FALCON INSURANCE CO (HK) LTD v. CHESHIRE CAT RESTAURANT & PUB CO LTD t/a CHESHIRE CAT PUB

DCCJ 5865 / 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5865 OF 2006

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JUDGMENT

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1.  This trial is about whether an insurer is entitled to be reimbursed the insurance money (and if so, to what extent) it has paid to an insured under a fire policy, when the insured subsequently receives a settlement payment from a third party tortfeasor more than the paid insurance sum. 

2.  In March 1998, a fire broke out at the pub operated by the Defendant (“Cheshire Cat”).  The fire destroyed the decorations and furniture within the pub.  In September 1998, Cheshire Cat was paid by the Plaintiff insurer (“Falcon Insurance”) HK$491,453.00 under a fire insurance policy^[1].  Cheshire Cat signed a subrogation letter in favour of Falcon Insurance for the receipt of this payment.

3.  After receipt of the payment under the policy, Cheshire Cat in 2003 brought an action in the High Court against a security company for HK$1,070,000.00 plus unquantified damages as its losses suffered because of the fire.  At the time of the fire, the security company was engaged by the bailiff to keep watch of the pub premises under a distress warrant issued by the landlord, Cheshire Cat having at that time failed to pay rent.  Cheshire Cat’s suit was settled with the security company paying it HK$760,000.00.

4.  Falcon Insurance now claims against Cheshire Cat for the reimbursement of the insurance money from the settlement sum, since Cheshire Cat has now received more than the insurance money for its losses.  The pleaded basis of Falcon Insurance’s claim are two folds:

(1)	Under the doctrine of subrogation, and having paid Cheshire Cat, Falcon Insurance is entitled under the policy and/or the subrogation letter to recover the said sum if Cheshire Cat has recovered its losses from a third party to the same extent or more.
(2)	By way of an oral agreement reached between Cheshire Cat’s solicitors and Falcon Insurance’s solicitors on or about 2 January 2002, Cheshire Cat agreed to return to Falcon Insurance the said HK$491,435.00 if it recovered the same or more from its intended action against the security company.

5.  Cheshire Cat contends that it needs not repay Falcon Insurance the insurance sum because it has suffered loss and damage to the extent of HK$1.3m, which is more than the total sum of HK$760,000.00 and HK$491,435.00.  As such, even under the doctrine of subrogation, it is not required to reimburse Falcon Insurance for the insurance money, as it is entitled to be compensated for the total loss it has suffered from the fire.  Cheshire Cat also denies the existence of the oral agreement.

6.  In Cheshire Cat’s originally pleaded case, it also alleges that the insurance policy and the subrogation letter were not explained to its director a Ms Cheung when they were signed.  At trial, Mr Bruce Lau for Cheshire Cat confirms that Cheshire Cat would not pursue this as part of the defence.  Further, Ms Cheung, the only witness who has filed a witness statement in this case, has elected not to give evidence.  As such, her witness statement is by consent excluded from the trial.  The trial thus is proceeded without any live evidence.

7.  In light of the above, the central issues before me are:

(1)	Whether Cheshire Cat’s actual loss from the fire is HK$1.3m or at least equal to HK$1,251,453.00, the total sum of the insurance sum and the settlement sum.
(2)	Whether Falcon Insurance is entitled under the doctrine of subrogation to recover the insurance money (and if so, to what extent) it has paid Cheshire Cat, given Cheshire Cat has now recovered more from the settlement payment.
(3)	Whether there is the oral agreement and if so, whether Falcon Insurance is entitled to the repayment of the insurance sum as a result of it.

Whether Cheshire Cat’s loss is HK$1.3m as alleged

8.  The burden is on Cheshire Cat to prove at trial that, for the present purpose, it has suffered a loss by reason of the fire in the sum of HK$1.3m, or at least equal to HK$1,251,453.00.

9.  Mr Lau for Cheshire Cat fairly accepts that there is no direct evidence to show that Cheshire Cat’s loss is more than the HK$760,000.00 it has received by way of settlement.  However, he relies on the following indirect evidence to support his submissions that Cheshire Cat has suffered a loss more than HK$1.25m or so.

10.  First, under the fire insurance policy, Cheshire Cat was insured to the limit of HK$903,000.00 for the value of the following items:

(1)	Decorations, furniture and fittings:	HK$800,000.00.
(2)	Machinery & trade utensils:	HK$  50,000.00.
(3)	Loss of rent not exceeding one month:	HK$  53,000.00.

11.  Secondly, by a letter dated 8 May 2000, Messrs Cheng, Yeung & Co, acting for Cheshire Cat on the instruction of Falcon Insurance, wrote to the security company and asked it to pay for Cheshire Cat’s loss and damage in the total sum of HK$911,650.00 for the following items:

(1)	Decoration, furniture, fixture and fittings:	HK$800,000.00.
(2)	Machinery and trade utensils:	HK$  50,000.00.
(3)	Loss of rent:	HK$  53,000.00.
(4)	Fees of fire investigation reports:	HK$    8,650.00.

12.  Thirdly, in Cheshire Cat’s claim against the security company in the High Court, the following particulars of loss were pleaded:

(1)	Decoration, furniture, fittings:	HK$800,000.00.
(2)	Air-condition system including ducts:	HK$200,000.00.
(3)	Inventory:	HK$  70,000.00.
(4)	Loss of business:	to be assessed.

13.  In light of the above, Mr Lau submits that there are principally two categories of loss suffered by Cheshire Cat because of the fire.  One is the loss arising from the property damage at the pub, which should be in the region of HK$900,000.00 to HK$1,000,000.00 as this is the value insured, and the sum claimed by Falcon Insurance (on behalf of Cheshire Cat) or by Cheshire Cat directly against the security company. 

14.  The other one is the loss of business.  Mr Lau submits that although this is not quantified in the pleading, and there is no evidence to show what it is or should be, there must be something under this item.   As a result, having added this item together with the loss on property damage, Cheshire Cat’s actual loss must be more than HK$1m, and should be close to HK$1.25m.

15.  I do not accept Mr Lau’s submissions. In relation to the alleged loss of business, Cheshire Cat has adduced no evidence whatsoever on its profit, if any, in running the pub before the fire to support the claim.  This is crucial and fundamental to prove such a claim.  Cheshire Cat has therefore failed to prove on a balance of probabilities that it had suffered any loss of profit by reason of the fire, or in any event the quantum thereunder.   

16.  Mr Lau says Cheshire Cat has been put into a difficult position to provide such evidence, as most of its accounting documents are lost in the fire.  That may well be the case, but that does not excuse Cheshire Cat from adducing sufficient evidence to prove its case.  Moreover, if the pub had in fact been running at a profit before the fire, it is incredible that:

(1)	Cheshire Cat has not even been able to provide evidence by way of its director to say at least what he or she understands the average monthly operative profit had been.
(2)	Cheshire Cat has not been able to provide any tax return to show what its profits were in the accounting year before the fire, copies of such documents even if destroyed by the fire should have been recoverable through the Inland Revenue.

17.  Insofar as the loss arising from the property damage is concerned, Mr Damian Wong for Falcon Insurance submits that the direct evidence before the Court shows that the quantum is likely to be HK$760,000.00 but not more.  This evidence is as follows:

(1)	After the fire, basing on the quotation made by its contractors for reinstating the pub, Cheshire Cat submitted a claim under the policy for HK$751,008.00 for its losses.  The items of the claim are as follows:
	(a)	Decorations, furniture and fitting (which included reinstating the air-conditioning ventilation system):
		HK$634,590.00.
	(b)	Machinery and trade utensils (including inventory of wine and beer):
		HK$  64,018.00.
	(c)	Loss of rent:
		HK$  52,400.00.
(2)	This submitted claim reflects what is likely to be the genuine estimate of Cheshire Cat’s loss because (a) it is based on its own contractors’ valuation, and (b) the sum claimed is noticeably below the insured limit of HK$903,000.00 under the policy.
(3)	Cheshire Cat in fact accepted a settlement sum of HK$760,000.00, which is very close to its above submitted claim.

18.  Mr Wong further submits that Cheng, Yeung & Co’s before action letter dated 8 May 2000 sent to the security company claiming HK$911,650.00 should not be given any weight as a piece of evidence to show that the loss for property damage should be in the region of HK$900,000.00.  He says this is because the letter was not based on any actual valuation or assessment of the loss, but nominally on the insured limit under the policy (HK$903,000.00) added with the cost of the fire investigation reports (HK$8,650.00).  This is particularly so, since (a) it is common ground that Falcon Insurance’s own loss adjustors assessed the loss to be only HK$491,453.00, and (b) it is not unusual that a party would generally inflate one’s claim in a pre-action letter to foster a settlement.

19.  I accept Mr Wong’s above submissions.   Moreover, given the above more direct evidence showing what the quantum of loss for property damage should be, I do not think Cheng, Yeung & Co’s pre-action letter has such an overwhelming weight as evidence to show that Cheshire Cat’s loss under this head is likely to be in the region of HK$900,000.00.

20.  In his closing submissions, Mr Lau for Cheshire Cat further contends that I should add to my assessment of the actual loss suffered by Cheshire Cat the interest it should be entitled to get on the damages, to see if the added amount comes to the contended figure of HK$1.25m or above.  This should be the interest levied on the sum representing the difference between the loss so assessed and the insurance money, and for the period of September 1998 (the time of payment of the insurance money) and July 2006 (the time of settlement).  Alternatively Mr Lau says I should deduct this interest from the repayment that Cheshire Cat should make to Falcon Insurance.

21.  I reject Mr Lau’s submissions for the following reasons:

(1)	As a matter of principle, I do not see why for the purpose of assessing the quantum of Cheshire Cat’s actual loss suffered by reason of the fire, potential interest should be added to it.  Cheshire Cat’s entitlement to interest is under section 49 of the District Court Ordinance (Cap 336), to be granted at the discretion of the Court on the damages as found.  This is not part of the damages itself.
(2)	In any event, Mr Lau has not even been able to provide to the Court what he says is the quantum of interest Cheshire Cat should be entitled to according to its own calculation.  As such, there is no question that Cheshire Cat could show (and the burden is on it) that the actual loss it had suffered by reason of the fire is above HK$1.25m or HK$1.3m as contended.  This is particularly so, since if the potential interest were of such a sizeable amount, it is difficult to understand (and there is no evidence to explain it one way or the other) why Cheshire Cat was willing to settle for the sum of HK$760,000.00 for a claim which included such interest.
(3)	Finally, there is no evidence before me to explain why there had been a long delay before the High Court Action was commenced against the security company in July 2003, noting that the insurance money was paid in September 1998.  In the circumstances, I cannot even start to consider whether I should deduct from the repayment of the insurance money any of the so-called potential interest that might be awarded to Cheshire Cat, as there is not even a prima facie case that Falcon Insurance was at fault for the delay.

22.  For the above reasons, I find that, on a balance of probabilities, Cheshire Cat’s actual loss caused by the fire is in the sum of HK$760,000.00.

Is Falcon Insurance entitled to the reimbursement of the insurance sum under the doctrine of subrogation

The law of subrogation

23.  It is well established that the doctrine of subrogation in insurance law requires one to imply in contracts of insurance such terms as are necessary to ensure that, notwithstanding that the insurer has made a payment under the policy, the assured shall not be entitled to retain, as against the insurer, a greater sum than what is ultimately shown to be his actual loss.  Thus, if after payment by the insurer of a loss that loss, as a result of an act of third party, is reduced, the insurer can recover from the assured the amount of the reduction because that is the amount which he, the insurer has overpaid under the contract of insurance.  See: Yorkshire Insurance Co Ltd v. Nisbet Shipping Co Ltd [1962] 2 QB 330[2] at 339-341 per Diplock J. 

24.  Further, equity will assist the insurer in recovering the amount of the reduction by imposing an equitable lien on the sum the assured has received from the third party:  Lord Napier v Hunter [1993] AC 713, 738B-G per Lord Templeman, 744H-745A per Lord Goff, 752D-G per Lord Browne-Wilkinson.

25.  The position and effect of this is succinctly set out by Lord Templeman’s example in Lord Napier v Hunter, supra, at 728E-G as follows:

“

My Lords, when an insured person suffers a loss he will be entitled to the insurance money and may also be entitled to sue for damages anyone responsible for the loss.  For example, if a house is insured for £100,000 against fire and is damaged by fire to an extent exceeding £100,000, the insurance company will pay £100,000.  If the fire has been caused by a negligent builder or some other contractual or tortuous wrongdoer, the insured person will sue the wrongdoer for damages.  If the house has been damaged to the extent of £160,000, the insured person will receive damages from the wrongdoer of £160,000.  At that stage the insured person will have made a profit since he will have only suffered a loss of £160,000 but will have collected a total of £260,000 from the insurance company and the wrongdoer.  A policy of insurance is however a contract of indemnity and by the doctrine of subrogation the insured person must pay back to the insurer the sum of £100,000.  The insured person will then have made neither a loss nor a profit.”

The present case

26.  It is not disputed at trial that the doctrine of subrogation applies in the present case under the policy and the letter of subrogation.  The subrogation letter provides that upon the receipt of the insurance payment, Cheshire Cat would:

“

…transfer to [Falcon Insurance] all [its] rights against the person or persons whatsoever arising out of the above loss [the loss because of the fire] reported to have occurred to the said interest, and grant [Falcon Insurance] full power to take and use all lawful ways and means in [Cheshire Cat’s or Falcon Insurance’s]  own name or otherwise, at [Falcon Insurance’s] own risk and expenses, to prosecute such rights for the recovery of the said loss or any part thereof, and [Cheshire Cat] hereby agree to subrogate [Falcon Insurance] to the same right as [Cheshire Cat] have in consequence of the said loss.”

27.  In the circumstance, given my finding that the actual loss suffered by Cheshire Cat is no more than HK$760,000.00, applying the above principles of subrogation, it is clear that Cheshire Cat will have to repay Falcon Insurance the insurance money of HK$491,453.00.  It is only upon such repayment that Cheshire Cat will not make a loss nor a profit.

28.  I therefore rule that Cheshire Cat should repay HK$491,453.00 to Falcon Insurance.

Is there an oral agreement

29.  In light of my above ruling, it is strictly speaking not necessary for me to deal with this issue.  However, given that the matter has been addressed before me and if I were wrong above, I will proceed to consider it as follows.

30.  Falcon Insurance contends that on about 2 January 2002, an oral agreement was formed between the parties through their respective solicitors, pursuant to which it is also entitled to recover the entire insurance money from the settlement sum. 

31.  I have to decide whether there existed the oral agreement and, if so, the terms of it.

32.  Falcon Insurance says the existence of the oral agreement is supported by the following undisputed evidence.

33.  In about October 2001, Cheshire Cat intended to bring a claim against the security company for negligence in relation to the fire.  Through its solicitors, it discussed the matter with Falcon Insurance’s solicitors, Messrs Cheng, Yeung & Co, seeking assistance in its intended claim by providing to it the necessary evidence on liability in support of the intended claim.

34.  Cheng, Yeung & Co replied by its letter dated 3 October 2001 as follows:

“

We understand that your client [i.e., Cheshire Cat] intends to commence proceedings against the security company, the tortfeasor, for loss and damages [sic] suffered by your client as a result of the fire on 16th March 1998.  Your client would like to seek our client’s assistance to provide you with the evidence on liability including but not limited to expert advice on the cause of the fire.  Before we take instructions from our client, we shall be grateful if you could let us know whether your client agrees to pay back the whole sum of HK$491,453.00 paid by our client under the above policy in case your client recovers any sum from the tortfeasor in the future common law proceedings or whether your client has any proposal in this regard.”

35.  Quan & Co replied to Cheng, Yeung & Co’s proposal on 11 October 2001 as follows:

“

We are further instructed that our clients are on principal [sic] willing to pay back part or whole of the sum of HK$491,453.00 but that will subject to how much we can recover from the security company.  In order to expedite the proposed legal proceeding could we have sight of your client’s evidence on liability so that we could advice our clients fully on the matter?”

36.  By a letter dated 7 December 2001, Cheng, Yeung & Co stated that Falcon Insurance agreed to provide Quan & Co the requested documents on condition that Cheshire Cat will, inter alia:  (a) include Falcon Insurance’s claim in the intended proceedings against the security company, and (b) if any sum is recovered in the said proceedings, pay to Falcon Insurance a sum at a rate proportionate to Falcon Insurance’s claim in the whole sum.

37.  By a letter dated 3 January 2002, Cheng, Yeung & Co sent to Quan & Co various documents and stated that, as a matter of record, pursuant to a telephone conversation between Mr Quan of Quan & Co and Ms Liu of Cheng, Yeung & Co on 2 January 2002, the terms and conditions set out in the above letter were agreeable to Cheshire Cat. 

38.  Mr Quan is not called to give evidence to rebut what was stated in Cheng, Yeung & Co’s letter dated 3 January 2002.  In the premises, in my judgment, the above correspondence supports clearly the existence of the oral agreement, the terms of which are stated in Cheng, Yeung & Co’s letter dated 7 December 2001. 

39.  Such terms include, inter alia, that Cheshire Cat would pay to Falcon Insurance from any sum it receives from the security company by way of the suit in the same proportion as that of the insurance sum to that of the amount claimed, that is:  HK$491,453/HK1,070,000.00 = 45.93%.

40.  Thus, on a proper and objective construction, this term means that Cheshire Cat should repay to Falcon insurance 45.93% of whatever sum it had received from the security company by way of the High Court Action up to the limit of HK$491,453.00.

41.  In the premises, if I were wrong on the above in relation to Falcon Insurance’s entitlement to recover the insurance sum under the doctrine of subrogation, I would have ruled that it is entitled to recover from Cheshire Cat 45.93% of the settlement sum pursuant to the oral agreement, that is: HK$760,000.00 x 45.93% = HK$349,068.00.

Conclusion

42.  For the above reasons, I grant judgment in favour of Falcon Insurance in the sum of HK$491,453.00, with interest at 1% above the prime rate as from time to time quoted by the Hong Kong and Shanghai Bank Ltd from the date of writ to the date of judgment, and thereafter at judgment rate until full payment.

43.  I further order that costs of the action be to the Plaintiff to be taxed if not agreed, with certificate for counsel.

44.  Finally, I wish to thank counsel for their assistance and the efficient way in which the trial is conducted.

[1] When the policy was issued, it was in the name Winterthur Swiss Insurance (Asia) Ltd.  Falcon Insurance subsequently acquired Winterthur’s interests in its policies.  For the present purpose and for convenience, I will refer to the Plaintiff as Falcon Insurance, which includes its former entity under the name of Winterthur.

[2] Although Lord Goff and Lord Browne-Wilkinson in Lord Napier v Hunter, supra, disagree with Diplock J’s observation (if that was the learned Justice’s observation) in this case that the doctrine of subrogation is only of common law origin, they do not doubt the correctness of this statement insofar as the insured’s liability to repay the insurance money under the law of subrogation is concerned.