The Insured’s Duty to Prevent and Mitigate Losses

Case Summary:

Company T (Plaintiff – the Insured) entered into an insurance contract with Company B (Defendant – the Insurer). After the insured event occurred, the Insurer alleged that the Insured had violated its obligation to prevent and mitigate losses. The Arbitral Tribunal acknowledged that such an obligation exists but concluded that the Insured did not breach it.

Lessons Learned:

When another party bears liability for one’s losses, an insured person may be tempted to neglect taking preventive or mitigating measures, believing that the loss will be covered anyway. Such an attitude is detrimental not only to the liable party but also to society, as it leads to wastefulness. Therefore, Point (đ), Clause 2, Article 18 of the Law on Insurance Business stipulates that “the insured must take preventive and loss-mitigation measures in accordance with the Law on Insurance Business and other relevant legal provisions.”

Regarding the duty to prevent losses, after affirming that “the insured must comply with contractual conditions and applicable laws, and take measures to prevent damage,” Article 574 of the Civil Code 2005 provides that “if the insured, through fault, fails to take the preventive measures stipulated in the contract, the insurer has the right to set a deadline for the insured to implement those measures; if, upon expiry of the deadline, the measures are still not taken, the insurer may unilaterally terminate the contract or refuse to pay insurance compensation for losses arising from the failure to take such measures.” In other words, the sanction for violating the duty to prevent losses is that “the insurer may unilaterally terminate the contract or deny compensation when the loss results from the insured’s failure to take preventive measures.”

With respect to the failure to mitigate losses, the Law on Insurance Business does not specify a particular sanction. However, as seen in the Civil Code 2005, the same sanction—termination of the insurance contract or denial of compensation—can be applied by analogy (Article 3 of the Civil Code 2005) to violations of the loss-mitigation obligation. The Civil Code 2015 later introduced a general provision applicable to all contractual obligations, including insurance relationships. Specifically, Article 362 provides that “an obligee must take all necessary and reasonable measures to prevent or minimize damage to itself.”

In the present case, the Insurer followed this reasoning and claimed that “the insurer is entitled to unilaterally terminate the contract or deny compensation when the loss occurs as a result of the insured’s failure to take preventive measures.”

The remaining issue, therefore, was whether the Insured had indeed violated its duty to prevent or mitigate losses. The Insurer argued that the Insured “did not take any measure whatsoever to prevent or mitigate the loss,” and thus “violated Point (đ), Clause 2, Article 18 of the Law on Insurance Business.” However, the Arbitral Tribunal found otherwise, stating that “the Plaintiff did take certain measures to prevent and mitigate losses to the goods, as confirmed by Surveyor R.” Consequently, the Tribunal concluded that “the Defendant’s assertion that the Plaintiff violated Point (đ), Clause 2, Article 18 of the Law on Insurance Business and used this as a basis to deny compensation under Clause 2, Article 574 of the Civil Code 2005 is unfounded. Therefore, the Tribunal determines that the Plaintiff’s loss incurred during the night of May 29 to early morning of May 30, 2013, falls within the scope of insurance coverage, and the Defendant – the Insurer – must compensate the Plaintiff in accordance with the insurance contract.”

In this case, the insured was not found to have violated its duty to prevent or mitigate losses. Consequently, the insured was entitled to compensation for the damages suffered.

From this case, insured businesses should understand that they are obligated to prevent and mitigate losses. When they have taken appropriate measures but damage still occurs, the losses remain compensable. Conversely, if an insured fails to take preventive or mitigating actions, any loss that could have been avoided or minimized may be excluded from compensation.

Disclaimer:
This article is published for informational purposes only, intended as a reference for arbitrators, disputing parties, participants in arbitration proceedings, and those studying commercial arbitration. It does not represent or express any opinion or viewpoint of the Vietnam International Arbitration Center (VIAC). Any reference or citation by third parties to part or all of this article has no validity and is not acknowledged by VIAC.

[1] According to Article 3 of the Civil Code 2005: “In cases where the law has no provision and the parties have no agreement, customary practices may apply; if no customary practices exist, analogous legal provisions may apply. Customary practices and analogous application of law must not contravene the fundamental principles set forth in this Code.” The Civil Code 2015 maintains this principle in Clause 2, Article 5: “Where the parties have no agreement and the law provides no regulation, customary practices may apply, provided such practices are not contrary to the fundamental principles of civil law stipulated in Article 3 of this Code.”

Source: https://www.viac.vn/