Subrogation under FIDO Insurance Policies in China

Securities claims are seen as a main type of Claim under D&O and FI policies. In securities misrepresentation cases, there could be multiple parties that are held jointly and severally liable (including, but not limited to, the Entity Insured and the Individual Insured under a D&O Policy, the Insured under a FI Policy, and other entities, such as accounting firms, law firms, etc.). As such, assessment of policy coverage where there are insureds that could be held jointly and severally liable and how to pursue any subrogation claim has been of concern to Insurers.

To be specific, Article 85 of the PRC Securities Law (revised in 2019) provides that “the controlling shareholder, actual controller, director, supervisor, senior officer or any other person directly liable of the issuer, as well as the sponsor, underwriter or the person directly liable thereof shall be jointly and severally liable for compensation together with the issuer, unless they are able to prove that they are not at fault.”

Policy Coverage and Subrogation

In the circumstances, these concerns included (1) if the parties that are held jointly and severally liable involve both covered and uncovered entities, whether Insurers should assume all the liability or whether the Insurers can assume liability proportionately; and (2) if the Insurers should assume all the liability first, whether the Insurers are entitled to pursue a subrogation claim and how to proceed with this.

These concerns have now been addressed under the implementation of Judicial Interpretation (IV) of the Supreme People’s Court on Several Issues concerning the Application of the PRC Insurance Law. Article 16 of the Judicial Interpretation (IV) states that “Where the insured in liability insurance assumes joint and several liability for the joint tort in accordance with the law, and the insurer refuses to pay the indemnity on the ground that the liability for the joint tort exceeds the share of liability that shall be assumed by the insured, the people's court shall not support such a claim. If the insurer claims indemnity from other persons jointly and severally liable for the part exceeding the share of the insured's liability after assuming the insurance liability, the people's court shall support such a claim.”

Accordingly, if the Claimant (i.e. the Claimant in legal actions arising from securities misrepresentation) seeks full compensation against the Insured, the liability Insurer should first assume respective insurance liability, subject to the policy limit. The Insurer can then pursue a subrogation claim against other jointly and severally liable parties for the part exceeding the Insured’s portion of liability.

Allocation of Liability in Subrogation Claims

Article 178 of the PRC Civil Code ("Civil Code") states:

"Where two or more persons are jointly and severally liable in accordance with the law, the obligee is entitled to request assumption of liability by part or all of the persons jointly and severally liable.

The shares of liability of persons jointly and severally liable shall be determined based on the gravity of liability of each person; or the liability shall be evenly shared if it is difficult to determine the gravity of liability of each person. If the liability actually assumed by a person jointly and severally liable exceeds the person's share of liability, the person shall be entitled to claim indemnities from other persons jointly and severally liable."

Based on the relevant provisions of the Civil Code and Interpretation IV of the Insurance Law regarding the allocation of liability and subrogation, if the Insurers have assumed liability for the part exceeding the Insured’s portion of liability, the Insurers should be entitled to seek reimbursement from other jointly and severally liable parties. In such subrogation claims, the following factors may be considered in order to determine the allocation of liability:-

• Firstly, from the perspective of information disclosure obligations, the Securities Law specifies the statutory information disclosure obligations of relevant entities. The issuer/listed company, its D&Os, as well as external intermediaries, shall discharge corresponding disclosure obligations in accordance with the relevant provisions of the Securities Law, and shall bear corresponding responsibilities for securities misrepresentation.
• Secondly, in situations where the securities misrepresentation has been ascertained through criminal proceedings, and the nature and severity of each party’s responsibility has been determined, Insurers may argue that the allocation of liability should be in parallel to the allocation of liability as determined by those criminal proceedings.
• Thirdly, where, as will be the case in the vast majority of legal actions arising from securities misrepresentation, the China Securities Regulatory Commission ("CSRC") has already determined the extent of fault (intentional or negligent) of the entities that are held jointly and severally liable by way of an administrative punishment decision, Insurers may argue that liability should be allocated based on the extent of fault as ascertained by that administrative punishment decision.
• Lastly, the amount of any administrative fines imposed by the CSRC on each party responsible for a securities misrepresentation could also form a reference point for the allocation of liability. If the fine imposed on the Insured is at the low end, while the fines imposed on other liable parties are at the high end, Insurers may then argue that the portion of liability that should be allocated to the Insured should be less or no more than the portion that should allocated to other jointly and severally liable parties.

In a subrogation case under a FI Policy, we have raised the abovementioned factors with a view to determining allocation and it will be interesting to see how they are received by the Court.