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Death and Business Interruption in China – Implications for Property Insurance Claims

By on November 25, 2021 0


In China, workplace accidents and fatalities have declined steadily since the mid-2000s.1 Although rarer than before, unfortunately, workplace accidents causing death in China continue to occur an average of 75 times a day.2

Often, such fatal accidents immediately result in a stop order from the local municipal security office (a “Stop work order“) to prevent further damage.

Stop-work orders can result in a complete shutdown of a job site for weeks or even months while the safety office investigates the accident, resulting in loss of operating time.

Losses from this downtime can reach tens of millions of dollars. This is especially common in the manufacturing and construction industries after fatal equipment malfunction.

If these losses are covered by an interruption of activity (“BIIs the central issue in many property insurance disputes.

Stop work orders

Intended to discover additional risks in the workplace and prevent further damage, the site of an accident is cordoned off and access is restricted when a stop work order is issued. Stop-work orders are usually issued by local safety offices in accordance with the Occupational Safety Law of the People’s Republic of China (“Workplace Safety Act“).

Under Chinese law, any accident resulting in death in the workplace is grounds for stopping work. They are usually issued in response to events that meet the legal definition of an “accident”. According to the Regulations on the Declaration, Investigation and Disposal of Workplace Accidents, Worker’s Death or Injury, or Losses amounting to RMB 10 million yuan, meet this definition.

BI insurance

Since stop-work orders interrupt operations for weeks or even months, they frequently lead to BI complaints.

BI insurance is usually taken out by the policyholder as an additional cover to property damage insurance.

However, in the PRC insurance market, BI policies cannot be purchased independently. Instead, they can only be purchased with property damage policies, such as comprehensive property insurance or comprehensive property insurance.

Therefore, a given BI policy typically specifies that in order to be triggered, a threshold level of physical damage must first be reached. These wordings include clauses stating that “this policy provides coverage only as a direct result of physical loss or damage to the insured property as described in the property damage policy”. A serious work accident is usually a sufficient trigger, especially when it involves damaged equipment or facilities.

However, when an additional event such as a stop work order is taken into account, determining the period of responsibility becomes very difficult.

Is the insurer responsible only for the time lost restoring the property due to physical loss or damage caused by the accident (e.g. replacement of broken equipment, a few days or weeks), or is the insurer rather responsible for the time lost due to the stoppage? Work order (potentially months)?

In some cases, the difference between the two liability periods can cause the insured’s insurance benefit to vary by tens of millions of dollars.

The answer almost always lies in contractual interpretation.

In the United States, in many cases, losses resulting from an accident stop work order are not covered by BI property insurance. Where the policy includes the following provision, regardless of whether the losses are “resulting directly from loss or physical damage”, time lost due to a stop work order is not included in the claim. benefit. Instead, such language limits the liability period to the time needed to repair or replace broken equipment. This downtime will be included, but no additional loss due to a stop work order will be.

The reasoning is simple: people are not goods. Stop work orders are the direct result of danger or damage to people, not property. They are issued to prevent harm to human life in the event of an occupational accident or death, and only rarely due to damage to equipment or installations. This is also the reason why extensions to BI losses which clearly cover work stop orders, such as the “Denial of access” and “Civil authority order” extensions, are commonly offered by insurers. Goods.

However, in some cases a policy has subtle words or wordings that include losses resulting from a stop work order under the coverage of a BI clause, even in the absence of an extension. .

In some cases, two words are enough to differentiate between a modest benefit and a potential windfall for the insured. Losses resulting from the stop work order are not included when the policy ends the period of liability once the damaged property is restored to the “same or equivalent physical condition that existed before the damage”.

However, by adding two simple words to the policy, “physical and operating conditions ”, may expand the scope of coverage to include a stop work order. Indeed, if the restoration of “physical conditions” refers strictly to the repair or replacement of damaged goods, the restoration of “operating conditions” extends to the restoration of the site to the state in which it was. before the accident.

Immediate cause in China

What about the role of causation in such clauses? In the absence of binding contractual language such as that stated in the above paragraph, the extent of BI loss coverage will depend on the legal findings of the immediate cause.

Although the principle of immediate cause is not clearly defined in the Law of the People’s Republic of China, it has been widely accepted as a fundamental principle of insurance law and applies when assessing the causality of insurance claims.

The immediate cause designates, in the chain of causation between the risk and the damage, the most direct, effective and decisive cause which plays a fundamental, traceable and dominant role in the realization of the damage. of the insurance policy, the insurer must assume responsibility and pay for the benefit. However, when an intermediate event “breaks” the chain of causation, the policy will not cover losses resulting from that secondary event.

In the circumstances described, a stop work order will be considered to break the chain of causation and the resulting losses will not be covered by the BI insurance. Indeed, if a physical accident is the most “fundamental, traceable and dominant” cause of the losses resulting from material damage, a stop-work order is, as a government directive, only a cause of non-damage. materials, which are generally out of scope.

Conclusion

Where a policy requires losses to be “resulting directly from loss or physical damage”, insurers are not responsible for time lost as a result of a stop work order. Under such a policy, the stop work order – by virtue of the immediate cause principle in China – is an intermediate event that “breaks” the chain of causation. Therefore, BI insurance will not cover losses resulting from this secondary event. Without an applicable “Denial of Access” or “Civil Authority Order” extension, these policies will not cover losses related to stop work orders.

However, in some cases a policy includes subtle words or wordings that incorporate losses resulting from a stop work order under the coverage of a BI clause, even in the absence of an extension. . In some cases, only two words (see the example “operating conditions” above) make the difference between a small or full insurance benefit.

Whether it is an insurer or an insured, hiring an experienced lawyer to review the BI clause of a new policy before entering into it can save valuable time, effort and resources before it is concluded. an accident does not happen.