In a recent decision, the Court was invited to give directions on a number of issues in dispute between the insureds and their insurers, with respect to the interpretation of terms concerning business interruption losses under two Composite Mercantile Policies. The Court's directions were sought in the expectation that they would assist the parties' settlement of claims without further recourse to the Court.
The Plaintiffs were owners and operators of convention centres, hotels, car parks etc. and were all insured under either of two "Composite Mercantile Policies" issued by the Defendants as insurers. The policies provided cover for actual loss sustained as a result of "notifiable human infectious or contagious disease occurring within 25 miles of Hong Kong". The Plaintiffs claimed under the policies in respect of business interruption loss suffered as a result of the outbreak of Severe Acute Respiratory Syndrome (SARS) in Hong Kong in 2003.
While it was agreed that the Plaintiffs were entitled to indemnity, there was a dispute as to the scope of coverage under the policies. The Defendants therefore applied for the Court's direction on 5 preliminary issues, with a view that the Court's decision would facilitate the parties' settlement of the claims without further recourse to the Court.
Main Issue in Dispute
Essentially, the crucial issue in dispute was when SARS became a "notifiable" disease as defined under the policies or, in other words, when the loss began to run.
The Plaintiffs argued that SARS became a notifiable disease when the Hospital Authority (HA) requested hospitals to report Community-Acquired Pneumonia cases, or at the latest when the "index patient" checked into the Kowloon Metropole Hotel and became the source of the SARS outbreak in Hong Kong. The Defendants disagreed and submitted that the relevant date was 27 March 2003, when it became a legal requirement for SARS cases to be notified to the Government under statutory provisions.
The Court held that SARS became a notifiable disease for the purposes of the policies on 27 March 2003.
In coming to his decision, the Honourable Mr Justice Reyes took into account the importance of certainty to commercial persons and favoured the construction of the policies by the Defendants, which he found would give a more clear-cut test for ascertaining whether a disease was "notifiable". The Plaintiffs' tests, on the other hand, would require an examination by relevant experts of the facts to ascertain when the disease became "notifiable". This would involve a potentially protracted and expensive exercise in every case of an infectious disease. Moreover, the word "notifiable" imported a legal or mandatory requirement to notify, and a voluntary obligation to notify (such as the request by HA) did not suffice.
Given that the loss only began to run when it became mandatory to notify SARS to the Government, it followed that coverage commenced on the same date, and the Court rejected the Plaintiffs' contention that the policies still covered losses occurring before that date on the basis of a Limit of Liability clause in the policies.
Ruling on Other Issues
With respect to the duration of the "Loss Period" (which was defined as "the period... from the date of loss to the resumption of the business and thence 180 days"), the Court also preferred the construction proposed by the Defendants that the "resumption of the business" presupposes that a business was interrupted or temporarily stopped and re-opened or "resumed" at some point thereafter. Since the Plaintiffs' businesses did not close down, the loss period would be 180 days from the date of commencement of loss.
Based on the wording of the policies, the relevant period for calculation of Standard Revenue to ascertain the quantum of actual loss would include the period before 27 March 2003, notwithstanding that SARS would already have affected the revenue of the Plaintiffs before that date. The Court insisted on applying the clear terms of the policies, since "(i)t was what the parties bargained for and agreed".
Finally, on the question of whether the policies constitute joint or composite insurance, which would impact on whether the limit for the "costs of claim preparation" would apply to each of the 10 Plaintiffs or to all of them as a whole, the Court found that the policies were composite since different interests were insured in respect of each of the "Named Insureds" (i.e. Plaintiffs') businesses. The fact that the Plaintiffs operated out of the same premises would not alter the fact that they had different insurable interests arising out of the very different business natures of the Plaintiffs.
As opined by Reyes J., parties are not allowed to use subsequent events to construe a policy, and one has to "restrict one's purview to the factual matrix known to the parties at the time" when the policy was executed. His Lordship's approach here in emphasising the importance of certainty of terms and the preference for clear-cut tests when construing the terms of an insurance policy is welcome.
Although this case concerns business interruption policies, the judgment is nonetheless important as it gives valuable insight into how the Courts in Hong Kong will construe insurance policies in general.