Litigation Preservation Liability Insurance in China – Data and Case Analyses

Litigation Preservation Liability Insurance（“LPL insurance”）refers to the damages that the court orders the insured to pay the respondent due to an erroneous application for litigation preservation by the insured. By combining data analysis and case study, this article discusses the legal issues surrounding LPL insurance disputes.

The number of LPL insurance cases in China has increased every year since 2016, with a surge in 2019. By 2020, the number of judicial cases was the highest ever, reaching 1,053 cases a year. The related industry distribution of LPL insurance was mainly concentrated in the financial industry (57.21%), followed far behind by the construction industry (14%) and real estate industry (10.87%). The trial distribution of LPL insurance was 2,076 cases of first instance (59.97%), 1,229 cases of second instance (35.5%) and 146 cases of retrial (4.22%).

The liability for damages caused by an incorrect application for preservation is categorised as tort according to the first paragraph of Article 1,165 of the Civil Code: “One who is at fault for infringement upon a civil right or interest of another person, causing harm, shall be subject to the tort liability.” In addition, according to Article 108 of the Civil Procedure Law of the People’s Republic of China (the “Civil Procedure Law”): “Where an application is erroneous, the applicant shall compensate the respondent for any loss incurred from preservation.”

In Qingdao Zhongjin Yuneng Property Co, Ltd v Qingdao Zhongjin Industrial Co, Ltd and Binzhou Zhongjin Haoyun Real Estate Co, Ltd,the Supreme People’s Court held that if an applicant for preservation causes property losses to others due to the improper exercise of rights, it will be liable for tort compensation.

In judging whether there is a mistake in an application for preservation, support for the litigation request of the applicant for preservation should not be taken as the sole standard. A comprehensive judgment should be based on the specific circumstances of the case, for example, whether the applicant has intent or is negligent, whether the object of preservation is wrong, or any other factors.

In Yixing Building Engineering & Installation Co, Ltd  v Zhang Xin and Zhang Xueshan, the Supreme People’s Court held that, because the parties had different legal knowledge, different capability to prove the facts of the case, and different capability to analyse and judge legal relations – ie, they generally had no professional capacity as required for judicial adjudication – their judgement about the issues, rights and obligations might not be the same as the adjudicative results of the court. The due care of a party when petitioning for preservation should not be too harsh. If whether the claim of a petitioner for preservation was supported were the only basis on which to decide whether a petition for preservation was erroneous, the parties in good faith would inevitably be obstructed from defending their rights through the litigation preservation procedure according to the law. The functions of the litigation preservation system would therefore be adversely affected.

The application for wrongful property preservation should be based on the general fault principle of torts. How to determine the applicant’s fault is one of the components of high difficulty and controversy in LPL insurance cases – for example, whether to adopt the objective criteria ( ie, the duty of care that an ordinary objective person would have under the same conditions) or the subjective criteria (ie, considering the applicant’s knowledge level, cognitive ability, social experience, etc). In actual cases, the courts have held that the general objective standard, namely the duty of care of an ordinary person, would be adopted as the judgment standard to decide whether the person applying for preservation was at fault.

According to Article 105 of the Civil Procedure Law: “Preservation shall be limited to the extent specified in an application or the property in connection with the case.” An “error in application” in the above provisions mainly refers to the existence of error in the subject matter or the amount of preservation applied for by the applicant. One of the primary criteria to judge the existence of an error in preservation is whether the amount applied for exceeds the amount claimed by the conservator in the civil suit.

In Hu XXX v CNSG Qinghai Kunlun Soda Industry Co, Ltd, the Supreme People’s Court held that the application for preservation was within the scope of the claim and the property related to the case, and thus there was no mistake in the preservation application.

Preservation measures may cause the subject asset to be sealed up, seized and frozen, and to lose its liquidity in market economic activities, which may lead to direct or potential loss of the property to be preserved.

In respect of the applicant’s losses, it is necessary to further prove the causal relationship between the property preservation error and the losses. Causality is the key factor in judging whether property preservation is wrong, which usually needs to be judged comprehensively based on the aspects of preservation time, release time and property impairment caused by the preservation.

In MinQin All Sheng Yong Tai Agriculture Co, Ltd v Minqin Rongxin County Bank, the Supreme People’s Court considered whether there was a causal relationship based on the following aspects: firstly, whether the preserved asset was within the control of the respondent; secondly, from the point of view of the time of preservation, whether the sealing period of the preservation did not exceed the warranty period; and thirdly, after the cancellation of the preservation order, whether the respondent could still repackage the subject asset and put it on record for sale, or whether the respondent allowed the loss of the case to continue to expand, in which case, the responsibility could not be attributed to the applicant for preservation.

With the rapid development of the economy and acceleration of the process of the rule of law, the application of LPL insurance in the judicial practice of China is becoming more extensive. In  future, it will play a more important role in promoting the reform of the litigation system, strengthening the judicial services to the parties and enhancing judicial credibility. Detailed factors, as given here, should be evaluated to avoid incorrect application for property preservation.