Floating Mountain Shipping Ltd SA Panama (FM), the plaintiff, brought a claim in the Qingdao Maritime Court due to a dispute with the defendant, the People's Insurance Company of China Qingdao Branch (PICC), over a ship insurance contract.

FM’s vessel, the Floating Mountain, was underwritten by PICC against all risks including war risks. The Floating Mountain collided with the Successor, a Cyprus-flagged ship, within the duration of insurance coverage. The Qingdao Maritime Safety Administration found that the accident was caused because the Successor did not fully appreciate the effect of the crosscurrent it would bear when turning left to avoid the Floating Mountain. The Successor was driven by the crosscurrent into the shallows where the vessel stranded. FM indemnified USD 350,000  to the owner of the Successor for its economic losses and paid an additional SGD 177,739.81 in legal expenses. PICC refused to accept liability for these insurance indemnities on the ground that the two ships did not contact each other and it was therefore not a collision. FM applied to the Court for an order that PICC should pay the insurance indemnities and the corresponding interest, which were converted to CNY 4,060,000.

PICC argued that: (1) the ship insurance contract in question clearly sets out that the insurer shall underwrite against all risks and war risks according to the 'Ship Insurance Clauses' promulgated by the People's Insurance Company of China on 1 January 1986. Regarding 'liabilities for collision' under 'insurance against all risks', the 'Ship Insurance Clauses' stipulate: 'The present insurance shall be liable for the legal indemnities to be borne by the insured due to the collision of the insured ship with any other ship or the contact-based collision of the insured ship with any fixed or floating object or any other object.' An incident without actual contact did not constitute a 'collision', and even less a 'contact-based collision'. When the insurance accident raised by the plaintiff occurred, the Floating Mountain had left Qingdao Port, and had not been involved in a collision or contact-based collision with any ship or object, and thus no insurance liability for collision arose.

(2) Article 165.1 of the Maritime Code of the People's Republic of China (Maritime Code) prescribes: 'Collision of ships means an accident arising from the contact of ships at sea or in other navigable waters adjacent thereto.' The foregoing provision clearly defines the meaning of 'collision of ships', and does not include non-contact accidents. In conclusion, FM's interpretation of the term 'collision or contact-based collision' in the insurance contract was a baseless and unreasonable expansionary interpretation, so its claim should be rejected.

The Qingdao Maritime Court held that the term 'collision of ships' as mentioned in the Maritime Code includes both direct and indirect collisions. This viewpoint is further clarified in art 16.1.3 of the Provisions of the Supreme People's Court on Collision of Ships. If the insurer is permitted to refuse to indemnify an indirect collision, the insured ship will inevitably be negatively encouraged, after an accident of indirect collision has occurred, to intentionally cause a direct collision in order to qualify for insurance indemnities, and thus make the insurer suffer from heavier losses. In this way, the ship insurance market will be disordered, and it will not be beneficial to cultivating a good insurance market and orderly insurance. Therefore, PICC’s case must be refused.

PICC appealed to the Higher People’s Court of Shandong on the grounds that the stipulations in the insurance contract in question were specific, and indirect collision did not fall within the insurance coverage, so it should not bear insurance liability as prescribed in law. The liabilities for collision insured by the insurer should be limited to direct-contact collisions only.

FM argued, amongst other things, that not only the law and the judicial interpretation of China, but also the Collision Convention 1910 classifies indirect collisions as collisions of ships. Article 13 of the Collision Convention 1910 points out clearly that indirect collisions fall within the scope of collisions of ships.

Held: Appeal dismissed.

Article 13 of the Collision Convention 1910 prescribes: 'This Convention extends to the making good of damage which a vessel has caused to another vessel, or to goods or persons on board either vessel, either by the execution or non-execution of a manoeuvre or by the non-observance of the regulations, even if no collision had actually taken place.' Article 17 of the Insurance Law prescribes: 'If an insurance contract provides for the exemption of liabilities for the insurer, the insurer shall clearly state it before signing the insurance contract. If no clear statement is made about it, the clause shall not be binding.' PICC asserted that it should not bear any indemnity liability for the indirect collision, but such an assertion was not prescribed in the exceptional liabilities of the 'Ship Insurance Clauses', nor did PICC clearly state it to FM when concluding the insurance contract. Hence, it shall not be effective.

In conclusion, it was correct for the Qingdao Maritime Court to affirm that the term 'collision of ships' involved in the insurance contract in question should include indirect collisions, which both conformed to the laws and judicial interpretation of China and coincided with the provisions of the Collision Convention 1910.