Dear Madam,

I have read with interest Mr Peter Gregoire’s observations in his letter to the editor (Hong Kong Lawyer, January 2012) and I am impressed by his yet so optimistic a view on the ability of the common law to solve thorny insurance legal issues. Perhaps, the saga of cases following Black King Shipping Corporation and Wayang (Panama) SA v Mark Ranald Massie (The Litsion Pride) [1985] 1 Lloyd’s Rep 437, where the court attempted to stretch the concept of ‘utmost good faith’ beyond its usual boundary, has not left any mark in his mind. It is true that adopting such an optimistic view might be an option, but one cannot help feeling that such an approach may be limited by some concerns. Such concerns arise from both legal and non-legal reasons.

Taking legal reasons first, the language of sub-sections (1) and (2) of s 18 of the Marine Insurance Act 1906 (UK) (MIA) quoted in my earlier article (Hong Kong Lawyer, November 2011, p 27) is abundantly clear and it is very hard, in fact, for the courts to try to evade from such strict language of the statute. The fact that materiality of fact is measured by a ‘prudent insurer’ yardstick was not open to challenge and indeed Fletcher Moulton LJ’s attempt to substitute it with a reasonable assured test in Joel v Law Union and Crown Insurance Company [1908] 2 KB 863, was met with rejection (albeit hesitatingly) by the Court of Appeal in Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485. As mentioned explicitly in the speech of Lord Justice Cairns (at 493):

“In providing by statute that the test should be that of the insurer in marine insurance cases, I think that the Parliament was doing no more than inserting in its code of marine insurance law what it regarded as the general rule of all insurance law ... I shared with respect the view that was expressed in that report [referring to the Fifth Report of the Law Reform Committee on Conditions and Exceptions in Insurance Policies, Cmnd 62 (1957)] that the law might well be changed...”.

Likewise, not much can be changed with regard to the sole remedy of avoidance stipulated in the language of ss 17-18 of the MIA. One should be reminded of the decision of the Court of Appeal in Banque Keyser SA v Skandia (UK) Insurance [1990] 1 QB 665, a case involving the reciprocal duty of disclosure whereby the insurer in a credit insurance knew of the dishonesty of the broker but did not inform the banks which were named as the assureds. By failing to do so, the banks advanced large sums of monies for loans. Due to the fact that there existed in the case a fraud exclusion clause exempting the insurer, the banks alleged non-disclosure on the part of the insurer and claimed damages. Such a claim was simply rejected. One of the reasons was that the language of the MIA is not open for other alternative remedies. For Slade LJ, ‘... the clear inference from the Act of 1906 is that Parliament did not contemplate that a breach of the obligation would give rise to a claim for damages ... Otherwise, it would surely have said so’ (at 781). This remains as an authority since the House of Lords in the same case did not cast doubts on this issue. It is true, as succinctly summarised by Mr Gregoire, that the Court of Appeal in Drake Insurance Plc v Provident Insurance Plc [2004] QB 601, albeit strictly obiter, all three judges were prepared to hint that the insurer must also exercise ‘good faith’ in exercising the right to avoid the contract. As Lord Justice Rix stated, ‘... the doctrine of good faith should be capable of limiting the insurer’s right to avoid in circumstances where that remedy, which has been described in recent years as draconian, would operate unfairly’ (at 628). Rix LJ, with whom Clarke LJ concurred, went on to formulate the scope of such duty of good faith. One could take from para 91 of the judgment that, if by the time of exercising the right to avoid, the insurer should know or has ‘turned blind-eye’ (or has a reason to doubt the truth) that the undisclosed fact he relied upon to avoid the contract did not actually exist, then such right has been exercised in bad faith. The problem here is reference to knowledge or blind-eye knowledge can render such doctrine of good faith to be of limited use. How many cases are there where true existing facts and the facts which came to the mind of the insurer are different? Moreover, it will be very difficult for the assured to prove that the insurer has knowledge or blind-eye knowledge of the true facts. In this respect, the minority approach of Pill LJ, referred to by Mr Gregoire, is indeed more attractive. However, one should not forget that the obiter in Drake stands in stark contrast with the judgment of Mance LJ (as he then was) in Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705 (at [27]): “It is clear that rescission in the general law of contract is by the act of the innocent party operating independently of the court ... I see no basis for saying that avoidance of an insurance contract for non-disclosure or misrepresentation is any different ...”. It remains to be seen which route the common law will opt for but in light of the promotion of Lord Mance to the Supreme Court of the United Kingdom, the Brotherton approach may be found favourable in the higher courts. Or else, we may just have to wait until a brave counsel raises the general discretion of the court to grant avoidance along the basis so strongly advanced by Mr Peter Macdonald-Eggers QC in his comprehensive and thoughtful article, ‘Remedies for failure to observe the utmost good faith’ [2003] LMLCQ 249.

Either on the basis that the court should have a general discretion to grant avoidance or that a judge should take a more pro-active role in remedying the defective state of the common law, in the context of Hong Kong, there are intrinsic non-legal problems. Such an approach is only viable if there are judges of the calibre of, for example, Longmore LJ, Rix LJ, Clarke LJ or Lord Mance. The sad fact is that there appears to be no judge with particular expertise in insurance law in Hong Kong. From working in a higher education institution in Hong Kong, I realise the situation that there is not much emphasis on insurance law in the university’s legal curriculum. For complex insurance legal issues, local lawyers still need to resort to the views of senior counsels in the UK. Many students have graduated and have entered professional training without even the slightest knowledge of insurance contract law! Therefore, expecting the common law relating to insurance law to be developed in Hong Kong may not be as entirely convincing as it first appears. Even waiting for the common law in the UK to develop may not provide a fast and effective antidote to relevant thorny problems either. To give just one example, it took nearly two decades with painstaking effort by the House of Lords in Manifest Shipping Company Limited v Uni-Polaris Shipping Company Ltd (The Star Sea) [2001] UKHL 1 to fix what Hirst J had found to exist in The Litsion Pride, and yet there are still some residual remains of The Star Sea left for the common law to clean up.

With the possibility of slow development and much uncertainty involved, I am of the opinion that statutory reform is a more preferable route. Indeed, the Hong Kong Law Reform Commission already recommended that there should be a reform to the Marine Insurance Ordinance (Cap 329) in its Reports on Law of Insurance in 1986. I sincerely urge that this project be revived.

Dr Poomintr Sooksripaisarnkit
Assistant Professor
School of Law
City University of Hong Kong
Email: psooksri@cityu.edu.hk