PHOENIX ASSURANCE PUBLIC LTD CO v. MADAM HO FUNG CHING

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JUDGMENT

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Fuad, J.A.:

1. This is an appeal, by leave of a member of this Court, from a judgment of His Honour Judge Scriven whereby he dismissed a claim brought by an insurance company against its insured.

2. By a policy of insurance dated 25 November 1982, the Phoenix Assurance P.L.C. ("the Insurers'') undertook to indemnify Madam Ho Fung Ching ("the Insured") and any other person driving with her permission against liability for, inter alia, bodily injury caused to any person by a Toyota motor car of which she was the registered owner. On 23 August 1983, a Mr. Lau Chi Keung was driving the vehicle with Madam Ho's permission, while a Miss Li Ho Yee was his passenger. An accident occurred and Miss Li was injured. It was reported to the Insurers one week later.

3. A "notice of intended prosecution" was issued to Mr. Lau on 26 August 1983 which he claimed he never received. There was a conflict of evidence as to when the Insurers first came to know of the prosecution which was later instituted against Mr. Lau, a summons for dangerous driving having been issued at the end of the year. The Judge found that the Insurers had first been informed about the case on 10 January 1984. Mr. Lau had pleaded not guilty on 11 December 1983 but was convicted of dangerous driving on 11 January 1984.

4. On 29 March 1984, solicitors acting for Miss Li wrote to the agents of the Insurers saying that they intended to rely on Mr. Lau's conviction to claim damages on her behalf, and gave notice of their intention to institute proceedings against Mr. Lau and Madam Ho. Negotiations then ensued, and on 9 November 1984, the Insurers' solicitors offered ("without prejudice") the sum of $26,518 in respect of Miss Li's loss of earnings, medical expenses, and pain and suffering. This offer was accepted on 13 November and paid the following day.

5. The Insurers' solicitors wrote another letter on 9 November 1984. This one was addressed to Madam Ho and was in the following terms: -

6. On 11 January 1985 the Insurers instituted an action in the District Court against the Insured. The Particulars of Claim recited the Insurers' liability under the policy and made reference to two of its provisions - one concerned the Insured's obligations in relation to the provision of information about claims, process etc., and the other, the right of the Insurers to take over the defence or settlement of any claim. After referring to the accident, and to the injury, loss and damage suffered by Miss Li, the Particulars of Claim go on to state that the Insurers knew nothing about the intended prosecution of Mr. Lau for dangerous driving until 10 January 1984, and to aver that the Insured's omission was a breach of the conditions of the policy.

7. The Particulars of Claim then mention s.10 of the Motor Vehicles Insurance (Third Party Risks) Ordinance, Cap.272, ("the Ordinance") stating that by virtue of its provisions, the Insurers would have been obliged to meet any judgment obtained against the Insured or Mr. Lau by Miss Li, notwithstanding the Insured's breaches "and accordingly by a .... letter dated the 9th November 1984 the Plaintiff reserved all its rights under the said Policy and took over the conduct of the claim then being made by Miss Li Ho Yee against the Defendant."

8. The Particulars of Claim go on to set out the amount for which Miss Li's claim was compromised - $26518. It is stated that the Insured failed to pay this sum on demand, and the following relief is claimed: "Damages, interest and costs".

9. All that it is necessary to say about the Defence is that the Insured states that the Insurers had been kept informed about the accident and its aftermath, throughout; and detailed particulars of this were given. The Insurers obligations under s.10 of Cap.272 were denied, as was the claim.

10. In a reserved judgment, the learned Judge stated that the case before him was "in substance either a claim under the provisions of [the Ordinance] or a claim in damages for breach of the conditions of the Policy." Since he accepted that until 10 January 1984 the Insurers had had no notice of the intended prosecution of the driver, or of the summons, or of the original or adjourned hearing date, he concluded that they were entitled to repudiate their contractual obligations. However, he held that they had not done so. He said: -

11. The learned Judge was clearly puzzled as to the foundation for the Insurers' claim. As we have seen, he understood them to be contending that they were bound to indemnify the lady injured in the Insured's vehicle under s.10 of the Ordinance. He considered, however, that a judgment was a condition precedent to the statutory liability created by that section, and there had been no judgment.

12. The Judge then addressed the question whether, if the Insurers were entitled to repudiate either the policy, or their liability for any particular claim, by reason of a breach of a condition precedent, they could also claim damages. He concluded that they had not made their election within a reasonable time, having waited from 10 January to 9 November 1984 to take any steps to protect heir interests under the contract. In his view there had been a complete affirmation of the policy when the Insurers elected to negotiate with Miss Li, so that they could not, now, set up the breach of condition for any purposes.

13. The Judge concluded his judgment as follows: -

14. The Notice of Appeal attacked each of the Judge's findings, but when the hearing of the appeal began, we had before us applications by each party for leave to amend the pleadings. The Insurers sought, by the amendments proposed, to plead in addition that there was an express provision in the policy to the effect that if the Insurers were obliged by the law of any country within the "Geographical Area" to pay an amount for which they would not otherwise be liable under the policy, the Insured was bound to repay the amount to the Insurers. The amendments would also allow the Insurers to plead, in the alternative, that the Insured was under an obligation implied by law to indemnify the Insurers where they had performed an obligation imposed by law for which the Insured was primarily responsible. In turn, by her application, the Insured had sought to amend her Defence to plead waiver and estoppel.

15. I am not surprised that the Judge was puzzled as to the true nature of the Insurers' claim, as originally pleaded. In my view it is difficult, if not impossible, to appreciate what the Insurers were putting forward as their cause of action, if it were not based on the obligations imposed upon insurers by s.10 of the Ordinance.

16. Be that as it may, in opening the appeal by the Insurers, Mr. Graham (who did not appear before the District Court) made it clear that reliance was no longer placed on s. 10 of the Ordinance. Rather, he contended that the Insurers had a valid claim by virtue of s.9 of the Ordinance, and certain provisions of the policy. Section 9 of the Ordinance is in these terms: -

17. I think it is fair to say that the burden of Mr. Graham's submissions on the effect of that section are in capsulated in a new paragraph for the Particulars of Claim which he formulated during the hearing. The proposed paragraph, which would replace the paragraph which referred to s.10 of the Ordinance, was as follows: -

18. The argument went this way: the Insured was in breach of the policy. But for s.9 of the Ordinance the Insurers would have been entitled to repudiate any obligations under the policy. Therefore, by the law of Hong Kong, the Insurers were obliged to pay an amount for which they would not otherwise be liable, and the Insured was bound to repay the amount involved.

19. Mr. Graham contended that the Insurers were fully entitled to compromise the claim without the Insured's consent and without waiting for an action to be filed. The driver concerned had been convicted of dangerous driving. Prima facie, there was little doubt that he would be held liable in negligence. No one could say that the Insurers had acted unreasonably, for the settlement was for an entirely reasonable sum. He suggested that there was no reason why the Insured should be concerned with the terms of the settlement, provided it was a reasonable one. If she had a complaint about it, the issue could be raised by an insured, if she wished it, and determined in an action following her refusal to pay the sum claimed by the insurers.

20. Leaving aside for the moment any difficulties that may arise from the fact that the Insurers are relying on breaches of the conditions of the policy, it would seem that the settlement of Miss Li's claim, even before any action had been instituted, was within the powers given to them by the following express term in the policy: -

21. There can be no doubt that if sensible compromises were not regularly reached between insurers and injured third parties, and every claim had to be adjudicated by a court, the lists would be swamped, and unnecessary delay and costs would be incurred. In the majority of cases, where liability under the policy towards the insured is not denied, he will not usually be concerned with the terms of the settlement. What is the position where the insurers intend to rely on a breach of condition by the insured to claim reimbursement from him? Of course, it might well be in the interests of the insured in circumstances where he would ultimately have to repay the sum paid to an injured person, that the matter is settled out of court.

22. I would mention here that it is accepted that the Insured knew nothing about the impending settlement between the Insurers and Miss Li. As we know, on the very day an offer was made to her on behalf of the Insurers, their solicitors wrote to the Insured, saying nothing about the negotiations, but referring to their obligations under s.10 of the Ordinance once there had been a judgment. In the circumstances that letter was misleading. However, I do not think that breaches of conditions of the kind alleged against the Insured affect the continued validity of the policy and so, it seems to me, that by its terms the Insurers were entitled to compromise Miss Li's claim. The settlement probably binds the Insured even though it was made without her knowledge or consent, unless it could be shown that it was not made bona fide.

23. Proceeding on this assumption, the next question to be addressed is whether the Insurers can claim the money they paid to Miss Li from the Insured. Apart from anything said in the policy, it might well be that if there had been a judgment so that s. 10 of the Ordinance applied, the Insurers could base their claim on the statutory right given by subsection (4) of that section, which reads: -

In my view, a perfectly respectable argument could be made for construing subsection (4) as giving insurers the right to recover any sum they are compelled to pay by virtue of s.10 of the Ordinance which they would otherwise not have been bound to pay, even though that subsection seems primarily to be designed to cover the situation (a) where the insured has agreed to bear the first so much of any claim or (b) where the insurers have limited their liability under the policy to a certain sum.

24. However, this is not a section 10 case. Section 9 of the Ordinance certainly renders ineffective, as against the injured third party, Miss Li, the breaches of condition which the Insurers allege against the Insured, so they could not be set up against her to defeat her claim, but it does not, on my reading, give the Insurers a statutory right to demand the re-payment by the Insured of any sum they might agree to pay to the third party. In my view, therefore, the validity of these proceedings must be founded upon an express provision in the policy. Mr. Graham relies on the following ("the recovery clause"): -

25. The task before the Court is a matter of pure construction. Although there is no authority directly in point, I derive some assistance from the Canadian case of Merchants Cas. Ins. Co. v. Waterloo Trust Savings Co. [1936] 1 D.L.R. 361. This is so despite the fact that the relevant statutory provisions and terms of the policy were not the same as those we have to consider. In that case, Makins J., sitting in the Ontario Supreme Court, had before him a claim by an insurance company to recover from the estate of their insured, who had since died, money they had paid out to a lady he had injured with his motor car. The policy contained the following condition: "Every person insured agrees to pay or reimburse the insurer upon demand any amount which the insurer shall have paid by reason of the provisions of any statute relating to automobile insurance and which the insurer would not otherwise be liable to pay under the policy issued upon this application." The policy also prohibited the driving of a car by a person under the influence of drink.

26. The injured lady issued a writ against the driver for damages for her injuries. He referred the claim to his insurers. After investigating the circumstances of the accident, they concluded that the driver had been in the wrong and made a settlement with the plaintiff in that action for $1,200. They then sued the driver's estate for recovery of that sum and interest.

27. Makins J. found on the facts that the driver had been driving under the influence of alcohol and that it was his condition which was the cause of the accident. He also reached the conclusion that the settlement was well within the damages sustained by the lady, and that had the action gone to judgment, damages for more than the amount of the compromise would probably have been awarded.

28. I will not refer to all the statutory provisions that were in force, but there was a section that said the insured shall be liable to pay or reimburse the insurer, upon demand, any amount which the insurer has paid by reason of the provisions of this section which it would not otherwise be liable to pay". This was s.183h(6) of the relevant Act. The learned Judge held that the insurers' rights under the policy and the statute were the same, and concluded his judgment as follows:-

29. While not wishing to give the recovery clause in the policy a narrow or grudging construction, I do not, consider that by any fair use of language it can be said that the Insurers were "obliged by law" .... "to pay an amount" to Miss Li. They could not resist her claim on account of any breaches of condition of which the Insured may have been guilty but they were not compelled by law to pay any specific amount - this could only be ascertained by a competent adjudicating authority. They were not even obliged to settle the claim, however sensible such a course might have been. If liability to an injured third party is conceded and the sum he or she is to receive is arrived at by agreement, then it is by virtue of that agreement that the amount must be paid and not by virtue of an obligation imposed by law. Here the Insurers are saying, in effect: "We could not rely on the Insured's breach of the conditions to resist Miss Li's claim. We had the right to settle her claim, and once an agreement was reached we were bound to abide by it. And so we were obliged by law to pay that amount." But in my judgment the recovery clause is only apt to cover re-payment by the insured when insurers make payment under compulsion of the kind contained in s.10 of the Ordinance. No doubt the recovery clause could be widened by suitable words to embrace the situation we have before us. But I hold that in its present form it is not wide enough.

30. I conclude that the Insurers' claim as originally pleaded was misconceived and rightly did not succeed. Moreover, even if Mr. Graham's new formulation of his case were allowed to go forward, and he could establish that the Insured had been in breach of the policy, and that the breaches had not been effectively waived by the Insurers' conduct since they became aware of them, in my judgment, the Insurers have no valid claim against the Insured.

31. I would therefore dismiss the appeal on this ground alone.

32. However, in case I am wrong I will briefly address the waiver/estoppel defence that the Insured's proposed amendments to her Defence would allow to be raised. The Insurers knew of the alleged breach of the conditions of the policy on 10 January 1984. They did nothing to indicate that they would be repudiating their liability to the Insured, but without her knowledge negotiated with the injured third party. They had plenty of time to make up their minds as to what attitude they desired to adopt in regard to the breach. They wrote a letter to the Insured 10 months later, reserving their rights it is true, but still not expressly repudiating their liability. I have earlier called this letter misleading. The Insured (and anyone else reading it) would assume that she would only be liable to pay the Insurers (if the repudiation turned out to be justified) if there was a judgment in favour of the third party, as a result of the obligations imposed on the Insurers by s.10 of the Ordinance. This was not mere silence or inactivity by the Insurers after they became aware of their rights. I find prejudice in the fact that the Insured had no opportunity to take part in the negotiation of the settlement.

33. The dividing line between estoppel and waiver is a fine one, but in my view the Insured would be able to succeed in defeating the claim made against her on either ground.

Silke, J.A.:

34. I agree and have nothing to add.

Penlington, J.:

35. The issue is whether the insurers were, to use the words of the policy, "obliged by the law of any country to pay" Miss Li the amount of $26,518. Mr. Graham, who has argued this matter well, says once an offer was made, which the insurer was entitled to do having taken over the conduct of the matter, that offer became binding on acceptance by the injured party and the insurer was so "obliged to pay". I am quite satisfied those words cover an obligation which the insurer could not avoid by reasons of provisions such as Sections 9 and 10 of this Ordinance. That is the insurer could not avoid liability to the injured person only because of the breach by the insured of a condition of the policy. They were never meant to, and do not, encompass an ordinary common law contractual liability arising from the acceptance of an offer of settlement.