The High Court of Hong Kong in Hua Tyan Development Limited v Zurich Insurance Company Limited [2012] HKLRD 827 held that an insurer cannot rely on the breach of a condition of the policy if the insurer or the broker (while acting as its agent) knew or ought to have known that it was incapable of being satisfied. The decision also confirms that an insurer will be unable to claim material non-disclosure, where such information is readily available and accessible to the insurer and/or the insurance broker.

Facts

The decision concerned a dispute between the insured (a goods trader), the insurer and the insurance broker in relation to a deadweight tonnage (DWT) condition incorporated in the cover note and the policy. The vessel carrying the insured cargo was less than the required DWT imposed by the condition. The broker did not make enquiries regarding the vessel’s DWT before issuing the cover note (under a delegated underwriting authority) and the policy. Similarly, the insured did not know the vessel’s DWT and did not appreciate the significance of the DWT condition in the policy.

After the vessel sank, the insurer sought to deny indemnify for the cargo on the following grounds:

  1. there was a breach of the DWT condition; and
  2. the insured failed to meet its duty of disclosure by not informing the insurer of the vessel’s DWT.

In response, the insured argued that the DWT condition was intended to be void as it was not capable of being satisfied by the vessel named in the cover note. Alternatively, the insured sought to rectify the policy to delete the DWT condition. If the insurer was not held liable under the policy, the insured made an alternative claim against the insurance broker on the basis that it had breached its duty to advise the insured of the condition and to obtain insurance that covered the insured’s needs.

Decision

The Court found that the DWT condition was inconsistent with the purpose of the policy. It noted that the policy included a clause which stated that the policy “replaced” the cover note. The cover note also specifically named the vessel, even though its DWT was incapable of satisfying the condition in the policy. As such, the Court held that the intention of the parties was to insure the cargo and, as a result, the DWT condition must have been intended to be ineffective. This flowed from the conclusion that the broker and insurer could have easily made enquiries to determine the vessel’s DWT and therefore had constructive knowledge that the vessel would not satisfy the DWT condition when it issued the cover note and the policy. Importantly, the broker was deemed to be acting as the insurer’s agent at those times. As such, the broker’s constructive knowledge of the vessel’s DWT was imputed to the insurer.

In the circumstances, it was not deemed necessary to “rectify” the policy to delete the condition. However, the Court indicated that there would have been a good case for rectification.

In respect of material non-disclosure, the Court held that both the insured and the insurer could have made enquiries to determine the vessel’s DWT. Such information was reasonably available to both parties. Accordingly, the insurer could not rely on the fact that the insured did not provide it with the information directly.

While it was not relevant to the decision, the Court also concluded that the broker would have been held liable to indemnify the insured if the policy did not respond. By failing to confirm that the vessel’s DWT satisfied the condition in the policy, the broker was in breach of its duty to properly advise the insured and to ensure that the insurance met the insured’s requirements.

Conclusion

Among other things, this case highlights the importance of an insurer and insurance broker conducting reasonable due diligence to discover material facts. In particular, the broker is under a duty to make such enquiries and bring relevant information to the attention of the insured and the insurer.

As evidenced by this case, such errors by the insurer and broker can have serious ramifications and may preclude any reliance on express terms of the policy and/or material non-disclosure by the insured.

This decision is on appeal and has been listed to be heard before the Court of Appeal in mid-2013.