By Guan Feng King & Wood’s Finance Group

This article continues to discuss Insurance Benefits for Banks as Mortgagees. The first part of this article was published on Chinalawinsight on January 2012.

III. Assignment of Insurance Benefits

In practice, in order to insure the debt, the lender bank often signs an insurance assignment agreement with the borrower, in which the borrower will assign all insurance benefits(1) under the related property insurance policy(2) to the lender bank. The assignment of rights becomes effective at the moment when the assignment contract is signed, or when the borrower defaults on the loan. Meanwhile, the endorsement slip, in which the insured designates the bank as the "first beneficiary" under the insurance policy, confirms the rights of the bank. To evaluate the feasibility of the insurance assignment contract, the fundamental approach from an insurance law perspective is to assess the nature of the insurance benefits assigned.Continue Reading Insurance Benefits for Banks as Mortgagees (Part II of II)

By Guan Feng King & Wood’s Finance Group

I. Introduction

Banks usually require a borrower to provide a mortgage on their property as security for the bank’s loan. However, under China’s laws, a mortgagee is not entitled to directly receive insurance benefits or indemnification relating to the mortgaged property. If the mortgagee cannot be directly indemnified when the mortgaged property suffers damage or loss, the mortgagee bears the risk of being under-secured on its loan since it does not have a priority right to the insurance proceeds. Although the mortgagee can seek indemnification from the borrower if the borrower has been reimbursed with insurance benefits, ideally the bank should directly receive indemnification for the loss in value of its security.

In practice, the lender bank usually requires the borrower to insure the mortgaged property and designate the bank as the "first beneficiary" in the property insurance contract. In this way, the bank can directly obtain indemnification if the mortgaged property suffers damage or loss due to insured incidents. However, under the Insurance Law of the People’s Republic of China ("Insurance Law"), the term "beneficiary" is only defined in life insurance rather than in property insurance. On September 23, 1992, the Department of Real Estate Credit of the Construction Bank of China promulgated the Interim Measures of Employees Mortgage, which defined the term of "first beneficiary". However, the Measures for the Administration of Individual Housing Loans promulgated by the People’s Bank of China on May 9, 1998 phased out the "first beneficiary" concept. Thus, since there is no definition for "beneficiary" in property insurance under China’s current laws, the question of whether such a "beneficiary" is entitled to any direct claim to indemnity remains a myth in the property insurance contract. In order to clarify this issue, the High Court of Shanghai, in its 2009 and 2010 White Paper on Trial Judgments in Financial Cases, instructed that a beneficiary can only be specified in a life insurance contract according to the relevant provisions of the Insurance Law and instructions of the Supreme Court of China.Continue Reading Insurance Benefits for Banks as Mortgagees (Part I of II)