) In commercial transactions, fully considering the matching of risks and benefits is an important embodiment of following the principles of maximum integrity and fairness. In the event that the buyer defaults on the payment and is finally repaid, if the time of occurrence of the risk of arrears is calculated separately for each shipment of goods for which the insured finally applies for compensation, and the determination is not made according to the agreement of the two parties on timely reporting of losses in the insurance contract, the insurer will not be able to grasp the credit worthiness and payment status of the overseas buyer in a timely manner, and will not be able to control the risk in a timely manner, and even cause the insured to still ship the goods to the overseas buyer when it is no longer able to repay the debt. As a result, the loss of the payment cannot be recovered. In such a case, if the insurer is also liable for compensation, it will obviously increase the liability of the insurer and be extremely unfair to the insurer. At the same time, it is not possible to urge the insured to exercise reasonable care. Therefore, as long as the buyer’s first overdue payment exceeds the agreed period, the risk of delinquency under the insurance contract arises. ”^[11]

The Chongqing Higher People’s Court held that “in the case of a continuous contractual relationship between the two parties to the sales contract and the buyer continues to make rolling payments, and there is no evidence to prove that the buyer’s qualifications and credit status have deteriorated, even if the buyer is in arrears, the insured cannot naturally refuse to continue the export on the grounds that the buyer is in arrears”. In addition, the court further held that the insurer had the obligation to review and approve each export underwriting, so the insurer’s argument that the insurer should be exempted from liability after knowing the risk could not be established.^[12]

3. The risk must have occurred during the insurance period

As to the timing of the occurrence of the risk, some courts have held that “the risk must be the risk that occurs during the insurance period, and if the insurer has incurred the corresponding risk before the insurer underwrites the insurance, it may affect the policyholder’s failure to perform the obligation of truthful disclosure at the time of insurance, but it is not a risk under the shipping clause after knowing the risk.” For example, in the case (2015) Shao Yue Shang Chu Zi No. 2979, the insured only took out insurance from the insurer on September 11, 2013, but the buyer in question had already made late payments in 2012 in previous transactions with the insured (editor’s note: such transactions were not insured). After the trial, the Yuecheng District People’s Court of Shaoxing City, Zhejiang Province, still held that “even if the buyer has not paid the overdue payment within the insurance period, it does not constitute that the risk of shipment has occurred after knowing the risk.” ”

3. Reasonably judging whether the insured knew or should have known about the occurrence of the risk based on the actual situation, in line with the original intent of the clause of “shipping after knowing the risk”.

Under normal circumstances, the insurer uses the insured’s export declaration records and foreign exchange receipts as the basis for judging whether the insured is aware of the occurrence of risks. However, in practice, in order to expand the overall export of the enterprise and circumvent the credit limit restrictions, some exporters apply for credit limits for the same buyer under different branches of the insurer with affiliated companies located in different regions. In this case, if one of the companies incurs the risk specified in the policy, does its affiliate know or should have known that the risk has occurred? Does an export by an affiliate to the same buyer constitute a “shipment with knowledge of the risk”, and can the insurer be exempted from liability on this basis?

According to the provisions of the law and the provisions of the Insurance Clause, Company A and Company B are affiliated companies, which is manifested in the following ways: Company A and Company B are controlled by the same shareholder/actual controller, and there is an equity relationship; Company A and Company B overlap in terms of management and have a business relationship; Based on the overlap of shareholders and management, Company A and Company B have a personnel relationship. Both companies A and B have credit sales with foreign quota buyer Company C and have taken out short-term export credit insurance in different branches under Insurance Company D, and both have applied for Company C to be the quota buyer under their respective policies. When the buyer C defaulted on the contract price of Company B, the risk of default under the insurance policy of Company B occurred, but Company A still exported the goods to the buyer Company C and claimed compensation from Insurance Company D after the risk of default. Consultation of insurance company D: Can the “ship after knowing the insurance” clause under the policy of company A be applied in this case?

From the perspective of contractual independence, the risks under Company B’s insurance policy are not automatically risks under Company A’s policy, and Company A’s continued shipment of goods to Company C, which is in arrears to the buyer, does not necessarily constitute “shipping after knowing the risk” under Company A’s insurance policy. However, in the author’s opinion, the determination of whether the insured has constituted a “shipment after knowing the risk” should not be a mere formal judgment, but should also be based on the purpose of the “shipping after knowing the risk” clause, and reasonably judging whether the insured knew or should have known about the occurrence of the risk based on the actual situation. Since the insurer does not have direct contact with the buyer and can almost only rely on the risk situation informed by the insured and the limited investigation for risk control, the insurer has a high trust interest in the buyer’s situation informed by the insured, for example, the buyer’s past credit situation and the transaction with the insured are important factors for the insurer to decide whether to underwrite and the insurance rate, and whether the insured timely informs the insurer of the buyer’s unfavorable information is the factor affecting the insurer’s decision to settle claims. In order to ensure that the insured stops losses in a timely manner after the risk occurs, and prevents the insured from continuing to ship the goods and improperly transferring the losses to the insurer, the export credit insurance clause usually stipulates the clause that “the insurer shall not bear the insurance liability after the insured knows the risk and ships”, so as to urge the insured to fulfill its due risk notification obligations and take stop-loss measures in a timely manner, so as to reduce the information gap between the insured and the insurer. Based on this, it is necessary to determine whether the insured is aware of the risk in light of the actual situation, and not just to do a formal examination. Especially for small and micro exporters, the company structure is relatively simple, the personnel structure is not complicated, and the company has a basic understanding of the operation of its affiliated companies. In this case, if only the formal examination is still conducted, it will violate the purpose and value of the “ship after knowing the risk” clause, and it is easy to induce moral hazard.

In this consultation, Company A and Company B not only had an equity relationship, a business relationship, and a personnel relationship, but also that Company A had the seal of Company A on the waybill of goods exported by Company B to Company C. Based on the above facts, the author is inclined to believe that Company A is more likely to have known that Company B had incurred risks under the insurance policy, so it should be interpreted and applied to “this policy” in the “shipment after knowing the risk” clause under Company A’s insurance policy, and that Company A’s act of shipping goods to Company C after the risk occurred constitutes “shipping after knowing the risk” under Company A’s insurance policy.

Of course, to determine whether the affiliated enterprises are aware of the risk situation, it is necessary to combine the actual materials of the case. The authors suggest that when underwriting short-term export credit insurance, especially for small and micro enterprises, the insurer can conduct a basic investigation of the insured’s affiliation at the time of underwriting, set a total limit on the same overseas buyer among affiliated companies, and include the transactions of affiliated companies in the scope of the exemption clause for shipment after knowing the insurance by way of special agreement.

4. With reference to the spirit of the Insurance Law, the insurer who underwrites after knowing the risk has no right to claim the exemption of the clause “shipping after knowing the risk”.

In a case heard by the People’s Court of the Qianhai Cooperation Zone in Shenzhen, the court examined whether the insurer had underwritten the insurance after knowing the risk, but the court ultimately did not find that the insurer had underwritten the insurance after knowing the risk, and the insured had no right to claim the exclusion of the application of the ship-after knowing the insurance clause^[13]。 In this regard, the author believes that if the insurer fully informs the insurer of the existence or possible risk at the time of insurance, or if the insurer knows or should know about the occurrence of risk according to the foreign exchange collection monitoring system, and the insurer still agrees to underwrite, it is a waiver of the insurer’s right to claim exemption from liability after knowing the risk when it is aware of the risk. Refer to the sixth paragraph of Article 16 of the Insurance Law^[14]If the insurer knows or should have known that the agreed risks have occurred between the insured and some of the buyers when underwriting or approving the buyer’s limit, and the insured still ships goods to the same buyer during the insurance period, the insurer has no right to claim exemption from liability under the clause of “shipping after knowing the risk” and shall be liable for compensation.

Therefore, the author suggests that the insurer should make a more detailed inquiry about the situation of the insured and the corresponding buyer when underwriting or approving the credit limit, and make a detailed understanding of the possible risk situation at the time of insurance application, so as to accurately study and judge the possible risk situation.

Based on the author’s experience in handling cases and the judicial trial practice of shipping after knowing the risk, the author suggests that insurance companies should pay attention to the following aspects in the process of short-term export credit operation:

• In the first year of underwriting and annual renewal, the insurer shall perform the obligation to remind and clearly explain the exclusion clause to the policyholder, and the insurer can improve the reminder and clear explanation obligation that the insurer should fulfill when renewing the insurance by serving the clause and requiring the policyholder to sign a simplified version of the policyholder’s statement at the time of renewal.
• Refine the applicable rules of the “ship after knowing the risk” clause. For example, if an affiliated company sets a total limit for the same overseas buyer, the insured is required to disclose its affiliated relationship when underwriting, and the transaction between the affiliated company and the buyer with the same limit is included in the scope of application of the insured’s exemption clause for shipping after knowing the risk through special agreement.
• The insurer should also strengthen the monitoring of the insured’s export declaration and foreign exchange receipt, and keep abreast of the insured’s risk occurrence in a timely manner.
• In the claim process, the insurer should require the insured to provide as many materials as possible, so as to reduce the information gap between the insured and the insurer and make a fair and reasonable claim settlement decision.

Notes:

[1] For example, Article 3 of the Short-Term Export Credit Insurance Comprehensive Insurance (Version 4.0) of China Export & Credit Insurance Corporation states: “Unless otherwise agreed in this policy, the insurer shall not be liable for the following losses…… (3) The Insured or its agent knows or should know that the risks agreed under Article 2 of this clause have occurred, or the Insured or its agent continues to export losses to the Buyer due to the buyer’s fundamental breach of the trade contract or the expected breach of the trade contract. ”

Article 5 of the Short-term Export Trade Credit Insurance Clause for Small and Micro Enterprises of Chinese Minmin Property Insurance Co., Ltd.: “Unless otherwise provided in this insurance contract, the insurer shall not be liable for the following losses…… (3) the loss suffered by the Insured as the Insured knows or should know that any of the risks under Article 4 of the terms of this insurance contract have occurred, or because the Buyer has fundamentally breached the sales contract or anticipates the breach of the sales contract, and the Insured continues to export to the Buyer; ”

[2] Paragraph 2 of Article 17 of the Insurance Law: “For the clause exempting the insurer from liability in the insurance contract, the insurer shall, at the time of entering into the contract, make a reminder sufficient to attract the attention of the policyholder on the insurance policy, insurance policy or other insurance certificate, and make a clear explanation to the policyholder in written or oral form of the content of the clause; If there is no reminder or clear explanation, the clause shall not be effective. ”

[3] Paragraph 1 of Article 11 of the Judicial Interpretation (II) of the Insurance Law: “When an insurance contract is concluded, if the insurer reminds the insurer of the clause exempting the insurer from liability in the insurance contract with words, fonts, symbols or other conspicuous signs sufficient to attract the attention of the policyholder, the people’s court shall determine that it has fulfilled the obligation to prompt as provided for in the second paragraph of Article 17 of the Insurance Law.” ”

[4] Paragraph 2 of Article 13 stipulates: “If the insurer has fulfilled the obligation of clear explanation that meets the requirements of paragraph 2 of Article 11 of this Interpretation, and signs, seals or otherwise confirms the relevant documents, the insurer shall be deemed to have fulfilled the obligation.” Unless there is other evidence proving that the insurer has failed to perform its obligation to make a clear statement. ”

[5] (2018) Su 07 Min Zhong No. 4236, (2020) Su Min Shen No. 858.

[6] Guidelines for the Adjudication of the Shenzhen Intermediate People’s Court on the Trial of Cases Involving Disputes over Property Insurance Contracts (4) Where the insurer claims that it should be exempted from the obligation to prompt or clearly explain the changes to the clause exempting the insurer from liability on the ground that the policyholder has repeatedly or repeatedly insured the same insurer for the same subject matter or type of insurance, and that it has already performed its obligation to prompt or clearly explain the changes to the clause exempting the insurer from liability, the people’s court will not support it.

[7] Article 11 of the Guiding Opinions of the Zhejiang Provincial High People’s Court on Several Issues Concerning the Trial of Cases of Property Insurance Contract Disputes: “The insurer’s obligation to make a clear statement may be appropriately reduced but not exempted under the following circumstances: (1) the same policyholder signs two or more insurance contracts of the same type; ……”

[8] Article 3 of the Guiding Opinions of the Beijing High People’s Court on Several Issues Concerning the Trial of Insurance Dispute Cases (for Trial Implementation) reads: “When an insurer signs a similar insurance contract with the same policyholder again or several times, the insurer’s obligation to explain may be appropriately reduced; However, the insurer shall still fulfill the obligation of clear explanation under the Insurance Law. ”

[9] (2019) Yu Min Shen No. 2769, (2019) Yu Min Shen No. 2770.

[10] (2021) Yue 01 Min Zhong No. 4415.

[11] (2018) Yue 0391 Min Chu No. 319.

[12] (2019) Yu Min Shen No. 2769, (2019) Yu Min Shen No. 2770.

[13] (2018) Yue 0391 Min Chu No. 319.

[14] Paragraph 6 of Article 16 of the Insurance Law If the insurer is aware of the failure of the policyholder to truthfully inform the insurer at the time of the conclusion of the contract, the insurer shall not terminate the contract; In the event of an insured event, the insurer shall be liable for compensation or payment of insurance money.

Anjie Broad, China, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact china@transatlanticlaw.com

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