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Hong Kong – Constructive Knowledge Of Insurers: Online Databases.

14 November, 2013

 

 

In an age of modern technology, with information readily accessible on the Internet, insurers may find themselves effectively fixed with constructive knowledge of certain information available online and hence unable to rely on policy conditions to decline cover.

 

This problem is particularly acute in marine risks where insurers are known regularly to access information on databases such as Equasis and Shipfinder as part of the underwriting process. If an insurer, having acquired actual or constructive knowledge of a vessel’s information online indicating a breach of policy conditions, proceeds to write a risk, it can pocket the premium if no claim arises or turn down cover if it does. A question then arises as to whether we can still legitimately call it a real assumption of risk. If not, should the return of premium be the only adverse consequence for the insurer? Does it not fly in the face of the time-honoured legal principle that one must not approbate and reprobate?

This issue came under consideration in a few recent cases in Hong Kong and England.

 

The Hong Kong Decisions

 

In Kam Hing Trading v PICC (Worldwide Shanghai) [2010] 4 HKLRD 630, a marine cargo dispute (in which Ince & Co acted for the successful brokers), the Hong Kong High Court was invited by the insured to fix the insurer with constructive knowledge of a vessel’s class information. The insurer admitted that it subscribed to the ‘Shipfinder’ database but had checked only tonnage not class, which is also available on the database. Mr Justice Stone refused to do so, no doubt influenced by the fact that the insurer had issued an obligatory open cover and the risk had attached without it knowing.

 

In 2012, the issue was re-visited by the Hong Kong High Court in Hua Tyan Development v Zurich Insurance (Ho Feng 7) [2012] 4 HKLRD 827. The facts are remarkably similar to Kam Hing Trading. The timber trader Hua Tyan had an open cover under which the insurer issued cargo policies sometimes incorporating a tonnage warranty (DWT 10,000 or above). For the subject shipment, the vessel’s name was expressly declared and approved by the insurer and stated in the policy, which contained the tonnage warranty. As it transpired, she had only 8,960MTs.

 

When the insurer declined cover for under-tonnage, Mr Justice Chung delivered an unpleasant surprise. He held that there was an obvious inconsistency in the policy wording. Whilst agreeing to insure cargo on board this named vessel, the insurer also included the tonnage warranty. By finding the terms inconsistent, Chung J effectively fixed the insurer with constructive knowledge of the tonnage, noting that “particulars (including the DWT) of a named vessel are relatively easily available on the Internet”. The inconsistency was resolved in favour of the insured by the annulment of the tonnage warranty. It could not have been the intention, so Chung J reasoned, that despite payment of premium the cover could never take effect. The insurer was held liable in full.

 

In August 2013, the Hong Kong Court of Appeal overturned the first instance judgment and found there was in fact no inconsistency because the insurer had agreed to insure subject to the warranty. Just because the information was available on the Internet and the insurer could have made enquiries, did not mean it should have made them. However, the Court of Appeal seems to have left the door open. In order to establish that the insurer should have enquired, the Court of Appeal held, Hua Tyan should at least have adduced evidence from the marine insurance trade about its practice on inquiry. There was none adduced in that case.

 

Meanwhile In England…

 

Unbeknownst to the Hong Kong Court of Appeal at the time, the same point had recently come before the English High Court, in Sea Glory v Al Sagr National Insurance (The Nancy) [2013] EWHC 2116 (Comm). In that case, the hull insurer tried to deny cover for a claim for total loss by fire by relying on the non-disclosure of a long history of port detentions. The insured ship owners argued that the detention history was available online and adduced expert evidence showing that the market practice was for insurers to access such information on renewal, and therefore owners were not obliged to disclose per s.18(3)(b) of the Marine Insurance Act 1906 (which provides that an insurer is presumed to know “matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know”). Whilst resolving the dispute by holding that the insurers would have insured on the same terms anyway, Mr Justice Blair went on to discuss possible constructive knowledge. He opined that the century-old principle that underwriters should not be burdened with knowledge of everything reported in Lloyd’s List (the newspaper) about ships in which they have no interest does not apply to modern-day online databases, if only because an underwriter does not now need to carry the information around in his head. Online information can be called up when necessary, and he accepted expert evidence that it was indeed market practice to do so. Nonetheless, in the end Blair J refused to find that the insurer had constructive knowledge of the detention history, primarily because the detailed history was only available at Lloyd’s MIU. The insurer only subscribed to Sea-web (and had access to the free service Equasis), neither of which contained the detailed detention history. It was thought inappropriate to fix the insurer with knowledge of something to which they had no means of access.

 

An Area Ripe For Clarification

 

Despite the lack of a definitive ruling on the issue, it seems clear that both the English and Hong Kong courts are getting ever closer to accomplishing just that. The possibility has been left wide open. Indeed, Ho Feng 7 is currently under appeal to the Hong Kong Court of Final Appeal. The issue is far from open and shut.

 

The Position Of Brokers

 

Insurers aside, we believe it is also possible for brokers be fixed with a duty to their customers to search for a vessel’s information online for disclosure to insurers. In Worldwide Shanghai, Stone J refused to impose such a duty on the broker. However, the judge was concerned with the duties owed in 2007, when paper publications from Lloyd’s (now IHS Fairplay) were, according to expert evidence, the only sources available to general brokers in Hong Kong, and Equasis was not terribly accurate. Gone are those days. It is wise for brokers now to expressly exclude such a duty in their standard terms of business.

 

Ince & Co

 

For further information, please contact:

 

Kelvin Lee, Partner, Ince & Co
kelvin.lee@incelaw.com

 

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Insurance & Reinsurance Law Firms (International) in Hong Kong

 

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