Hong Kong Court of Appeal’s ruling on ‘deadweight’ warranty and duty of disclosure

by Publications Officer

Introduction

In Hua Tyan Development Limited v Zurich Insurance Company Limited [2012] HKCU 1632 the Court of First Instance decided in favour of the insured in respect of the duty of disclosure under an insurance policy. More than a year later, the Court of Appeal handed down a judgment [2013] HKCU 1858 that overturned the lower court’s decision and which should provide a degree of comfort to insurance companies in Hong Kong.

Facts

A vessel carrying cargo belonging to Hua Tyan (the insured) sank during a voyage and the cargo was lost. The insured claimed $1.5 million from Zurich Insurance (the insurer) and Courtesy Insurance (the broker), representing the value of the cargo insured under the policy. The policy contained a deadweight tonnage warranty that provided coverage for a vessel with a deadweight tonnage of no less than 10,000 tonnes. The vessel named
in the policy did not fulfil the deadweight tonnage warranty requirement and the insurer thus refused to pay the claim.

Court of First Instance decision
The Court of First Instance dealt with the construction of the contract and held that there had been an inconsistency in the contract because although the cover sheet provided that the vessel named Ho Feng 7 was covered, the policy incorporated the deadweight tonnage warranty. Reaching his decision on the facts, the judge held that the policy was intended by the parties to cover the named vessel, notwithstanding the existence of the deadweight tonnage warranty.

In respect of the insured’s obligation to disclose material information, the insurer contended that an insurance contract imposed a duty on the insured to make full and frank disclosure, and claimed that the insured merely disclosing the vessel’s name and not its deadweight tonnage was insufficient to discharge that duty. The judge held that as the deadweight tonnage information was readily available on the Internet, and as the insurer was experienced in the marine insurance business, it could easily have obtained the relevant information which “cannot be regarded as outside the knowledge of the insurer”.Also in the Court of First Instance, the insured had pleaded an alternative claim against the broker. Although the court held that the insurer was liable, it discussed the liability of the broker. The broker would also be liable for the failure of the policy, as it is the broker’s duty (under the insured’s instructions to the broker) to secure an effective marine insurance coverage and reasonably ensure that the policy meets the needs of the insured.

Court of Appeal decision
The appellate court overruled most of the trial judge’s findings. It held that the judge had been wrong in his construction of the policy, and that the insurer was to provide the coverage subject to the insured giving the warranty that the vessel’s deadweight  tonnage was no less than 10,000. In order to sustain the insured’s case on the inconsistency of the terms of the policy, it had to be established that at the time of issuance of the policy, both parties had actual knowledge of the vessel’s deadweight tonnage. The Court of Appeal went on to discuss the insurer’s presumed knowledge. The insurer is presumed to know only matters which it should know in the ordinary course
of business. The court distinguished between whether the insurer could have inquired into the matter and whether it should have. In order to establish the latter, the court suggested that the insured would have to adduce evidence from the marine insurance trade about its practice on inquiry, instead of merely relying on evidence that shows the availability of the information on an internet website. The court was
not satisfied that in this particular case, the insurer should have inquired into the information merely because of its availability on the Internet.

The broker, in contrast, did not appear at the appeal hearing. As the insured claimed damages against the broker in the alternative and the insurer was held not to be liable, the court made order against the broker for the full amount claimed.

Comment
The parties’ knowledge of the vessel’s deadweight tonnage was the key issue in the case. The Court of First Instance placed the burden of due diligence firmly on the insurer’s shoulders and the fact that the information was accessible on the Internet would not relieve the insured from disclosing the information. The Court of Appeal significantly departed from the first-instance judgment and held that the insured was
still required to disclose information so long as it was material to the risk. The fact that the material information was available and accessible on the Internet did not exempt the insured’s duty to make disclosure.
The Court of Appeal did not explore deeply the broker’s liability in its failure to facilitate an insurance contract that fit the insured’s specific requirements. Judgment was entered against the broker simply because it was absent from the hearing and did not have its case properly argued before the court. The Court of Appeal decision has been welcomed by insurers in Hong Kong. The Court of First Instance decision cast doubts on the level of due diligence required of insurers and the extent to which insured parties can avoid their duty of disclosure. The responsibility of disclosing material facts, regardless of whether they are available on the Internet or other public domain, is now shifted back to the insured, whereas insurers are not expected to undertake inquiries in relation to every material fact that may be known to the insured. However (and as a note of caution), if the material information should have come to the insurer’s knowledge in the ordinary course of its business, it should retain the responsibility for making relevant inquiries.

(1) The editor would like to thank Mr. Kevin Bowers of Howse Williams Bowers who contributed this article. The view expressed therein does not represent the view of any of the Executive Committee Member of the Hong Kong Insurance Law Association Limited (HILA).

(2) From the editor’s understanding, the case Hua Tyan Development Limited v Zurich Insurance Company Limited is due to be heard by the Hong Kong Court of Final Appeal on the issue of construction by August 2014.