- within Insurance, Environment and Employment and HR topic(s)
By： Jia Wan and Jingzhe Wei
（Jia Wan https://www.anjielaw.com/team/resume.html?id=236 ）
I. Background
Commercial General Liability insurance (“CGL”) is one of the most widely used forms of commercial liability insurance internationally. Originating from the standardized policy forms developed by the Insurance Services Office (“ISO”) in the United States, CGL policies generally provide coverage for third-party claims arising from bodily injury or property damage caused by an “occurrence” in connection with the insured’s business operations. In China, CGL insurance has increasingly been adopted by manufacturing enterprises, particularly those engaged in export-oriented businesses. In many international supply chains, overseas customers or distributors require suppliers to maintain CGL coverage as a contractual prerequisite. For example, since March 2021, certain sellers on Amazon’s global e-commerce platform have been required to purchase and maintain commercial liability insurance once their sales exceed specified thresholds.
Given that CGL policies are typically drafted in English and contain numerous industry-specific terms of art, disputes frequently arise from differing interpretations of policy wording. These disputes are further complicated by the limited judicial guidance currently available in China regarding the scope of CGL coverage and the application of key exclusions.
This article discusses a recent Chinese court decision concerning whether product recall-related losses were recoverable under a CGL policy. AnJie Broad represented an insurer (referred to as the “Insurer”), in both the trial and appellate proceedings and obtained favorable judgments at both levels. This case provides useful guidance on the distinction under Chinese law between: (i) products liability coverage for third-party bodily injury or property damage caused by an insured occurrence; and (ii) separate product recall expense extensions covering certain preventive recall measures.
II. Coverage Framework under a CGL Policy
Although described as “Commercial General Liability”, a CGL policy is not a blanket policy covering all liabilities of an insured. Rather, it is a structured framework comprising multiple coverage modules, each addressing distinct categories of liability risks.
Under the ISO standard CGL framework, a policy typically includes the following principal coverage sections:
- Premises and Operations Liability
This section generally covers third-party bodily injury or property damage caused by an occurrence arising from the insured’s premises or ongoing business operations.
- Products and Completed Operations Liability
This section provides coverage for third-party bodily injury or property damage arising from defects in the insured’s products or completed operations after such products or operations have left the insured’s control. For manufacturers, distributors and service providers, Products and Completed Operations Liability is often the most commercially significant component of CGL coverage and is typically a primary reason for purchasing CGL insurance. The dispute discussed in this article primarily concerns this coverage section (the “products liability coverage”).
- Personal and Advertising Injury Liability
This section generally covers specified categories of non-physical injury arising from acts such as defamation, invasion of privacy and certain intellectual property-related claims. This coverage was not at issue in the present case.
A product defect, standing alone, does not trigger coverage under the products liability section. Coverage requires an “occurrence”—an accident causing third-party bodily injury or property damage. A defect may exist for years without ever causing such an accident: for example, a design flaw that is never triggered by any actual use or failure. It is only when that defect manifests in an accident causing covered loss that an “occurrence” arises and coverage is potentially triggered. This distinction—between the existence of a defect and the occurrence of a covered loss—is the crux of the coverage dispute here.
III. Factual Background
The insured in this case (referred to as the “Manufacturer”) produces automotive seals. In 2020, the Manufacturer mass-produced motor-shaft oil seals for a downstream customer (referred to as the “Customer”). An engineer changed the process parameters without updating the corresponding process documentation, and the resulting batch of oil seals suffered a serious durability defect. The defective units were substantial in number. Many had already been assembled into automotive electronic-control drive units, and some finished units had been shipped to an overseas automotive group’s plant, installed in vehicles that were subsequently sold to consumers.
Because the motor of the automotive electronic-control drive unit is integrally molded in a single piece and the defective oil seal sits inside the motor, the recall and dismantling process inevitably resulted in the scrapping of a large number of components. The Customer subsequently sought compensation from the Manufacturer in the amount of approximately USD 4 million. The Manufacturer sought indemnity under its CGL policy issued by the Insurer, claiming USD 2 million under the products liability coverage, representing the policy limit applicable to property damage arising from a single occurrence.
Previously, the Insurer had, pursuant to the product recall extension clause appended to the policy, paid the Manufacturer more than USD 1.5 million for direct recall expenses such as dismantling and reinstallation labor costs and return-shipping costs. However, the Insurer refused to indemnify the third party’s scrapped-component losses, taking the position that such losses fell outside the scope of the CGL primary coverage.
IV. Key Defense Arguments
The reasoning starting point of this case is that the triggering of insurance liability under the CGL primary coverage is premised on the happening of an “occurrence”.
The policy at issue defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. According to the Insurance Terminology (GB/T 36687-2018) issued by the State Administration for Market Regulation of the PRC, an “accident” in property insurance refers to “an unforeseen, sudden event beyond the insured’s control that causes physical loss”. Authoritative reference works such as Black’s Law Dictionary and Webster’s Third New International Dictionary likewise define “accident” in similar terms, emphasizing its characteristics of fortuity, unexpectedness, and suddenness.
Accordingly, a core point of dispute in this case is whether the Manufacturer’s voluntary product recall constitutes an “occurrence” under the products liability coverage. We argued that the Manufacturer’s recall was a proactive, preventive commercial decision taken after the product defect had been discovered, the purpose of which was to stop the potentially defective oil seals from continuing to circulate and reaching end use, thereby avoiding possible future vehicle damage or casualties. At that time, the vehicles in question had not yet suffered any actual, sudden accident caused by the defective oil seals, and the losses arising from the recall did not stem from any fortuitous or accidental events that had already occurred; rather, they were preventive costs that the Manufacturer voluntarily incurred to guard against future risk. Such losses therefore did not constitute third-party property damage caused by an “occurrence” and should not fall within the scope of the products liability coverage.
The court ultimately adopted the above core argument. Both the trial and appellate courts found that no actual “occurrence” had taken place in this case, that the CGL primary coverage had not been triggered, and that the Manufacturer could claim indemnity only for the agreed expenses under the product recall extension clause. This finding constitutes the cornerstone of the judgment.
Since there are currently no comparable precedents on the scope of CGL coverage for reference in Chinese courts, in arguing the meaning of “occurrence”, we systematically reviewed how this issue has been addressed in U.S. judicial decisions and cited several U.S. cases involving similar ISO standard CGL provisions for the court’s reference.
It should be noted that U.S. court rulings are not legally binding on Chinese courts. Nonetheless, given that CGL policy wording itself derives from the U.S. ISO standard form, the extensive practical experience that U.S. courts have accumulated in interpreting identical wording carries considerable reference value for Chinese courts in understanding the original intent behind the policy’s design and industry practices. Where comparable precedents are scarce and the interpretation of policy terms is in dispute, the targeted citation of authoritative foreign cases can help a court grasp more intuitively the substantive meaning of the disputed wording; this was one of the areas in which we invested the most effort in this case.
V. Conclusion
Based on our research, this case is the first in which a Chinese court has rendered a substantive ruling on the scope-of-coverage question under a CGL policy. The court ultimately held that the circumstances in question did not constitute an “occurrence” within the meaning of the policy, thereby establishing a clear analytical framework for distinguishing between products liability coverage and product recall extensions under a CGL policy. Specifically, products liability coverage responds to third-party bodily injury or property damage arising from an insured occurrence, whereas product recall extensions cover specified expenses incurred in connection with proactive recall measures taken to address product defects. These two types of coverage address different categories of risks and should not be conflated or applied interchangeably.
As Chinese enterprises continue to expand into global markets, CGL insurance is expected to become increasingly important for businesses engaged in international trade and supply chains. Further interaction between Chinese and international insurance practices will continue to shape the development of CGL-related jurisprudence and market practice in China.
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.
