CHINA PING AN INSURANCE (HONG KONG) CO LTD v. TSANG FUNG YIN JOSEPHINE AND ANOTHER

CACV 179/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 179 OF 2012

(ON APPEAL FROM HCA 308/2010)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  On 20 March 2013, we dismissed the 1^st defendant’s appeal from To J’s decision dated 19 March 2012 whereby the judge allowed the plaintiff’s appeal from Master de Souza’s order dated 24 November 2011 and dismissed the 1^st defendant’s Order 14A summons. We now give our reasons.

The facts

2.  The essential facts can be very briefly stated.  The 1^st defendant was the registered owner of a private car.  The plaintiff was and is an insurance company carrying on (amongst other things) the business of motor vehicle insurance in Hong Kong.  On 1 June 2006, the 1^st defendant signed and submitted a standard form motor vehicle insurance proposal form (“the Proposal”) to the plaintiff.  It was to take out third party motor insurance, “in [the plaintiff’s] usual insurance policy form for this class of insurance”, for her vehicle.  The period of insurance was for one year, that is, 1 June 2006 to 31 May 2007.  On the same day, the plaintiff issued her with a “cover note” (“the Cover Note”).  The Cover Note stated that the 1^st defendant having proposed for insurance in respect of her motor vehicle, “the risk [was thereby] held covered in terms of [the plaintiff’s] usual form of THIRD PARTY ONLY Policy applicable thereto for a period of 30 days that is to say from 1 June, 2006 11:30am/pm on the above date to the same time on the thirtieth day after such date unless cover be terminated …”.

3.  On 4 July 2006, after the period covered by the Cover Note had expired, the plaintiff issued a formal insurance policy (“the Policy”) to cover the same risk for a period of twelve months from 1 June 2006.  General condition 18(b) and clause 14 of the Policy contained notice requirements in case of accident.  On a date prior to 22 July 2006 (but after 12 July 2006), the plaintiff delivered the Policy to the 1^st defendant through intermediaries.

4.  In the meantime, on 12 July 2006, an accident occurred whilst the 2^nd defendant, as the 1^st defendant’s authorized driver, was driving the vehicle.  Two persons were injured.  Subsequently, notice of the accident was sent to the plaintiff.

5.  The accident resulted in the careless driving conviction of the 2^nd defendant and two personal injuries claims against the two defendants.  The plaintiff repudiated liability on the ground of the defendants’ failure to give due notice in breach of general condition 18(b) and clause 14 of the Policy, but it nonetheless took over the conduct of the defence of the civil claims on a without prejudice basis on 31 March 2007.  The cases were eventually settled by payment of agreed damages to the injured persons.

6.  The present action was commenced by the plaintiff to seek recovery of the damages so paid and legal costs incurred from the two defendants.  According to the pleadings, repudiation of liability is based on the breach of the provisions described above.

7.  On 8 April 2011, the 1^st defendant took out an Order 14A summons asking for the dismissal of the action on the basis that general condition 18(b) and clause 14 formed “no part of the contract of insurance between the [parties] at the accident date”.  This was because the accident occurred before the Policy containing the relevant provisions was delivered to the 1^st defendant.

The decisions below

8.  The 1^st defendant succeeded before Master de Souza but his decision was reversed by the judge on appeal.  In a detailed judgment, To J considered that during the period of insurance of one year, the parties’ relationship was governed successively by two or three contracts of insurance.  First, an interim contract represented by the Cover Note for the initial 30 days – pending the plaintiff’s consideration and acceptance of the 1^st defendant’s proposal for a one‑year insurance policy.  Secondly, either the first interim insurance contract as extended or a second interim contract (on the same terms as the first interim contract) after the expiry of the initial 30 days to cover this second interim period pending the issue and delivery of the formal policy. Thirdly, a formal contract of insurance represented by the Policy, covering the period from the delivery of the Policy to the 1^st defendant until the end of the one‑year period of insurance.

9.  Importantly, the judge held that the interim contract of insurance covering the time of accident was one which had incorporated as its terms of contract the terms and conditions found in the plaintiff’s standard‑term third party motor insurance policy, and they included general condition 18(b) and clause 14.  The judge did not find himself able to decide on paper whether those provisions had been breached on the facts.  In those circumstances, he came to the conclusion that the action could not be disposed of without a trial.  He therefore allowed the appeal and dismissed the Order 14A summons.

Counsel’s arguments

10.  In the appeal, Mr Timothy Parker, for the 1^st defendant, supported the judge’s analysis of the different contracts of insurance covering different periods of time within the one year of insurance.  Indeed that had been his submission before the judge which was eventually accepted.  However, he submitted that the judge erred in holding that under the interim contract of insurance in question, the terms and conditions in the plaintiff’s usual form of third party motor insurance policy (particularly general condition 18(b) and clause 14) had been incorporated as terms of contract between the parties.

11.  Counsel argued that the reference in the Cover Note that “the risk is hereby held covered in terms of the Company’s usual form of THIRD PARTY ONLY Policy applicable thereto” did not have the effect of incorporating the terms and conditions in the plaintiff’s usual form of policy to the interim contract of insurance.  The effect of those words, according to counsel, was “to define the scope of the risk covered”, so that it would not be construed as covering a wider class of risks than the usual form of policy.  Counsel also relied on Re Coleman’s Depositories Ltd [1907] 2 KB 798 as an authority for the proposition that in this type of situation, the exclusory condition in the formal policy was not applicable until the contents of the policy had been communicated to the assured.  This was because the assured had no opportunity of knowing of the condition until delivery of the policy, and it could not have intended that he should be bound by it until either he was told of it or he received the policy. Mr Parker also emphasised that in the present case, what the Cover Note did not say was that the cover offered was “subject to the terms and conditions contained in the policy”: contrast the cover note considered in Neil v The South East Lancashire Insurance Co Ltd [1932] SC 35; see also Wyndham Rather Ltd v Eagle Star & British Dominions Insurance Company Ltd (1925) 21 Lloyd’s List 214, where “subject to” was used on each instance.

12.  Mr Parker also argued that the Cover Note must be construed contra proferentem against the plaintiff and the court will strictly construe purported exclusion clauses.

13.  Mr Parker further made miscellaneous points on pleadings and an arbitration clause contained in the Policy.

14.  Mr Ashok Sakhrani, for the plaintiff, submitted otherwise.  He essentially supported the judge’s analysis and conclusion.  On the crucial question of incorporation, Mr Sakhrani referred to authorities to support the judge’s construction of the relevant wording in the Cover Note.  Counsel also relied on implied incorporation of the standard terms and conditions in the formal policy.

The successive contracts of insurance

15.  In my view, the judge’s analysis of the contractual relationship between the parties was correct.  The position has been summarised in MacGillivray on Insurance Law (11^th ed) as follows:

“4‑002 Nature of interim insurance. An interim insurance, usually evidenced by a cover note, is a preliminary contract of insurance granted in anticipation of the acceptance of the assured’s proposal and the issue of a formal policy. Its function is to provide immediate cover until the proposal is either accepted and superseded by the policy, or declined upon notice to the assured. A loss occurring during the currency of this preliminary protection is usually governed by the terms of the interim insurance and not by those of any policy which supersedes it. Like any insurance contract it requires agreement to be reached on all essential terms and takes effect subject to its own particular terms. …

4-003 The cover note. The general practice is for a cover note to be issued to the assured by the agent of the insurers who has undertaken to forward the proposal to them for consideration. …

… It is a document evidencing an actual agreement to insure for a maximum stated period, and, moreover, so far as its function as a receipt for the premium is concerned, it is a receipt valid for longer than just that interim period between application and the decision of the insurers.”

16.  It does not matter whether, after the expiry of the first thirty days, the parties’ relationship was governed by a second interim contract of insurance of terms the same as the first one, or by the original interim contract of insurance as extended.  In either case, the terms, as contained in or evidenced by the Cover Note, would be exactly the same, pending the issue/delivery of the formal policy (or, as the case may be, the rejection of the proposal).

17.  It is common ground, it should also be noted, that the Policy, although issued on 4 July 2006, did not replace the interim contract of insurance until its delivery to the 1^st defendant, and that took place after the accident.  In other words, it is common ground that at the time of accident, the parties’ relationship was governed by an interim contract of insurance.

A question of incorporation

18.  The key issue is therefore whether the relevant provisions in the Policy, now relied on by the plaintiff to repudiate liability, had been incorporated into this interim contract of insurance.  In my view, the judge’s consideration of the relevant factual matrix against which to construe the terms of the interim contract cannot be faulted.  As the judge said (paragraph 44), a cover note is a creation of the insurance regime. It is intended to provide instant but interim cover for risks on usual terms, while in the meantime the insurer assesses the risk, considers the background of the assured, calculates the premium, and prepares the policy.  A valid insurance cover is required before the Transport Department would issue a vehicle licence to permit the vehicle to be used on the road.  In the present case, the Cover Note was issued immediately after the receipt of the Proposal. Plainly, it was issued to enable the 1^st defendant to obtain a vehicle licence to allow her to use the vehicle as soon as possible, pending the plaintiff’s consideration of the Proposal and preparation of the Policy. The 1^st defendant declared in the Proposal that she agreed to accept a policy in the plaintiff’s usual policy terms for third party motor insurance.  It was on that basis that the Cover Note was issued.  As the judge said, all this constituted the factual matrix in which the Proposal was made and Cover Note issued and against which the Cover Note should be construed.

19.  In my view, the judge was also right to say (paragraph 45) that commercially speaking, the insurer could not have intended to give the 1^st defendant, during this interim period, a protection upon more favourable terms than those which were to be embodied in the formal policy to be issued.  Likewise, from the perspective of the 1^st defendant, there was no reason why she would have intended or expected to obtain from the insurer in that interim period a protection upon better terms than those which were to be included in the formal policy.  After all, she declared in the Proposal that she was prepared to accept a policy “in the [plaintiff’s] usual insurance policy form for this class of insurance”; and the Cover Note she was issued with and made use of for her vehicle registration said that the cover provided for was in terms of the plaintiff’s usual form of policy.

20.  In Wyndham Rather Ltd, the formal policy was issued 4 months after the issue of an insurance slip insuring the assured against fire, burglary and theft subject to the proposal form.  A burglary occurred before the issue of the formal policy.  On the question of incorporation, Sargant LJ said at page 215:

“The slip contains a clear reference to the proposal form, and the proposal form contains a clear incorporation of the usual conditions of the company’s policy. Looking at it from the broad business point of view, it appears that just as Mr Justice Mathew held that a slip must be deemed to constitute a contract, and that it could not be properly held that the assured was left unprotected in the interval between the slip and the preparation of the policy, so in a case of this kind it cannot be properly supposed that the insurers are giving the assured in that interval a protection upon greater or other conditions than those which are to be embodied in the ultimate policy.” (my emphasis)

21.  It should be noted that, by definition, one is concerned with the express incorporation of the standard terms contained in the insurer’s usual policy for this type of insurance.  In other words, the assured had every opportunity to find out what those terms were before he or she submitted the proposal form and accepted the cover note.  One is not, therefore, talking about unusual terms not contained in the insurer’s standard policy which the assured did not know of and could not reasonably be expected to find out before delivery of the formal policy.  For in this latter situation, absent very clear and specific wording, it would be difficult to say that it was, objectively speaking, the insured’s intention to be bound by such unusual terms in the interim.

22.  But not so with the usual terms, and when there was in the proposal form an agreement to be issued with a policy on those usual terms.

23.  So far as the form of words used is concerned, I am in agreement with the judge that it is quite unnecessary to use the words “subject to” in order to incorporate the usual terms in the formal policy into the interim contract of insurance.  The fact that those words were used in Wyndham Rather Ltd and other cases where there was successful incorporation does not mean that they were the only words that could be used for incorporation.  In my view, the present wording is adequate and sufficient to incorporate the terms in the usual form of policy.  I see no merit in the suggestion that the words used merely referred to the scope of the risks covered by the insurance.  Rather, to my mind, they referred to the terms found in the plaintiff’s standard form policy for this type of insurance based on which the plaintiff was prepared to provide the one-year insurance cover proposed for.

24.  On the above analysis, I do not find the submission based on the contra proferentum rule or strict interpretation of exclusion clauses helpful in the present case.

25.  In any event, Mr Sakhrani has referred the court to the case of General Accident, Fire and Life, Assurance Corporation Ltd v Shuttleworth (1938) 60 Ll LR 301, where the cover note said, “[the assured] … having proposed for insurance in respect of the motor vehicles … is hereby held covered in terms of the [insurer’s] usual form of policy applicable thereto …”.  This was essentially the same form of words used in the present Cover Note.  The court had no difficulty in holding that the assured was bound by the terms found in the insurer’s usual form of insurance policy in relation to an accident that happened after the cover note was issued but before the formal policy came into being.

26.  Likewise, MacGillivray, para 4‑014, says:

“Incorporation of policy conditions. The protection afforded by an interim receipt is not fully defined in the instrument itself, which is usually expressed to be on the company’s usual terms, or subject to the conditions contained in the company’s policies. Where the conditions are thus referred to expressly, the insurer does not have to prove that they were brought to the notice of the assured, or even that he had an opportunity of making himself acquainted with them. In such a case, the assured is bound by the conditions contained in the form of the company’s policy currently in use and applicable to the case.” (emphasis added)

Express vs implied incorporation

27.  Mr Parker’s reliance on Re Coleman’s Depositories did not actually advance his case.  The crucial difference in that case was that the relevant proposal and interim document did not say that the insurance cover proposed for was to be in accordance with the insurer’s usual form of policy, nor did they say that the interim cover the assured was provided with was in terms of or subject to the insurer’s usual form of policy.  It was therefore not a case of express incorporation and the Court of Appeal had to consider whether the relevant terms were impliedly incorporated into the interim insurance.  And on the facts, the Court of Appeal held that, so far as those terms were concerned (which were considered to be onerous and unusual), they were not so incorporated and therefore never formed part of the relevant contract between the parties.  The present case, on the other hand, is one of express incorporation.

28.  Likewise, in my view, the discussion in MacGillivray, paras 4‑015 to 4‑019 (also relied on by Mr Parker), relates to implied, as opposed to express, incorporation, and is therefore unhelpful to the present case.

29.  For the sake of completeness, it should be mentioned that Mr Parker also relied on this passage from the judge’s decision (paragraph 51):

“I have no doubt as a general proposition that a contract has retrospective effect if it is the common intention of the parties that it shall have such effect. However, how that operates depends on the terms of the contract and the factual circumstances in each case. Having said that, it does not necessarily follow that an assured will be liable for breach if the term incorporated was only brought to his notice when the circumstances were such as to render compliance impossible. For example, if the obligation under the policy was to report any accident within seven days but the policy was not delivered to the assured until fourteen days after the accident. Such a term must be held to have been suspended until such time when the policy has been brought to the notice of the assured or at least been delivered to the assured. In Wyndham Rather Ltd, the policy provided for arbitration. The assured was not required to perform any act for which retrospectivity has any effect. The policy was held to have retrospective effect. Had the court in Coleman’s Depositories Limited held that the policy had been incorporated into the cover note, I have no doubt that it would have held that the term was suspended until reasonable time after delivery of the policy to the employer and whether the notice given a day before the employee’s death was immediate notice would have to be determined on that basis.”

30.  In this paragraph, the judge was dealing with an argument by the insurer that it was the Policy which, having retrospective effect (the insurer contended), governed the parties’ contractual relationship as at the time of accident.  It was an argument which the judge rejected and which was not repeated before us. I therefore wish to express no view on the first part of this paragraph about the suspension of a term in the formal policy.  As regards the latter part on Re Coleman’s Depositories, I do not think the postulation by the judge was correct.  In any event, as I have said, the case was about implied incorporation, whereas the present case is one of express incorporation.

31.  In my view, all this defeats entirely the underlying premise for the Order 14A application.  Whether there was a breach of the relevant provisions in the Policy, as incorporated into the interim contract of insurance, must be a question of fact to be decided at trial.

Miscellaneous points

32.  There is nothing to the argument based on pleadings.  The Order 14A summons was taken out on the only basis described above.  It was not founded on any other basis.  The pleading point did not feature in the notice of appeal either.

33.  Likewise, the argument based on lack of arbitration whilst general condition 18(g) made an arbitral award a condition precedent to any right of action to suit upon the Policy did not take the 1^st defendant’s case anywhere.  First, the Order 14A application never relied on this as a ground for seeking judgment against the plaintiff.  Secondly, this was never raised in the notice of appeal.  Thirdly, any reliance on the condition precedent by either side must have been waived given the many steps that both have taken in these proceedings.

Disposition

34.  For all these reasons, the appeal was dismissed with costs to the plaintiff.  Those costs are summarily assessed at $170,083.

Hon Fok JA:

35.  I agree with the Reasons for Judgment of the Chief Judge and also with his summary assessment of costs.

Hon Lam JA:

36.  I agree and have nothing to add.