The Law Reform Commission Of Hong Kong

Report On Laws On Insurance

(Topic 9)

TERMS OF REFERENCE

On 15 January 1982 the Honourable Attorney General and the Honourable Chief Justice referred to this Commission for consideration a topic in the following terms :-

“ Laws on Insurance :

1. The present law permits an insurer to avoid his liability under the Policy if :

1. the insured, at the inception of the policy, failed to disclose or otherwise misrepresented a material fact; or

2. was in breach of the conditions of the policy

without regard to whether the particular non-disclosure, misrepresentation or breach of condition played any part in the causation of, or had any relevance to, the accident in respect of which the claim is made.

Should such law, and any other law related thereto, be changed, and if so in what way?

2. Whether any, and if so what, change is required in the laws governing the manner in which contracts of insurance are made (in particular the communication of the terms thereof to prospective policyholders) and including the activities of intermediaries such as brokers and agents, and whether there should be any regulation, and if so in what form, of such intermediaries."

We have considered the topic and now present our report.

Now therefore do we the following members of the Law Reform Commission of Hong Kong present our report on Laws on Insurance

Hon Michael Thomas CMG QC

(Attorney General)

Hon Sir Denys Roberts KBE

(Chief Justice)

Mr J J O'Grady

(Law Draftsman)

Mr Robert Allcock

Mr Graham Cheng JP

Hon Mr Justice Fuad

Hon HU Fa-kuang OBE JP

Dr the Hon Henrietta Ip

Mr Martin Lee QC JP

Mr T S Lo CBE JP

Miss Christine Loh

Mr Brian McElney JP

Mr Arjan H Sakhrani QC JP

Dr Byron S J Weng

Professor Peter Willoughby JP

Dr Ambrose King

(Member 1980-85)

Mr David K P Li JP

(Member 1982-85)

15 January 1986

Report By

The Law Reform Commission

On Laws Of Insurance

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CONTENTS

INTRODUCTION

Terms of Reference

1. On 15 January 1982 the Honourable the Chief Justice and the Honourable the Attorney General signed a Notice of Reference to the Law Reform Commission of Hong Kong and referred to the Commission for its consideration the matter contained therein.

2. The scope of the Commission's terms of reference does not include those areas covered by the Insurance Companies Ordinance, Cap. 41 which seeks to provide an extension of the control exercised by Government over those undertaking insurance business. The Ordinance repeals existing Ordinances relating to insurance but in effect carries forward existing authorisations of insurance companies. Supervision of insurance companies is extended to all classes of insurance and a variety of specific requirements are made in respect of, inter alia, accounts, authorisation, long term business, powers of intervention and insolvency and winding up.

Sub-committee membership

3. A sub-committee under the Chairmanship of Professor Peter Willoughby was appointed by the Commission on 22nd January 1982 to consider these questions and to report back to the Commission. The Hon Mr Justice Barker agreed to serve as Deputy Chairman on the sub-committee. The full membership of the sub-committee is to be found at Annexure 1, including members who were co-opted by the sub-committee.

Method of working

4. The first meeting of the sub-committee was held on 23 February 1982 and between then and the conclusion of the sub-committee's deliberations on 16th April 1984 meetings were held at frequent intervals.

5. A considerable quantity of materials was accumulated by the sub-committee in the course of its deliberations, ranging from case studies provided by the Consumer Council to reports issued by other law reform agencies. A list of those materials is to be found at Annexure 2.

6. From its first appointment, the emphasis of the sub-committee was to canvass as wide a range of opinions as possible. This emphasis is clearly seen in the range of fields from which the members of the sub-committee were drawn and in the programme of public consultation which was undertaken.

7. Two press releases were issued by the sub-committee. The first of these, on 17 May 1982, announced the formation of the sub-committee and requested submissions from interested parties. The statement was published by 2 English and 10 Chinese newspapers on 18th May and the Hong Kong Standard on that day carried a report on the response of insurance associations to the press release.

8. A further press release was issued to the media on 19 November 1982, announcing the imminent intention of the sub-committee to move on to consideration of the question of brokers and intermediaries and seeking relevant submissions. This second statement appeared in 3 Chinese evening papers on 19 November and 4 Chinese papers on 20 November.

9. On 31 May 1982 submissions were specifically invited from some 28 representative bodies and on the same date letters were sent to over 500 solicitors individually requesting them to provide the sub-committee with information and argument for and against reform. Annexure 3 lists the representative bodies to whom the first of these 2 letters was sent. A letter was subsequently sent to the Law Society of Hong Kong on 20 July 1982, seeking to encourage the Society's members to make submissions to the sub-committee.

10. It was felt by the sub-committee that it would be helpful to examine the actual policies used by insurance companies in Hong Kong and to that end on 16 July 1982 letters were sent to each of the 101 companies in Hong Kong authorised to write motor vehicle insurance, requesting copies of the policy forms used. A very high response was achieved and around 70 companies supplied forms.

11. The sub-committee's report was submitted to the Commission at a meeting on 6th July 1984. It was decided that the report should be circulated on a restricted basis to selected organisations and individuals with expertise in insurance to obtain their views on the sub-committee's recommendations. The views which were received were carefully considered by the Commission at a number of meetings and this final report has been completed in the light of those responses.

12. It was decided at an early stage of the sub-committee's deliberations that examination of the 2 questions contained in the Notice of Reference should, as far as possible, be kept separate and this separation has been retained in the Commission's own Report. Accordingly, our Report falls into 2 main parts, the first of which deals with the question of non-disclosure, misrepresentation and breach of conditions and the second of which turns to the question of intermediaries and the formation of the insurance contract. In the course of completing this Report, however, we have sometimes found that the areas of interest have merged and, for instance, we refer to proposal forms in both sections of our Report. A summary of the recommendations of the entire Report can be found in Chapter VII. At Annexures 5 and 6 are two draft Bills which reflect the recommendations we have made in our Report.

Acknowledgements

13. We wish to place on record our gratitude to all those individuals and organisations who have assisted the sub-committee and the Commission in its deliberations. The Commission is particularly indebted to the members of the sub-committee who worked with such diligence and enthusiasm over the 2 years during which the sub-committee regularly held its meetings. We would also wish to express our gratitude to the secretaries of the sub-committee, Mr. Thomas Kwan and Mr. Stuart Stoker, who were largely responsible for drafting this report in response to the Commission's instructions.

PART I

Chapter I

THE SCOPE OF THE PROBLEM

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1.01 The first question posed by the Notice Reference concerns itself with 3 issues : non-disclosure, misrepresentation and breach of the conditions of the policy. Breach of the conditions of the policy may itself of be divided into 2 further areas, those of warranties and basis of contract clauses. Accordingly, we approach the first part of the Notice of Reference by dealing with each of these 4 heads in turn. We begin by outlining the meaning of each term before turning to a more detailed examination of the difficulties involved.

1.02 By non-disclosure we mean a failure by the insured to reveal to the insurer a material fact. For instance, it would be non-disclosure for an insured to fail to reveal a previous conviction for a motoring offence when applying for motor insurance.

1.03 When we refer to misrepresentation we are concerned only with innocent misrepresentation, which arises when the insured positively mis-states the position to the insurer but without fraudulent intent. It would be misrepresentation for an insured to state that he had fully recovered from a disclosed illness when, unknown to him, he had not.

1.04 Warranties as used in insurance law are terms of the contract of insurance with which the insured must comply strictly and any breach, however trivial, will enable the insurer to repudiate the policy. The insured might warrant that premises would be kept securely locked when not occupied. They are not locked and are struck by lightning. The insurer may repudiate.

1.05 A basis of contract clause is a statement in an insurance policy which makes the proposal the basis of the contract. The insurer may then repudiate for any inaccurate answer given in the proposal, regardless of its materiality. For example, if there is a basis of contract clause and the insured inaccurately records his age in the proposal the insurer may repudiate.

NON-DISCLOSURE

The basic rule

1.06 A contract of insurance is a contract uberrimae fidei. That is to say, it is a contract in which each party must display "the utmost good faith". It is this common law principle at the foundation of insurance law which has led to the requirement on the prospective insured to disclose all material facts. It matters not that the insurer did not ask the insured for the particular information in a proposal form or otherwise . if the facts are material they must be disclosed to the insurer with or without the insured's attention having been directed to them by specific questions by the insurer.

1.07 The underlying reasoning behind this approach is clearly seen in the judgment of Lord Mansfield in Carter v. Boehm (1766) 3 Burr 1905 at page 1909 where it was said :

"The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist. The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention, yet still the underwriter is deceived and the policy is void, because the risque run is really different from the risque understood and intended to be run at the time of the agreement"

1.08 On a strict interpretation of the law, insurers are entitled to refuse to make payment in respect of an insurance policy where the insured has failed to disclose any facts "material to an insurer's appraisal of the risk which are known or deemed to be known to the assured, but not known or deemed to be known to the insurer" (MacGillivary & Parkington, "Insurance Law", 7th Edition, para 617).

Lambert's Case

1.09 The question of what is "material" to a contract of insurance was considered by the English Court of Appeal in Lambert v. Co-operative insurance Society Ltd. ([1975] 2 Lloyd's Rep. 485) and the Court concluded that a fact was material if it would influence the mind of a "prudent insurer". The case concerned an insurance policy taken out by a Mrs. Lambert to cover her own and her husband's jewellery. Mrs. Lambert's husband had been convicted of a criminal offence before the contract of insurance was made but this fact was not disclosed to the insurer. Mr. Lambert was subsequently convicted again of offences of dishonesty but Mrs Lambert did not disclose any of the convictions on renewal of the policy. No question regarding convictions was directed to Mrs Lambert by the insurer at either the inception or the renewal of the policy.

1.10 Reference was made to the provisions of the Marine Insurance Act 1906 which states at section 18(1) :-

"The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract".

Sub-section (2) provides that :-

"Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk".

1.11 Mr Justice McKenna considered that there was "no obvious reason why there should be a rule in marine insurance different from the rules in other forms of insurance and, in my opinion, there is no difference" (at page 487). Earlier in his judgement (at page 487), Mr Justice McKenna had examined the duty of disclosure and had said:-

"Everyone agrees that the assured is under a duty of disclosure and that the duty is the same when he is applying for a renewal as it is when he is applying for the original policy. The extent of that duty is the matter in controversy. There are, at least in theory, four possible rules or tests which I shall state. (1) The duty is to disclose such facts only as the particular assured believes to be material. (2) It is to disclose such facts as a reasonable man would believe to be material. (3) It is to disclose such facts as the particular insurer would regard as material. (4) It is to disclose such facts as a reasonable or prudent insurer might have treated as material".

The court concluded that the proper test of materiality was that enunciated by Mr Justice McKenna as his fourth example. Lord Justice Cairns remarked that he saw "no reason why the rule should be different for fire or burglary or all risks insurance from that which has been laid down by statute for marine insurance" and "in providing by statute that the test should be that of the insurer in marine insurance cases., I think that 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" (at pages 492 and 493).

Scotland - a different view?

1.12 It is interesting to note that it is arguable that the position in Scotland, at least as far as life assurance is concerned, differs from that in England and Wales. The Scottish approach has been to the effect that in life assurance the test of materiality is to ask whether a reasonable man in the position of the assured with knowledge of the facts in dispute ought to have realised that they were material to the risk. This approach was clearly enunciated by Lord President Inglis in Life Association of Scotland v. Foster (1873) 11M 351. That case concerned an assured who had at the date of her proposal a slight swelling in her groin which, because it caused her no pain or disquiet, she did not disclose but which to a medical man would have presaged serious medical complications. Lord President Inglis examined the duty of disclosure and continued :-

"My opinion is, upon a consideration of the whole circumstance disclosed in the evidence, that the swelling which is proved to have existed at the date of the contract of insurance has not been shown to be such a fact as a reasonable and cautious person unskilled in medical science and with no special knowledge of the law and practice of insurance would believe to be of any materiality or in any way calculated to influence the insurers in considering and deciding upon the risk."

"Prudent Insurer" and "Reasonable Insured"

1.13 Be that as it may, the law in England and in Hong Kong since Lambert v. Co-operative Insurance Society Ltd. has clearly looked to the "prudent insurer" rather than the "reasonable insured" as its lodestar. It is this reference to the mind of the insurer rather than that of the insured when considering materiality which has caused concern. An insured may innocently fail to disclose a fact which he considers immaterial to the risk insured but which would have persuaded the insurer to re-assess the premium or conditions of the policy. Should a claim thereafter be made the insurer is entitled to refuse payment, even if the undisclosed fact bore no causal connection to the claim.

1.14 MacGilliverary & Parkington take the view that to ascribe the maxim uberrima fides to an insurance contract in such circumstances is to an extent misleading "since an assured might believe in all honesty that he was complying with the duty of good faith, and yet fail to discharge the duty of disclosure" ("Insurance Law", page 639). While being in no doubt what the law was, the Court in Lambert's case nevertheless expressed dissatisfaction at its effects. Mr Justice McKenna remarked at page 491 that "the present case shows the unsatisfactory state of the law. Mrs Lambert is unlikely to have thought that it was necessary to disclose the distressing fact of her husband's recent conviction when she was renewing the policy on her little store of jewellery. She is not an underwriter and has presumably no experience in these matters".

The United Kingdom Statements of Practice

1.15 The hardship to policyholders to which the present law can give rise was recognised by the United Kingdom insurance industry when in 1977 it promulgated the Statements of Practice. These were subsequently amended in 1981 and the current versions are to be found at Annexure 4. Separate statements were issued in respect of Long–Term Insurance, Industrial Assurance and Non-Life Insurance. The Statement of Non-Life Insurance Practice seeks in part to cover the situation described at paragraph 1.13 above by providing that :-

"Except where fraud, deception or negligence is involved, an insurer will not unreasonably repudiate liability to indemnify a policyholder

i) on the grounds of non-disclosure or misrepresentation of a material fact where knowledge of the fact would not materially have influenced the insurer's judgment in the acceptance or assessment of the insurance;

ii) on the grounds of a breach of warranty or condition where the circumstances of the loss are unconnected with the breach."

1.16 The Statements have no force of law and are merely advisory. However, a statement issued by the Department of Trade at the time of the publication of the amended Statements of Insurance Practice indicated that the Statements had "in general been closely followed". The Statements do not apply to Hong Kong but the indications are that the insurance industry in Hong Kong would readily subscribe to similar formal statements in consultation with the Insurance Authority and we are of the view that such statements would form a useful supplement to the law.

The extent of the problem in Hong Kong

1.17 Evidence obtained from the Fire, Marine and Accident Insurance Associations suggests that the problem caused by non-disclosure in terms of the number of cases involved is not a significant one in Hong Kong. Further, there is evidence to suggest that insurance companies in Hong Kong do not always depend on a strict interpretation of their rights in order to avoid liability. It is equally clear, however, that the present position in Hong Kong offers scope for less scrupulous insurance companies to avoid liability by relying on failure by the insured to disclose material facts not causally connected with the loss. The likelihood of unintended non-disclosure in Hong Kong is increased by the fact that many insureds may have only a rudimentary grasp of English. It may be argued in such circumstances that a review of the legal situation in advance of a significant problem is to be preferred to ex post facto action.

MISREPRESENTATION

The basic rule

1.18 To be distinguished from the case where the would-be insured fails to disclose a material fact is the situation where he mis-states the position to the insurer. We are concerned here only with innocent misrepresentation and not misrepresentation amounting to fraud.

1.19 For the insurer to be able to avoid the policy, it is necessary that the misrepresentation was material to his undertaking of the risk and for this purpose the meaning of "material" is the same as it is in relation to non-disclosure. Furthermore, the misrepresentation must be a statement of fact and not merely of opinion; it must be untrue or inaccurate; it must be a statement as to a present fact, and not as to matters occurring in the future; and it must have induced the insurer to enter into the contract in question.

1.20 The foregoing must be qualified by the fact that a statement of opinion will nevertheless be sufficient to found a claim by an insurer that the policy should be avoided if it can be shown that the insured did not honestly hold the opinion at the time that he held himself out as subscribing to it. Similarly, a statement as to future intention may constitute a misrepresentation enabling the insurer to avoid the policy if the insured misrepresented his actual state of mind at the time of the statement.

The extent of the problem in Hong Kong

1.21 We have received no evidence to suggest that there has been a significant number of cases where mis-representation has led to avoidance of insurance policies by insurers in Hong Kong. We nevertheless reiterate our reasoning at para. 1.17 in respect of non-disclosure for believing that reform is nonetheless desirable.

WARRANTIES

The basic rule

1.22 The term "warranty" in insurance law denotes a term of the contract of insurance with which there must be strict compliance and upon any breach of which, however trivial, the insurer may repudiate the policy. Upon such breach, the insurer is entitled to repudiate the entire contract from the date of the breach regardless of the materiality of the term, the state of mind of the insured or of any connection between the breach and the loss. Circumstances may readily be conceived where the incident giving rise to the claim bears no causal connection with the particular breach of warranty for which the insurer seeks to avoid liability. It has been argued (notably in the English Law Commission Report discussed later) that it is unjust that an insurer should be entitled to reject a claim for breach of warranty, no matter how irrelevant the breach may be to the loss.

1.23 The basis of contract clause (which we examine at paras. 1.26 to 1.30) incorporates into the policy a number of warranties. While the warranties created by a basis of contract clause relate to past or present facts, warranties may also be created which relate to the future. These are generally referred to as "promissory warranties". For example, an insurer may insert a clause in a policy providing for the insurance of premises that those premises shall not be used for the storage of inflammable materials. If a claim is made following damage to the premises and it is discovered that the insured has stored inflammable materials there, the insurer is entitled to avoid the policy, even though the breach of warranty was in no way responsible for the damage giving rise to the claim.

1.24 Where a breach of a warranty of past or present fact is concerned, the breach occurs at the inception of the policy and the insurer is therefore entitled to reject all claims under the policy. However, where a promissory warranty is in issue, the insurer is only entitled to reject claims which have arisen after the breach, which may well be after the policy has been in force for some time. The insurer remains liable for claims arising before the breach and it may be that the insured is entitled to a proportionate refund of premium , though this will often be governed by an express contractual provision.

The extent of the problem in Hong Kong

1.25 The problem posed by the use of warranties appears to represent in Hong Kong a more significant one than that of non-disclosure but the numbers are not substantial. Nevertheless, to reiterate the reasoning outlined in relation to non-disclosure and mis-representations, the present law provides scope for injustice and preventive measures may well be appropriate, particularly in view of the difficulties of language in Hong Kong to which we have already referred.

BASIS OF CONTRACT CLAUSES

The basic rule

1.26 In order to avoid the problems which may be caused by misrepresentation, insurers sometimes resort to what is termed a "basis of contract clause". This consists of a statement in the policy that the proposal shall be the basis of the contract. The inclusion of such a clause enables the insurer to avoid the policy for any inaccurate answer given in the proposal, regardless of its materiality, since the truth of the answers has become a condition of liability of the insurers.

1.27 The attraction of such clauses for some insurers is obvious. Their use has been widely criticised and the English Law Commission concluded that "'basis of the contract' clauses constitute a major mischief in the present law" (Law Commission No. 104, "Report on Insurance Law – Non-Disclosure and Breach of Warranty", para 7.5).

1.28 The effect of such a basis of contract clause is not only that an insurer may repudiate for non-fraudulent immaterial misrepresentations but also for statements which, although true to the best of the insured's knowledge and belief, are in fact inaccurate. The inherent difficulties for an insured can be readily appreciated where questions relating to his health form a part of the proposal.

The extent of the problem in Hong Kong

1.29 We see no reason to suppose that the difficulties posed by the use of basis of contract clauses which the Law Commission identified in England do not apply equally in Hong Kong. The desirability of reform is apparent. It has been brought to our attention that some life insurance policies issued in Hong Kong purport to contain a basis of contract clause which provides that the insurer may not rely on matter not contained in the application to deny the claim. This does not seem to us to be a basis of contract clause as we understand it and we do not find it in any way exceptionable.

1.30 The difficulties which may be caused by basis of contract clauses are likely to be exacerbated in Hong Kong by the predominant use of English in the formation of insurance contracts and the danger that those seeking insurance cover may therefore not fully understand the commitment which they are making.

Chapter II

POSSIBLE SOLUTIONS - APPROACHES OF OTHER JURISDICTIONS

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2.01 The problems we have outlined in the previous Chapter have not been confined to one jurisdiction. They have been widely recognised and attempts have been made to rectify them by a number of law reform bodies in other jurisdictions. In this chapter we examine some of these approaches with a view to ascertaining if any would be suitable for implementation in Hong Kong.

THE ENGLISH LAW COMMISSION

2.02 In October 1980 the Law Commission in England presented their Report on Non-Disclosure and Breach of Warranty (Law Com. No. 104 "Insurance Law - Report on Non Disclosure and Breach of Warranty"). The members of the Commission who studied this area of the law, headed by Lord Justice (then Mr Justice) Kerr, drew on a wealth of experience and considered an extensive body of evidence when compiling the Report. The law relating to insurance in Hong Kong follows that of England and the recommendations as to reform produced by the English Law Commission therefore merit careful consideration. For that reason, we consider it appropriate to examine in some detail the contents of the Commission's Report and to assess whether its proposals might prove suitable for implementation in Hong Kong.

2.03 The Commission received and considered evidence, both written and oral, not only from England but also from abroad. It came from the legal profession, academic sources, the insurance industry and consumer interests. The Report does not deal with Marine, Aviation, and Transportation insurance, nor re-insurance, since it was thought that these aspects of Insurance Law were generally satisfactory, especially in view of the fact that the vast majority of insureds would be commercial organisations which, it could be assumed, would be substantially on equal terms with insurers when it came to the intricacies of insurance law.

Non-disclosure

2.04 The Marine Insurance Act 1906, to which we have already referred at para. 1.10, codified the common law in relation to marine insurance, and provided by section 18 that the assured must disclose to the insurer every circumstance which would influence a prudent insurer in fixing the premium or determining whether he will take the risk. These provisions are reproduced in Hong Kong in the Marine Insurance Ordinance (Cap. 329) at section 18.

Lambert's Case

2.05 In the case of Lambert v. Co-operative Insurance Society Ltd. (discussed at paras. 1.09 to 1.11 above) in England the Court of Appeal held that the provisions of the Marine Insurance Act applied equally to non marine insurance. In Hong Kong it would appear that section 18 of the Insurance Ordinance has the same general effect. This principle, the Commission concluded, could and does work hardship. Many laymen do not, in the absence of a proposal form, realise that there is a duty of disclosure at all, and few would appreciate what would influence the mind of a prudent insurer. Moreover, where an insurance policy is effected by means of a proposal form, the fact that an insured answers accurately, truthfully and fully every question posed does not relieve him of the duty of giving other material information, which he did not realise the insurers required to know. The Commissioners concluded that :-

"the very fact that specific questions are invariably asked in proposal forms, which is their essential purpose, may have the effect of creating a trap for the insured under the present law" (para. 4.56 of the English Law Commission Report).

2.06 Whenever an insurance policy is renewed, the insured has a duty once more to disclose material facts - even though the insurers may well not have informed or reminded him of his obligation. In Lambert v. Co-operative Insurance it was observed that the insured's duty of disclosure at renewal "is the same …… as it is when he is applying for the original policy" (at page 487).

The Statements of Insurance Practice

2.07 It was argued before the Commission that the Statements of Insurance Practice (to which we have referred at paragraphs 1.15 and 1.16 above) are to the effect that insurers will not "unreasonably" repudiate liability or reject a claim for non-disclosure. The Commissioners pointed out, however, that this leaves insurers as the sole judges of whether repudiation or rejection is unreasonable in any given situation, a position which the Commissioners regarded as totally unsatisfactory. Indeed, the liquidator of an insurance company would be bound to disregard the provisions of the Statements of Insurance Practice. The Commissioners' criticism finds support in McGilliverary & Parkington's work, "Insurance Law" (7th Edition at paragraph 705) where the authors state : "we do not regard these statements of self-regulatory practice as a substitute for reform of the law. The insurers are themselves judges of whether it is reasonable to reject a claim and the statements lack the force of law".

"Prudent Insurer" and "Reasonable Insured" – The Commission's recommendations

2.08 Some consumer interests recommended the total abolition of the duty of disclosure but the Commission took the view that the duty of disclosure should be retained but that it should be modified to provide that a fact should be disclosed to the insurers by an applicant if :

"(a) it is material [to the risk] in the sense that it would influence a prudent insurer in deciding whether to offer cover against the proposed risk and, if so, at what premium and on what terms; and

(b) it is either known to the applicant or it is one which he can be assumed to know; for this purpose he should be assumed to know a material fact if it would have been ascertainable by reasonable enquiry and if a reasonable man applying for the insurance in question would have ascertained it; and

(c) it is one which a reasonable man in the position of the applicant would disclose to his insurers, having regard to the nature and extent of the insurance cover which is sought and the circumstances in which it is sought" (paragraph 10.9 of the English Law Commission Report).

It will be observed from (c) that the test shifts from what would influence the mind of a prudent insurer to that which a reasonable insured would disclose.

Proposal Forms

2.09 As mentioned earlier, one of the major difficulties of the duty of full disclosure arises from policies that are concluded on the basis of proposal forms. Laymen are unlikely to realise that there is a residual duty to disclose facts not asked for in the proposal form. The Commission therefore recommended that an applicant for insurance should be considered to have discharged his duty in relation to the answers to specific questions if, after making such enquiries as are reasonable having regard to the subject matter of the question and to the nature and extent of the cover which is sought, he answers the questions to the best of his knowledge and belief. The duty to volunteer information in addition to answering the questions in the proposal form should be retained and would be the same as the duty of disclosure where no proposal form was used. However, the Commission considered that all proposal forms should contain clear and explicit warnings as to the duty incumbent on the insured to volunteer such additional information, together with a warning as to the standard of answer required by questions in the proposal form. The Commission further recommended that the insured should be supplied with a copy of the completed proposal form at the time of its completion, incorporating clear advice to the insured of the importance of retaining his copy of the form. They further recommended that if any of these proposed warnings had not been given, the insurers should not be allowed to rely on a defence of non-disclosure except where the court is satisfied that the failure to comply with the requirements of warning the insured did not cause him any prejudice with regard to his obligation to disclose the material fact in question.

Renewals

2.10 Turning to the question of renewals, the Law Commission were of the view that the duty of disclosure on renewal should be retained and the same standard should apply as at the original application. Thus, when answering questions in a renewal notice the insured should be required to answer "to the best of his knowledge and belief after making such enquiries as are reasonable having regard to the subject-matter of the question and the nature and extent of the insurance cover to be renewed" (para 10.18). Similar recommendations regarding warning notices and the effect of failing to issue such warnings were made in relation to renewals as have already been outlined in respect of the original proposal.

Three solutions rejected

2.11 Three other solutions to the problems of non-disclosure were canvassed by the Commission and each was rejected. First, the Commission considered whether there should be a connection between the non-disclosure and the loss before insurers should be able to rely on non-disclosure. This has been described as the "nexus test" and at first sight may appear to be just but there are cases, it was concluded, where the nexus test would be inappropriate. While it may cause hardship if a claim is refused for a failure to disclose a fact unconnected with the loss, there is equal unfairness on insurers if they are held to a policy which they would never have accepted, or accepted on different conditions, such as at a higher premium, had they been in possession of the full facts.

2.12 The Commission also considered the adoption of the principle of proportionality which is followed in, inter alia, Sweden and France. The principle operates to provide that where there has been a breach of the duty of disclosure by the insured and a claim arises before the contract has been terminated, the insurer shall be liable to provide only such cover as is in accordance with the ratio between the premium paid and the premium that the policyholder should have paid if he had declared the risk correctly.

2.13 As with the "nexus test", the principle appears attractive at first sight but there are underlying problems which prompted the Commission to reject it. The principal objections are that it fails to provide solutions in cases where the insurer would have declined the risk altogether had he been fully appraised of the facts; where he would have imposed additional warranties on the insured; where he would have narrowed the risk by the incorporation of exclusion clauses; and where he would have imposed an "excess". Further, the difficulties of calculating a notional premium are self-evident.

2.14 Finally, the Commission considered whether matters might be dealt with through judicial discretion. The courts could be given a general discretion to adjust the rights of the parties where rejection of a claim would otherwise be permitted but would result in a clear injustice to the insured. This approach, too, was considered unsuitable both because of the difficulty of providing guidelines to the judiciary for the exercise of that discretion and because of an anticipated increase in litigation and uncertainty in the law.

Misrepresentation

2.15 The Commission recommended that the insurer should not be entitled to rely on the making of a non-fraudulent misrepresentation as such but should be confined to remedies (if any) available for non-disclosure where :-

1. the insured had made an actionable misrepresentation which was in breach of either the existing duty of disclosure or of the proposed duty of disclosure; or

2. the insured had made an actionable misrepresentation through having given an inaccurate answer in response to a question in a proposal form which would be regarded under the Commission's proposals as having fulfilled the duty of disclosure.

Where a breach of warranty is involved which consists wholly or in part of a non-fraudulent misrepresentation, the insurer should not be entitled to rely on the misrepresentation but should be restricted to remedies for breach of warranty.

Warranties

2.16 As explained earlier (at para. 1.22), the word 'warranty' is used in insurance law to denote a term of the contract of insurance which must be strictly complied with and upon any breach of which, however trivial, the insurer is entitled to repudiate the contract. A warranty may be created by -

1. the use of the word "warranty";

2. an express provision for strict compliance and the right to repudiate for breach;

3. the use of some phrase such as "condition precedent" from which a Court may infer a warranty; or

4. the use of a 'basis of contract clause'.

2.17 The Law Commission concluded at paragraph 6.8 of its Report that there were 4 major defects in the existing law of warranties. First, the Commission considered it was wrong "that an insurer should be entitled to demand strict compliance with a warranty which is not material to the risk and to repudiate for a breach of it"; second, it was wrong that insurers could "reject a claim for any breach of even a material warranty, no matter how irrelevant the breach may be to the loss"; third, since warranties are of such importance to the insured, they should be contained in a written document to which he may refer; and fourth, the problems already outlined relating to the use of basis of contract clauses.

The Statements of Practice

2.18 Insurers again represented to the Commission that reform of the law was unnecessary in view of the Statements of Insurance Practice (referred to at paragraphs 1.15 and 1.16 above) to the effect that, except where fraud, deception or negligence was involved or suspected an insurer would not unreasonably repudiate liability. The Commission observed at paragraph 6.10 of their Report, that, "we would again draw attention to the fact that this provision in effect confers a discretion on insurers to repudiate a policy on technical grounds if they suspect fraud but are unable to prove it". The insurers would become the sole judges of whether repudiation or rejection is unreasonable in each case, a situation the Commission considered unsatisfactory.

The Commission’s Recommendations

2.19 The Commission therefore recommended that :-

1. A term of a contract of insurance should only be capable of constituting a warranty if it is material to the risk. There should be a presumption that a provision in a contract of insurance which possesses the attributes of a warranty at common law is material to the risk. The insured should be able to rebut this presumption by showing that the provision in question relates to a matter which is not material to the risk (paragraph 10.34 of the English Law Commission Report);

2. In order to create an effective warranty the insurer should be obliged to furnish the insured with a written document containing the warranty within a reasonable time of the insured having given the warranty in question. If the insurer fails to comply with this formal requirement he should be precluded from relying on a breach of the warranty in question in order to repudiate the policy or reject a claim. However, if a loss should occur before a reasonable time has elapsed for the provision by the insurer of such a document, then the insurer should be entitled to rely on an oral warranty (paragraph 10.35); and

3. Where the insured is in breach of warranty the insurer should prima facie be entitled to reject claims in respect of all losses which occur after the date of breach. If the insured can show either :

1. that the broken warranty was intended to safeguard against the risk that a particular type of loss would occur and the loss which in fact occurs is of a different type; or

2. that even though the loss was of a type which the broken warranty was intended to safeguard against, the insured's breach could not have increased the risk that the loss would occur in the way in which it did in fact occur;

then the insured should be entitled to recover. Nevertheless, in such cases the insurer should remain entitled to repudiate the policy in the future on account of the breach of warranty (paragraph 10.36).

Basis of Contract Clauses

2.20 The difficulties posed by the use of basis of contract clauses have already been explained (see paras. 1.27 to 1.30 above) and their use has been widely criticised. In Joel v. Law Union and Crown Insurance Co. [1908] 2 K.B. 863. Fletcher Moulton L.J. said :

"the desire to make themselves (i.e. Insurance Companies) doubly secure has made them depart widely from this position by requiring the assured to agree that the accuracy, as well as the bona fides, of his answers to various questions put to him by them or on their behalf shall be a condition of the validity of the policy. I wish I could adequately warn the public against such practices on the part of the insurance offices".

The Commission's Recommendations

2.21 The Commission endorsed these criticisms as well founded and recommended -

1. that any "basis of the contract" clause should be ineffective to the extent that it purports to convert into a warranty any statement by the insured as to the existence of past or present facts, whether the insured's statement is contained in a proposal form or elsewhere; and

2. that no provision in a proposal form whereby the insured promises that a state of affairs exists or has existed should be capable of constituting a warranty (paragraph 7.8).

THE AUSTRALIAN LAW REFORM COMMISSION

2.22 In September 1976 the Australian Attorney General referred to the Australian Law Reform Commission for comprehensive examination the subject of insurance contracts. In December 1982 the Commission produced its report, parts of which were concerned with areas covered by our own study.

Non-disclosure

2.23 In respect of non-disclosure, the Australian Report concluded that the existing duty of disclosure should be modified so that "an insurer who wishes to rely on innocent non-disclosure should warn the insured of his duty of disclosure before the contract is entered into. The duty should itself extend to facts which the insured knew, or which a reasonable person in the insured's circumstances would have known, to be relevant to the insured's assessment of the risk" (Australian Law Reform Commission Report No. 20, "Insurance Contracts", para 183). The Commission considered, unlike the Law Commission in England, that individual characteristics of the insured should be taken into account in applying the standards of the new rule and "literacy, knowledge, experience and cultural background are all vitally important factors affecting the behaviour which can reasonably be expected of insureds, both by insurers and by the legal system which regulates the insurance relationship" (para 183).

Misrepresentation

2.24 The existing rule on misrepresentation that an insured is under a duty not to make misrepresentations to the insurer about facts which a prudent insurer would regard as relevant to the assessment of the risk should be amended, the Australian Commission concluded. The emphasis should change from the "prudent insurer" to the "reasonable insured" by providing that "an insurer should be entitled to redress for misrepresentation of a fact which the insured knew, or which a reasonable person in his circumstances ought to have known, to be relevant to the insurer's assessment of the risk" and in construing the meaning of any question in a proposal form "it should be determined by reference to the meaning which would be put upon it by a reasonable man in the insured's circumstances" (para 184). The insurer should be held to have waived the duty of disclosure where he fails to pursue unanswered, or manifestly inadequately answered, questions in a proposal form.

Warranties

2.25 As a general rule, the Commission considered that a representation as to the existence of a fact should be read as a representation that that fact exists to the best of the insured's knowledge and reasonable belief. Some absolute warranties of existing fact might be rephrased as exclusions from cover and to avoid this the Commission concluded that where an exclusion is based on the state or condition of the subject-matter of the insurance, the insurer should not be able to rely on that exclusion if the insured proves that, at the time the contract was entered into, he did not know, and a reasonable man in his circumstances would not have known, of the existence of the relevant state or condition.

The Commission's Recommendations

2.26 The Australian Commission's Report took a new approach to the question of remedies and decided that the insurer's right to avoid a contract from its inception for innocent non-disclosure or misrepresentation should be abolished and a right to damages should be substituted. The insurer should be able to cancel the contract prospectively and should be entitled to deduct from the claim an amount that fairly reflects the loss it has suffered as a consequence of the insured's breach of duty. The amount of damages should be calculated so that it "would place the insurer in the position in which it would have been if the misrepresentation or breach of the duty of disclosure had not occurred" (para 27).

2.27 Where the misrepresentation or non-disclosure is fraudulent, the right to avoid the contract from its inception should be retained but the court should have a discretion to award damages instead. This discretion would be exercised so that the court could "disregard the avoidance and adjust the rights of the parties in cases where the loss of the insured's claim would be seriously disproportionate to the harm which the insured's conduct has caused or might have caused. In adjusting the rights of the parties, the court should be required to have regard to all relevant facts, including the need to deter fraud" (para 30).

THE NEW SOUTH WALES LAW REFORM COMMISSION

The Insurance Act 1902

2.28 A different approach from that proposed by the Australian Law Reform Commission can be found in New South Wales where the Insurance Act 1902 provides by section 18 that :-

"(1) In any proceedings taken in a court in respect of a difference or dispute arising out of a contract of insurance, if it appears to the court that a failure by the insured to observe or perform a term or condition of the contract of insurance may reasonably be excused on the ground that the insurer was not prejudiced by the failure, the court may order that the failure be excused.

(2) Where an order of the nature referred to in subsection (1) has been made, the rights and liabilities of all persons in respect of the contract of insurance concerned shall be determined as if the failure the subject of the order had not occurred."

This provision passes discretion to the court to excuse a breach of the contract of insurance by the insured where the breach was not a causative factor in the loss.

2.29 In February 1983, the New South Wales Law Reform Commission issued a report in which the working of s.18 of the Insurance Act 1902 was examined ("Insurance Contracts – Non-disclosure and Misrepresentation"). The New South Wales Commission identified 2 deficiencies in the application of s.18. The first of these was that the section was held not to apply to a breach by the insured of the common law duty of disclosure but only to "a failure … to observe or perform a condition of the contract of insurance". This view was expounded in Kolokythas and Anor. v. The Federation Insurance Limited [1980] 2 NSWLR 663 in a case involving fire insurance. Cover was taken out for 4 lock-up shops, in respect of 2 of which planning consents expired 4 days before the date of the proposal. No reference was made to the planning consents in the proposal but at the time the proposal was made it had become unlawful to carry on the business being undertaken in the 2 shops where consents had expired.

2.30 A subsequent claim under the policy was refused and the court held that the common law duty on the insured to disclose all material facts was one separate from the provisions and requirements of the insurance contract. This was so even where a declaration regarding disclosure was made part of the contract of insurance. The duty could not therefore be considered a "term or condition of the contract of insurance" for the purposes of section 18. Since section 18 was confined to "a term or condition of the contract of insurance", the court had no power to give relief for a failure to discharge the duty of disclosure. The expiry of the planning consents was held by the court to be a material fact following the hearing of evidence that the absence of planning permission could provide a strong temptation to cause a deliberate loss.

2.31 The second deficiency in section 18 is its possible inapplicability to "basis of contract" clauses. The NSW Commission took the view that "the power of the court under section 18 to excuse a failure by the insured 'to observe or perform a term or condition of the contract of insurance' does not extend to a 'basis of contract clause'. This is because an incorrect answer in a proposal, which is subject to a basis of contract clause, probably cannot be described as constituting a failure by the insured 'to observe or perform' a term or condition of the contract. The error is more accurately regarded as a failure by the insured correctly to complete a proposal, which is made the basis of the contract, than a breach of a term or condition" (NSW Report, para 2.11).

2.32 A further difficulty with section 18 may be the fact that the court may only excuse the failure by the insured where the insurer has suffered no prejudice. This prejudice need not be substantial and there may be cases where the suffering suffered by the insured outweighs any prejudice caused to the insurer but the court is nevertheless powerless to intervene under section 18.

The Consumer Credit Act 1981

2.33 In an attempt to overcome these limitations of section 18 of the Insurance Act 1902, the New South Wales Law Reform Commission considered whether provisions similar to section 137 of the Consumer Credit Act might be extended to cover all insurance contracts. Section 137 provides that a contract of insurance within its reach is not void or unenforceable :

"(a) by reason only of a false or misleading statement made in or in connection with the contract or a proposal, offer or document that led to the entering into, reinstating or renewing of the contract unless the statement was material to the insurer in relation to the contract of insurance and

(i) the statement was fraudulent; or

(ii) the insured knew or ought reasonably to have known that the statement was material to the insurer in relation to the contract of insurance; or

(b) by reason only of an omission of matter from the contract or a proposal, offer or document that led to the entering into, reinstating or renewing of the contract unless the matter omitted was material to the insurer in relation to the contract of insurance and -

(i) the omission was deliberate; or

(ii) the insured knew or ought reasonably to have known that matter material to the insurer in relation to the contract of insurance had been omitted."

2.34 The effect of section 137 is that before an insurer can rely on material non-disclosure to refuse liability for a claim, he must show that the non-disclosure was of matter material to him in relation to the contract in question and that the non-disclosure was deliberate or that the insured must have known or ought reasonably to have known that the matter omitted was material to the insurer in relation to the contract. As far as misrepresentation is concerned, the insurer cannot rely on this to avoid liability unless the misrepresentation is fraudulent or the insured knew or ought reasonably to have known that the statement was material in relation to the particular contract of insurance in question.

2.35 The difficulties posed by warranties and basis of contract clauses are faced by section 138 of the Consumer Credit Act 1981 which provides that where by or under the provisions of a contract of insurance within its reach :

"(a) the circumstances in which the insurer is bound to indemnify the insured are so defined as to exclude or limit the liability of the insurer to indemnify the insured on the happening of particular events or on the existence of particular circumstances; and

(b) the liability of the insurer has been so defined because the happening of those events or the existence of those circumstances was in the view of the insurer likely to increase the risk of loss occurring

the insured shall not be disentitled to be indemnified by the insurer by reason only of those provisions of the contract of insurance if, on the balance of probability (the onus of proof being upon the insured) the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of those events or the existence of those circumstances."

This section leaves insurers free to invoke exemption and limitation clauses (which may be the result of warranties and basis of contract clauses) where the loss is caused by the breach but not otherwise.

The Commission's Recommendations

2.36 The Commission concluded that legislation should be enacted similar to sections 137 and 138 of the Consumer Credit Act 1981 to apply to all insurance contracts except certain specified classes. The Commission considered the fears of the insurance industry that such an enactment would encourage fraudulent claims but pointed out that there was nothing in the terms of section 137 of the Consumer Credit Act 1981 which would assist a person who has withheld material information deliberately or who knows or ought to know that the information is material to the insurer. The Commission went on to say (at paragraph 7.14 of the NSW Report) that :-

"it is true that our recommendations, if implemented, will deprive insurers of the opportunity in some cases to raise the defence of non-disclosure. It is also true that reputable insurers may choose to raise an essentially technical defence where they suspect (but perhaps cannot prove) that an insured person has acted dishonestly..... But in our view it should be a court and not the insurer that determines the truth of allegations of fraud."

2.37 The Commission considered whether the reference in section 137 of the 1981 Act to facts which "the insured knew or ought reasonably to have known" was the most appropriate formula and decided that justice would be better served by the use of a test which enabled the courts to take into account considerations personal to the individual insured. The Commission proposed that the test should be changed to refer to facts which "the insured knew or a reasonable man in his circumstances ought to have known" and argued that insurers would not be disadvantaged by such an approach. It was pointed out by the Commission (at paragraph 7.30 of the NSW Report) that "an insured who, for example, is a knowledgeable lawyer, or a large public company, will be expected to 'know' much more than a modestly educated individual with poor command of the English language". Indeed, to adopt an objective "reasonable insured" test would be to unduly advantage the knowledgeable lawyer and the public company.

NEW ZEALAND

2.38 In New Zealand, section 11 of the Insurance Law Reform Act 1977 states that :-

"Where (a) By the provisions of a contract of insurance the circumstances in which the insurer is bound to indemnify the insured against loss are so defined as to exclude or limit the liability of the insurer to indemnify the insured on the happening of certain events or on the existence of certain circumstances; and

(b) In the view of the court or arbitrator determining the claim of the insured the liability of the insurer has been so defined because the happening of such events or the existence of such circumstances was in the view of the insurer likely to increase the risk of such loss occurring:-

the insured shall not be disentitled to be indemnified by the insurer by reason only of such provisions of the contract of insurance if the insured proves on the balance of probability that the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of such events or the existence of such circumstances."

This section is not so wide in its application as s.18 of the New South Wales legislation as the New Zealand statute deals only with non-causative exemptions or exclusions while the New South Wales provisions give the court power to excuse the breach of any term of the contract of insurance where the insurer has not suffered thereby. The New Zealand Statute's wording is similar to that of section 138 of the New South Wales Consumer Credit Act 1981.

2.39 The Contracts and Commercial Law Reform Committee in New Zealand considered the introduction of legislation similar to Section 18 of the New South Wales provisions in a Report issued in May 1983. The Committee revealed that while "some insurers took exception to the introduction of a provision similar to the New South Wales section ... in our view none of the objections raised any matter of real substance .... We consider that reputable insurers have nothing to fear from the introduction of a provision similar to the New South Wales section, and it was interesting to us to learn that the State Insurance Office had no objection to the proposal, it having already established a similar policy" (para 10.2, "Aspects of Insurance Law (2)").

Chapter III

OUR APPROACH TO REFORM AND OUR RECOMMENDATIONS

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Our approach to reform

3.01 Having examined the present state of the law in Hong Kong relating to non-disclosure, misrepresentation and breach of conditions of the contract, and having had the benefit of studying Reports on the subject in a number of jurisdictions, we are satisfied that the law as presently stated offers scope for unfairness to insureds and, while the actual number of cases of such unfairness referred to us is small, the Commission believe that reform is appropriate. In approaching the question of reform, the Commission has been conscious of the international nature of the insurance industry and the difficulties which might well be caused by the adoption in Hong Kong of measures out of step with insurance practice elsewhere. Further, the Commission consider that in general terms the person the law should seek to protect is the individual in his private capacity least able to protect himself. Of particular concern in Hong Kong is the fact that many people are not fully conversant with the English language and may be misled by inaccurate translation. The Commission felt that major commercial undertakings could reasonably be assumed to be familiar with the requirements of insurance and to have ready access to professional advice.

Scope of application - Categories of insured

3.02 The sub-committee was divided in its approach to this aspect of its task. Taking account of the desire to protect the individual in his private capacity and to avoid reform which may remove Hong Kong from the mainstream of international insurance, some members proposed that reforms should apply only to individuals rather than to commercial undertakings. Such an approach was favoured by the insurance industry both here and in other jurisdictions for, while the industry had no objection to providing greater protection to individuals, it saw no reason for extending that protection to commercial bodies. Other members of the sub-committee understood the concern of the insurance industry but did not think it right to draw an arbitrary line between individuals and commercial bodies. They argued that it would be difficult to justify an approach which provided protection to a lawyer who takes out household insurance cover in respect of his house to cover risks such as fire, storm, damage and theft while denying that protection for a semi-literate small businessman taking out similar cover in respect of his business premises.

3.03 Each argument has its supporters elsewhere. The English Law Commission specifically rejected the suggestion that their proposals should apply only to private individuals while the United Kingdom Department of Trade and Industry considered that reform should be largely confined to areas affecting the individual. We take the view, however that the recommendations which follow should be applied to all insureds, whether individuals or commercial bodies. The essence of our recommendations is that, where a dispute arises, the court may take account of the particular circumstances of the insured. Clearly, more rigorous standards will be applied where the policy-holder is a corporate body which might be expected to be familiar with the intricacies of insurance. In this way, we do not think that insurers will be put at a disadvantage by the application of our recommendations to all insureds.

Scope of application - categories of insurance

3.04 We are conscious of the difficulties which may be caused for the insurance market in Hong Kong if the law is reformed in such a way that Hong Kong's approach no longer conforms to international practice. For that reason, we consider that the recommendations in this report should be restricted to insurance which is essentially domestic. Reinsurance is frequently conducted in the international market and it is not intended that this area of insurance should be within the scope of this report. Similarly, marine and aviation insurance are aspects of insurance with well-settled practices and any amendment of the existing law would cause difficulties for the Hong Kong insurance market in its international relations. Accordingly, we have concluded that the proposals contained in this report should not apply to reinsurance, marine insurance or aviation insurance.

3.05 The intention is to restrict the scope of our recommendations to insurance which is essentially of a domestic nature. One possible approach would be to confine the application of the reforms to policyholders resident in Hong Kong. This would act to the detriment, however, of a policyholder resident overseas insuring his Hong Kong property with a Hong Kong insurer. An alternative approach would be to apply the reforms to all insurance contracts of which the "proper law" was Hong Kong. If such a measure were introduced, the amended law would in most cases be applied in the circumstances of the overseas resident we have just described, since both the property insured and the insurer are Hong Kong based.

3.06 There is, however, a difficulty with the "proper law" approach. It is well-settled law that the parties to a contract are entitled to agree what is to be the proper law of the contract. Where the proper law has been expressly stated in the contract, that intention of the parties will be effectuated by the court provided it is bona fide and legal. Lord Wright put it this way in Vita Food Products Inc. v. Unus Shipping Co. [1939] A.C. 277 at page 290 :-

"It is true that in questions relating to the conflict of laws rules cannot generally be stated in absolute terms but rather as prima facie presumptions. But where the English rule that intention is the test applies, and where there is an express statement by the parties of their intention to select the law of the contract, it is difficult to see what qualifications are possible, provided the intention expressed is bona fide and legal, and provided there is no reason for avoiding the choice on the ground of public policy."

It is possible, therefore, that insurers might seek to avoid the more stringent requirements of the amended law by including in the insurance contract a clause stipulating that the proper law of the contract would be that of a jurisdiction other than Hong Kong. Unless that clause fell within the proviso enunciated by Lord Wright as being illegal or contrary to public policy, the court would be obliged to apply the law specified in the contract. There appears to be no reported English decision in which the court has refused to give effect to an express choice of law clause in reliance on Lord Wright's proviso, although there is an Australian case not concerned with insurance where this has happened (Golden Acres Ltd v Queensland Estates Pty Ltd (1969) Qd. R. 378).

3.07 In order to prevent insurers avoiding the application of the amended law to their insurance contracts by incorporating a spurious proper law clause, the Commission examined the possibility of legislative provision on this aspect of the problem. Our attention was drawn to the Unfair Contract Terms Act 1977 in the United Kingdom. Section 27(2) states :-

"This Act has effect notwithstanding any contract term which applies or purports to apply the law of some country outside the United Kingdom, where (either or both) -

(a) the term appears to the court, or arbitrator or arbiter to have been imposed wholly or mainly for the purpose of enabling the party imposing it to evade the operation of this Act; or

(b) in the making of the contract one of the parties dealt as consumer, and he was then habitually resident in the United Kingdom, and the essential steps necessary for the making of the contract were taken there, whether by him or on his behalf."

We find this approach attractive but foresee difficulties in relation to insurance if a provision such as section 27(2)(b) were incorporated into Hong Kong's legislation. The effect would be that where, for example, someone resident in Hong Kong took out insurance on his property in Canada with a Canadian Insurance Company, the law of the contract would be Hong Kong's, even though both insurer and insured wished it to be Canada's. We consider that the introduction of a provision similar to section 27(2)(a) of the Unfair Contract Terms Act 1972 is desirable, however. We therefore recommend that our proposals should apply to all insurance contracts the proper law of which is that of Hong Kong (other than those categories of insurance excluded in paragraph 3.04). The Court should be empowered to disregard any contract term which purports to apply the law of a jurisdiction other than Hong Kong if it appears to the court that that term was included wholly or mainly for the purpose of avoiding the application of the proposed amendments to the law contained in this Report.

3.08 We considered at length whether our proposals should apply to all insurance contracts from a specified date or merely to contracts taken out or renewed after that date. If the former course were adopted, it might be thought unfair to insurers who had entered into contracts of insurance in good faith under different conditions. Equally, if the second course were followed, holders of policies of long-standing (such as life insurance) which were not subject to renewal would not gain the benefit of the amended law. However, we understand that it is general insurance practice in Hong Kong not to avoid liability under a policy by relying on a failure of the insured to disclose a fact at the policy's inception where the policy has been in force for some years and no loss has been suffered as a result of that non-disclosure. In some cases, a policy may lapse because of a failure of the insured to pay his premium on time. He may subsequently apply to have the policy reinstated. We consider that where a policy is reinstated it should be treated in a similar manner to a renewal. Accordingly, after careful consideration, we recommend that our proposals should apply to all contracts taken out, reinstated, or renewed after the date of implementation of these proposals. The insurer will, of course, be able to refuse the risk or amend the conditions of the policy at renewal.

Statements of Practice or Legislation?

3.09 It was maintained by the insurance industry in England that such defects as had been identified could be adequately cured by the adoption of a non-statutory Code of Practice and an undertaking not to repudiate liability "unreasonably". This approach was, however, specifically rejected by the English Law Commission and we are persuaded that it should also be rejected in Hong Kong.

3.10 The Statements of Insurance Practice adopted by the insurance industry in England are set out at Annexure 4. The first statement, which relates to non-life insurance taken out by persons resident in the U.K and insured in their private capacity, states at paragraph 2(b) that the insurer will not "unreasonably" repudiate liability for non-disclosure or misrepresentation "except where fraud, deception or negligence is involved". The wording is unsatisfactory on two counts. First, the measure of reasonableness is left to the insurer himself to decide and, second, the Statement leaves it open to the insurer to repudiate the contract where fraud, deception or negligence is suspected rather than proved. Similar criticism may be levelled at the Statement of Insurance Practice which relates to long-term insurance effected by individuals. Its wording varies in that paragraph 1(a) provides that "fraud or deception will, and negligence or non-disclosure or misrepresentation of a material fact may. result in adjustment or constitute grounds for rejection".

3.11 The insured must rely on the insurer's good faith in his interpretation of the Statements for he can have no redress for a failure to observe their requirements. As the English Law Commission observed :-

"The Statements of Insurance Practice are themselves evidence that the law is unsatisfactory and needs to be changed. As we have pointed out, the Statements lack the force of law so that an insured would