Fuzhou Fengda Shipping Co., Ltd. v China Pacific Property Insurance Co., Ltd. Fujian Branch on disputes over hull insurance contract

[Basic facts]

The insured, Fengda had taken out all risks hull insurance for its vessel M/V “Tianli 69” with the insurer, CPIC Fujian Branch. The ship certificates showed that the trading limit for M/V “Tianli 69” was offshore and her Business Transportation Licence showed that her permitted business scope was the transportation of general cargo in domestic offshore areas and the middle and lower reaches of the Yangtze River. On 24 October 2014, M/V “Tianli 69” went aground when she was anchored near Huayang Reef, Nansha awaiting discharge. The ship sank during the rescue operation for failure in containing the flooding through the damaged part. Her sinking location was approximately 8°53′589″ N, 112°51′267″ E in waters about 2,000 metres deep. Sansha Maritime Safety Administration investigated into the accident and found that M/V “Tianli 69” should be solely liable.

Fengda filed a claim with CPIC Fujian Branch, and the latter denied the claim on the grounds that at the time of the accident the insured vessel was outside the trading limit agreed in the insurance contract. Fengda then brought an action to this Court, requesting to order CPIC Fujian Branch to make a settlement under the hull insurance in the sum of RMB10.2 million.

[Judgments]

Opinions of this Court: the insurance policy taken out with CPIC Fujian Branch covered “Tianli 69” against all risks and relevant additional risks under the Hull Insurance Clauses for Ships Engaging in Coastal and Inland River Transportation, and the covered trading limit was offshore areas and Classes A and B areas on Yangtze River. However, the accident took place in the waters near Huayang Reef, Nansha, which was in the far seas. M/V “Tianli 69” was outside her trading limit without prior notice to or consent of the insurer. This was a breach of the insured’s duty. Article 16 of the Hull Insurance Clauses for Ships Engaging in Coastal and Inland River Transportation which was appended to the policy provided that “…prior written notice shall be given to the insurer of any sale or bareboat charter of the insured ship or any change in her trading limit or owner, manager, operator, name, technical condition or use or of her requisition for title or for use. The insurance contract remains in effect with the insurer’s consent and upon completion of necessary formalities, or otherwise automatically terminates upon the occurrence of any of the foregoing.” Accordingly, the insurance contract in dispute had automatically terminated when the insured ship sailed out of the agreed trading areas, which had happened before the accident took place. The legal relationship between the parties under the insurance contract had ceased to exist at the time of the accident. For this reason, the loss of the insured ship resulted from the accident should not be covered by the insurance, and CPIC Fujian Branch should not be held liable for making settlement for such loss. This Court thus rejected the claims made by Fengda, who was unsatisfied with our judgment and proceeded to file an appeal. The Higher People’s Court of Hainan Province heard the second instance proceedings and affirmed the original judgment.

[Significance]

This case concerns disputes arising from marine hull insurance contract and has attracted wide attention as it involves transportation in the South China Sea. The trial of the case has the following significance: first, it clarifies the concept of trading limit. During the court hearing, Fengda claimed that the location of the accident was less than 1 nautical mile from Huayang Reef and therefore should be deemed as within the offshore trading limits. We hold that trading limit was a specific term in China’s Specifications for Domestic Voyage Ships, and its meaning should be defined by authorities in charge of shipping insurance and vessel inspections and registration, instead of being interpreted in an arbitral manner. In China, such authorities are the Maritime Safety Administration of the People’s Republic of China. Accordingly, the definition of trading limit shall be subject to the specifications they issue. In such specifications, the waters near Huayang Reef, Nansha is classified as far sea areas. Second, it affirms the consequences of breach of duty by the insured. The insured ship was sailing outside her trading limit without prior notice to or consent of the insurer. Such act was a breach of the insured’s duty. As provided for in Article 9.2 of the Interpretation II of the Supreme People's Court on Several Issues concerning the Application of the Insurance Law of the People's Republic of China, circumstances in which the insured breached its duty are not under “clauses exempting the insurer from liability” as set out in Article 17.2 of the Insurance Law, and the insurer is not obliged to warn, explain or notify in respect of the consequences thereof. Third, it sets a unified criterion for the trial of similar cases. It is not uncommon that Chinese coastal vessels usually navigate outside their trading limits. The nationwide insurance industry and shipping industry have been following this case with interest and expecting the judicial decisions to define the relationship between trading limits and jurisdictions so as to set standards for the industries. This judgment has decided that the division of trading limits have nothing to do with jurisdictions, vessels shall operate within their trading limits, and that the insured vessels navigating outside their trading limits might not be covered by their insurance due to breach of duty. Such decisions have imposed restraints on unsafe navigation outside trading limits and set standards for the domestic shipping market.