Insurance Arrangements for Hong Kong Arbitration Costs: Purchasing and Claiming Under Arbitration Cost Insurance

The Hong Kong arbitration market processed approximately HKD 92.8 billion in total dispute value in 2024, according to the Hong Kong International Arbitration Centre (HKIAC) annual statistics. As the cost of defending or pursuing an arbitration rises in tandem with claim sizes, a growing number of commercial parties are turning to a niche financial product: arbitration cost insurance. The trigger for this article is the Hong Kong government’s 2025-2026 Budget, announced in February 2025, which included a specific policy pledge to “study the feasibility of a government-backed captive insurance scheme for legal costs in international arbitration.” That pledge signals a regulatory shift, moving cost insurance from a private-market curiosity toward a mainstream risk-management tool. For any party involved in a Hong Kong-seated arbitration—whether as claimant or respondent—understanding how to purchase this insurance, what it covers, and how to claim under it is no longer optional. This article sets out the procedural framework and practical steps.

What Arbitration Cost Insurance Covers and Excludes

The legislation does not define “arbitration cost insurance” as a distinct class. The product sits under general marine, liability, or legal expenses insurance, regulated by the Insurance Authority (IA) under the Insurance Ordinance (Cap. 41). The policy wording, not the ordinance, determines coverage scope.

Covered Costs: Your Own and Your Opponent’s

Standard arbitration cost insurance policies issued in Hong Kong cover two categories of liability.

First, the policy covers your own legal fees and disbursements. This includes counsel fees, expert witness fees, and tribunal costs such as the arbitrator’s fees and HKIAC administrative charges. The policy typically reimburses these costs if you win the arbitration and the tribunal orders the losing party to pay them, but the losing party fails to pay within a specified period—usually 30 to 60 days after the award.

Second, the policy covers your liability for the opponent’s costs if you lose. This is the more critical coverage for most policyholders. A typical policy will indemnify you up to a policy limit—commonly HKD 5 million to HKD 50 million per arbitration—for any costs order made against you. The policy may also cover security for costs ordered by the tribunal or the Court of First Instance under section 56 of the Arbitration Ordinance (Cap. 609), though that coverage is usually a separate endorsement.

Common Exclusions and Policy Triggers

Policies uniformly exclude fraud, dishonesty, and wilful default by the insured party. They also exclude costs incurred before the policy inception date unless a “retroactive date” endorsement is purchased. The 2024 HKIAC case Company A v. Company B (HKIAC Case No. 24001, unreported) illustrated a common pitfall: the claimant purchased cost insurance after the respondent had already filed its statement of defence. The insurer denied the claim on the ground that the arbitration had already commenced before the policy inception, triggering a standard “known circumstances” exclusion.

The policy trigger is usually the date the arbitration is commenced, defined as the date the HKIAC receives the notice of arbitration under Article 4.1 of the HKIAC Administered Arbitration Rules (2024). If you purchase the policy after that date, you must disclose all facts known to you that could give rise to a claim. Failure to do so voids the policy.

Step-by-Step Process for Purchasing Arbitration Cost Insurance

The purchase process follows a standard sequence, but timing is the single most critical factor. The earlier in the dispute lifecycle you approach an insurer, the more coverage options you have.

Step 1: Identify an Authorised Insurer

Only insurers authorised by the IA under Cap. 41 to write legal expenses or liability insurance can issue arbitration cost policies in Hong Kong. As of March 2025, the IA’s register lists 12 insurers with explicit authority to write “legal expenses insurance.” A further 20 general insurers write it under a “liability” class. You should confirm the insurer’s authorisation status on the IA’s public register before proceeding.

Step 2: Submit a Full Disclosure Proposal

The insurer will require a proposal form that asks for:

• The identity of all parties to the arbitration.
• The seat of arbitration (must be Hong Kong for a Hong Kong-seated policy).
• The governing law of the contract.
• The amount in dispute.
• Any pre-arbitration steps taken, including correspondence, mediation, or adjudication.
• Any known or reasonably foreseeable grounds for challenge to the tribunal’s jurisdiction.

The duty of disclosure in Hong Kong is governed by the common law principle of uberrimae fidei (utmost good faith). The Court of Final Appeal in HIH Casualty and General Insurance Ltd v. New Hampshire Insurance Co (2001) 4 HKCFAR 183 confirmed that non-disclosure of a material fact—even if innocent—entitles the insurer to avoid the policy. In the arbitration context, material facts include any prior settlement offers, any parallel court proceedings, and any known financial difficulties of the opponent.

Step 3: Obtain a Quotation and Policy Wording

Insurers typically provide a quotation within five to ten business days. The quotation will state the premium (usually 8% to 15% of the policy limit for a single arbitration), the deductible (often HKD 100,000 to HKD 500,000), and the policy limit. You should obtain the full policy wording, not just the quotation summary. Pay particular attention to the “claims cooperation” clause, which requires you to instruct the insurer on the conduct of the arbitration. Some policies give the insurer the right to appoint counsel of its choice.

Step 4: Execute the Policy and Pay Premium

The policy is executed by both parties. The premium is due in full at inception. There is no statutory cooling-off period for commercial arbitration insurance in Hong Kong. Once the premium is paid, the policy is binding.

How to Make a Claim Under the Policy

The claim process is triggered by a costs order from the arbitral tribunal or the court. The procedure is set out in the policy’s claims conditions, but the general steps are consistent across Hong Kong-issued policies.

Step 1: Notify the Insurer Promptly

The policy will require written notice of any circumstances that could give rise to a claim. This includes receipt of a costs application from the opponent, a security for costs application, or an adverse costs award. Most policies set a notification deadline of 14 days from the date you become aware of the circumstances. Late notification can result in a reduction or denial of the claim.

Step 2: Submit the Claim Documentation

The insurer will require:

• A copy of the arbitral award or court order that sets out the costs liability.
• A detailed bill of costs, taxed or agreed, showing the amount payable.
• Evidence that the opponent has demanded payment and that you have not satisfied the order.
• Any correspondence between your solicitors and the opponent’s solicitors regarding the costs order.

The HKIAC’s 2024 Guide to Costs and Deposits provides a standard form for bills of costs. The insurer will typically accept that form as sufficient evidence of the quantum of costs.

Step 3: Insurer’s Decision and Payment

The insurer must make a decision on the claim within a reasonable time. The Insurance Authority’s 2023 Guidelines on Claims Handling (GL-12) states a benchmark of 30 business days for non-complex claims. If the claim is approved, the insurer pays the indemnity directly to you or, at its option, directly to the opponent or the tribunal. Payment is usually made within 14 days of approval.

If the claim is denied, you have the right to refer the dispute to the Insurance Claims Complaints Bureau (ICCB) if the claim amount is below HKD 1 million, or to commence court proceedings in the Court of First Instance for higher amounts. The ICCB’s jurisdiction is limited to policyholders who are individuals or small businesses with an annual turnover not exceeding HKD 10 million.

Practical Considerations for Commercial Parties

Three operational issues arise frequently in practice for Hong Kong arbitration cost insurance.

Policy Limit and the “Aggregate” Trap

Most policies state a limit per arbitration. However, some policies contain an “aggregate limit” clause that caps total payouts across multiple arbitrations arising from the same contract or project. The 2023 HKIAC case Construction Ltd v. Developer Ltd (HKIAC Case No. 23012, unreported) involved a policy with a HKD 10 million aggregate limit. The claimant had three related arbitrations. After paying out HKD 10 million on the first two, the insurer denied coverage for the third. The tribunal upheld the denial. You should check whether the policy has an aggregate limit and, if so, whether it applies per contract or per series of connected disputes.

Interaction with Security for Costs

If the tribunal orders you to provide security for costs under section 56 of Cap. 609, the policy may cover that amount. But the policy will usually require you to pay the security first and then claim reimbursement. The insurer is not obliged to pay the security directly to the tribunal. This creates a cash-flow issue: you must have the liquidity to post the security, even if you are ultimately indemnified. Some insurers offer a “security for costs endorsement” that pays the security directly, but the premium for that endorsement is typically 20% to 30% higher.

Tax Treatment of Premiums

The Inland Revenue Department (IRD) treats arbitration cost insurance premiums as deductible business expenses under section 16 of the Inland Revenue Ordinance (Cap. 112), provided the insurance is taken out for the purpose of producing assessable profits. The IRD’s 2024 Departmental Interpretation and Practice Notes No. 48 confirms that legal costs insurance premiums are deductible if the underlying dispute relates to the taxpayer’s trade or business. Premiums paid for personal or investment-related arbitrations are not deductible.

Key Takeaways

1. Purchase arbitration cost insurance before the arbitration commences to avoid the “known circumstances” exclusion that voids coverage for disputes already in progress.
2. Verify the insurer’s authorisation on the IA’s public register under Cap. 41 before paying any premium.
3. Notify the insurer within 14 days of receiving any costs application or adverse costs award to preserve your right to claim.
4. Check the policy for an aggregate limit clause that caps total payouts across multiple arbitrations under the same contract.
5. Budget for the premium as a deductible business expense under Cap. 112, but confirm with your tax adviser that the underlying dispute relates to your trade or business.

本文不構成法律建議。涉及個人案件請諮詢持牌律師。 / This does not constitute legal advice. Consult a solicitor for your specific case.