Litigation Security Insurance

Premium Structure

Costs for obtaining a bond are determined by the insurance company based on the total value of the assets to be frozen and the perceived strength of the plaintiff’s case. When a company applies for litigation security insurance, it must pay a one time premium, which typically ranges from a small percentage to a few points of the insured amount. This fee is non refundable, even if the lawsuit is settled quickly or the asset freeze is never used.

The insurer evaluates the risk by reviewing the legal documents and the financial stability of the plaintiff. A higher risk of a wrongful seizure claim will result in a higher premium or a requirement for additional counter security. This financial arrangement is often more cost effective than tying up a large amount of working capital in a court controlled account for the duration of the trial.

The insurance premium is generally not recoverable from the losing party as part of the legal costs.

Judicial Acceptance

Approval by the court is a mandatory step before the insurance policy can function as a valid form of security for property preservation. Every People’s Court maintains a list of qualified insurance companies whose bonds are accepted for litigation security insurance purposes. If a plaintiff submits a policy from an unapproved insurer, the court will reject the application for an asset freeze.

The judge reviews the insurance contract to ensure it provides an unconditional and irrevocable guarantee to pay for any damages caused by the seizure. This scrutiny protects the defendant from being harmed by a frivolous lawsuit backed by a weak insurer. The court’s role is to balance the plaintiff’s right to secure their claim with the defendant’s right to use their property during the proceedings.

This administrative filter ensures that only legitimate and well backed claims lead to the freezing of assets.

Claim Event

Liability for the insurer is triggered if the court later determines that the plaintiff’s application for property preservation was wrongful and caused actual damage to the defendant. In a litigation security insurance scenario, the defendant must file a separate lawsuit or a counterclaim to prove that the asset freeze was unnecessary or malicious. For example, if a company’s factory was shut down due to a frozen account and it missed critical orders, the insurer would be liable for the lost profits up to the policy limit.

The insurer then has the right to seek reimbursement from the plaintiff under the terms of their agreement. This recursive liability ensures that the plaintiff remains cautious about freezing more assets than necessary. The statutory position is that the plaintiff is always primarily responsible for the consequences of a wrongful seizure.

This insurance product has significantly increased the volume of property preservation applications in Chinese courts.