CHAN WOON-HUNG t/a OCEAN PLASTICS FACTORY v. ASSOCIATED BANKERS INSURANCE CO LTD

Insurance policy - procedural guide attached to policy - whether guide forms part of policy

Contra proferentem rule

Contract uberrimae fides

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JUDGMENT

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Hon. Yang, C.J.

1. This is the defendant insurance company's appeal from a judgment of Master Perrior (as he then was) sitting as a Deputy Judge of the High Court.

2. The plaintiff ("the respondent") is the sole proprietor of a small plastic factory. In 1980 he took out an insurance policy for employer's liability under the Employees' Compensation Ordinance, Cap. 282 with the defendant insurance company ("the appellant") through its agent the Hang Seng Bank. An insurance policy in the English language was issued to the respondent, and attached thereto was a printed pro forma note in the Chinese language and entitled "Procedure for Lodging Claims". It was the respondent's evidence that an official of the Hang Seng Bank told him that in the event of an industrial accident he was required to follow the instructions given in the pro forma note attached to the insurance policy. The policy was thereafter renewed annually with the same pro forma note (''the pro forma note").

3. On or about the 10th October 1983, the respondent's employee, a Mr. Mak Chun, suffered serious injury to his hand. He instituted proceeding for compensation under the Employees' Compensation Ordinance and subsequently also in respect of common law damages. A total of $272,100 was paid to Mr. Mak by the appellant as employee's compensation. In October 1985, the appellant instructed a firm of solicitors to act on behalf of the respondent in respect of Mr. Mak's common law claim. There were delays in the common law action, and it was not until May 1987 that a defence was filed on behalf of the respondent. Shortly afterwards, the firm of solicitors perceived a conflict of interest between the appellant and the respondent. On the 22nd June 1987 the solicitors informed the respondent by letter that the appellant was repudiating liability under the insurance policy and advised him to seek separate legal representation.

4. It should be noted that in May 1984 the respondent pleaded guilty to a summons brought by the Labour Department before the Magistrate's Court and was convicted of failing to provide an effective guard for dangerous parts of machinery contrary to Regulations 4(1) and 13(1) of the Factories and Industrial Undertaking (Guarding and operation of Machinery) Regulations, Cap. 59.

5. The reason for the appellant's repudiation of liability was that the respondent had failed to comply with certain conditions set out in the insurance policy. They are:

6. The learned judge noted that those conditions contrast somewhat with the terms in the pro forma note, which requires the employer, after seeing that the injured employee had been medically treated, to report the accident to the Labour Department and the appellant or its agent, i.e. the Hang Seng Bank. The pro forma note makes no mention of Condition 5 of the policy, which requires the assured to give notice to the insurers of, inter alia, any notice of intended prosecution or summons.

7. It is not disputed that the respondent faithfully followed the instructions in the pro forma note, but he failed to inform the appellant or the Hang Seng Bank about a prosecution by way of summons which the Labour Department brought against him in respect of the machines which caused Mr. Mak's injury.

8. Finding that there is no ambiguity in Condition 5, the judge nevertheless concluded that there is an ambiguity between the pro forma note and Condition 5, and applied the contra proferentem rule against the appellant. Having found that the pro forma note was attached to the front of the insurance policy "at the behest of" the appellant, the judge came to the view that the pro forma note must be deemed to be part and parcel of the contractual relationship between the parties. He went on to say:

           "Thus, as the plaintiff has faithfully followed the procedures laid down in the Chinese memorandum, notwithstanding the fact that these are at odds with a condition in the policy, the defendant only has itself to blame for the situation in which it finds itself. Accordingly, in my judgment, this is precisely the sort of situation where the contra proferentem rule should apply."

9. His judgment is that the respondent is entitled to, and has, a declaration that he is entitled to be indemnified by the appellant against liability at law (including liability under the Employees' Compensation Ordinance) to pay compensation, and the appellant's counterclaim for a refund of the $272,100 paid to Mr. Mak Chun under the said Ordinance must fail.

10. At the hearing of the appeal, it is submitted that the pro forma note was provided by the appellant's agent, and it is clear law that an agent cannot alter the terms of a policy, for an agent does not have the usual authority to waive a condition concerning the giving of a notice of loss to the head office: Brook v Trafalgar Insurance Co. [1946] 79 Ll Rep. 365 CA cited in support.

11. In an affirmation dated 22nd December 1989, the respondent deposed to the fact that the appellant did not deny that they had provided the pro forma note. And our attention has not been drawn to any such denial on the part of the appellant. Indeed the judge in his judgment found that the pro forma note was attached "at the behest of" the appellant. We have not heard any argument which supports Mr. Pirie's contention that the pro forma note emanated from the Bank rather than the appellant.

12. Be that as it may, there is no authority for the proposition that a note attached to an insurance policy, which is indisputably intended to be nothing more than a guide to the assured and deals with procedures, could effectively contradict or amend the clear words of a fundamental condition (which Condition 5 undoubtedly is) within the policy. In my judgment, there is nothing in the pro forma note which displaces the contractual obligation upon the assured under Condition 5. The pro forma note was designed to be a helpful guide to the assured as to what he should do in certain circumstances and was not intended to be comprehensive: it certainly does not cover the steps which the assured should take in the event of a prosecution.

13. If the pro forma note is rightly excluded from the insurance policy as no more than a procedural guide, then the contra proferentem rule has no application in respect of a policy which contains no ambiguity. The judge found no ambiguity in Condition 5.

14. The judge having considered all the evidence held that there was no prejudice caused to the appellant by his failure to report the summons by the Labour Department. With respect to the judge, the appellant, if informed of the summons, might well wish to test the evidence of the injured employee, and to suggest that on the evidence the employee had tampered with what was otherwise a safe and well guarded machine. It might also be possible to run a defence to the summons that the injury which occurred was not a "reasonably foreseeable hazard" under Regulation 4 of the Factories and Industrial Undertakings (Guarding and Operation of Machinery) Regulations, Cap. 59. The prejudice to the appellant was that it was deprived of the opportunity of contesting the summons through the respondent and having the summons dismissed. Quite clearly, a conviction or acquittal would materially affect a judge's consideration on the question of liability in subsequent proceedings on the policy.

15. The last point of appeal I propose to deal with may be shortly disposed of. It is trite law that an insurance contract is a contract of utmost good faith uberrimae fides. As such the assured is obliged faithfully and strictly to comply with the terms of the insurance policy. By not reporting the Labour Department's summons against him, he had failed in his contractual obligation. The appellant is therefore entitled to repudiate any liability under the policy. I accept that the respondent is not, and never was, guilty of bad faith or dishonesty; on the contrary, he acted in compliance with the pro forma note, thinking, unfortunately mistakenly, that that was all that was required of him. There was nevertheless a breach of contract on his part.

16. The appeal is allowed and the judgment of the lower court is reversed. The effect of this judgment is that the respondent will repay to the appellant the sum of $272,100 together with costs of the claim and the counterclaim. The appellant shall have the costs of the appeal.

Hon. Mayo, J.:

17. I agree. There is nothing I can usefully add.

Hon. Sears, J.:

18. I agree.