If I were to list out the most common litigation-inducing problems our China lawyers have seen in the last few years, that list would consist of the following:

  1. Bad product received from a China manufacturer
  2. Late product received from a China manufacturer
  3. No product received from a China manufacturer
  4. An investment into a China company or project that never existed
  5. The China Bank switch scam
  6. IP theft (trademark, copyright, patent or trade secret)
  7. Failure to get paid by a Chinese company
  8. The reverse of some of the above. In other words the American/European/Australian company is being accused of having provided bad product, failing to pay, or having engaged in fraud or IP theft.

Because litigating and arbitrating against Chinese companies is rife with so many issues specific to China and to Chinese companies, we have begun an indefinite series on China Litigation and Arbitration. If you have any questions regarding litigating or arbitrating against Chinese companies, please leave them as a comment below or please email us and we will try to incorporate answers in future posts within this dispute resolution series. Part 1 of this series, China Litigation and Arbitration: What we are seeing, provides a very general overview of current trends in China litigation and China arbitration.

The first thing my firm's international litigators usually do when they get an international litigation or international arbitration matter involving one of the above (or really any international arbitration or international litigation matter) is ask for a copy of our client's insurance policies. After reviewing the policies, we typically predict one of following three results, fairly evenly spread out:

  1. The insurance company(s) likely will pay our client the full amount of coverage (or close to it) without much dispute.
  2. The insurance company(s) may or may not pay our client the full amount of coverage without much dispute, but if there is a dispute, it will likely be worth our client fighting over coverage because it is likely to secure full coverage or at least enough to warrant the fight.
  3. The insurance company(s) is not likely to provide any coverage (beyond maybe a very minimal amount) and it probably will not be worth it to our client to spend much money or time litigating the insurance coverage.

But here is the important thing: the insurance policies we see are all over the map on just about everything.

By way of one example, many policies have almost afterthought provisions on cyberfraud or computer hacking. The main part of the insurance policy may clearly provide that there will be no coverage for fraud, and yet there will be a provision stating that the policy will cover "computer fraud" up to x dollars per incident. The x dollars is overtimes a very small amount, but because the law is unclear both as to what constitutes "computer fraud" and as to what constitutes an incident, we have used this provision to drive a truck through on behalf of companies we represent on China bank switch scam cases. We argue that because the fraud was induced via a hacked email, it comes within the coverage exceptions provided for either (or both) cyberfraud and computer hacking. We then argue that each payment made by our client (and oftentimes in these fake bank frauds there have been multiple payments) constitutes a separate incident. Let's just say that insurance companies usually prefer settling to litigating a case that might establish new and unfavorable law on one of their own policies. This is especially true in the more friendly policyholder states.

I wrote on this previously in Cheated By China. Check Your Insurance:

This insurance coverage lawyer told me that he is building up a cottage industry representing companies that have been hit with this scam. He said that he alone has taken on about a half dozen of these matters in just the last six months. And if he has taken on about a half dozen of these, that almost certainly means that he has reviewed about a dozen. What he is doing is going to the insurance company of the company that has been scammed and demanding it reimburse his client for the money his client lost. This lawyer tells me that the insurance company's initial reaction is to essentially call his client an idiot, but as I pointed out, even if true (and I vehemently deny that it is), I have yet to see an insurance policy with an "idiot exclusion." This lawyer then convinces the insurance company that what happened is plain and simple employee negligence and that the insurance company must provide coverage.

The same can hold true for companies that order a product from China that never comes. There is a an argument to be made that this is fraud and that this is theft and since many policies provide some coverage for fraud and many provide a lot of coverage for theft, it usually behooves us to make an insurance claim on behalf of those companies that ordered product from China and never got anything but a runaround. The same holds true for companies that send product to China or provide a service for a Chinese company and never get paid. They can argue that they are victims of a fraud or a theft. These are not simple arguments, however, as they usually involve inherently inconsistent provisions within the insurance policy contract. An insurance policy may provide coverage for theft on the one hand while excluding breach of contract damages on the other.

Some general business insurance policies — typically called a Commercial General Liability (CGL) insurance policy — may provide a little (or even sometimes a lot) of coverage if your intellectual property (be it your trademark, your patent, your copyright or even your trade secret) gets stolen in China or anywhere else. Beyond that some companies purchase IP protection policies that provide specific protection against IP theft. More common is to have advertising coverage in your standard business insurance policy that will oftentimes provide you with insurance coverage in a dispute involving allegations that you are using someone else's intellectual property.

Bottom Line: Massive books have been written on insurance coverage. Indeed, massive books have been written on insurance coverage for specific losses like fraud or intellectual property theft. So there is no way a blog post can do anything but touch on the issues. And that is the point of this post. Just to put into your head that you have been paying insurance premiums for years just so that it will be there when you suffer a loss or get sued. So next time you are looking at litigating or arbitrating against a Chinese company or your company is facing a lawsuit or an arbitration for something it is alleged to have done in China or involving China, have your lawyer check your insurance policy for coverage. Because unless you have that done, you just never know.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.