Welcome to our quarterly bulletin on insurance issues in the Asia Pacific region. In this bulletin we will cover recent legal developments that may be of interest to insurers and reinsurers operating in the region.
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Directors at risk of losing D&O defence costs cover in NSW (Steigrad v BFSL  NZHC 1037)
A primary benefit of Directors & Officers (D&O) cover is the costs protection it provides for directors and officers. The recent High Court of New Zealand case of Steigrad v BFSL puts this cover at risk when a company collapses and a third party claimant seeks a charge over the insurance proceeds of the D&O policy.
The Bridgecorp group collapsed and was placed into receivership owing investors nearly $500 million. The directors of Bridgecorp faced numerous criminal and civil claims following the collapse.
The Bridgecorp companies held D&O cover with QBE. The directors also held separate defence costs cover which had been fully eroded by the defence costs incurred to date. The directors were therefore relying on the cover available under the D&O policy to cover their defence costs going forward. Significantly for the directors, the D&O policy responded to the directors' legal liability to third parties and the limit of indemnity under the D&O policy was inclusive of defence costs.
The investors of Bridgecorp who had lost their money in the collapse claimed a charge over the monies payable under the D&O policy pursuant to section 9 of the New Zealand Law Reform Act 1936 (the NZ Act) which is written in substantially similar terms to section 6 of the New South Wales (NSW) Law Reform (Miscellaneous Provisions) Act 1946 (the NSW Act). Section 9 of the NZ Act relevantly provides as follows:
(1) If…the insured has, whether before or after the passing of the Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance money that is or may become payable in respect of that liability.
(2) If, on the happening of the event giving rise to any claim for damages or compensation, the insured…is being wound up, the provisions of [subsection (1)] shall apply notwithstanding the…insolvency…of the insured.
(3) Every charge…shall be enforceable by way of an action against the insurer in the same way and in the same Court as if the action were an action to recover damages or compensation from the insured…
Section 9 of the NZ Act (and section 6 of the NSW Act) creates a charge in favour of a claimant over insurance proceeds enabling the claimant to directly access these funds in certain specified circumstances. The purpose of this statutory charge is to ensure that enforcement of a claimant's entitlements is not frustrated by, relevantly, the insolvency of the insured.
The charge having being claimed, QBE advised the directors that it could not make any payments under the D&O policy in respect of their defence costs until the directors and the investors agreed on an allocation of the funds available under the D&O policy. When the parties were unable to agree on this allocation, the directors approached the court seeking a declaration that the charge did not prevent QBE from funding their defence costs.
The High Court's ruling
The High Court determined that the payment of the directors' defence costs could not be permitted to reduce the pool of funds that would otherwise be available to meet claims to which the charge applied. The NZ Act (and the NSW Act) charged "all insurance money" that was or may become payable in respect of "liability to pay damages or compensation". According to the High Court, this meant that where the level of cover was less than the amount of a notified claim, the entire cover under the policy was subject to the charge. As the investors' claim was significantly greater than the limit of indemnity under the D&O policy, QBE was obliged to keep the insurance proceeds intact for the benefit of the investors. The High Court noted that the position would be different in circumstances where the amount of the claim was well within the amount of cover available under the policy. In that case, an insured director may be able to gain access to the policy to meet defence costs.
The High Court warned that the risk to QBE in meeting the directors' defence costs where a charge had been claimed was that it could become liable to restore that amount to the pool of money available under the policy to meet the investors' claim.
While observing that this ruling produced unsatisfactory consequences for the directors, the High Court commented that this outcome was party a consequence of the decision by the Bridgecorp companies to take out a policy that provided cover for both defence costs and claims for damages and compensation.
In NSW, where the limit of indemnity under a traditional D&O policy is costs-inclusive, directors are at risk of losing their defence costs protection should the company become insolvent. It was accepted in Steigrad that the separate defence costs cover held by the directors, which had already been eroded at the time of this action, would not have been subject to the statutory charge as it did not indemnify the directors for damages or compensation - it covered only defence costs. This decision has caused debate in the industry as to whether new language in D&O products can be devised to prevent this outcome or whether it is necessary to take out separate defence costs cover to ensure that this protection will be in place for directors when they need it.
For further information, please contact Marnie Mcconnell in Sydney.
The following case summaries have been written by Professor Rob Merkin who is a consultant to the insurance and reinsurance and international arbitration teams.
Westport Insurance Corporation v Gordian Runoff Ltd  HCA 37
Gordian wrote professional indemnity insurance. One of the policies written by Gordian was in favour of FAI Insurance. In the latter part of 1998 FAI was taken over by Winterthur, and FAI negotiated a run-off policy with Gordian, under which Gordian would for a period of seven years indemnify FAI for all claims arising out of wrongful acts committed before 31 May 1999.
The run-off policy was entered into on 23 December 1998 and attached on 1 January 2000. Up to December 1998 Gordian was reinsured under an excess of loss treaty subscribed to by Westport. In the renewal negotiations in December 1998 Gordian indicated that it had written policies for two or three years and sought the reinsurers’ approval to include in the renewed treaty capacity to write multi-year contracts. Westport said that it would do so and that “up to three years is acceptable”. Westport then renewed the reinsurance treaty with Gordian, and this applied to claims made on policies attaching from 1 January 1999 to 3 March 2000.
The Gordian-Westport treaty contained an arbitration clause under which disputes were to be determined by arbitration in NSW. Claims were made against Gordian under the FAI run-off treaty and these were notified to Westport. At this point Westport became aware of the seven-year FAI insurance, and it contended that it faced liability only under policies which ran for a maximum of three years. In fact, all but one of the claims made under the FAI insurance fell within three years from the date of the policy, but Westport nevertheless denied liability for all claims under the FAI insurance on the ground that the treaty did not apply to any underlying policy capable of lasting longer than three years.
The arbitrators held that the FAI insurance fell outside the treaty but that the effect of section 18B of the Insurance Act 1902 was to allow Gordian to recover for any claims falling within three years, on the basis that its breach of the treaty had not caused Westport any loss. The High Court by a majority overturned the award, holding that the arbitrators had not given full reasons so that there was manifest error on the face of the award and there was also error of law in applying section 18B to a case where there was no coverage. Heydon J, dissenting, upheld the award but on the basis that the arbitrators had erred in holding that the treaty did not include the FAI insurance in the first place.
Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd  VSC 467
The assured supplied synthetic resins to customers who used it to manufacture plastic containers. In 2007 and 2008 Signum Specialities purchased resins from Leading Synthetics on terms stating that payment would be made within 60 days. In the event Signum Specialities defaulted and was placed into liquidation in November 2008, at the time owing Leading Synthetics some Aus$2,265,000. The assured sought to recover under a credit policy.
The insurers asserted that they had not entered into any contract because they had informed the brokers that “[t]hese terms are provided without commitment on the part of [insurers] until such time we provide you with written confirmation that we are on risk for your transaction and agree to issue a policy.” No policy was issued, but shortly afterwards the insurers had failed to respond to an email from the brokers asking for confirmation of other declarations to the policy.
The court held that:
- the parties had entered into a contract;
- the insurers were estopped from denying the existence of a contract, given their failure to reply to the email when they ought to have known that the assured was relying on cover;
- there was no failure to disclose the customer’s payment record, given that the insurers had limited their questions to sums which were 60 days overdue so that other information had been waived; an
- a policy term which provided for “automatic stoppage of cover where payment of any receivable is still overdue from the Buyer at the expiry of the maximum extension period [of 60 days]” had no application to a small debt which had been outstanding from the customer for some years, as the wording only applied to products supplied after inception.
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Compulsory auto insurance market likely to welcome foreign players
For a long time, China has been recognised as one of the largest car markets in the world. Motor insurance in China already accounts for more than 70 per cent of non-life insurance premiums in the country. However, existing legislative restrictions in the market have effectively blocked foreign invested insurers (insurers incorporated in China by foreign insurers with foreign ownership of 25 per cent or more) from tapping into this market. This legal hurdle is expected to be lifted shortly once the State Council gives its approval to a recent proposal submitted by the China Insurance Regulatory Commission (CIRC).
The Current Legal Hurdle
Pursuant to the Measures on Compulsory Motor Vehicle Accident Liability Insurance (《机动车交通事故责任强制保险条例》), only domestic Chinese property and casualty insurance companies, approved by CIRC, are qualified to carry out the business of offering compulsory motor third party liability (MTPL) insurance. Foreign invested insurers are prohibited from entering into this market, although they may underwrite optional vehicle insurance. This prohibition on foreign invested insurers’ access to MTPL business limits their ability to develop downstream commercial networks capable of reaching individual clients, since the majority of clients would not normally use two insurers (one for compulsory insurance and one for vehicle insurance) to cover the same vehicle.
In practice, we have seen several structures that were developed for foreign invested insurers to become indirectly involved in MTPL business. One commonly used structure is through strategic cooperation between Chinese insurers who are qualified to underwrite MTPL insurance policies and foreign invested insurers. Under this cooperation model, Chinese insurers are only responsible for the issuance of MTPL insurance policies while foreign invested insurers will act as the client facing primary contact, carrying out the sales of MTPL insurance and offering other optional policies, providing after sales services, settling claims etc.
In addition, foreign insurers often look to acquire a minority equity stake of less than 25 per cent in Chinese non-life insurers which are qualified to carry out MTPL business in order to earn dividends generated from the non-life Chinese insurers’ MTPL business. However, as foreign invested insurers are not permitted to conduct MTPL business, under this shareholding structure they may not acquire an equity stake exceeding 25 per cent. In this scenario, the insurer will be considered to be a foreign invested insurer and it will trigger the prohibition under the current legal regime.
Recently, CIRC submitted a proposal to the State Council, which will allow foreign invested insurers to sell MTPL insurance. Under CIRC’s proposal, foreign invested insurers that wish to engage in MTPL insurance business will be required to meet certain eligibility criteria such as profitability, solvency, size of the parent companies etc. This is the first time that Chinese insurance regulators appear likely to open the MTPL insurance market to foreign invested insurers. A source inside CIRC has suggested that it is likely that the MTPL market will be open to foreign invested insurers next year (i.e. 2012). The underlying reason for the potential liberalisation of MTPL business is generally considered to be that CIRC is seeking to tap foreign expertise to help reverse chronic losses in auto insurance and improve service so as to better protect the victims of traffic accidents. This move also gives a positive signal that CIRC respects the lobbying efforts of foreign insurers and their chambers of commerce.
It is anticipated that once MTPL business is open to foreign investment, most existing foreign invested insurers will immediately apply to CIRC to carry out this potentially high-profit business. More foreign insurers are expected to consider setting up non-life entities in China to gain entry into the MTPL market, though they may have to meet high entry thresholds such as a minimum 30-year insurance business history, a 2-year representative office already established in mainland China, total assets in an amount of no less than USD 5 billion etc.
For further information, please contact Ai Tong in Shanghai.
CIRC publishes final measures on internet sales by insurance agents and brokers
On 20 September 2011, CIRC published the Regulations on the Supervision of Internet Insurance Business for Insurance Agents and Brokers (the Internet Sale Regulations), which will take effect on 1 January 2012. We previously reported on this development in the July 2011 edition of Asia Pacific - focus on insurance, when CIRC published a draft version of the Internet Sale Regulations for consultation. The finalised version makes significant changes to the draft version and these are summarised below:
- Only insurance intermediaries (including professional insurance agents and brokers) (Qualified Insurance Intermediaries) are specifically permitted by the Internet Sale Regulations to engage in sales over the internet. Qualified Insurance Intermediates providing services through the internet must have a registered capital of no less than RMB 10 million. The Internet Sale Regulations are silent on whether insurance sideline agents and other non-regulated entities are able to engage in internet sales. It remains to be seen how CIRC will clarify the ambiguity of the legislation in practice.
- The Internet Sale Regulations significantly lower the entry requirements for third party service providers, i.e. those who own websites used by, or otherwise provide web services to, Qualified Insurance Intermediaries which allow them to engage in internet sales. For example, a third party service provider is no longer required to meet the RMB 10 million (approximately USD 1.57 million) net asset requirement.
- There are no longer any specific monetary penalties that CIRC must impose. There is now a wide discretion available to CIRC when deciding which penalty to impose on Qualified Insurance Intermediaries who are in breach of the relevant law.
In addition to the changes listed above, Qualified Insurance Intermediaries are required to disclose key information pertinent to insurance products being sold online including but not limited to the key features of the products, the terms and conditions of the policies, the procedures for underwriting claims and the methods by which premiums can be paid. The requirements applying to the website owners, e.g. that they must obtain the requisite Internet Content Provider Licences and that the website server must be located in mainland China, remain unchanged.
For further information, please contact Ai Tong in Shanghai.
CIRC publishes final measures on transfer of insurance business in China
On 26 August 2011, CIRC issued the Interim Administrative Measures on Transfer of Insurance Business by Insurance Companies (the Measures) which took effect on 1 October 2011. We previously reported on this development in the July 2011 edition of Asia Pacific - focus on insurance, when CIRC published a draft version of the Measures for consultation. The finalised version retains much of the same wording.
The Measures are a response to the increased recognition of the need for a streamlined process for the acquisition and disposal of insurance business for both domestic and foreign insurers in the Chinese market.
The Measures state that any proposed transfer of insurance business should be approved by the directors and shareholders of the insurers, and subsequently CIRC. The insurers involved in the transfer are required to appoint both professional accountancy and law firms to advise on the value and nature of the business to be transferred and to ensure that there is no detriment to the policyholders. Unlike a portfolio transfer in the UK, where court approval constitutes the deemed consent of all policyholders and makes the transfer binding on them, upon obtaining approval from CIRC, the transferor is still obliged to notify policyholders and other assureds and to obtain their consent. However, the Measures are silent as to what happens if the assureds fail to give their consent to the transfer of the policies. We expect this to be clarified over time.
For further information, please contact Ai Tong in Shanghai.
CIRC imposes requirements on insurance intermediary group companies
Since the first insurance intermediary company was set up in 1993, the number of Chinese insurance intermediary companies has reached 2,300 in total. The insurance intermediary market has seen a boom in recent years as a result of increasing investment by private equity/venture capital funds and an influx of foreign capital. On 22 September 2011, CIRC issued the Trial Administrative Measures on Insurance Intermediary Group Companies (the Trial Measures) which took effect immediately. The Trial Measures impose requirements which large insurance intermediaries will have to fulfil in order to qualify as insurance intermediary group companies.
In accordance with the Trial Measures, an insurance intermediary group company has to (among other things) have a minimum registered capital of RMB 100 million and own at least five subsidiaries (two of which must be related to insurance intermediary business and with at least 50 per cent of their combined revenue being generated from insurance intermediary business). Although there are a large number of insurance intermediaries, not many of these are capable of meeting the minimum registered capital requirements, those that can include CNinsure Inc. and Datong Insurance.
For further information, please contact Ai Tong in Shanghai.
Potential investments in derivative products by insurance funds
Since 2010, CIRC has changed several rules with a view to gradually liberalising investment restrictions in China. CIRC now allows insurers to make capital investments in new asset classes and has increased the maximum allowed exposure of insurers’ capital in existing asset classes.
Investments in derivative products by insurers, or via qualified entities entrusted by insurers, are expressly permitted by CIRC and such products are generally used for hedging investment risks rather than speculation or leverage. However, in practice an insurer wishing to enter into a derivative transaction is subject to CIRC’s case-by-case review and approval procedure on both the insurer’s authorisation to engage in derivative investments and the specific derivative products to be invested in. As a result, the uptake for this type of business has been lower than might otherwise have been the case.
Over the course of 2011, CIRC has considered broadening existing investment channels for Chinese insurers in derivative markets, both domestically and overseas. Stock index futures are likely to become the pilot derivative products permitted by the regulators. Insider sources indicate that, if stock index futures are launched successfully, regulators will consider making more types of derivative products available to insurers, such as interest rate/FX futures and other option products. This makes a lot of sense in view of the ability of insurers to invest offshore and thereby expose themselves to currency and other non-domestic risk.
For further information, please contact Ai Tong in Shanghai.
Insurance sector launches anti-money laundering practice
On 13 September 2011, CIRC issued Administrative Measures on Anti-money Laundering in Insurance Sector (the AML Measures) which took effect on 1 October 2011. This is the first time that anti-money laundering practice will be specifically regulated in the insurance industry. The previous regulatory regime, which was introduced five years ago by the Anti-money Laundering Law of People’s Republic of China, was a general one applying to all businesses in the PRC.
According to the AML Measures, the satisfaction of anti-money laundering requirements will be a pre-requisite for candidates looking to establish an insurance company or an insurance asset management company (or a branch thereof). These anti-money laundering requirements include, but are not limited to, the legality of investment funds to set up insurance entities, the establishment of anti-money laundering internal control systems, the establishment of an internal department which is responsible for anti-money laundering practice within the insurance entity etc.
In addition to the above entry thresholds, CIRC requires insurance companies and insurance asset management companies to fulfil certain disclosure requirements. For example, they should be fully aware of the source of investment funds and declare the source and legality of such funds in the case of (i) any increase in capital or (ii) any change or transfer of equity holdings (unless such change or transfer is via stock purchase at a stock exchange in an amount no more than five per cent of the registered capital) of the insurance company or insurance asset management company.
For further information, please contact Ai Tong in Shanghai.
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OCI publishes Questions & Answers on establishment of IIA
On 6 October 2011, the Office of the Commissioner of Insurance (OCI) published a set of Questions & Answers, which are intended to provide clarification on various issues relating to the establishment of an Independent Insurance Authority (IIA) in Hong Kong. The Questions & Answers focus on some of the more controversial issues including the IIA’s disciplinary mechanism and the regulation of the insurance intermediary activities of banks.
The disciplinary mechanism
Insurance intermediaries in Hong Kong are currently supervised by three self-regulatory organisations (SROs), namely, the Insurance Agents Registration Board (IARB) under the Hong Kong Federation of Insurers, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association. The three bodies handle complaints against individual intermediaries and are able to impose disciplinary sanctions where necessary. The Questions & Answers confirm that in establishing the IIA reference will be made to the disciplinary systems currently employed by the SROs and attempts will be made to merge the regimes. However, there is no intention to introduce stricter sanctions.
Regulation of insurance intermediary activities of banks
The Hong Kong Monetary Authority (HKMA) regulates the banks and is capable of sending complaints to the IARB. Approximately 30 per cent of all insurance products are sold through banks. Bank staff selling these products are registered with the IARB, who supervise their conduct and deal with complaints. At present, the HKMA is unable to discipline bank employees and there is no system in place to deal with the distinct nature of bancassurance.
In July 2010, it was suggested that the HKMA should regulate insurance products sold through banks. However, numerous respondents raised concerns regarding the potential risk of double-standards and inconsistent disciplinary decisions. Subsequently, the Government put forward a proposal, under which the IIA will be primary and lead regulator for all insurance intermediaries and the only regulator able to set requirements and standards of conduct. The HKMA will work closely with the IIA who will delegate specific powers to assist with the regulation of the intermediary activities of banks.
The Questions & Answers reinforce the “single regulator” concept and state that there will be “one regulator for one industry”. That means the IIA will regulate the whole of the insurance industry, including the sale of insurance products through banks. In terms of bancassurance, the IIA will have the power to carry out joint inspections with the HKMA, and when carrying out investigations, the IIA will have the power to involve the HKMA. Where the HKMA carries out an investigation on behalf of the IIA, it will be accountable to the IIA and has no power to impose any disciplinary sanctions.
For further information: Establishment of an Independent Insurance Authority: Questions and Answers
For further information, please contact Marie Kwok in Hong Kong.
Can there be an employment relationship between an insurance company and an insurance agent?
In the insurance industry, it is common for insurance companies to use freelance agents to sell insurance products to their customers. Insurance companies intend these agents to be categorised as independent contractors, as opposed to employees. In a recent case, an insurance agent engaged by the Prudential Assurance Company requested judicial determination as to whether she was engaged as an employee or an independent contractor. Leung Suk Fong Peggy v The Prudential Assurance Company Limited represents the first case in which the court has been asked to determine the nature of the relationship between an insurance company and an insurance agent.
In Peggy Leung, the plaintiff was engaged by Prudential as an “insurance agent” under a written agreement, which contained an express provision stating that “[i]t is... expressly agreed and understood that nothing under this Agency Agreement...is intended or intended to be construed as being capable of giving rise to an employment contract or contract of service". On termination of the agreement, the plaintiff lodged a claim with the Minor Employment Claims Adjudication Board against Prudential for outstanding wages, statutory holiday and annual leave pay on the basis that she was an employee. The board found that she was not an employee and dismissed her claim. The plaintiff then lodged an appeal at the Court of First Instance.
On 30 September 2011, the Court of First Instance decided in favour of Prudential, holding that the plaintiff was an independent contractor rather than an employee. In reaching its decision, the Court adopted the approach set out in the leading case, Poon Chau Nam v Yim Siu Cheung, in which Mr. Justice Ribeiro PJ of the Court of Final Appeal held that "the modern approach to the question of whether one person is another’s employee is therefore to examine all the features of their relationship against the background of the indicia developed in the … case-law with a view to deciding whether, as a matter of overall impression, the relationship is one of employment, bearing in mind the purpose for which the question is asked. It involves a nuanced and not a mechanical approach".
In particular, the Court of First Instance considered the following eight factors when determining whether the plaintiff was engaged by Prudential as an employee:
- the extent of control by the insurance company;
- whether the insurance agent bore any financial risks;
- whether the insurance agent was an integral part of the company's organisation;
- whether there was mutual obligation to work and to provide work;
- who provided the equipment;
- incidence of tax and insurance obligations;
- the parties’ own view as to the relationship; and
- the traditional structure of the trade in the insurance industry.
In the past, the Hong Kong Courts tended to find that there was an employer-employee relationship if the work provided was done as part and parcel of the employer’s organisation. However, in Peggy Leung, whilst the plaintiff was found to be an integral part of Prudential, the Court did not give much weight to this in the overall context. The Court considered that the fact that Prudential did not provide work to the plaintiff, who had to look for her own business and clients was a strong factor against any suggestion of an employment relationship. The Court also took into account, amongst other factors, that no employment relationship between an insurance company and its agents existed in the traditional structure of trade in the insurance industry.
Whilst the issue as to whether an employment relationship exists will need to be considered on a case by case basis, the Court of First Instance’s decision in Peggy Leung is a welcome precedent for the insurance industry and legal advisers which confirms the nature of the relationship between an insurance company and an insurance agent.
For further information, please contact Wynne Mok or Ada Li in Hong Kong.
Business interruption insurance - an update on New World Harbourview Hotel Company Limited v Ace Insurance Limited (HCA 46/2007, CACV 97/2010, FAMV No. 6 of 2011)
Business interruption insurance (also known as business income insurance) is designed to protect the insured from the loss of income resulting from an interruption of business. In general, business interruption insurance is not sold as a stand alone policy. It is usually included in a comprehensive packaged policy or is combined with property insurance which provides an indemnity in respect of material damage to the subject matter and also business interruption loss flowing from such damage.
There are various kinds of business interruption insurance available which are tailored for policyholders in different industries. Specific business interruption insurance is designed for hotels and similar establishments to provide cover for losses arising from an outbreak of disease. In this context, the Court of First Instance and the Court of Appeal have considered business interruption claims arising from the outbreak of Severe Acute Respiratory Syndrome (SARS) in New World Harbourview Hotel Company Limited v Ace Insurance Limited. Permission has been given for a further appeal to the Court of Final Appeal.
The plaintiffs (all belonging to the New World Group) own or operate convention centres, hotels, car parks and related businesses. Each of the plaintiffs was insured under one of two "Composite Mercantile Policies" issued by the defendant insurers. The plaintiffs claimed under the policies for loss suffered following the outbreak of SARS in Hong Kong in 2003. The defendants accepted in principle that the plaintiffs were entitled to be indemnified under the policies, but there was dispute as to the duration of the cover. The policies provided coverage for actual loss sustained from "notifiable human infectious or contagious disease occurring within 25 miles of the Premises".
When SARS became a “notifiable” disease
The question was the date on which SARS became a "notifiable" disease. There was an outbreak of a pneumonia-like disease in Guangdong in late 2002 and early 2003 and this was reported by the Hong Kong media on 10 February 2003. On 11 February 2003, the Hospital Authority set up a Working Group to consider how to deal with Severe Community-Acquired Pneumonia (CAP) cases. On 13 February 2003, the Hospital Authority asked hospitals to report CAP cases. On 21 February 2003, a Mainland visitor checked into the Kowloon Metropole Hotel, and on 27 March 2003, it became mandatory in Hong Kong under the Quarantine and Prevention of Diseases Ordinance (the Ordinance) to report SARS cases. The patient subsequently died and in mid-April 2003 was confirmed as having had SARS. The insurers asserted that the start date for the cover was 27 March 2003, when notification became mandatory whereas the insured claimed that SARS became notifiable either on 13 February 2003 or on 21 February 2003 at the latest.
The Court of First Instance, by a judgment dated 8 April 2010 ruled in favour of the insurers considering that the period of indemnity began to run on 27 March 2003 when it became mandatory to report SARS cases to the Government under the Ordinance. The Court of First Instance went on to hold that in calculating "Standard Revenue" (defined as "the revenue realised during the 12 months immediately preceding the date of the damage"), it was permissible to take into account the 12 months immediately preceding 27 March 2003, which included a short period in which SARS was not notifiable but had nevertheless affected revenue.
In relation to “Loss Period” (which is defined as "the period during which the Revenue of the Insured Business has been affected in consequence of Damage from the date of loss to the resumption of the business and thence 180 days"), the Court ruled that where a business ceases, the Loss Period initially runs from the date of loss to the time when the business resumes. Upon resumption, the business is covered for any additional loss of revenue arising in the ensuing 180 days. In this case where the business did not close but continued through the currency of an insured peril, the business was only covered for a period of 180 days. The initial period from date of loss to date of “resumption of the business” was irrelevant and inapplicable.
The plaintiffs appealed and the Court of Appeal, by a Judgment dated 8 October 2010, upheld the policy interpretation adopted by the lower court.
On 26 August 2011, the Court of Final Appeal granted leave to the Plaintiffs to appeal on the following question of law:-
"Whether, in common form and widely issued policies of the type in question, the provision of insurance cover in respect of loss sustained “as a result of notifiable human infectious or contagious disease” is limited to cover losses resulting from infectious diseases which are by statute compulsorily notifiable or whether such cover extends to losses caused by diseases subject to administrative reporting requirements although not backed by statutory sanctions."
It remains to be seen how the Court of Final Appeal will resolve the issue. Although this case focuses on a specific kind of business interruption insurance, it will show how the courts in Hong Kong interpret policy wording in general. It will be interesting to see whether they follow recent English cases which allow for the disregard of literal language in favour of commercial considerations.
We previously reported on this development in September 2010 (for further information, please refer to Insurance updater 22 September 2010).
For further information, please contact Winnie Lee in Hong Kong.
Government issues proposed amendments to the Competition Bill
On 18 October 2011, the Hong Kong Government released a briefing paper outlining proposed amendments to the Competition Bill.
Under the proposals, only four types of so-called "hardcore" conduct (price fixing, market sharing, limiting production and bid-rigging) will attract fines. Sanctions for “non-hardcore” conduct can only be imposed if parties ignore warning notices, which will be issued by the Competition Commission. The maximum fine has also been revised and is now capped at 10 per cent of sales achieved in Hong Kong for the duration of the infringement, up to a maximum of three years.
In response to concerns expressed by SMEs, the Government’s new proposal will contain an exemption relating to non-hardcore anti-competitive arrangements (amongst undertakings or when decided by trade associations) where the aggregate turnover of the parties involved is below HK$100 million. Similarly, parties whose annual turnover falls below HK$11 million will be exempt from the rule on the abuse of market power. In addition, stand-alone rights of private action and merger activities are now expressly excluded from the Competition Bill. Interested parties had until 8 November to submit their views on the latest Government proposals.
For further information: Bills Committee on Competition Bill: Responses to Concerns on the Competition Bill
Please click here to request a copy of the Norton Rose briefing on the latest Government proposals.
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