Insurance law in Hong Kong – sailing into uncharted territory
Picture the scene. A claim notification hits your desk. You take one look at it and alarm bells start ringing. It’s late, for one thing; you’re not even sure whether it falls within the insuring clause; and if you had known all the salient facts when the risk was first presented, there is no way you would have written it. So rights are reserved and the matter is passed to your lawyers for a quick advice on coverage.
Of course, if the policy was subject to English law, your lawyer could rely on that vast body of case precedent which, over the past few centuries, has developed and refined the principles of insurance law on which to formulate his opinion. That used to be the way in Hong Kong too before the handover, when the courts automatically followed English precedent.
Now, Hong Kong lawyers don’t have the same luxury as their English counterparts. The courts of the HKSAR are no longer bound by English law. Instead, they are able to develop their own body of case precedent to address those same questions of principle that the English courts have long since answered. This will take time - a considerable amount of time and until then, Article 84 of the Basic Law enables HKSAR courts to refer to case precedent from any other common law jurisdiction in reaching its decisions; a position which means that they can pick and choose from judgments in England, Scotland, Ireland, Australia and the United States among others.
In these circumstances, predicting how those principles common to any policy dispute – contractual interpretation, late notification and compliance with the duty of utmost good faith - might be developed by the HKSAR courts is by no means easy. So far, there have been hardly any HKSAR cases addressing these issues, but those that do exist may give an indication as to what the future holds.
Contractual interpretation
Cases decided by HKSAR Courts which have considered how a contract should be interpreted, appear to have been far more reverend to English case law than that of any other jurisdiction. Take for example Wong Henry v Hong Kong Bay Properties Ltd (Court of First Instance 10 April 2002) which considered the issue of how the terms of a standard Chinese tenancy agreement should be construed. The approach adopted by the court in that case was that set out by Lord Hoffman in his defining judgment in Investors Compensation Scheme v West Bromwich Building society [1998]1 WLR.
Lord Hoffman stated that the purpose of interpretation was to ascertain what the true intention of the parties was from the words used in light of the background knowledge available to the parties at the time the contract was entered into (the so-called “factual matrix”). The judgment was a controversial one at the time, as it appeared to give wide latitude to parties looking to dispute the terms of their written contract by adducing evidence that
showed the words in the document meant something entirely different to what they said. Despite this criticism, and despite being afforded the opportunity to disregard it, the courts of the HKSAR appear to have taken to Lord Hoffman’s approach which has often been quoted and relied on.
Notification provisions
In fact a recent decision by the HKSAR court of First Instance may have taken Lord Hoffman’s approach to contractual interpretation one step further when it comes to interpreting the meaning of notification of claims provisions in insurance policies. The recent case of Fong Wing Shing Construction Co. Limited v Assurances Generales de France (HK) Ltd (28 May 2003) marked the first occasion an HKSAR Court had to consider such provision.
The question before the Court was whether there had been a breach of a clause requiring the insured to:
“notify Insurers of any occurrence which might give rise to a claim… as soon as possible”.
Compliance with the clause was stated in the policy to be:
“condition precedent to insurers liability”.
This type of issue has been ‘meat and drink’ to an English court – but in Hong Kong, lawyers held their breath to see whether the same principles would be followed.
In brief, the facts of the case were that the plaintiff, a building contractor, was seeking to recover from the defendant CAR insurer, a payment he had made to a third party who had been injured during a construction project. The project had been completed in February 1999, but the contractor did not receive notice of the claim by the third party until 7 June 2000. It notified its insurer the following the day. The insurer, however, rejected the claim on the basis that the contractor had breached its duty to give notice “as soon as possible”, the occurrence giving rise to the claim having occurred almost 18 months previously. The contractor argued that it had complied with this requirement as it simply had not known about the accident giving rise to the claim until 7 June 2000 – and it was notified the following day.
In deciding the case the HKSAR Court did look to English law for guidance relying on a passage from Malcolm Clarke’s ‘Law of Insurance Contracts’ (a defining text on insurance law in England and Wales), a judgment of the English King’s Bench of 1925 (rather than some a more up to date decision) and a pre-handover Hong Kong case that was subject to English law. But just as English lawyers were about to breath a sigh of relief at the prospect of not having to look to other jurisdictions when advising on the same issue, the proverbial “googly” was bowled in the form of an 1869 case from the Irish Law reports.
The HKSAR Court decided that as the context in which the claim was made showed that the contractor did not actually know of the accident until 18 months after it happened and notice was given to its insurer at that stage, it had effectively complied with the notification provisions of the policy. This was no doubt the common sense decision. Nevertheless, the route by which this decision was reached may appear somewhat strange to an English lawyer.
The approach which the HKSAR court adopted in interpreting the notification
clause was that laid down in the following passage of Malcolm Clarke’s textbook:
“The ordinary meaning of the words is the meaning when read in isolation but in context. The context is a series of circles: the phrase, the sentence, the paragraph, the part of the policy, the whole of the policy, and then, outside the policy itself, the past dealings of the parties, the trade context, and the object which the policy was intended to achieve. The court moves outward through circles until it is satisfied that it has found the meaning intended by the parties.”
This passage outlined an English Court’s approach to interpreting a policy, as refined by Lord Hoffman in ICS v West Bromwich (see above), namely that a Court would aim to glean the intention of the parties by reference to the words used in the policy when read in light of the context of the commercial background that exists at the time the policy is entered into. In Fong Wing Shing, by contrast, the HKSAR Court of First Instance, used this passage to support a new principle, namely that the words in the policy should be interpreted by reference to the context that exists at a later date: when the claim is made.
As such, the principle laid down by the HKSAR court appears to depart from English law, by offering a wider latitude to an insured or an insurer seeking to use background material as an aide to interpreting what the words in their policy actually mean. Whereas in England, such background material is limited to that in existence at the time the contract was entered into, in the HKSAR this may be extended to the background existing at the time the claim is made. Whether Fong Wing Shing is given such wide application or just limited to its facts remains to be seen.
Duty of utmost good faith
The biggest unknown factor at present concerns the approach HKSAR courts will take in relation to the duty of utmost good faith governing all insurance contracts and the remedies available to an insurer for a breach of that duty. There have been scant decisions in the post-handover period considering the issue and it is certainly unpredictable given the varying law that exists in the different common law jurisdictions.
In English law, of course, a material non-disclosure made prior to the policy being entered into, entitles the Underwriter, subject to arguments on waiver and affirmation, to avoid the contract ab initio. The harshness of the singular remedy of avoidance in cases of non-disclosure, however, has had its critics, and other common law jurisdictions have seen fit to adopt a different approach.
Take, for example, Australia which has the Insurance Contracts Act 1984, section 28 of which limits the remedy for avoidance in the case of non-disclosure to circumstances where the failure to disclose the material fact was committed fraudulently. In the case of a non-fraudulent non-disclosure, the insurer is not entitled to avoid. He is, however, entitled to reduce his liability to pay the claim being advanced by an amount that would place him in the position he would have been in had full disclosure been made. In other words, if the material fact not disclosed related to the subject matter of the claim, then the claim can be rejected without the policy being avoided.
From the limited case law there has been on this issue, it would appear that the HKSAR Courts, at present, favour the harsher English approach. Bruce Porter Baron v Hartford Fire Insurance Company [1997] 916 HKCU was decided only a few months after the handover on 18 December 1997. One of the questions considered was whether the defendant insurer was able to avoid a personal accident policy under which the plaintiff’s representatives were seeking to advance a claim after the plaintiff had been murdered. The ground on which insurers were seeking to avoid, was that at the time the risk was accepted the plaintiff had failed to disclose the material fact that he had in the past passed suffered from liver cancer.
It appears that one of the arguments advanced on the plaintiff’s behalf was that the policy might still have been effective had full disclosure been made, albeit with insurers insisting on an illness contingency exclusion clause being written into it (a position which would not have been dissimilar to that in Australian law). The court, however, disagreed and upheld insurers entitlement to avoid the policy.
Since that case, however, HKSAR case law on this issue has been scant indeed. Nam Kwong Medicines & Health Products v China Insurance Co. Ltd [2002] 792 HKCU 1 considered the issue of non-disclosure, but in that case the insurance policy was expressly stated to be subject to English law and practice. Nevertheless, the judge did rely on the often quoted observations on the harshness of avoidance made by Staughton LJ in the English case of Kausar v Eagle Star Insurance Co Ltd 1997 CLC 129:
Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered the risk turns out to be a bad one; …. I do not say that non-disclosure operates only in cases of dishonesty. But I do consider that there should be some restraint in the operation of the doctrine. Avoidance for honest non-disclosure should be confined to plain cases.”
Perhaps this passage points the way for Hong Kong Courts to adopt the via media developed in Australia? Namely avoidance only in fraudulent cases; but in non-fraudulent cases the insurer’s liability to pay the claim be reduced by an amount that would place him in the position he would have been in had full disclosure been made.
Conclusion
The post handover case law that has considered the subject matter of insurance, indicates that English common law still forms the main jurisdiction to which HKSAR courts have looked for guidance. Yet this respect for English law should not be mistaken for a blind reverence. Reference to cases from alternative jurisdictions can be found in many HKSAR judgments. In addition, HKSAR courts do not always go to the most up to date English cases on an issue, preferring sometimes to look to turn-of-the-century precedent so that they can use the old principles laid down and adapt them to the local modern requirements.
It will, of course, take years before the HKSAR has its own body of case precedent. Until then, however, legal advice will have to tempered with more than just the traditional caveats.
For further information, please contact Tim Ingham at tim.ingham@cms-cmck.com or Steven Dewhurst at steven.dewhurst@cms-cmck.com or on +852 2846 3575.
