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.”
In judicial practice, it is not uncommon that the controlling shareholder, the D&Os, and other intermediaries could be held jointly and severally liable for misrepresentations made in relation to securities. In the "Wuyang Bonds Case", adjudicated by the Zhejiang Higher Court, the "China Security Case", adjudicated by the Shanghai Higher Court, and the "AVIC Sanxin Case", adjudicated by the Shenzhen Financial Court, certain listed companies and intermediaries that have not been sanctioned by the regulator have been held jointly and severally liable for securities misrepresentations.
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.
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:-
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.