Dear Madam,

Dr Sooksripaisarnkit’s excellent article (Hong Kong Lawyer, November 2011) on the recent developments being taken in England and Scotland to codify insurance contract law as it applies in the consumer context and whether Hong Kong should follow the same route, is certainly thought provoking. However, one feels that we in Hong Kong should not give up on the common law’s ability to solve thorny insurance legal issues just yet.

That there are thorny issues requiring resolution is in no doubt. As Dr Sooksripaisarnkit points out, the duty of pre-contract disclosure, which requires a prospective insured to disclose to the insurer all facts which are material to the risk prior to entering into an insurance contract, carries with it the single and draconian remedy of avoidance of the entire contract ab initio in the event of non-disclosure. This would even be the case if the non-disclosure is simply negligent or even innocently made. Such an unbalanced result (unbalanced in the sense that the only punishment available is far too drastic when compared with the crime involved) is one, admittedly, of the common law’s own creation and serves as one of the principal reasons why statutory intervention was deemed appropriate, first in Australia and now in England and Scotland. Indeed, the unfairness of the duty of disclosure and its limited remedy were criticised in the English Court
of Appeal, which had judges openly calling on a statute to right these wrongs (see for example, Longmore LJ in North Star Shipping v Sphere Drake Insurance plc [2006] All ER (D) 102 (Apr)).

However, just because other common law jurisdictions have gone down the path of statutory intervention does not necessarily mean Hong Kong should, or has to follow. After all, the strength of the common law lies in both its malleability – its ability to adapt to the needs of society – and its evolutionary nature – the fact that the change it brings about is gradual and incremental. The former trait means that the common law can retain its currency in an ever changing world. The latter trait ensures legal predictability, a concept that underpins Hong Kong’s position as an international finance centre where companies and persons can enter into contracts knowing the limits of their rights and obligations under the law. Intervening in the operation of the common law, therefore, has its downsides which cannot be ignored.

Further, if one looks at how case law on the duty of disclosure has attempted to mitigate the doctrine’s harsh effect, one feels this path has not yet been fully exhausted in the search for a solution. Take Drake Insurance plc v Provident Insurance [2003] EWCA Civ 1834 as an example.

In Drake, an insurer was seeking to avoid a motor insurance policy on the grounds that the insured had failed to disclose a speeding conviction at renewal. This fact, together with another fact which had been disclosed (a prior accident in which the insured driver was at fault) would, based on the insurer’s ‘points’ system, hypothetically have caused the insurer to charge a higher premium. As such, so the insurer argued, the non-disclosure of the speeding conviction was material and the policy was voidable. Not so, said the insured, for although the fact which had been disclosed, the accident, had been notified as a ‘fault’ accident, it had subsequently turned out that the accident was not in fact the insured driver’s fault. Accordingly, the insured argued, had the insurer known the accident was a ‘no fault’ accident, then the additional disclosure of the speeding conviction would have made no difference to the premium based on its ‘points’ system.

As it happens, the English Court of Appeal decided that the insurer had waived any breach of the duty of disclosure and this of itself was enough to decide the case. But the three-member court did not stop there and it is in their observations that one can see the elegant malleability of the common law searching for a solution to the problems posed by the duty of disclosure. By way of example, all three Court of Appeal judges found that the non-disclosure had not induced the insurer to charge a lower premium than would otherwise have been the case. To reach this conclusion, however, the court had to build hypothetical upon hypothetical, creating a kind of parallel universe in which they assumed the following chain of communications would have taken place had the fact of the speeding conviction been disclosed. If hypothetically (so the court said) the insured had disclosed the speeding conviction, this would hypothetically have caused the insurer to quote a higher premium in the first instance which, hypothetically, the insured would have queried, a process which would
then have led the insured to tell the insurer that the ‘fault’ accident (which together with the speeding conviction had caused the higher quote) was in fact a ‘no fault’ accident and this would, hypothetically, have caused the insurer to re-quote at the lower premium rate which was in fact charged. Phew! In giving legal credence to justify this, one of the judges (Pill LJ) went so far as to say that the insurer had a duty of good faith to enquire about the ‘fault’ accident before reaching a decision on whether to avoid the policy – and this would then have instigated this extraordinary hypothetical chain of communications.

Here we see, then, judges making observations that stretch existing legal concepts which other courts, like those in Hong Kong, can take into account, mould and flesh out into a new line of case law which could potentially emasculate the duty of disclosure into something which mitigates its harsh effect; in short, achieving by judicial precedent what other jurisdictions have sought to do by statute.

The common law’s ability to achieve these results stretches to other parts of insurance law too. For example, Waller LJ’s judgment in Alfred MacAlpine Plc v BAI (Run off) Ltd [1998] 2 Lloyd’s Rep 694 gave rise to the suggestion that a notification of claim provision in an insurance policy, which was not a condition precedent to the insurer’s liability, could still possibly give rise to the right to reject the claim (rather than just sue for damages) where the breach of the notification was sufficiently serious. Alas, this radical departure was frowned upon by a later Court of Appeal decision, but again it shows the elegance of the common law in searching for solutions to right unfair situations.

These decisions, and the fact that our Basic Law enables our courts to refer to them, means that it is perhaps premature for us in Hong Kong to give up on the common law’s ability to solve such issues just yet.

Peter Gregoire
Vice President and Associate General Counsel
Chartis Insurance Hong Kong Ltd