China’s Legal System: an Insurance Perspective

October 29, 2010

Years ago a lawyer friend told me of an experience. While teaching a group of Chinese lawyers, he proposed a question to them of who is responsible if a vehicle hits a pedestrian in a cross walk? The class said it was the vehicle.

A Chinese lawyer then raised his hand and asked: What if the vehicle hits the pedestrian while in the cross walk, but the pedestrian flies out of the cross walk and lands outside the lines, who is then responsible? It was easy to grasp this concept if the pedestrian landed within the crosswalk lines, but what he did not?

Those of us who live and work in China clearly understand that the deeper you get into China the more complicated and complex it becomes. China is such a vast land. The wide range of wealth and socio-economic classes make it hard to define China as one country.

There is the very modern fast paced China with high rise buildings, high speed trains, gated housing developments, luxury cars and stores. This is the elite China, a China of wealth and power.

Then there is the rising class of China. They may not have all the property or luxury goods the elite Chinese have, but their living standards have greatly improved over the last ten years and they are increasingly able to afford more and more high end goods and services.

Finally there is the left behind China, where the mindset of the people, and in many cases their life-style and poverty, harkens back to the era of the difficult economic times when Mao ruled China.

If a foreigner enters China today and stays in a five star hotel, shops at a luxury store, travels by luxury car or bus, and eats at only the fine restaurants, he may be under the impression that what he sees in China today is the real China—the reality is much different.

One of the most important events to take place in China from a legal, social and economic development perspective was when China was accepted as a member of the World Trade Organization (WTO). This acceptance was a long time coming and finally happened in December 2001.

I clearly remember the day it was announced because all of China took to the streets and set off fire crackers in celebration. For China it was an important step towards acceptance on the world stage. At that time I don’t think the Chinese fully understood the inevitable changes accession would make in their country, such as their personal wealth and their economic standing.

The WTO has helped ensure that China continues to reform, legislate and open up many of its business sectors, including the insurance industry. Due mainly to these policies, China revised its Insurance Law in 2009 to be more in line with international requirements.

China adheres to a Civil Law system, which is based on legislation, rather than case law. In simple terms this means that the judges interpret the laws rather than case law and precedent as in the United States. A judge in the United States is more like a good umpire between the two sides.

In China, with its legal inquisitorial system, it is not uncommon for judges to be active participants in a case and to even go out and do their own research on the matter at hand. This proactive approach by the judges may affect how a case is conducted, and could ultimately help decide the outcome of the case.

Furthermore, what and how the law is interpreted would more than likely be different in different parts of China. Cities like Shanghai or Beijing are usually more up to the standards of the western world. However, in other places, such as the far western parts of China, the judges may not even be familiar with some of the new Chinese laws or reforms. Therefore, the way the law is interpreted will depend on the location, quality, education and qualifications of the judges you have handling your case.

In addition many Chinese distrust the legal system. This goes back to the not so distant past under the leadership of Mao, when there was no legal system that could be depended upon and the country was in legal, economic and social chaos.

In the Mao era the courts were more like a mock trial system and there was no justice. Due to this general distrust, the decision to take another party to court means that the parties generally do not see any other way or method to solve a dispute.

This is further emphasized by the tendency for the Chinese Civil courts to use Court Mediation. Thus in a Civil Court a Judge may act more like a father figure working to mediate and solve the dispute between the two parties, by negotiating a compromise for both sides to resolve an issue. This Court Mediation is legally binding.

A majority of Chinese believe in harmony and relationships, with a social understanding that, if two parties will strive to solve a problem with some harmony and a good will relationship, most problems can be solved through competent negotiation without legal intervention by a court. For this reason, many Chinese companies do not carry a large number of insurance policies to protect themselves against frivolous law suits, damage claims or other liabilities and risks as do their American counterparts.

As China continues to become more westernized, the general population in China will more than likely continue to follow America’s example and require increased risk protection against civil suits, property damage, health, life and other liabilities.

Chinese companies, like their American counterparts, will need to carry more insurance to protect themselves and their companies against potential losses. More individuals will start to demand better health and medical care and will look more to private health service providers and insurance companies.

All of this will be good news for carriers and insurance professionals, since it obviously means a third of the World’s population is waiting to be insured and more importantly to be educated as to how insurance can help them individually, help their businesses, and improve the quality of life for their families.

__________________________________________________________________ Anita Hummel has lived in China for the last 25 years, following a family tradition. Her grandfather, Dr. Arthur W. Hummel Sr., was a missionary in northern China for 14 years, devoting his life to the study of China and the Chinese language. He established the Asian division at the Library of Congress. Her uncle was U.S. ambassador to China from 1981 to 1985.

Anita is a successful business woman. In 1996 she started the design and production company, Mondoro, which specializes in supplying the home furnishings market worldwide. As its president, she oversees activities in China, Vietnam and other Asian countries.

Somehow she found the time to complete law school in China, graduating with an LLMPRC degree, which describes as, “a lot of letters for a Masters in Chinese Business Law which includes Insurance Law.”

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