The extent of the insured’s duty of disclosure:

a comparative analysis of the disclosure obligations of insured

in Australia, Singapore and China

Wei Song

LLB

Lawyer NSW, NT

Faculty of Law

Queensland University of Technology

2012

ii

KEYWORDS

Acts, Dispute, Common Law, Claims, Court, Duty of Disclosure, Fraud, General

Insurance, Jurisdiction, Judges, Insurance Policy, Insurance Contracts, Insurer,

Insured, Law Reform Commission, Legislation, Life Insurance, Non-disclosure,

Misrepresentation, Misleading, Obligations, Regulators, Utmost Good Faith,

Australia, Singapore, People’s Republic of China, Hong Kong.

iii

ABSTRACT

Pre-contractual material disclosure and representation from an insurance policy

proposer is the most important element for insurers to make a decision on whether

a proposer is insurable and what are the terms and conditions if the proposal by the

proposer is able to be insured.

The issue this thesis researches and investigates focus on the issues related to the

pre-contractual non-disclosures and misrepresentations of an insured under the

principle of utmost good faith, by operation of laws, can achieve with different

results in different jurisdiction. A similar disputed claim involving material non-

disclosed personal information or misrepresentation at the pre-contractual stage

from an insured with respect to both general and life insurance policies settled by

an insurer in Australia could be that the policy is set aside ab initio by the insurers in

Singapore or China.

The jurisdictions this thesis examines are

• Australia;

• Singapore; and

• China including Hong Kong.

iv

TABLE OF CONTENTS

KEYWORDS ii

ABSTRACT iii

LIST OF STATUTES vii

ABBREVIATIONS ix

DECLARATION x

1 INTRODUCTION 1

2 INSURANCE LAW OF AUSTRALIA 6

2.1 The Sources of Insurance Law in Australia 6

2.2 Contract of Insurance at Common Law 9

2.3 Duty of Utmost Good Faith at Common Law 11

2.4 Duty of Utmost Good Faith under the ICA 15

2.5 Duty of Disclosure and Misrepresentation at Common Law 16

2.6 Duty of Disclosure under the ICA 23

2.7 Misrepresentation under the ICA 29

2.8 The Insurer’s Duty of Notification under the ICA 32

2.9 Remedies for Non-Disclosure and Misrepresentation

under the ICA 34

2.10 Section 56 of the ICA 39

2.11 The Duty of Utmost Good Faith and its application to a

Third Party 41

2.12 Reinsurance 44

v

2.13 Conclusions 45

3 GOVERNMENT REVIEW OF THE ICA 47

3.1 The Insurance Contracts Amendment Bill 2010 49

3.2 Utmost Good Faith under the Insurance Contracts Amendment Bill 2010 50

3.3 Disclosure and Misrepresentations under the Insurance

Contracts Amendment Bill 2010 51

3.4 Notice to an Insured of Duty of Disclosure under the Insurance

Contracts Amendment Bill 2010 53

3.5 54

3.6 Conclusions 54

4 SINGAPORE INSURANCE LAW 55

4.1 The Insurance Law of Singapore 55

4.2 Legal Requirement for an Insurance Contract under

Singapore Law 55

4.3 Duty of Disclosure under the Principle of the Utmost

Good Faith 56

4.4 Insurers’ Duty of Notification 59

4.5 Insured’s Duty of Disclosure 61

4.6 How Singapore Courts Apply the Principle of Duty of

Disclosure to Claims 63

Proposed reforms to the Remedies for Non-disclosure and

Misrepresentation under the Insurance Contracts

Amendment Bill 2010

vi

4.7 Conclusions 68

5 THE INSURANCE LAW OF CHINA INCLUDING HONG KONG 73

5.1 Insurance Law of China 73

5.1.1 Introduction to Chinese Legal System and Source

of Laws 73

5.1.2 Insurance Law 1995 76

5.1.3 The Revised Insurance Law 80

5.1.4 Conclusions 86

5.2 Insurance Law of Hong Kong 90

5.2.1 The Hong Kong Legal System and the Source of Law 90

5.2.2 Insurance Companies Ordinance (Cap 41) 92

5.2.3 Hong Kong Insurance Law Reform 108

5.2.4 Conclusions 111

6 SUMMARY OF THE SCOPE OF ANALYSIS AND COMPARISON 114

7 CONCLUSIONS 118

BIBLIOGRAPHY 121

vii

LIST OF STATUTES

Australian Securities and Investments Commission Act 2001 (Cth)

Corporations Act 2001(Cth)

Competition and Consumer Act 2010 (Cth)

Financial Services Reform Act 2001 (Cth)

Insurance Act 1973 (Cth)

Insurance Contracts Act 1984 (Cth)

Life Insurance Act 1995 (Cth)

Retirement Savings Accounts Act 1997 (Cth)

Superannuation Industry (Supervision) Act 1993 (Cth)

Superannuation (Resolution of Complaints) Act 1993 (Cth)

Application of the English Law Act 1994 (Cap 7A) (Singapore)

Banking Act 2003 (Cap 19) (Singapore)

Civil Law Act 1999 (Cap 43) (Singapore)

Companies Act 1994 (Cap 50) (Singapore)

Finance Companies Act 2000 (Cap 108) (Singapore)

Insurance Act 2002 (Cap 142) (Singapore)

Marine Insurance Act 1994 (Cap 387) (Singapore)

Monetary Authority of Singapore Act 1970 (Cap 186) (Singapore)

Motor Vehicles (Third-Party Risks and Compensation) Act 2000 (Cap 189)

(Singapore)

Securities and Futures Act 2003 (Cap 289) (Singapore)

viii

Life Assurance Act 1774 (UK)

Road Traffic Act (UK)

Marine Insurance Ordinance (Cap 329) (HK)

Insurance Companies Ordinance (Cap 41) (HK)

Insurance Law 1995 (People’s Republic of China)

Insurance Act 2004 (Republic of China)

ix

ABBREVIATIONS

ALRC Australian Law Reform Commission

APRA Australia Prudential Regulation Authority

ASIC Australia Securities and Investments Commission

CIRC China Insurance Regulatory Commission

HKFI Hong Kong Federation Insurers

HKSAR Honk Kong Special Administrative Region

ICA Australia Insurance Council of Australia

ICA Insurance Contact Act 1984 (Cth)

ICO Insurance Companies Ordinance

MIO Marine Insurance Ordinance

RPT Related Party Transactions

The Code Code of Conduct for Australian Insurers

The Commission Australian Law Reform Commission

WTO World Trade Organisation

x

DECLARATION

The work contained in this thesis has not been previously submitted to meet

requirements for an award at this or any other higher education institution. To the

best of my knowledge and belief, the thesis contains no material previously

published or written by another person except where due reference is made.

Signed:

Date

1

1. INTRODUCTION

The insurance laws governing non-disclosure and misrepresentation by an insured in

different jurisdictions such as Australia, Singapore and China including Hong Kong, although

in principle are similar, but in day to day practice, the application of those principles can

result in very different outcomes. A similar claim under an insurance policy disputed on the

basis of non-disclosure by the insured would most likely be settled by an insurer in Australia

whereas the policy would most likely be set aside ab initio by an insurer in Singapore or

China.

Having previously worked for a major life reinsurer with business units in several Asia Pacific

countries it was observed that claims declined by the direct life insurers were similar where

there were allegations of pre-contractual non-disclosure or misrepresentation of a material

fact by the insured. Direct life insurers are required by reinsurance treaties to notify their

reinsurers in respect of claims which have a contestable ground for review together with an

assessment of the costs of defending or litigating such claims.

All Australian claims cases assessed involved claims denied by direct life insurers who are

major life insurers operating in the Australian market1 on the basis of pre-contractual non-

disclosure or misrepresentation, involving sections 21 and 26 of the Insurance Contract Act

1984 (Cth) (The ICA).

A common basis for direct life insurers to decline a claim is that the insured failed to disclose

material information or made misrepresentations of material facts at the pre-contractual

stage.

1 Tower Australia Limited, MLC Limited and Asteron Life Limited

2

There are many reasons for the different outcomes, including:

(a) cultural differences;

(b) different insurance laws and a different approach by the courts in the application of insurance laws;

(c) different decision making mechanism of insurers;

(d) industrial self-regulatory bodies’ ongoing supports towards the insured notwithstanding whether the insured has good standings when come to the claims; and

(e) intensive regulatory intervention from different regulators to protect the consumers (insured) affairs.

Of all of the above, a most significant factor is the different approach as in the various

jurisdictions to the investigation and analysis of the issues of non-disclosure and

misrepresentation in the context of the principle of the duty of utmost good faith.

In Australia at common law, where the insured failed to disclose material facts at the pre-

contractual stage, the strict application of the duty of disclosure under the principle of

utmost good faith favours the insurer in that the remedy where there has been a breach

entitles the insurer to avoid the contact of insurance ab initio. The ICA has changed the

common law by amending the duty of disclosure in section 21 ICA and altering the

parameters for a misrepresentation by section 26 and in the provision for remedies in

sections 28 and 29 ICA.

3

In Singapore the resolution of claims involving pre-contractual non-disclosure or

misrepresentation issues depends principally upon whether the relevant policy contains a

“basis clause” 2.

In the event that a standard basis clause is incorporated in a proposal form as the basis of

the contract, when there has been a failure to disclose relevant facts by the insured, the

Singapore courts follow a line of English authorities to relieve insurers from their liability to

pay claims made by an insured. The fact that the non-disclosure or misrepresentation was

innocent is not relevant and the insurer need only prove that the non-disclosure or the

statement given by the insured is factually untrue in order to avoid the contract.

In the absence of a basis clause in a proposal form or where the basis clause cannot be

invoked by an insurer, the insurer must prove the elements of fraud or misstatement

relating to a material fact. In Australia, such remedies are certainly less easily available for

insurers.

In China, the Chinese Insurance Law 1995 sets out a heavy penalty for an individual for

breach of the duty of good faith, the civil penalty is also “subject to criminal liability”. The

revised 2009 Insurance Law further requires that the applicant must truthfully disclose all

information in respect of the subject matter insured as the insurer may require. If the

applicant intentionally or through gross negligence fails in its duty of disclosure and these

facts would be sufficient to affect the decision of the insurer to underwrite the risks or raise

the insurance premium, the insurer may cancel the contract and would not be liable to pay

the indemnity or insurance proceeds.

2 The most popular basis clause used by insurers in Singapore is extracted as following: “I warrant that the above statements made by me or on my behalf are true and complete and I agree that this proposal shall be the basis of the contract between me and the company.”

4

If the applicant’s failure to disclose is intentional or fraudulent, the insurer does not even

have to return insurance premiums.

Because of the heavy penalty including the criminal liability imposed to the non-disclosure

and misrepresentation, it is commonly considered that it is not worthwhile for an insured to

defraud the insurers.

The respective positions outlined above will be further examined in this paper by a detailed

comparative analysis of the relevant legislation and case authority applicable in the relevant

jurisdictions.

This paper will:

(a) examine and analyse the legal position in relation to pre-contractual non-

disclosure and misrepresentation under the principle of the utmost good faith through comparison of the Australian insurance laws (both statutory and common law) with those in Singapore and China including Hong Kong;

(b) consider how the duty to act under the principle of the utmost good faith

operates in the context of making a claim in Australia, Singapore and China including Hong Kong jurisdictions; and

(c) study the potential impact of recent reform proposals in Australia relating to

the duty of utmost good faith and disclosure in the Insurance Contracts Amendment Bill 2010 (Cth) and the revised 2009 Chinese Insurance Laws.

The paper applies insurance law relating to the areas of direct life and general insurance

current as at 1 July 2012.

5

The following jurisdictions will be examined:

(a) Australia.

(b) Singapore.

(c) The People’s Republic of China including Hong Kong.

6

2. INSURANCE LAW OF AUSTRALIA

2.1 The Sources of the Insurance Law in Australia

Professor Sutton described the sources of insurance law in Australia as:

• “the common law in respect of matters not covered by the ICA;

• the common law as modified by State legislation where such exists, in respect of those matters not covered by the ICA; and

• the law enshrined in the provisions of the ICA and covering those aspects of

insurance within its ambit.”3 Before the ICA came into operation on 1 January 1986, the common law principles

governing the insurance law developed by the various courts from the 18th century onwards

were the overriding principles applying to all insurance matters in Australia.

In 1976, the Australian government commissioned the Australian Law Reform Commission

(ALRC) to review the law of insurance. Led by Justice Kirby, ALRC carried out a thorough

investigation of Australian insurance law and in its Report 4 recommended that the

Australian insurance law should be reformed to provide strong consumer protection.

Subsequently, an Insurance Contract Bill was introduced to the Parliament and ICA was

assented on 25 June 1984 and implemented with an effective date from 1 January 1986.

As the primary function of insurance is to transfer and distribute risk to different parties

(reinsurers), the ICA chooses not to have a definition for a contract of insurance but to

consider a broad meaning within the provisions of the ICA. It adopts a liberal approach to

3 K. Sutton, Insurance Law in Australia, 3rd Edition LBC Information Services 1999, at 24. 4 Australian Law Reform Commission Report 20 (The ALRC Report) Australian Government Publishing Service, 1982 Canberra

7

encourage parties identifying the type of contract to which the special rules of insurance law

apply before determining the nature of an insurance contract.

The ICA does not prescribe a complete code of insurance law for insurance to follow like

some Asian (Hong Kong and China) insurance legislation but rather deals with certain

aspects of insurance contract issues and is superimposed on the existing law. It also sets out

some exceptions for insurance products and services.

Section 9 (1) of ICA states:

“(1) Except as otherwise provided by this Act, this Act does not apply to or in relation to contracts and proposed contracts:

(a) of reinsurance; or

(b) of insurance entered into, or proposed to be entered into, by a private health insurer within the meaning of the Private Health Insurance Act 2007 in respect of its health insurance business within the meaning of Division 121 of that Act; or

(ba) of insurance entered into, or proposed to be entered into, by a private health insurer within the meaning of the Private Health Insurance Act 2007 in respect of its health-related business within the meaning of section 131-15 of that Act that is conducted through a health benefits fund (as defined by section 131-10 of that Act); or

(c) of insurance entered into, or proposed to be entered into, by a friendly society; or

(ca) of insurance entered into, or proposed to be entered into, by the Export Finance and Insurance Corporation, other than short-term insurance contracts within the meaning of the Export Finance and Insurance Corporation Act 1991 that are entered into on or after the commencement of this paragraph; or

(d) to or in relation to which the Marine Insurance Act 1909 applies; or

(e) entered into or proposed to be entered into for the purposes of a law (including a law of a State or Territory) that relates to:

8

(i) workers' compensation; or

(ii) compensation for the death of a person, or for injury to a person, arising out of the use of a motor vehicle.”

As a result of the section 9 (1), the following insurance contracts are exempted by the ICA.

(b) reinsurance,

(c) health insurance,

(d) marine insurance,

(e) workers’ compensation, or

(f) compulsory third party motor vehicle insurance.

It is interesting to note that although section 9 sets out the above exemptions, the

Australian courts in recent years have expressed some concerns and surprisingly have made

some decisions5 on the exempted issues in the context of reinsurance.

The courts have not provided detailed guidance on the scope and content of the duty of

utmost good faith in reinsurance circumstances. However, it is expected that the scope of

the duty and conduct, which amounts to a breach in the reinsurance context, will be subject

to further judicial consideration.

The enactment of the Insurance ICA was a landmark for law reform in Australia and the

most important piece of insurance legislation in recent years. The ICA has brought

significant changes to the operation of insurance law in Australia and has strongly promoted

the interests of consumers over insurers. In many ways it redressed an imbalance which

existed between insurers and insureds under the common law.

5 Trans-Pacific Insurance Co (Aust) Ltd v Grand Union Co Ltd (1989) 18 NSWLR 675; AMP Financial Planning Pty Limited v CGU Insurance Limited [2005] FCAFC 185

9

The reforms are widely acclaimed within the Australian community and by legal

professionals in different jurisdictions6.

2.2 Contract of Insurance at Common Law

Before the ICA, a contract of insurance was governed by common law principles.

“Contracts of insurance” were considered by Romer LJ in Seaton v Heath7 , where His

Lordship underlined the rationale for insurance contract:

“Contracts of insurance are generally matters of speculation, where the person desiring to be insured has the means of knowledge as to the risk, and the insurer has not the means or not the same means.”8

Turner described a contract of insurance as:

“A contract by which one party, called the insurer, in consideration of a sum of money called the premium undertakes to pay to another person called the insured, a sum of money, or its equivalent, on the happening of a specified event. The person undertaking the risk is called the insurer and the party who is indemnified is called the insured.”9

The contract of insurance has also been defined by reference to certain characteristics. A

classic formulation is that by Sir Robert Megarry V.C. in Medical Defence Union Ltd

v Department of Trade10:

“First, the contract of insurance must provide that the assured would become entitled to something on the occurrence of some event… … Second, the event must be one which involves some element of uncertainly… … Third, the assured must have an insurable interest in the subject matter of the contract… …”11

6 Professor R Merkin, Law School, Southampton University, UK 7 [1899] 1 Q.B. 782 8 Ibid, at 793 9 Australian Commercial Law 25th edition Law book Co. 2005 at 580 10 (1979) 2 WLR 686 by stating the three point test Channell J made in the case of Prudential Insurance Co v Inland Revenue Commissioner [1904] 2 KB 658 11 (1979) 2 WLR 686 at 690 - 691

10

The formation of the contract of insurance is subject to the general rules of the law of

contract and is based on the rules of offer and the acceptance, although with a more

formalized structure than ordinary contracts. In addition, unlike some other commercial

contracts, contracts of insurance must be in the form of a written agreement, signed and

dated by both parties. For an insurance contract to be effective, the acceptance of the

proposal by the insurer must be communicated or delivered to the insured. Some special

policies, such as a medical policy for travel or a risk policy for building operations do not

become operative until a specified date or until a specified event occurs: Evans v Sirius

Insurance Co Ltd12.

In addition, the law imposes a number of obligations for both insurers and insured before

they enter into a particular insurance contract. Those obligations make the insurance

contract unique from most of other commercial contracts. The pre-contractual disclosure

requirements for the insured and the due diligence process for the insurer are the most

significant obligations for an insurance contract to be effective.

Due to its unique nature, an insurance contract is also known as “a contract of good faith”. A

contract of good faith requires that parties to it to act towards each other with the utmost

good faith. Therefore, an insurance contract is categorized as a special class of contract

known as a contract of good faith13.

The term “utmost good faith” is derived from the Latin term uberrimae fidei. The concept of

uberrimae fide was first discussed by judges in England in Dalglish v Jarvie14. Only a contract

12 (1986) 4 ANZ Insurance Cases 60 13 Dalglish v Jarvie [1850] 42 ER 89 14 Ibid, at 99

11

of uberrimae fidei requires that parties to the contract be under a duty to exercise the

utmost good faith and to make voluntary full disclosure of all material facts to the contract.

The Australian courts discussed this concept first in Seaton v Heath15 where Romer LJ

described a contract of uberrimae fidei as:

“There are some contracts in which our courts of law and equity require what is called ‘uberrimae fidei’ to be shown by the person obtaining them ... Of these, ordinary contract of marine, fire and life insurance are examples, and in each of them the person desiring to be insured must, in setting forth the risk to be insured against, not conceal any material fact affecting the risk known to him. On the other hand, ordinary contracts of guarantee are not amongst those requiring ‘uberrimae fidei’… … Whether the contract be one requiring ’uberrimae fidei’ or not must depend on its substantial character and how it came to be effected.”16

The duty of disclosure arising from the obligation of utmost good faith does not apply to

other contracts and is a concept unique to contracts of insurance.

2.3 Duty of Utmost Good Faith at Common Law

The principle of utmost good faith was well established by sections 17, 18 and 20 of the

Marine Insurance Act 1906 (UK) (MIA) and cases earlier in the 19th century.

Lord Mansfield in Carter v Boehm17 stated the basis for the duty of disclosure in insurance

contract as follows:

“Insurance is a contract upon speculation. The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist.

The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent

14 Seaton v Health (1899) 1 QB 782 16 Ibid, at 792 17 (1766) 3 Burr 1905

12

intention; yet still the underwriter is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, at the time of the agreement… Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.”18

This principle was later adopted by courts In Australia. Young J of the New South Wales

Supreme Court examined the development of the duty of utmost good faith at common law

in: GIO Insurance Ltd v Leighton Contactors Pty Ltd.19

Academics have considered utmost good faith as a term with various meanings in the legal

context. Professor Sutton holds the view that: “it encompasses notions of fairness,

reasonableness and community standards of decency and fair dealings.”20

Commentators Derrington and Ashton said that “good faith has proved difficult to define,

but it has generally come to mean fair dealing in which one party puts the interests of the

other at least at the same level of protection as his or her own.”21

The principle of utmost good faith does not require the parties to act generally in good faith,

but rather prescribes a set of specific duties.22 The duty focuses on the word “utmost”, that

is being the measure of good faith relied upon and of which fairness and honesty form part.

The duty of utmost good faith must be distinguished from ordinary good faith which

requires honesty in providing information, but does not require disclosure of all that one

knows. If ordinary good faith may be described as a duty of not telling lies, utmost good

faith goes further. Utmost good faith requires one party voluntarily to reveal all important

information in its knowledge to the other party, even if not asked to do so. 18 Ibid, at 1909 -1910 19 (1996) 8 ANZ Insurance Cases 61.293 20 Sutton, Insurance Law in Australia, 3rd Edition, LBC Information Services 1999, at 157-158 21 D, Derrington and R, Ashton, The Law of Liability Insurance 2nd Edition, LexisNexis Australia 2005 at 236 22 Re Zurich Australian Insurance Ltd (1999) 10 ANZ Insurance Cases 61.429

13

The information required to be disclosed by the parties to determine whether the contract

is fair and equitable cannot be ascertained by common sense or reasonable enquiry, as with

most other commercial transactions. In particular, for an insurer to assess a proposed risk, it

will need information within the exclusive personal knowledge of the insured. For this

reason, courts have decided that utmost good faith is the appropriate standard to apply to a

contract of insurance.

Having said above, the duty of utmost good faith must be distinguished from the general

fiduciary duty between a doctor and a patient or a solicitor and a client. Lord Millett stated

in Bristol and West Building Society v Mathew that:

“A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”23

In principle, the relationship between an insurer and an insured is equal and the duty of

utmost good faith for the insurer and the insured does not require an insurer to act in the

best interests of the insured and vice versa.

The principle of the utmost good faith extends to all matters relating to or arising from the

contract of insurance and applies to both parties. Willes J in Britton v Royal Insurance Co24

had already confirmed that the contract of insurance was one of perfect good faith on both

sides.

Lord Jauncey, in the House of Lords, in Banque Financiere v Skandia (U.K.) Insurance Co.

Ltd25 also concluded that the duty to exercise the utmost good faith and to make disclosure

23 [1998] Ch 1 at 18 24 (1866) 4 & F 905 25 [1990] 2 Lloyd’s Rep. 377

14

of material information applies equally to both an insured and his insurer. He stated the

duty mutually owned by an insured and his or her insurer as follows:

“The duty of disclosure arises because the facts relevant to the estimation of the risk are most likely to be within the knowledge of the insured and the insurer therefore has to rely upon him to disclose matters material to that risk. The duty extends to the insurer as well as to the insured: Carter v Boehm26. The duty is, however, limited to facts which are material to the risk insured, that is to say facts which would influence a prudent insurer in deciding whether to accept the risk and, if so , upon what terms and a prudent insured in entering into the contract on the terms proposed by the insurer. Thus any facts which would increase the risk should be disclosed by the insured and any facts known to the insurer but not to the insured, which would reduce the risk, should be disclosed by the insurer. There is, in general, no obligation to disclose supervening facts which come to the knowledge of either party after conclusion of the contract. … Although the r have been no reported cases involving the failure of an insurer to disclose material facts to an insured the example given by Lord Mansfield in Carter v Boehm27 is of an insurer who insured a ship for a voyage knowing that she had already arrived. Another example would be the insurance against fire of a house which the insurer knew had been demolished. In these cases the undisclosed information would have had a material and direct effect upon the risk against which the insured was seeking to protect himself. Indeed the insured would have said that the risk no longer existed.”28

Therefore, under the common law, before the ICA was enacted; the insured was under a

duty of utmost good faith to disclose material facts and not to make material misstatements

at the pre-contractual stage, that is, before the formation of a policy. Any breach of that

duty would entitle the insurer to void the policy ab initio at claim stage.

In addition, the insured was under a further and continuing duty of utmost good faith to

disclose material facts and not to make material misrepresentations as long as the policy is

valid.

On the other hand, the insurers are equally under both pre-contractual and continuing duty

of utmost good faith to disclose or not to misrepresent material facts to the insured. 26 (1766) 3 Burr. 1905 27 Ibid 28 [1990] 2 Lloyd’s Rep. 377 at 389

15

The principles of utmost good faith established in case law is now codified in sections 13 and

14 of the ICA. The law relating to utmost good faith in insurance contracts is therefore no

longer the common law principles but rather the statutory principles which have replaced

them.

2.4 Duty of Utmost Good Faith under the Act

The ICA replaces the continuing duty of good faith at common law with an implied term in

section 13.

Section 13 provides:

A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

Under this term of the contract, the parties are required to act in respect of any matter

“arising under or in relation to the policy”, with the utmost good faith. The potential

application of the duty is therefore very broad. The statutory duty has been applied pre and

post contract, including to the settlement of claims29.

Although the duty applies post contractually, section 12 of the ICA specifically provides that

the duty is not to be applied so as to extend the duty of disclosure as set out in section 21.

This has the effect of confining the duty of disclosure to the pre-contractual stage. If an

ongoing obligation of disclosure is required then a term to that effect must be inserted in

the contract. If that term is breached the appropriate remedy provision would be section

54, not section 28 for general insurance and section 29 for life insurance.

29 The ALRC Report 20 Para 328 that: “The duty of good faith applies to all aspects of the relationship between insurer and insured, including the settlement of claims.”

16

Section 54 of ICA provides a remedy to insureds that in certain circumstances, insurers must

pay a claim “either in whole or in part”.

The ICA does not define “utmost good faith” so the common law definition is applied. The

remedy for a breach of the term implied by section 13 is damages for breach of contract:

Moss v Ltd Sun Alliance Australia30.

2.5 Duty of Disclosure and Misrepresentation at Common Law

At common law an insurer may be entitled to avoid a contract of insurance where the

insured has:

(a) failed to comply with the duty of disclosure; and

(b) made a misstatement of a fact material to the insurer’s decision as to whether or not to accept the risk.

Non-disclosure and misrepresentation are considered as fundamental failures when

determining if the insured has acted in good faith during the process of applying for an

insurance policy. Even though the above failures both provide grounds for an insurer to

rescind a contract of insurance, the rationale relied upon by the insurer to rescind a

particular contract of insurance may vary. This is because non-disclosure is about the

insured’s duty to volunteer information to the insurer while misrepresentation is about the

insured’s duty to respond accurately to questions he or she is asked by the insurer. The law

has settled that the duty of disclosure requires the insured to volunteer material

information known to him or her related to the subject matter of the contract: Mayne

30 [1990] 55 SASR 145

17

Nickless Ltd v Pegler31 and Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd32.

Therefore, the obligation to provide information known to him or her requires a true

statement of a material fact from the insured. This requirement imposes a strict obligation

on the insured not to give material information, which is incorrect or false.

As to what degree the relevant facts known by the insured should be disclosed under the

duty of disclosure, two distinct tests of materiality have been applied.

Prudent Insurer Test

The “Prudent Insurer” test referred as that a fact is material if it would have reasonably

affected the mind of a prudent insurer in determining whether it will accept the insurance,

and if so, at what premium and on what conditions. The test was elucidated by May J

in March Cabaret Club & Casino Ltd v London Assurance Ltd.33 The fundamental element of

the test requires an insured to disclose every material fact known to him or her which a

reasonable person would realise to be material to a prudent insurer undertaking the

insurance risk proposed by the insured.

In Australia the “Prudent Insurer” test was adopted by Pape J in Babatsikos v Car Owners’

Mutual Insurance Co. Ltd34 . His Honour applied the prudent insurer test in much the same

terms as that applied by Samuels J in Mayne Nickless Ltd v Pegler35:

“The question is whether [the] information would have been relevant to the exercise of the insurer’s option to accept or reject the insurance proposed. It seems to me that the test of materiality is this: a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether he will accept the insurance, and if so, at what premium and on what conditions. The word

31 [1974] 1 NSW LR 228 32 (1998) 151 ALR at 529 33 [1975] 1 Lloyd’s Rep. 169 34 [1970] VR 297 35 [1974] 1 NSW LR 228

18

“reasonably” is necessary to maintain control over the evidence of possibly absurd stringent insurance practice.”36

In Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd,37 Kirby P (as he

then was) applied the test formulated by Samuels J in Mayne Nickless Ltd v Pegler38 as:

“... I would read the test in Mayne Nickless v Pegler to require that the effect on the mind of the insurer, to which Samuels J was referring, should be something more than the effect produced by information which the insurer would have been generally interested to have. If, though interested to have it, such information would not, in the end, have determined for a reasonably prudent insurer the acceptance or rejection of insurance, the setting of the premium or the attachment of conditions, there is not such effect on the mind as requires disclosure by the insured. The information, although of interest, is not material. As such it is not information which must be disclosed by the insured.”39

The “Prudent Insurer” test was not the only test that the court had applied. An alternative

view was expressed by some other judges, referred to as the “reasonable insured” test.40

Reasonable Insured Test

The critical question under the “reasonable insured” test is “whether a reasonable man in

the position of the insured and with his knowledge of the relevant circumstances would

have realised that they were material to the risk.”41

Fletcher Moulton LJ further stated in Joel v Law Union and Crown Insurance Company42 that:

“… … you cannot disclose what you do not know. The obligation to disclose, therefore, necessarily depends on the knowledge you possess.”43

36 Ibid, at 239 37 [1987] 8 NSW LR 514 38 [1974] 1 NSW LR 228 39 [1987] 8 NSW LR 514 at 517 40 Joel v Law Union and Crown Insurance Company [1908] 2 KB 863 41 Ibid, at 883-4 42 [1908] 2 KB 863 43 Ibid, at 884

19

The key argument Fletcher Moulton LJ presented that the duty of disclosure is not a duty to

volunteer all information within his or her knowledge was supported by some Australian

judges.

Isaacs J in the High Court decision, Guardian Assurance v Condogianis44 favoured the

Fletcher Moulton LJ argument by stating that the insured’s duty was:

“...to disclose such material facts as a reasonable man in his position would have considered material.”45

Jordan CJ and Nicholas J expressed in their judgment in Southern Cross Assurance Co. Ltd v

Australian Provincial Assurance Association Ltd46 that:

“Since the contract of assurance is uberrimae fidei the assured is subject to an obligation ... to disclose to the Assurance Company every material fact known to him which a reasonable man would realise to be material”47

The courts vacillated between these two views until the English Court of Appeal in Lambert

v Co-operative Insurance Society Ltd48 which finally settled the position on the basis that an

insured’s duty of disclosure was to disclose information material to a prudent insurer’s

assessment of the risk. The court rejected the “Reasonable Insured” test and the contention

that the insured’s duty of disclosure was a duty to disclose information which a reasonable

insured considered to be material. The court decided that an insured’s duty of disclosure

was a duty to disclose every fact that was material to a prudent insurer.

44 (1919) 26 CLR 231 45 Ibid, at 246 46 [1939] 39 SR (NSW) 174 47 Ibid, at 187 48 [1975] 2 Lloyd’s Rep. 485

20

The facts in Lambert v Co-operative Insurance Society Ltd49 were that Mrs. Lambert’s

husband had been convicted of a criminal offence before the contract of insurance was

entered and this fact was not disclosed to the insurer. Mr. Lambert was subsequently

convicted again of offences of dishonesty. Mrs. Lambert did not disclose any of the

convictions on renewal of the policy. The insurer did not ask any questions regarding Mr

Lambert’s convictions at either the inception or the renewal of the policy.

McKenna J first considered and further analysed the provisions of section 18 (1) of

the Marine Insurance Act 1906 (UK) and stated that:

“The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.”

In considering the above provisions, McKenna J concluded that there was no obvious reason

why the rule in marine insurance should be different from the rules in other forms of

insurance.

In examination of the duty of disclosure, McKenna J stated:

“Everyone agrees that the assured is under a duty of disclosure and that the duty is the same when he is applying for a renewal as it is when he is applying for the original policy. The extent of that duty is the matter in controversy. There are, at least in theory, four possible rules or tests which I shall state. (1) The duty is to disclose such facts only as the particular assured believes to be material. (2) It is to disclose such facts a reasonable man would believe to be material. (3) It is to disclose such facts as the particular insurer would regard as material. (4) It is to disclose such facts as a reasonable or prudent insurer might have treated as material.”50

49 Ibid 50 Ibid, at 487

21

However, in Pan Atlantic Insurance Ltd and Another v Pine Top Co Ltd,51 the members of the

House of Lords did not adopt the “Reasonable Insured” test. The majority judgements

formulated the decision that “the effect that all that was necessary was that the

circumstances would have been taken into account by a “prudent” underwriter in

determining whether to underwrite the risk and if so on what terms.”52

It is this reference to the mind of the insurer rather than that of the insured when

considering materiality which has caused concern. An insured may innocently fail to disclose

a fact which he considers immaterial to the risk insured but which would have persuaded

the insurer to re-assess the premium or conditions of the policy had the disclosure been

made. Should a claim thereafter be made the insurer is entitled to refuse payment, even if

the undisclosed fact bore no causal connection to the claim. If the insurer could establish

that the insured had misstated or not disclosed information at common law, the contract

could be rescinded ab initio.

As a result of such rescission, an insurer was entitled to decline a claim made by an insured.

Therefore, at common law, non-disclosure or misrepresentation of a material fact by the

insured had serious consequences even if it was innocent. An innocent but material non-

disclosure or misrepresentation entitled the insurer to have the contract set aside. In other

words, non-disclosure or misrepresentation of a material fact entitled the insurer to avoid

the contract ab initio.

51 [1994] 3 All ER 581 52 Marks & Balla, Guidebook to Insurance Law in Australia, 3rd edition, CCH Australia Limited, 1998, at 222

22

The test used to determine materiality of non-disclosure or misrepresentation was finally

settled in Pan Atlantic Co Ltd and Another v Pine Top Insurance Co Ltd.53 This case is

regarded as the final decision and been the law adopted by the Australian courts in deciding

the question of materiality at common law.

The principle of the Pan Atlantic Insurance Ltd and Another v Pine Top Insurance Co Ltd54 has

since been accepted as the law in this area for non-marine insurance.

The Pan Atlantic Insurance Ltd and Another v Pine Top Co Ltd55, presented an opportunity

for the House of Lords to review the issue of materiality after Container Transport

International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd.56

However, their Lordships held that:

“… … the rules relating to non-disclosure and misrepresentation, at least as they affect materiality and subsequent avoidance, should be, and indeed always have been, the same… …”57

Section 21(1) of ICA now provides that a potential insured must disclose to its potential

insurer every matter that:

(a) it knows will be relevant to the decision of whether the insurer will accept the risk, and if so, on what terms (a subjective test); and

(b) a reasonable person in the circumstances could be expected to know to be a relevant matter (an objective test).

Section 21 of the ICA will be considered further in the later section of the thesis.

53 [1994] 3 All ER 581 54 Ibid 55 Ibid 56 [1984] 1 Lloyd’s Rep 476 57 [1994] 3 All ER 581 at 588-619 per Lord Mustill

23

2.6 Duty of Disclosure under the Act

Divisions 1, 2 and 3 of Part IV of the ICA set out provisions for issues of:

(a) disclosure;

(b) misrepresentation; and,

(c) remedies for non-disclosure and misrepresentation.

The High Court in Advance (NSW) Insurance Agencies Pty Ltd v Matthews58 firmly stated that

“Pt IV is a statutory code which replaces the common law” to the extent it is now the

governing rules for non-disclosure, misrepresentations and incorrect statements by

insured59.

The concepts of non-disclosure and misrepresentation are similar and sometimes overlap. It

is often the case that non-disclosure of a fact may also be construed as a misrepresentation

concerning that fact. Similarly, misrepresentation about a fact may also constitute non-

disclosure of that fact. Where there is a duty to disclose, failure to do so may amount to an

implied representation that there is nothing that ought to be disclosed.

Under the ICA, the application of the above provisions to issues of non-disclosure and

misrepresentation is significantly different from the principles governed by the common

law.

As to the duty of disclose the ICA has effectively:

(a) separated the disclosure obligation (as a pre-contractual obligation) from utmost good faith (as an implied term);

58 (1989) 166 CLR 606 59 (1989) 166 CLR 606 at 615: “The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt IV. To that extent Pt IV is a statutory code which replaces the common law.”

24

(b) changed the common law test from the “prudent insurer” to the “reasonable insured”;

(c) in relation to “eligible contracts” the duty of disclosure is waived unless the insurers have asked specific questions60; and

(d) insurers owe a duty under section 22 to inform the assured of the duty of disclosure. An insurer cannot rely on a breach of the duty of disclosure if they have not complied with section 22 unless the insured’s failure was fraudulent.

Section 21 makes it clear that the insured’s duty of disclosure applies only up until the

insurance contract is entered into. Post contract disclosure will be a matter of asserting a

breach of a term of the contract which imposes such an obligation and/or a breach of the

duty of utmost good faith as implied by section 13.

Section 21 provides:

The insured's duty of disclosure

(1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.

(2) The duty of disclosure does not require the disclosure of a matter:

(a) that diminishes the risk;

(b) that is of common knowledge;

(c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or

(d) as to which compliance with the duty of disclosure is waived by the insurer.

(3) Where a person:

60 Section 21A of the ICA

25

(a) failed to answer; or

(b) gave an obviously incomplete or irrelevant answer to;

a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

The duty to disclose under section 21 applies upon entry into the contract which includes

upon renewal under section 11 of the ICA.

The insured is required to disclose:

(a) “matters that the insured knows to be a matter relevant to the decision of

the insurer whether to accept the risk and if so, on what terms” (section 21 (1) (a)); or that

(b) “a reasonable person in the insured’s circumstances could be expected to know” to be a matter so relevant (sub-section 21 (1) (b)).

An insured must disclose every matter:

(a) he or she knows that will be relevant to the decision of whether the insurer will accept the risk, and if so, on what terms (a subjective test); and

(b) a reasonable person in the circumstances could be expected to know to be a relevant matter (an objective test).

Reasonable Insured Test

The ALRC Report 20 preceded the enactment of the Act considered the common law test of

materiality imposed an obligation of disclosure on insureds that was too onerous and which

would be difficult for insureds to meet. The ALRC Report further considered whether

intrinsic factors, namely the insured’s personal circumstances, should be taken into

consideration. It was concluded that the common law “prudent insurer” test was unfair to

the insured.

26

The ALRC formed a view that such a test would be particularly unfair

“in a country like Australia, with a high proportion of first generation citizens from overseas, to impose a standard which would discriminate against those who have had less than average education, who are inexperienced in, and unaccustomed to, business and insurance practice or who have an imperfect understanding of ordinary English, let alone the legal and commercial jargon used in insurance forms and policies... ...”.61

As a result, the ALRC recommended the “prudent insurer” test be abandoned and the

“reasonable insured” test (“…to disclose those facts which a reasonable person n his or her

circumstances would consider to be material in the sense that they would influence the

judgment of a prudent insurer in accepting the risk or fixing the premium”)62 be adopted.

The above recommendation was enacted and accordingly, the test determining the issue of

materiality is determined by applying a partly subjective and partly objective test. This is

because the word “known” or “knows” has a special meaning defined in section 21 (1) of

the ICA.

Hodgson CJ in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd63dealt with

the issue of the meaning of “knowledge” in the context of section 21. In His Honour’s

opinion “known” in section 21 (1) means more than suspected or believed. His Honour

stated:

“What is required is that the matter should be the subject of a true belief, held with sufficient assurance to justify the term ‘known’. However, it must be remembered that a belief may sometimes itself be a matter relevant to the decision of an insurer. An insured may know that it has a particular belief, and know that its having that

61 The ALRC Report 20, Para 180 62 Law Com. WP 73 (1979), Para 60 63 (1998) 151 ALR 529

27

belief is relevant to the decision of an insurer, in which case that belief itself is a matter which must be disclosed.”64

The Queensland Court of Appeal adopted this meaning of ‘known’ in Australian Casualty &

Life Ltd v Hall65. It has also been held that under section 21 (1) the knowledge that needs to

be disclosed by an insured extends to inferred knowledge.

In CIC Insurance Ltd v Midaz Pty Ltd66 the court also held that:

“If an insured knows matter A which is not in itself relevant to insurance, but the insured should reasonably infer from matter A at further matter B which is so relevant, then the duty to disclose matters A and B arises.”67

The High Court of Australia in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq)68 settled the interpretation of section 21 and held that to satisfy section 21(1)(a), the matter to be disclosed must not only be a matter that is “relevant to the decision of the insurer as to whether to accept the risk, and if so, on what terms”, it must also be a matter which the insured knows to be relevant. “Knows” in this context is meant the knowledge of the insured.

The High Court further held in Permanent Trustee Australia Ltd v FAI General Insurance Co

Ltd (in liq)69 that section 21(1)(a) of the ICA required disclosure only of a matter which has a

bearing on the nature and extent of the risk involved.

The duty of disclosure imposed by section 21(1)(a) does not require disclosure of matters

extraneous to a strict assessment of the insurer’s risk at either inception or renewal of the

contract of insurance.

64 Ibid, at 582 65 (1999) 151 FLR 360 66 (1998) 10 ANZ Insurance Case 61-394 67 Ibid, at 74-186 68 (2003) 214 CLR 514 69 Ibid

28

The High Court finally concluded that:

“The word ‘knows’ is a strong word. It means considerably more than ‘believes’ or ‘suspects’ or even ‘strongly suspects’.”70

Section 21(2) qualifies the general disclosure obligations of the insured in that the duty does

not require disclosure of something that is common knowledge or that the insurer already

knows or in the ordinary course of the insurer’s business as an insurer ought to know.

Section 21 (3) provides that the insurer will be deemed to have waived compliance with the

duty of disclosure by the insured if the insurer does not follow up in relation to a matter

where, in response to a question in the proposal form, the insured either failed to answer

the question, or gave an obviously wrong, incomplete or irrelevant answer to it.

At common law, a fact is material if it would have reasonably affected the mind of a prudent

insurer in determining whether to accept the insurance, and if so, at what premium and

upon what conditions. Under section 21 this is no longer the case. Section 21 of the ICA

provides that, now an insured is only required to disclose those facts which a reasonable

man in his or her circumstances would consider to be material in the sense that they would

influence the judgment of a prudent insurer in accepting the risk or determining the

premium.

70 Ibid, at 530

29

2.7 Misrepresentation under the ICA

Division 2 of Part IV of the ICA governs misrepresentation. The effect of this Division is to

limit the circumstances in which an insurer can establish that an actionable

misrepresentation by the insured has occurred.

At common law, an insurer is entitled to avoid the contract if an insured fails to comply with

the duty of disclosure or a contract is induced by a misrepresentation made by the

insured71.

However, the rights of a party to a contract of insurance in relation to misrepresentation

depend on whether the misrepresentation was innocent or fraudulent and whether the

misrepresentation was one of fact or opinion. Prior to the ICA, an insurer was entitled to

avoid liability under the contract when a misrepresentation of a material fact by the insured

was proved during the negotiations leading to the formation of the contract of insurance,

whether it was innocent or fraudulent.

The ALRC rejected the notion that an insurer has the right to avoid a contract of insurance

for innocent non-disclosure or misrepresentation.

In considering the existing rule on misrepresentation, (that an insured is under a duty not to

make misrepresentations to the insurer about facts which a prudent insurer would regard as

relevant to the assessment of the risk) the ALRC recommended that the parameters as to

what constitutes a misrepresentation should be amended. The ALRC commended changing

the test from the “prudent insurer” to the “reasonable insured”. As a result of the amended

test “an insurer should be entitled to redress for misrepresentation of a fact which the

71 Timms v FAI Insurance Ltd (1976) 12 ALR 506; Huddleston v R.A.C.V. Insurance Pty Ltd [1975] VR 683

30

insured knew, or which a reasonable person in his circumstances ought to have known, to

be relevant to the insurer’s assessment of the risk”.

In addition, the ALRC concluded that in construing the meaning of any question contained in

a proposal form “it should be determined by reference to the meaning which would be put

upon it by a reasonable man in the insured’s circumstances.”72

As a general rule, the ALRC considered that a representation as to the existence of a fact

should be read as a representation that that fact exists to the best of the insured’s

knowledge and reasonable belief. Some absolute warranties of existing fact might be

rephrased as exclusions from cover and to avoid this, the ALRC concluded that where an

exclusion is based on the state or condition of the subject-matter of the insurance, the

insurer should not be able to rely on that exclusion if the insured proves that, at the time

the contract was entered into, he or she did not know, and a reasonable person in his or her

circumstances would not have known, of the existence of the relevant state or condition.

Section 24 of the ICA does not permit “a misrepresentation, including a misrepresentation

by omission of information” being “converted into a warranty of existing fact”73 by the

insertion of a “basis of the contract clause” in the proposal of the policy.

Section 24 of the ICA provides:

A statement made in or in connection with a contract of insurance, being a statement made by or attributable to the insured, with respect to the existence of a state of affairs does not have effect as a warranty but has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into.

72 The ALRC Report 20, Para 184 73 The ALRC Report 20, Para 185

31

Commentator Peter Mann in Annotated Insurance Contracts Act74 states that section 24 has

two purposes:

“1. It prevents insurers from avoiding the provisions of the ICA relating to remedies for misrepresentation by incorporating representations as a term of the contract.

2. It ensures that the substantive rights and obligations of insurer and insured are the same, irrespective of the form in which those obligations are phrased… … Section 24 converts only warranties of existing facts into representations.”75

The significance of section 24 is that it reduces a pre-contractual statement from a warranty

to a representation in circumstances where it would otherwise constitute a warranty. A

warranty is a condition of the contract which, if it is breached, entitles the other party to

rescind the contract. However, remedies for breach of a representation have significantly

less impact on the insured than those for breach of a warranty.

Section 26 has to be read in connection with the application of section 24. Section 26

addresses the question of materiality.

Section 26 of the ICA provides:

(1) Where a statement that was made by a person in connection with a

proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation.

(2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.

74 P. Mann, Annotated Insurance Contracts Act 4th edition, Law Book Co Sydney 2003 75 Ibid, at 89

32

Section 26 (1) provides that certain innocent or justifiable misrepresentations “shall not be

taken as misrepresentations” unless the insured knew, or a reasonable person in the

circumstances could be expected to have known, that the statement would have been

relevant to the insurer’s decision whether to accept the risk and, if so, on what terms. It

further provides that the statement will not be treated as a misrepresentation, even though

it is untrue, where it was made on the basis of a belief held by the insured, being a belief

which would have been held by a reasonable person in the circumstances.

Section 26 (2) imposes the onus of proof on the insurer to prove that the insured “knew, or

a reasonable person in the circumstances could be expected to have known” the

representation is relevant to an insurer.

Section 26 imposes a very high standard in relation to the onus of proof on the insurer. In

practice, insurers have difficulties satisfying the burden of proof for alleged fraudulent

misrepresentation in most cases where it is alleged. This is because insurers find it difficult

to prove that the insured “knew” or ought to “have known” a particular representation the

insured made during the negotiation stage was relevant to the insurer.

In practice, the application of section 26 has disadvantaged insurers in that it has made the

task of declining a claim on the basis of misrepresentation more difficult to prove.

2.8 The Insurer’s Duty of Notification under the ICA

The ICA imposes such a duty on insurers to notify the prospective insured of the nature and

extent of their duty of disclosure. At common law, this obligation did not exist.

33

Section 22 provides:

(1) The insurer shall, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure and, if section 21A applies to the contract, also clearly inform the insured in writing of the general nature and effect of section 21A.

(2) If the regulations prescribe a form of writing to be used for informing an insured of the matters referred to in subsection (1), the writing to be used may be in accordance with the form so prescribed.

(3) An insurer who has not complied with subsection (1) may not exercise a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent.

A contentious issue in relation to the operation of section 22 is the meaning of the words

“clearly inform”. It was held in Suncorp General Insurance Ltd v Cheihk76 that to satisfy its

obligations under section 22 it was not sufficient for an insurer to simply send a note

contained in a lengthier document to the insured without an appropriate explanation, even

if the contents of the note adequately set out the general nature and effect of the duty of

disclosure.

Further, in Lumley General Insurance Ltd v Delphin77, it was held that an insurer could not

rely on non-disclosure to avoid or limit its liability to pay for a claim since the court was not

prepared to infer, on the evidence, that the insured had received a renewal notice

containing notification of the duty of disclosure and hence, that the insurer had failed to

establish compliance with section 22 of ICA.

If the insurer fails to comply with their duty as outlined in section 22, the insurer may not

rely on a breach of the duty of disclosure by the insured unless the breach by the insured

was fraudulent.

76 (1999) 10 ANZ Insurance Cases 61-442 77 (1990) 6 ANZ Insurance Cases 60-986

34

2.9 Remedies for Non-disclosure and Misrepresentation under the ICA

The ALRC Report made the following recommendations in relation to the appropriate

remedies where a non-disclosure or misrepresentation had occurred:

(a) The insurer’s right to avoid a contract from its inception for innocent non-disclosure or misrepresentation should be abolished and a right to damages should be substituted.

(b) The insurer should be able to cancel the contract prospectively and should be entitled to deduct from the claim an amount that fairly reflects the loss it has suffered as a consequence of the insured’s breach of duty.

(c) Where the misrepresentation or non-disclosure is fraudulent, the right to avoid the contract from its inception should be retained but the court should have discretion to award damages instead.

Sections 28 and 29 provide remedies in relation to non-disclosure and misrepresentation for

general and life insurance respectively.

Section 28 of the ICA sets out the remedies in respect of general insurance and provides:

(1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:

(a) failed to comply with the duty of disclosure: or

(b) made a misrepresentation to the insurer before the contract was entered into:

but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.

(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.

(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

35

Section 28 (2) clearly indicates that under the Act, an insurer is not entitled to avoid a

contract of general insurance for innocent misrepresentation or non-disclosure.

Section 28 (1) further limits an insurer’s remedy in the situation where an insurer would

have entered into a contract with the insured anyway ‘with the same premium and on the

same terms and conditions’ regardless of the non-disclosure or misrepresentation made by

the insured.

The relief provided under section 28 (3) is that the insurer may reduce its liability to the

amount that would place it in the position it would have been in had no misrepresentation

or non-disclosure occurred.

Accordingly, where insurers are able to demonstrate that an insurer would not have entered

into the contract had the relevant disclosure in truth been made before the contract is

entered; its liability under the contract will or can be reduced by an amount equal to the

claim.

In Lindsay v CIC Insurance Ltd,78 in considering the application of section 28 (3) of the ICA,

the court held:

“The intention is to put the insurer in the position it would have been in if the relevant disclosure had, in truth, been made. If, in those circumstances, the insurer would not have accepted the policy, then the only way in which the insurer can be restored to the position that it would have been in is by reducing the payment required to be made under the policy to nil. That is because the damage suffered by the insurer is the total amount of the claim made against it.”79

78 [1989]16 NSWLR 673 79 Ibid, at 687

36

The remedies for misrepresentation under the Act are similar to those which apply in the

case of a non-disclosure by the insured.

In Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd,80 for example Gobbo J held that

the insurer was not liable to pay the claim under section 28 (3) because the insurer had

satisfied the court that if the misrepresentation had not been made it would have declined

the risk.

Gobbo J in considering the application of section 28 (3) held:

“In my view, the correct construction of section 28 (3) is that, although it presumes the existence of the policy and the insurer’s liability under it. It offers an indirect means in an appropriate case of avoiding the policy in the event of innocent misrepresentation or non-disclosure by reducing the liability to nil, being the position in insurer would have been in if there had not been a misrepresentation.”81

In Orb Holdings Pty Ltd v Lombard Insurance Co (Aust) Ltd,82 the court used a similar

approach. There the insurer was not liable to indemnify under the policy for damage caused

by fire to a shopping arcade which had been described in the proposal as being of a

“brick/iron” construction when in fact the arcade consisted of two brick walls, two wooden

walls and an iron roof. The court was satisfied with the evidence produced by the insurer

that in the particular circumstances, the insurer would have declined to insure the building

had it been aware that two of the walls were of not brick construction.

In summary, the law is settled in Australia that in the case of innocent non-disclosure or

misrepresentation, the insurer is not entitled to avoid the contract, but by the application of

section 28 (3), the insurers’ liability can be reduced to nil if an insurer can establish that it

80 [1991] 2 VR 146 81 Ibid, at 151 82 [1995] 2 Qd R 51

37

would not have entered into the contract at all had it known the true situation. This

requires an insurer to prove that insured deliberately withheld information of the kind

required to be disclosed, or in other words, that the non-disclosure or misrepresentation is

fraudulent in nature.83 The onus of proof is also on the insurer84 to satisfy that a particular

contract of insurance was induced by the insured’s particular fraudulent statement or non-

disclosure.

Having discussed above, it comes to the conclusion that under the ICA, an Australian insurer

is not able to rely on section 28

(a) if an insurer is unable to prove that a contract of insurance for the same premium and on the same terms and conditions would not have been entered with the insured if an insured had disclosed the matters that needed to be disclosed or the misrepresentation had not been made; and

(b) even if an insurer has successfully proved the above, under section 28 (2), the court has power by virtue of section 31, to disregard avoidance of a contract by an insurer as a result of a fraudulent non-disclosure or misrepresentation when it would be harsh and unfair not to do so: Von Braun v Australian Associated Motor Insurers Ltd.85

Section 29 deals with issues related to non-disclosure and misrepresentation for life

insurance. Section 29 enables an insurer to avoid a life policy where an insurer has

established the non-disclosure or misrepresentation on the part of the insured. An insurer

may do so in one of two ways. If the non-disclosure or misrepresentation is not fraudulent

and the policy is avoidable within three years of issue, the insurer may avoid under section

29(3) but in that situation it must also demonstrate that the insurer would not have issued a

policy of life insurance on any terms had it known the true position.86 In addition, section

83 Twenty-first Maylux Pty Ltd v Mercantile Mutual Insurance (Australian) Ltd, [1990] VR 919 84 GRE Insurance Ltd v Ormsby [1982] 29 SASR 498 85 (1999) 10 ANZ Insurance Cases 61-419. 86 Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182

38

29(3) does not permit an insurer to avoid part of the insured’s cover. It permits the insurer

to avoid the “contract”. The “contract” in this regard means the whole policy87.

Section 29 (3) provides an insurer with the option to decline the contract within the first

three years after the contract was entered into. It will no longer be able to avoid the

contract if an insurer fails to do so (other than in cases involving fraud).88

If the non-disclosure or misrepresentation is fraudulent the insurer may avoid the contract

at any time, but the insurer must, in addition to establishing fraud, demonstrate that it

would not have issued the policy on the same terms89. An allegation of fraud in any

circumstance is difficult for insurer’s to prove. The high standard of the onus of proof, the

complexities of the litigation process, the legal costs and issues related to resources and the

time required to manage the investigation are all relevant factors which deter life insurers

from declining claims on this basis.

Section 31 allows the court to disregard any avoidance for fraudulent misrepresentation if

the insured can establish that it is harsh and unfair to avoid the policy. Under this section,

the court is given the broad power to allow the insured to recover the whole, or such part as

the court thinks just and equitable, of the amount that would have been payable if the

contract had not been avoided.

Section 33 provides that the he remedies under sections 28 and 29 are the only remedies

for general and life insurers with respect to non-disclosure or misrepresentation under the

Act (which excludes the common law remedies) and is the only relief that can be sought by

an insurer in relation to a failure of an insured for non-disclosure or misrepresentation. 87 The Insurance Contracts Amendment Bill 2010 (Cth) has proposed amendments of this part with further provisions 88 Herbohn v NZI Life Ltd (1998)10 ANZ Insurance cases 61-410 89 Section 29 (2) of the ICA

39

Part IV of the ICA has been regarded as one of the most significant changes to insurance law

in Australia.

Mason CJ and Dawson J in their joint judgment in Advance (NSW) Insurance Agencies Pty Ltd

v Matthews90 held that Part IV of the ICA:

“…is a statutory code which replaces the common law. Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the Statute are extremely limited.”91

The ICA has greatly enhanced the protection afforded to consumers in the insurance market

in Australia although the operation of some provisions still has uncertainty in some respects

and awaits further judicial clarification.

2.10 Section 56 of the ICA

Although the duty of disclosure strictly applies pre-contractually, under section 56, if an

insured makes a false statement at the claims stage it could mean that the claim may not be

paid.

Section 56 provides:

(1) Where a claim under a contract of insurance, or a claim made under this Act against an insurer by a person who is not the insured under a contract of insurance, is made fraudulently, the insurer may not avoid the contract but may refuse payment of the claim.

(2) In any proceedings in relation to such a claim, the court may, if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair, order the insurer to pay, in relation to the claim, such amount (if any) as is just and equitable in the circumstances.

90 (1988) 5 ANZ Insurance Cases 60,910 91 (1988) 5 ANZ Insurance Cases 75,836

40

(3) In exercising the power conferred by subsection (2), the court shall have regard to the need to deter fraudulent conduct in relation to insurance but may also have regard to any other relevant matter.

Section 56 has been drafted in such a way as to protect prior valid claims that have been

paid in contrast to the position at common law where the contract was avoided ab initio.92

At common law, an insurer is entitled to avoid the contract in the event of a fraudulent

claim being made whereas under section 56, an insurer cannot avoid the contract but may

only refuse to pay the relevant claim.

Section 56 is subject to the court’s discretion as the provision gives the court the power to

order an insurer to pay in respect of a fraudulent claim an amount that it assesses as “just

and equitable in the circumstances” provided that only a "minimal or insignificant” part of

the claim is made fraudulently and non-payment of the remainder of the claim would be

“harsh and unfair”.

Commentator Phillip Carr examined the application of section 56 in an article in the

Australian and New Zealand Institute of Insurance and Finance Journal and commented

that:

“Under section 56 (1) of the Act, a claim made fraudulently is not sufficient to render a contract of insurance void ab initio, but the insurer may deny the specific claim and may cancel the policy prospectively under section 60 (1) (e). In making the decision to rely on this provision, attention must be turned to section 56 (2) which stipulates that the court may order payment of a portion of the claim where a ‘minimal or insignificant’ component of the claim was fraudulent and declinature of the remainder bona fide amount would be ‘hash and unfair’. In such cases, the court may order such payment as it deems to be ‘just and equitable in the circumstances’, while being mindful of the need to deter insurance fraud (s. 56 [3]).”93

92 The ALRC Report 20, Para 243 93 P, Carr, Australian and New Zealand Institute of Insurance and Finance Journal 2006 Vol.29 No. 3 at 29

41

Carr further summarized the effect of section 56 of the ICA:

“The common law approach has been altered slightly in the Act – specifically with regards to the remedies available to insurers. By virtue of section 56(1) when a fraudulent insurance claim is made, ‘… … the insurer may not avoid the contract but may refuse payment of the claim’. Section 56 (2) has the effect of insurers no longer necessarily being able to avoid payment on a claim altogether when the claim is subject to fraud, but rather the court may at its discretion ‘order the insurer to pay, in relation to a fraudulent claim, an amount that it considers to be ‘just and equitable in the circumstances’ where non-payment of the entire claim would be harsh and ‘unfair’.94

In summary, a false statement made by the insured in connection with a claim with the

intent to deceive the insurer will constitute the making of a fraudulent claim. Section 56

applies to that if an insured makes a fraudulent claim, under section 56 the claim may be

denied by the insurer.

2.11 The Duty of Utmost Good Faith and its application to a Third Party

Sections 48 and 48A of the ICA were introduced for both the general and life insurance

industry in order to override the common law doctrine of privity and aims to provide

protection for third party beneficiaries under an insurance contract. The enactment precise

nature of the rights and obligations of a third party beneficiary under section 48 have

caused considerable uncertainty.

Section 48 provides:

(1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person's loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract.

94 Ibid, at 29

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(2) Subject to the contract, a person who has such a right:

(a) has, in relation to the person's claim, the same obligations to the insurer as the person would have if he were the insured; and

(b) may discharge the insured's obligations in relation to the loss.

(3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured.

Section 48A states:

(1) This section applies to a contract of life insurance effected on the life of a person but expressed to be for the benefit of another person specified in the contract (the third party).

(2) The following provisions have effect in relation to a contract to which this section applies:

(a) any money that becomes payable under the contract is payable to the third party, even though he or she is not a party to the contract;

(b) money paid under the contract does not form part of the estate of the person whose life is insured.

(3) Nothing in this section restricts the capacity of a person to exercise any right or power under a contract of life insurance to which the person is a party. In particular, nothing in this section restricts the capacity of a person:

(a) to surrender a contract of life insurance to which the person is a party; or

(b) to borrow money on the security of a contract of life insurance; or

(c) to obtain a variation of a contract of life insurance, including a variation having the result that the contract ceases to be a contract to which this section applies.

It has been held that where a party “is to be named on the policy as an interested party” the

named party is a third party beneficiary.95 However, the court did not give clear explanation

as to whether the effect of the named party as a third party beneficiary is the party who was

covered for its own acts or omissions or only for its liability for the acts or omissions of the 95 NSW Arabian Horse Association Inc v Olympic Co-Ordination Authority [2005] NSWCA 210

43

contracting party. Therefore, it has been held that in order to have the benefit of section 48

of the ICA, care must be taken in dealing of the issue of noting interests as persons to whom

the insurance cover extended.96

Other uncertainties exist in relation to the effect on a third party of the insured’s conduct, in

particular where there has been:

• fraud by the insured;

• breach of a term by the insured; or

• non-disclosure or misrepresentation by the insured

For example, the court has not addressed the uncertainty to the satisfaction that is to an

insured who has been allegedly breached a condition of the policy rather than committed

fraud’’. In C E Health Casualty and General Insurance Ltd v Grey,97 the court only suggested

that whether there was a breach of the policy condition, it much depended on whether the

terms of the policy specify the consequences of the breach and whether the third party is

held to those consequences.

Insurance lawyers Peter Mann and Ray Giblett in delivering a training course held in Clayton

Utz law firm commented in relation to the above issue. They stated whether or not there is

a breach of the policy conditions, it “will depend on the precise wording of the policy.

Although in most cases it may remain open for an insurer to assert that a breach of a policy

condition (as opposed to fraud) by an insured which gives rise to the loss can taint the claim

of a third party beneficiary.”98

96 General Motors Acceptance Corp v RACQ Insurance Limited (2003) 12 ANZ Insurance Cases 61-574 97 [1993] 32 NSWLR 25 98 P Mann, R Giblett. Joining the Dots on Risk between Contract and Insurance; Notes taken from the Master Class for Insurance Law, 22 August 2006

44

They further suggested that same rationale applies to where the insured has enlivened a

relevant exclusion.99

Having discussed above, at least one point is clear that pre-contractual non-disclosure or

misrepresentation by an insured will affect the claim by a third party beneficiary. This is

because the insured’s misconduct has effectively affected the existence of the insurance

contract in the first place.100

2.12 Reinsurance

In Australia, the insurance contract law which governs a reinsurance treaty between a

reinsurer and a direct insurer differs from the insurance contract law which governs a

policyholder and a direct insurer. The ICA which applies to an insurance contract between a

policyholder and a direct insurer does not apply to the reinsurance treaty between a

reinsurer and a direct insurer101.

Reinsurers do not have direct disputes with the insured as they are not a party to the

insurance policy. However reinsurers are responsible for the settlements of claims according

to the percentage the direct insurers reinsured the policy. The reinsurance treaty requires

the direct insurer to notify reinsurers any element which has a contestable nature as part of

the due diligent process of managing of any claim. Reinsurers must make sure that the

direct insurers have assessed the claim adequately to avoid any undesired settlements by

direct insurers in particular to policies which are 100% reinsured.

99 GIO Australia Ltd v P Ward Civil Engineering Pty Ltd (2000) 11 ANZ Insurance Cases 61-647 100 Commonwealth Bank of Aust v Baltica General Insurance Co Ltd 1992] 28 NSWLR 579; C E Health Casualty and General Insurance Ltd v Grey [1993] 32 NSWLR 25 101 Section 9 of the ICA

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2.13 Conclusions

In conclusion, in Australia, at common law, where the insured failed to disclose material

facts, the strict application of the duty of disclosure under the principle of utmost good faith

favours the insurer in that the remedy entitles the insurer to avoid the contract of

insurance ab initio. The ICA has changed the common law and under section 21, this is no

longer the case.

Under the ICA, insurers are no longer entitled to avoid a policy for pre-contractual non-

disclosure or misrepresentation. Under sections 28 and 29 of the ICA, remedies are available

for pre-contractual non-disclosure or misrepresentation. Notwithstanding an insurer may be

able to provide convincing evidence of pre-contractual non-disclosure by the insured, the

insured may be able to avoid any consequence if the insurer failed to comply with its

obligation under section 22 in failing to advise the insured of the nature and extent of their

duty of disclosure.

In addition to sections 28 and 29, even where there has been a fraudulent non-disclosure or

misrepresentation, the court has the ultimate power under section 31 to disregard any

avoidance if the insured can establish that it is harsh and unfair to avoid the policy.

When there are insurance disputes between the insurer and the insured, the insurance law

including the Act promote justice and fairness for both parties. However, in practice, the

insurers are much willing to settle the claim with the insured for a number of factors

irrespective of whether there are valid grounds upon which possibilities to dispute the claim

can be investigated.

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Factors that insurers would want to take into account for the purpose to settle a particular

claim include, for example:

• The lengthy litigation procedure and process.

• The limited resources available for insurers to manage the disputed claims.

• The legal costs involved in assessment of the claim.

• The percentage of risk transferred to the reinsurers.

• The insurers’ public reputation.

• The difficulties in proving the insured’s non-disclosure or misrepresentation

under section 21 of the ICA.

• The application of section 31 of the ICA.

All of above factors encourage a direct insurer to settle claims with the insured even where

strong evidence suggests that the insured might deliberately withheld material information

prior to the formation of the insurance contract; or made a fraudulent claim.

For commercial reasons, most Australian insurers believe that the importance for an insurer

to successfully decline a disputed claim is neither significant nor fundamental for daily

management of the insurance business. Because, the benefit of settling a claim is more

practical and cost effective than trying to successfully defend against a claim.

A good claim management strategy in relation to insureds non-disclosure and

misrepresentation issues requires insurers not only effectively control the claim process but

also to carefully advise the insured of their obligation of disclosure prior to enter an

insurance contract. In addition, insurer should prepare their proposed questions for the

insured in a way that all reasonable insureds are able to understand and act upon correctly.

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3. 2004 GOVERNMENT REVIEW OF THE ICA

The ICA reformed and modernized the law of insurance as it stood in 1984 with a view to

keeping apprised of the regulatory, commercial and technological changes of the time.

The government recognized the need for an ongoing process of reform and conducted a

review of its implementation in 2004, 20 years after its enactment. The Review Panel

considered that the ICA was generally operating satisfactorily in the Australian insurance

industry and for the benefit of both insurers and insureds in general terms.

Having concluded the above, the Review Panel nevertheless made 38 recommendations in

its final report.

In response to the 2004 Review, the Insurance Council of Australia (ICA Australia) has made

a number of submissions on behalf of its members, being insurers subject to the ICA. As to

non-disclosure and misrepresentation the ICA Australia recommended amendments which

took into account the High Court’s decision in Permanent Trustee v FAI General Insurance

Company Limited (in Liq).102

In this case, the insurer denied liability on the grounds of non-disclosure of a matter that the

insurer considered to be relevant to its decision as to “accept the risk and, if so, on what

premium”. The High Court was divided with a narrow 3:2 majority on the interpretation of

these words.

The High Court raised two key problems.

102 (2003) 214 CLR 514

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• Firstly, the need for insurers to have remedies where an insured fails to disclose all matters that are relevant to their decision both to accept a risk and the terms upon which they will accept that risk, including commercial considerations.

• Secondly, whether the non-disclosure or misrepresentation of a person acting as an intermediary of the insured should be treated as a non-disclosure or misrepresentation by the insured.

The majority judges, McHugh, Kirby and Callinan JJ found that the focus of attention in

section 21(1)(a) is upon risk and not upon the much broader question of the commercial

willingness of the insurer to accept the risk. Therefore, the insured’s disclosure obligations

did not extend to matters of a commercial nature. The minority disagreed by stating that:

“To attempt to distinguish between matters which bear upon the risk and those which concern the making of the contract under which the risk was undertaken, but not the risk, would require a very fine distinction. If such a distinction can be drawn, it is not one which the Act requires or permits.”103

Section 21(1) of ICA focuses upon two steps which an insurer may take when dealt with an

insured in deciding whether to accept the risk at all or deciding the terms upon which the

risk would be accepted. The matters which an insured must disclose to their respective

insurers are matters which are known to the insured and which are relevant to either of

those steps.

Section 21(1) does not require, however, the identification of the particular step in the

insurer’s decision-making process to which the matter in question relates. If a matter bears

upon the decision to accept the risk, or bears upon the terms upon which the risk is to be

accepted, or bears upon both, the matter must be disclosed. The obligation to disclose is

fixed by reference to the relevance of the matter to the making of either decision by the

103 Ibid, at 382

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insurer. It is the insurer’s decisions, about whether to accept the risk or the terms upon

which it will be accepted, that is the fulcrum about which section 21 (1) turns.

The minority judges, Gummow and Hayne JJ went further and stated that:

“…there is no reason to exclude from consideration matters which do not affect the nature or extent of the risk but which are known by the insured to be relevant to whether the insurer will make the contract proposed.”104

In light of the differing opinion in the majority and minority opinions of the High Court in

Permanent Trustee v FAI General Insurance Company Limited (in Liq) 105 on the

interpretation of section 21 (1)(a) of the ICA, the insurance industry considers that the

words “accept the risk and, if so, on what terms” as they appear in Part IV need appropriate

amendment.

The 2004 Review of the ICA has provided the industry with an important opportunity to

assess whether the rights and obligations of both parties to the insurance products under

the ICA continue to be appropriate and effective, in light of the regulatory developments

and the judicial interpretation of the ICA.

3.1 The Insurance Contracts Amendment Bill 2010

The previous Federal Government released its exposure draft legislation on 12 February

2007 for public comment with the intention to implement most of the recommendations of

the Review Panel. The Insurance Contracts Amendment Bill 2007 had been included in the

list of legislation proposed for introduction in the autumn 2007 sittings of the Federal

Parliament. However following the change in government in late 2007, there has been

104 Ibid, at 382 105 Ibid

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further consultation with stakeholders. As a result of the further consultation with

stakeholders, a number of measures in the 2007 Bill have been modified in light of concerns

that were raised by the insurance industry.

The Insurance Contracts Amendment Bill 2010 introduces a number of significant changes

to the Act, in particular to the duty of disclosure under the principle of utmost good faith.

The Insurance Contracts Amendment Bill 2010 aims to bring new provisions concerning life

insurance in line with the rules set out for general insurance.

The changes made by the Insurance Contracts Amendment Bill 2010 will affect an insurance

contract in number of ways when it is enacted. This paper only discusses those relevant

changes made relating to the duty of disclosure and misrepresentation and the principle of

the utmost good faith.

3.2 Utmost Good Faith under the Insurance Contracts Amendment Bill 2010

One significant change proposed by the Insurance Contracts Amendment Bill 2010 was the

amendments in relation to the duty of disclosure. Those amendments intend to bring a

number of provisions concerning life insurance in line with the rules set out for general

insurance. In addition, it largely enhances the rights and obligations for third-party

beneficiaries under the ICA.

Section 13 implies a term that parties to the contract must act towards each other with the

utmost good faith. The 2010 Bill amends s13 so that a breach of the duty of utmost good

faith is a breach of the ICA and in addition, it applies to third party beneficiaries after a

contract is entered into.

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This amendment purports to address the perceived flaws in the current operation of section

13. The purpose of the amendment is to prevent poor and inefficient claims handling

practices by insurers. The proposed amendment makes a breach of the duty of utmost good

faith a breach of the ICA. It is proposed that the Australian Securities and Investments

Commission (ASIC) will be able to commence proceedings against an insurer on behalf of an

insured and seek various remedies under the Corporations Act 2001 (Cth). In addition, ASIC

will be entitled to bring representative proceedings under section 55A of the ICA in certain

circumstances where insureds have suffered damage or to intervene in future proceedings

concerning matters arising under the ICA.

3.3 Disclosure and Misrepresentations under the Insurance Contracts Amendment Bill 2010

The Review Panel considered that sections 21 and 21A in their current form imposed an

unreasonable burden on insureds in the following situations.

(a) Under a statutory obligation (The Insurance Contract Act 1984 (Cth)) an insured is required to disclose the facts that an insurer consider as relevant to its decision on whether an insurer will enter into a contract of insurance.

(b) The formulation of “a reasonable person in the circumstances” test required on disclosure for the insured is partly objective and partly subjective, in reality, it creates confusion for the insured when they are required to disclose in particular to that there are still conflicting authorities as to which object factors are relevant and can be taken into account in applying that test.

The Insurance Contracts Amendment Bill 2010 aims to clarify the content of the duty of

disclosure in the following situations.

(a) It extends the disclosure regime for ‘eligible contracts’ of insurance to renewals.

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(b) It imposes more onerous obligations on insurers by requiring them to remind prospective insureds that their duty of disclosure continues until the policy commences.

(c) It extends to third parties who have the benefit of a policy but who are not the named insured.

The proposed changes to section 21 greatly expand the objective limb of the test in section

21106 so that a court will be able to consider the nature and extent of cover to be provided

when determining what a reasonable person should be expected to know is relevant.

Furthermore, the Insurance Contracts Amendment Bill 2010 provides a number of non-

exclusive factors to which the Court may have regard in determining the extent of the

reasonable person’s knowledge.

Those factors include

(a) the types of cover to be provided;

(b) the class of persons for whom that type of cover is provided in the ordinary course of the insurers’ business; and

(c) the circumstances in which the insurance contact was entered into. Including the type and extent of questions asked by the insurer.

The amendments to section 21A will have the effect of extending the application of section

21A to all renewals, extensions and variations to an eligible contract rather than only to

contracts for “new business”.

106 What a reasonable person in the circumstances should be expected to know would be relevant to the insurer’s decision to enter the insurance contract.

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3.4 Notice to an Insured of Duty of Disclosure under the Insurance Contracts Amendment Bill 2010

Proposed changes to section 22 emanated from a concern that the Review Panel had as to

there can be a delay between the receipt of such a notice and the inception of the policy.

The current section 22 sets out number of requirements for insurers to notify prospective

insureds in relation to their duty of disclosure.

The insurer is required to inform the insured the general nature of the duty of disclosure

and possible effect of not complete the duty of disclosure. In addition, insurers are further

required to notify insureds that they have the duty to disclose any material fact relevant to

their application of a life insurance product ‘before the contract is entered’.

The Review Panel considered insureds may not appreciate that their duty of disclosure

applied right up until inception of the policy. The Insurance Contracts Amendment Bill 2010

has adopted the Review Panel’s recommendation that insurers in addition to the current

obligation, be required to specifically remind their prospective insureds that the insured

duty of disclosure continues until the time that the policy commences.

The proposed amendments to section 22 of the ICA provide:

(a) a notice provided to an insured pursuant to s22 should explain that the duty of disclosure applies until the proposed contract of insurance is entered into; and

(b) if there is more than a 2 month delay between the insurer’s agreement to provide cover and receipt of the proposal, the insurer has to provide the insured with a further reminder of its duty of disclosure at the time the insurer communicates its agreement to provide cover.

54

These amendments are intended to avoid harsh outcomes where a claim is denied for non-

disclosure of a change in the insured’s circumstances that occurred between the proposal

and commencement of cover.

3.5 Proposed reforms to the remedies for Non-disclosure and Misrepresentation under the Insurance Contracts Amendment Bill 2010

The Insurance Contracts Amendment Bill 2010 seeks to amend sections 28 and 29 in a

number of respects. The main amendments are to insert a new section 31A which would

have the effect of imputing a non-disclosure made by a life insured (that is, a person other

than the insured whose life is insured under the insurance contract) to the insured thereby

making available the remedies in section 8 to an insurer in respect of a life insured’s non-

disclosure and to insert a new section 27A the purpose of which is to “unbundle” contracts

of life insurance that provide two or more kinds of insurance cover or insurance cover for

two or more life insureds. Further, section 28 is amended by extending the remedies for

general insurance in section 28 to non-traditional contracts of life insurance, namely to

contracts of life insurance other than those with a surrender value or that provide cover on

death. The provision dealing with the remedy where an insured misstates the relevant date

of birth has also been amended by permitting the insurer to vary the contract by changing

its expiration date to the date that would have applied if the contract had been based on

the correct date of birth.

3.6 Conclusions

Up to the completion of this thesis, the government has no further action in relation to the

Insurance Contracts Amendment Bill 2010 since it has been released.

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4. SINGAPORE INSURANCE LAW

4.1 The Insurance Law of Singapore

Unlike Australia, Singapore has not introduced any its own legislation to regulate the area of

insurance contracts.

Associate Professor Poh Chu Chai of the National University of Singapore described the

Singapore insurance law as the following:

“The law applicable to contracts of insurance in Singapore is generally based on English law. The common law of England continues to apply in Singapore by virtue of section 3 of the Application of English Law Act 1993.”107

Subsection 3 (1) of the Application of English Law Act 1993 states that

“The common law of England (including the principles and rules of equity), so far as

it was part of the law of Singapore immediately before the commencement of this

Act shall continue to be part of the law of Singapore.”

4.2 Legal Requirement for an Insurance Contract under Singapore Law for Life Insurance

In order for a valid insurance contract to exist the following requirements must be satisfied:

(a) The three elements (1 First, the contract of insurance must provide that the assured would become entitled to something on the occurrence of some event… Second, the event must be one which involves some element of uncertainly… Third, the assured must have an insurable interest in the subject matter of the contract…”)

108 laid down by Sir Robert Megarry in Medical Defence Union Ltd v Department of Trade109.

(b) The statutory requirement of insurable interest in the risk insured110.

107 P. C Chai, Principles of Insurance Law, 6th Edition LexisNexis 2005 at p 1 108 [1979] 2 WLR 686 at 690-691. 109 [1979] 2 WLR 686 110 Preamble to the Marine Insurance Act 1746 and section 3, Life Assurance Act 1774 UK (re-enacted by the Insurance Act 2002) Singapore

56

(c) There is a binding contract (under the common law principle).

(d) The contract must be in writing (other contracts subject to the common law rules applicable to contractual matters do not necessarily have to be in writing)111.

Singapore has adopted the Life Assurance Act 1774 (IMP) which is re-enacted by

the Insurance Act 2002 for life insurance products and is the major legislation for life

insurance contracts. Section 2 of the Life Assurance Act 1774 (IMP) requires that all life

insurance contracts must be in the formation of a written policy.

Section 22 of the Marine Insurance Act 1994 (Cap 387) and section 4(5) of the Motor

Vehicles (Third Party Risks and Compensation) Act 2000 (Cap 189) have the same

requirements for other general insurance contracts subject to the provisions set out in those

Acts.

4.3 Duty of Disclosure under the Principle of the Utmost Good Faith

The Life Assurance Act 1774 (IMP) re-enacted by the Insurance Act 2002 Singapore does not

have provision governing the issue of duty of disclosure for life insurance applicants. The

pre-contractual disclosure for a life insurance product applicant is still governed by the

common law principle of uberrimae fidei which is later codified in the Marine Insurance

Act 1994 Singapore.

Section 17 of the Marine Insurance Act 1994 provides:

A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith is not observed by either party, the contract may be avoided by the other party.

111 Section 2, Life Assurance Act 1774 UK (re-enacted by the Insurance Act 2002), Singapore

57

The duty of disclosure is set out in section 18 which provides:

1 Subject to this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him; and if the assured fails to make such disclosure, the insurer may avoid the contract.

2 Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.

3 In the absence of inquiry, the following circumstances need not be disclosed:

(a) any circumstance which diminishes the risk;

(b) any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;

(c) any circumstance as to which information is waived by the insurer;

(d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

4 Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.

5 The term “circumstances” includes any communication made to, or information received by, the assured.

Under section 18, the following principles apply to contracts of marine insurance.

1 The remedy for the insurer in the event of a breach by the insured of the duty of disclosure is to avoid the contract ab initio.

2 The common law “prudent insurer” test applies in determining what a material fact is.

3 In the absence of inquiry by the insurer, there are limits to the extent of the disclosure required in some circumstances.

4 The duty of disclosure applies up until the contract is concluded.

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The above principles have been applied by courts in general insurance contracts: Britton

v Royal Insurance Company.112

Therefore, what must an insured disclose to his insurer? Before Lambert v Co-operative

Insurance Society Ltd113, Singapore courts vacillated between the views of an insured’s duty

of disclosure was limited to information considered to be material by a reasonable insured

as opposed to the information considered to be material by a prudent insurer.

Singapore courts have finally adopted the “Prudent Insurer” test in determining material

facts after the English Court of Appeal in Lambert v Co-operative Insurance Society Ltd.114

The issue the Court was asked to decide was stated by MacKenna J as follows.

“Everyone agrees that the assured is under a duty of disclosure and that the duty is the same when he is applying for a renewal as it is when he is applying the original policy. The extent of that duty is the matter in controversy. There are, at least in theory, four possible rules or tests which I shall state. (1) The duty is to disclose such facts only as the particular assured believes to be material. (2) It is to disclose such facts as a reasonable man would believe to be material. (3) It is to disclose such facts as the particular insurer would regard as material. (4) It is to disclose such facts as a reasonable or prudent insurer might have treated as material.115

The court settled in the fourth rule which is later referred as the “Prudent Insurer” test after

taking consideration the fact that the same principle had been regulated by the Marine

Insurance Act 1906116 and the Road Traffic Act 1934.117

112 (1866) 4 F. & F. 905 Willes J commenting on an insured’s duty not to put forward a fraudulent claim under a fire insurance policy and stated at 909: “The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained.” 113 [1975] 2 Lloyd’s Rep.485 114 Ibid 115 Ibid, at p 487 116 Section 18 provide that

(1) Subject to this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him; and if the assured fails to make such disclosure, the insurer may avoid the contract.

(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.”

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In light of the provisions under the Marine Insurance Act 1906nand the Road Traffic Act

1934, Cairns L.J. concluded that:

“In providing by statute that the test should be that of the insurer in marine insurance cases, I think that Parliament was doing no more than inserting in its code of marine insurance law what it regarded as the general rule of all insurance law.”118

The standard for insured to disclose any material information to the insurer in Singapore is

higher where in Australia; as the ICA has amended the “Prudent Insurer” test to the

“Reasonable Insured” test, as a result, in Australia the duty of disclosure for insured has

been limited by the ICA to only disclose that information considered being material by a

reasonable insured.

The court also decided that the onus of proof is on the insurer to establish the information

not disclosed by the insured affected his decision to grant the insurance policy: Drake

Insurance Plc v Provident Insurance Plc119.

4.4 Insurers’ Duty of Notification

Singapore courts have further recognized that the duty of good faith requires both the

insured and the insurer to disclose to each other facts which are material to the risk insured:

Banque Financiere v Skandia (UK) Insurance Co Ltd120.

Therefore, an insurer same as their Australian counterparty, in addition to the common law

duty of disclosure, has a similar statutory obligation to notify the insured about their duty of

117 Section 10(5) provides: “In this section the expression ‘material ’means of such a nature as to influence the judgment of a prudent insurer in determining whether he would take the risk and, if so, at what premium and on what conditions.” 118 [1975] 2 Lloyd’s Rep.485 at 493 119 [2004] 2 W.L.R 531 The English Court of Appeal decided, inter alia, that an insurer seeking to rely on an insured’s non-disclosure of material information was obliged to show that they would not have entered into the contract or would have charged a different premium. 120 (1990) 2 Lloyd’s Report 377, Lord Jauncey stated the duty of disclosure at p 189 as follows. “The duty of disclosure arises because the facts relevant to the estimation of the risk are most likely to be within the knowledge of the insured and the insurer therefore has to rely upon him to disclose matters material to the risk.”

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disclosure. This is stated in section 25 of the Insurance Act 2002 Singapore. This section is

equivalent to section 22 of the ICA

In addition to the general notification requirement, under subsection 25(5), Singaporean

insurers are further required to inform the insured about their duty of disclosure in a

“prescribed form”. Australian insurers do not have this requirement 121.

Insurers have a statutory obligation to “prominently display” the duty of disclosure in the

prescribed form in the proposal document for the prospective insured. This requires an

insurer, in particular to notify the insured of their duty to faithfully and correctly disclose all

material facts relevant to a ‘prudent insurer’ in applying for an insurance policy. The insurer

is entitled to avoid the policy if the insured failed to disclose a ‘material’ fact. The wording in

the second half of the last sentence of section 25 (5) provides insurers with absolute relief

from liability if the insured does not fully and faithfully disclose material facts.

Subsection 25 (5) provides:

No Singapore insurer shall use, in the course of carrying on insurance business in Singapore, a form of proposal which does not have prominently displayed therein a warning that if a proposer does not fully and faithfully give the facts as he knows them or ought to know them, he may receive nothing from the policy.

Section 25 is very powerful and it effectively covers any proposal document issued by the

insurer notwithstanding whether a basis clause is included as a ‘contractual warranty’122 in

the proposal form.

If the insurer does not fulfil this requirement that is not display the prescribed warning

regarding the insured’s duty of disclosure in the application form, the insurer cannot rely on

121 No such requirement in the Australian insurance legislation. Australian insurers can inform the insured in any type of written notice in relation to their duty of notification to insureds. 122 A contract warranty is created by the basis clause contained in most of proposal form issued by insurers.

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this ground later to avoid an insurance contract in the event it is proved in the claim that an

insured has concealed material facts or misstated a material fact in application of a life

insurance products or before entering into a life insurance policy.

In addition to that insurers lost their ground to avoid the contract, they also face heavy fine

if, for any reasons, an insurer not displaying the prescribed warning. Subsection 25 (6)

further imposes a fine on insurers should they fail to notify the prospective insured of their

disclosure obligations in the prescribed form. Upon conviction a maximum fine not

exceeding Singapore dollars $12,500 may be imposed for such contraventions by the

insurer.

4.5 Insureds’ Duty of Disclosure

The Singapore Insurance Act 2002 imposes a strict obligation on an insured to disclose any

material information to the insurer at the time an application for insurance is made. It is

common practice for insurers in Singapore to incorporate a “basis” clause in the proposal

form. The benefit of a basis clause for insurers is that it creates a warranty for the insurer

under the common law principles. The effect of a basis clause is that the insurer is entitled

to avoid the contract if there is any material misrepresentation in the proposal form which

contains a basis clause.

The most popular basis clause used by insurers in Singapore is extracted as following:

“I warrant that the above statements made by me or on my behalf are true and complete and I agree that this proposal shall be the basis of the contract between me and the company.”123

123 Poh Chu Chai, Principles of Insurance Law, 6 Ed LexisNexis, Singapore 2005, at 237

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By virtue of the basis clause the insured warrants that the information provided to the

insurer is accurate and correct. By incorporating the basis clause into the policy, a

contractual obligation is thereby created between the insured and insurer. When the

insured has accepted and signed the proposal form, an automatic warranty is given by the

insured that the statements they made in the proposal are true and correct.

This warranty effectively entitles an insurer to avoid the contract ab initio if the insurer

discovers that the statements are inaccurate or fraudulent even if they have no effect on

the insured risk. In other words, it is irrespective of whether the non-disclosure or

misrepresentation was material.

In Duckett v Williams,124 Lord Lyndhurst held that once the truth of a statement was made

the basis of the contract, an insurer was entitled to avoid the contact if he could show that

the statement was untrue or inaccurate and it was immaterial that the insured was unaware

that the statement was not true.

In addition, the insurer is not obliged to prove any causal link between the misstatement

and the loss which takes place if the basis cause is valid. Materiality is no longer an issue

where a basis clause is operative.125

In circumstances where there is a misstatement in the proposal form, but the basis clause is

absent or ineffective, an insurer then needs to establish either fraudulent intention or that

the misstatement is related to a material fact before the insurer is entitled to avoid the

policy.126

124 (1834) 2 Cr. & M 348 125 Anderson v Fitzgerald, (1859) 4 H.L.C 484 126 Sirius International Insurance Corp v Oriental Assurance Corp, [1999] 1 All ER 699

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The insurers’ entitlement to avoid the policy on the basis of an untruth or inaccuracy in a

proposal subject to a basis clause has been subject to criticism by the public and legal

commentators. It has been argued that the basis clause provides an advantage to insurers

but creates unfairness for an insured particularly where the non-disclosure is innocent or

the misstatement is made in error. This debate has led to a school of thought that such

unequal bargaining power has placed an onerous disclosure burden on an insured desirous

of purchasing insurance products in Singapore. It is argued that in particularly some country

like Australia has legislated that basis of contract clauses are rendered nugatory and the

duty of disclosure is circumscribed by section 21 of the ICA.

Associate Professor Poh Chu Chai has described the statutory notification requirement in

relation to the insurers’ duty of notification as that:

“Section 25 (5) of the Insurance Act 2002 is wide enough to cover any proposal form issued by an insurer whether it does or does not contain a basis clause. If a proposal form is used in an application for insurance, the insurer is entitled to avoid the contract if there is any material misrepresentation in the proposal form. An insurer is generally entitled to avoid a policy if the misrepresentation related to the material fact even though there is no basis clause in the proposal form. Any proposal form, whether it contains a basis clause or not, can potentially operate to deprive an insured of the benefits provided under an insurance policy.”127

4.6 How Singapore Courts Apply the Principle of Duty of Disclosure to Claims

An insured is expected to observe the utmost good faith when he or she makes a claim

against the insurer. In Singapore, the duty of good faith extends to the process of making a

claim. An insured must therefore ensure that he or she does not engage in any fraudulent

127 Principles of Insurance Law, 6 Edition LexisNexis, Singapore 2005 at 238 – 239

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conduct as it was decided by the court that making a fraudulent claim is acting in bad faith

and was regarded as fraudulent conduct.128

If an insured makes a fraudulent claim, the innocent non-disclosure or misrepresentation by

error before entering an insurance contract is regarded as breaching the duty of disclosure.

This was considered in Britton v Royal Insurance Company.129 The court held that the

innocent non-disclosure or misrepresentation by error prior to entering an insurance policy

would be regarded as fraudulent conducts when the insured making a fraudulent claim.130

This situation was examined in depth in the above case. Willes J stated the rule as follows:

“The law is that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained.”131

Singapore courts have applied a line of English authorities which have held that where it is

proved that an insured has failed to act in good faith, the insurer has the right to decline the

entire claim, even if the insured only exaggerated the amount claimed: Galloway v Guardian

Royal Exchange (UK) Ltd.132 In this case, the English Court of Appeal decided inter alia, that

the insured is under a duty to ensure that he or she does not make a claim for an amount

greater than his or her actual loss so the insurer is not misled by his claim. Because there is

no “substantially fraudulent”, once it is proved that the claim was made with the fraudulent

intention, the insurer is entitled to reject the whole claim.

128 Britton v Royal Insurance Company (1866) 4 F. & F. 905 129 (1866) 4 F. & F. 905 130 Ibid 131 Ibid, at 909 132 Galloway v Guardian Royal Exchange (UK) Ltd, [1999] Lloyd’s Report I. R. 209

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Lord Woolf stated that:

“In determining whether or not the fraud is material so that it has that effect, one of course has, in my judgment, to look at the whole of the claim. But if you have a claim (which admittedly here is for a much more substantial sum than the part which is fraudulent) where the part which is fraudulent is nonetheless in relation to £2000 (which amounts to about ten per cent of the whole) that is an amount which is substantial and therefore an amount which taints the whole. I would take the view that the consequences are that the view of the Judge was right and the whole of the claim was thus tainted by the fraud. The position is that the contract remains one of good faith and the insured is required to exercise good faith in the making of the claim. In the making of the claim, the facts are normally wholly within the insured’s knowledge. The insurers are dependent on the insured exercising good faith in order to evaluate the claim.”133

Millett LJ in rejection of the submission that “substantially fraudulent” is to be tested by

reference to the proportion of the entire claim which is represented by the fraudulent claim,

agreed with Lord Woolf’s view that the entire claim was tainted by the plaintiff’s fraudulent

claim. His Lordship stated:

“Assuming (without deciding) that a policy of insurance is avoided only a claim which is “substantially fraudulent” or “fraudulent to a substantial degree”, I reject the submission that this is to be tested by reference to the proportion of the entire claim which is represented by the fraudulent claim. That would lead to the absurd conclusion that the greater the genuine loss, the larger the fraudulent claim which may be made at the same time without penalty. In my judgment, the size of the genuine claim is irrelevant. The policy is avoided by breach of the duty of good faith which rests upon the insured in all his dealings with the insurer. The result of a breach of this duty leaves the insured without cover. In the present case the insured took advantage of the happening of an insured event to make a dishonest claim for the loss of goods worth £2000 which to his knowledge had not occurred. In my view, the right approach in such a case is to consider the fraudulent claim as if it were the only claim and then to consider whether, taken in isolation, the making of that claim by the insured is sufficiently serious to justify stigmatizing it as a breach of his duty of good faith so as to avoid the policy. The making of dishonest insurance claims has become all too common. There seems to be a widespread belief that insurance companies are fair game, and that defrauding them is not morally reprehensible. The rule which we are asked to enforce today may appear to some to be harsh, but it is

133 Ibid, at 213 and 214

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in my opinion a necessary and salutary rule which deserves to be better known by the public, I for my part would be most unwilling to dilute it in any way.”134

There are arguments put forward by legal professionals on behalf of the insured that an

honest mistake should not be sufficient to invalidate the claim, particularly where the

amount claimed has been exaggerated in error. However, the above case clearly indicates

that if a claim is grossly exaggerated and it is unlikely the insured will succeed on the basis it

was an innocent overstatement.

An insured who inflates most of the items in his or her claim is likely to have difficulty

convincing the court that he or she had no intention to defraud the insurer in Singapore.

Thomas J in Nsubuga v Commercial Union Assurance Co Plc135 decided, inter alia, that when

an insured inflated most of the items in his claim, an intention to defraud would be fairly

evident even on a higher standard of proof. Touching on the applicable principles, Thomas J

further stated that:

“The position at common law can be summarized as follows: (1) A person who has made a fraudulent claim would not be permitted to recover at all. That principle was set out in the judgment of Mr. Justice Willes to which I have already referred, and reaffirmed recently in the decision of the Court of Appeal in Orakpo v Barclays Insurance Services.136 (2) If a claim is fraudulently inflated so that the claim is made in an amount which the plaintiff clearly knows he has not suffered, that will amount to a fraudulent claim and will have the same effect. That seems to me to be established by the decision in Orakpo v Barclays Insurance and in particular in the judgment of Sir Roger Parker at p. 452. However, it is important to stress that in connection with this way of putting the claim it is my view that very clear evidence of fraud would be required because one has to accept as a matter of commercial reality that people will often put forward a claim that is more than they believe that they will recover. That is because they expect to engage in some form “horse trading” or other negotiation. It would not generally in those circumstances be right to conclude readily that someone had behaved fraudulently merely because he put forward an amount greater than that which he reasonably believed he would recover. He would

134 [1999] Lloyd’s Report I.R. 209 at 214 135 [1982] 2 Lloyd’s Report 682 136 [1995] Lloyd’s Report 443

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have to put forward a claim that was so far exaggerated that he knew that in respect of a material part of it, there was no basis whatsoever for the claim. (3) If a matter that is directly material to the claim advanced is fraudulently concealed, then that too can amount to fraud in the making of the claim. That is established by the judgment of Mr. Justice Hirst in The Litsion Pride,137 but read in the light of the decision of the Court of Appeal in The Star Sea,138 and in particular in the passage at p 371. Those principles I do not regard as being in dispute.”139

The above authorities have established that the position of the insured in Singapore, when

making a claim, is to exercise the utmost good faith to the insurer. The common law rule

that an insured’s claim will be struck down entirely if an intention to defraud the insurers is

proved has been affirmed and accepted in Singapore courts.

In Singapore, it is the same as Australia that the onus of proof of an allegation that an

insured has intended to defraud an insurer in relation to a claim is placed on the insurer.

Generally, fraudulent activity is regarded as criminal offence, but courts have held that the

insurer is only obliged to prove the insured’s intention to act fraudulently in an insurance

claim to the standard applies to civil matters, that is, on the balance of probabilities,140 but

does not need to go beyond reasonable doubt.141

In Bater v Bater,142 LJ Denning in commenting on the standard of proof in civil cases stated

that:

“In civil cases, the case may be proved by a preponderance of probability within that standard. The degree depends on the subject matter. A civil court, when considering a charge of fraud, will naturally require for itself a higher degree of probability than that which it would require when asking if negligence is established. It does not adopt so high a degree as a criminal court, even when it is considering a charge of a

137 [1985] 1 Lloyd’s Report 437 at 512-513 138 [1997] 1 Lloyd’s Report 361 139 [1982] 2 Lloyd’s Report 682 at 686 140 Bater v Bater [1951] P 35 141 Grunter Industrial Developments Ltd v Federated Employers Insurance Association Ltd [1976] 2 Lloyd’s Report 259 142 [1951] P 35

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criminal nature; but still it does require a degree of probability which is commensurate with the occasion.”143

Denning LJ in Hornal v Neuberger Products Ltd144 further stated that:

“The more serious the allegation the higher the degree of probability that is required: but it need not, in a civil case, reach the very high standard required by the criminal law.”145

Lord Denning’s view was adopted by the local Singapore and Malaysian Judges. In Wong

Cheong Kong Sdn Bhd v Prudential Assurance Sdn Bhd,146 Justice Vincent Ng held that when

an allegation of fraud levelled against an insured amounted to a criminal offence, the

burden of proof resting on the insurer was that of the criminal standard. Similarly, in Asean

Security Paper Mills Sdn Bhd v Commercial Union Assurance (M) Sdn Bhd,147 PS Gill J

adopted a similar approach that when an insurer was alleging arson, the standard of proof

resting on the insurer was proof beyond reasonable doubt.

4.7 Conclusions

The Singapore courts follow a line of authorities from British case law to relieve insurers

from liability to settle insurance disputes with the insured. Once the basis clause is

incorporated as the basis of contract and there has been failure from insured to disclose

relevant facts, the insurance dispute is very much decided in favour of the insurers.

Innocence cannot be successfully claimed as a defence. Insurers only need to prove that the

statement given by the insured is factually untrue to be able to avoid the contract. In the

143 Ibid, at 36-37 144 [1957] 1 QB 247 145 Ibid, at 258 146 [1998] M.L.J. 724 147 [2003] 6 C.L.J. 505

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absence of a basis clause or when it cannot be invoked the insurer needs to prove the

elements of fraud or misstatement relating to a material fact.

This is in contrast to the position in Australia where basis of contract clauses are rendered

nugatory and the duty of disclosure is circumscribed by section 21 of the ICA.

A common issue in relation to non-disclosure in South-East Asian countries, including

Singapore, is the insured’s intentional concealment of their criminal activities, in particular

those involving drug trafficking. The deliberate concealment of criminal activities when

completing a proposal for life policies is a common problem for many insurers. This is a

particular issue in countries like Singapore, Malaysia, Indonesia and Burma (now known as

Myanmar). The type of life policies in dispute generally covers a large payout to

beneficiaries upon the death of the insured.

A Singapore insurer was recently investigating a claim involving suspected non-disclosure by

the insured. The insured and the beneficiary were Indonesian citizens but resided in

Singapore for business reasons. The insured proposed 10 life policies with the company in

which seven of them benefited the insured’s wife and three of them benefited the insured’s

daughters. The insured was fatally shot in a police shoot-out in 2002.

The insured declared himself as the “businessman in charge of the international freight

company in Indonesia and Singapore” as his occupation in the proposal form. Extensive

evidence from various sources established that in fact the insured was one of the largest

drug producers in Indonesia back in 1998 and his factory in Indonesia manufactured ecstasy

tablets. It was claimed that the factory was one of the most significant producers of ecstasy

tables in the world. He was the “wanted” by the Republic of Indonesia and a warrant to

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arrest him was issued in 2001. He escaped Indonesia to Singapore in order to escape arrest.

He went back to Indonesia on 4 April 2005 for illegal drug trafficking and was killed for

attempting to resist arrest on 8 April 2005 by the Indonesian Police during a police raid. The

insured was also known to US law enforcement agencies as well as Interpol.

The insurer declined the claims made by the beneficiaries according to the policies on the

ground that a warrant had been issued by the Indonesian police for the arrest of the insured

for involvement in criminal activities and the insured did not disclose all material facts at the

time the insurance application was submitted. Accordingly, the insurer cancelled all his life

policies and refunded the premium to the beneficiaries.

The beneficiaries of the policies challenged the insurer’s decision upon received the refund

premiums by engaging a law firm considering to issue the legal proceedings.

The beneficiaries argued that the insurers had been satisfied with the information provided

by the insured and had not sought verification from the insured on his occupation as

declared in the proposal form. That is, that the insurer had failed to conduct the due

diligence on the insured and that, if had proper due diligence been undertaken, the insurers

would not have issued the policies.

This matter has not yet been resolved before this paper was submitted however that the

beneficiaries’ arguments will not be successful in Singapore. Under the Singapore law the

insurer only needs to prove that the statement given by the insured is factually untrue or in

the case with fraudulent nature, prove the elements of fraud or misstatement relating to a

material fact in order to avoid the contract. The court would consider the following

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questions to determine whether the insurer is entitled to avoid the policies under section 25

of the Insurance Act 2002 (Cap 41).

(a) Is it practical in the normal business environment for a Singaporean insurer to investigate the type of business a proposer declared involving trans-boarder or international business?

(b) Is it possible for the insurer to find out the true nature of the business a proposer declared in the application even if a further investigation had been conducted in relation to that particular application?

The answer to both questions above are likely to be “no” because criminal activity is by its

very nature secretive and unlikely to be discovered by even the most diligent insurer.

The important factor in this case was that the insured’s criminal activities were of a serious

nature and contrary to the public interest in Singapore. If the true situation had been

disclosed to the insurer, the insurer would not have issued the policies as to do so would be

against the public interest and contrary to other Singapore laws. For example premiums

may have been paid from the proceeds of crime.

However, this matter has raised the issue as to what steps a prudent insurer should carry

out before accepting a proposal. As the duty of utmost good faith applies to both parties,

the insurer, arguably is (not by law but for internal company policy and good practice)

should conduct a due diligence before issuing a policy in some circumstances. An insurer

should ask itself what kind of investigation is sufficient to satisfy the reasonable

requirements based on the information disclosed by the insured at the time of the

application.

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If this case was determined under the Australian law, under the ICA, for an insurer to avoid

the policy, the test will be whether a reasonable person would have believed the

information as to the applicant’s occupation is relevant to the insurer.

In summary, Singapore legal system and laws have been developed in accordance of the

English common law system. The Singapore Government has recently announced that it has

no intention to reform its insurance laws in the near future and is content to maintain its

trust in the British legal system in relation to its insurance laws.

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5. THE INSURANCE LAW OF CHINA INCLUDING HONG KONG

5.1 INSURANCE LAW OF CHINA

5.1.1 Introduction to the Chinese Legal System and Source of Laws

It is interesting to note that the first insurance policy in the world is documented as having

been written in ancient China some thousands of years ago.

The Peoples’ Republic of China (mainland only, not including Hong Kong, Macau and Taiwan)

bears material differences from those countries imbued with common law principles such as

Singapore and Malaysia or those with a mixture of civil and common law traditions such as

the Philippines.

China developed its own civil law system after the Chinese Communist Party took over the

sovereignty of the mainland in 1949. The Constitution of China is universally accepted as

the supreme authority of all laws dealing with the:

• nature of the State,

• the State structure,

• the form of government,

• and citizen’s fundamental rights and obligations and the State organs.

A major difference between the Chinese legal system and the common law system is that

precedents are not binding, although the interpretation of law by the Supreme Court of

China is an important influence and source. Another unique characteristic of the Chinese

legal system is that the law emphasizes ‘substantive justice’ over ‘procedural fairness’.

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Professor YK Zu in his book titled Concise Chinese Law described China’s unique legal system

as follows:

“Its uniqueness lies in

• the multiple legal jurisdictions;

• the striking Chinese characteristics manifested by the traditional heritage and unique solutions to the problems of the transitional economy; and

• significant external elements including civil law tradition, common tradition the heritage of former Soviet Union.”148

As a mixture of civil law and common law, Chinese law includes:

• constitution,

• laws,

• administrative regulation and ministerial rules,

• military regulations and rules,

• local regulations and rules,

• Special Economic Zone regulations and rules,

• Special Administrative Region Laws and regulations, and

• autonomous region regulation.

The enactment of the Sino-Foreign Equity Venture Law in 1979 was the first step China took

towards establishing a legal structure governing foreign investment. Since that time, China

has continued building and extending a legal system which protects its rights and the rights

of their foreign partners.

148 Law Press China 2002 at 1

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The entry of the World Trade Organization (WTO) in 2002 was regarded by the Chinese

government as a landmark. As promised, the Chinese government subsequently reviewed

and amended all its existing laws and regulations to ensure consistency with WTO rules.

The current Chinese legal system does not formally recognize cases or judicial precedents as

a source of law. However, in practice, cases are often cited as persuasive authority and

some courts follow judicial precedents to decide issues when statutes are vague.

Tort principles in China are adopted as an ‘at fault’ system and comparatively conservative,

as is the case in most developing countries. However, strict liability applies in certain areas,

especially those in which death or bodily injury is involved.

China has not yet introduced a codification system. Most of Chinese laws and regulations

do not have English translations. Although the China Law Reference Service lists titles of

most Chinese laws and regulations, the full text of Chinese law is not always translated into

English.

When using the limited English version of Chinese laws, it is a well-recognized common rule

under traditional Chinese practice that the English translation is not always quite as

authentic or accurate as the original Chinese language. When there is a conflict between

the English translation and the original Chinese language, it is the rule that the original

Chinese language prevails. Another common rule that Chinese legal practitioners apply is to

cite the original Chinese legislation when conducting arguments in Chinese courts. English

translations of Chinese legislation are not accepted by Judges in Chinese courts.

In addition, there is no comprehensive official or unofficial reporting system of case law in

China. Only some important cases are selected and reported in the Gazette of Supreme

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People's Court of China. In recent years, a few selective collections of cases have been

compiled and published in China. However it is still difficult to access current cases and

judgments.

The legal system in China is formulated in accordance with the Constitution of the People's

Republic of China. The highest legislative body in China is the National People's Congress.

The Standing Committee of the National People's Congress exercises powers as provided in

the Constitution, such as the power to:

(a) interpret the constitution and law;

(b) enact and amend laws, and

(c) approve international treaties entered into by the Government.

Laws in China are enacted by the National People's Congress and its Standing Committee,

whereas the State Council is authorized to issue administrative regulations. Local people's

congresses may, in accordance to the constitution, laws and administrative regulations,

enact local regulations to be applied at local levels. Ministries and Commissions under the

State Council, as well as local people's governments, may issue governmental orders in

implementing laws and administrative regulations.

5.1.2 Insurance Law 1995

The research of the Chinese Insurance Law this paper conducted is border then addressing

the issue of pre-contract non-disclosure and misrepresentation. It focuses more on the

insurance law in general due to the limited published authorities in the area of insurance

claims.

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Insurance law in China is within the branch of civil law which is also known as the citizen’s

code. It is to safeguard the rights of individuals and companies and is an indispensable basic

law regulating the market economy. Since China entered into WTO, the Chinese insurance

industry has experienced significant changes. It has gone from being a predominantly

closed market when it started to one in which foreign insurers constitute more than half of

all insurance companies operating in most major cities of China.

China first introduced its insurance legislation, the People’s Republic China Insurance Law

1995 (The Insurance Law) at the 14th Standing Committee meeting of the Eighth National

People’s Congress on 30 June 1995. It is interesting to note that while the Chinese legal

system is entirely different from the common law, Chinese insurance law has been strongly

influenced by British insurance law. .

The Insurance Law introduced in 1995 is firmly geared towards the Chinese market-

economy system. It is designed to regulate the creation and activities of insurance

organizations and protect the lawful rights and interests of the insured. It not only facilitates

the creation and operation of the modern business system, but also maintains the social

economic order and promotes the development of socialist market-economy.

The codified Insurance Law is still the only legislation for insurance business. The common

law principle of uberrimae fidei is adopted in the Chinese Insurance Law for parties

negotiating insurance arrangements. Other common law insurance principles are also

incorporated in the Insurance Law including the common law insurable interest requirement

and an insured’s obligation to disclose material facts.

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General provisions of insurance contracts are in accordance with the internationalized

terms. Trends for consumerism are also evidenced by exclusion clauses that may be ruled

void unless clearly disclosed to the policyholder. An insurance contract is always

interpreted by the court in favour of the policyholder if the policy is ambiguous.

Unlike the ICA, a definition of an insurance contract is provided in the Insurance Law:

“An insurance contract is an agreement for defining insurance rights and obligations of the insured and the insurers.”149

The utmost good faith principle is also prescribed in the Insurance Law as:

“The parties concerned in insurance activities shall abide by the principle of good faith in the exercise of rights and performance of obligations.”150

Property and life insurance contracts are further defined as “an insurance contract with the

property or related interests as the object of insurance,” and “an insurance contract that

takes the life and body of persons as the objects of insurance.”

An insurable interest in the insured subject matter is required under the Insurance Law in

that the insurance contract shall be invalid if an insurant has no insurable interest in the

objects of insurance. An insurable interest is defined as “objects of insurance recognized by

law in property or life and health of a person.”

It is defined that a policy should commence upon the insurer the contract being entered and

the premium being paid by the insured.

The Insurance Law further requires that for an insurance contract to be legally binding, it

must contain certain terms and conditions - the basic terms for a contract of insurance. 149 Article 10 of the Insurance Law of China 1995 150 Article 5 of the Insurance Law of China 1995

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The following minimum information requirements must be included:

(a) Name and domicile of the insurer.

(b) Names and residences of the insurant and the insured and the name and

residence of the beneficiaries of life insurance.

(c) Objects of insurance.

(d) Insurance liability and liability exemption.

(e) Insured value.

(f) Insured amount.

(g) Premium and the method of payment.

(h) The method of payment of insurance indemnity or insurance money.

(i) Liabilities for breach of contract and the handling of disputes.

(j) The year, month and date in which the contract is signed.

The Insurance Law prescribes a list of mandatory duties for both parties to the insurance

contract. The rules cover the following areas.

(a) Insurers’ duty to explain the contents of the insurance contract to the insurant and inquiries may be raised concerning the objects of insurance by the insurant.

(b) duty of disclosure for insurant to make true representations.

(c) Insurers have the right to terminate the insurance contract:

(i) if the insurant conceals facts deliberately; or

(ii) refuses to perform the obligation of making true representations; or

(iii) fails to perform the obligations of making representations due to negligence that would be enough to influence the insurer’s decision as to whether or not to accept the insurance or increase the insurance premium.

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(d) In the situation where a misrepresentation by the insured is deliberate, the

insurer is not required to pay claims nor is it required to refund the premium. (e) In the situation where a misrepresentation by the insured is negligent and

the consequence of the negligence seriously affects the assessment of insured risks, the insurer. is not required to pay the claim however, it may refund the insurance premium to the insured.

(f) Terminate the insurance contract with the insurance premium not being

returned if the insured or beneficiaries falsify the occurrence of insured risks and claim for compensation or insurance payments.

(g) Terminate the insurance contract and not be liable for any obligations regarding compensation or making any payments under the policy if the insured or beneficiaries deliberately fabricate the occurrence of the insured risks.

(h) Refuse compensation or payment for the part falsified after an insured contingency occurs, the insurant, insured or beneficiaries are found to have forged or fabricated related certificates, materials or other evidence to prove the causes of the insured risks or for exaggerating the losses.

(i) Recover payment or seek compensation in the event that the insurant, the insured or beneficiaries are found to have committed one of the acts listed in the above three paragraphs that have caused the insurer to pay the insurance money or other expenses.

5.1.3 The Revised Insurance Law

The above Insurance Law applied until 2002 before China joined the WTO. Shortly after

China became a member of WTO, the Chinese Insurance Law was amended in accordance

with the promise the Chinese government made prior to entering the WTO. The nature of

the review was to ensure that the Chinese insurance law enacted since 1995 matching the

international insurance standard.

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The amendments included removing the authorized insurance company to be in the form of

a company limited by shares or a wholly state-owned company151. This amendment

provides the insurance companies with more flexibility in offering new products and making

investments. The amendment was largely welcomed by the insurance industry.

The 2002 amendment also extended the power of the China Insurance Regulatory

Commission (“CIRC”) to take various measures against any insurance company who fails to

meet the solvency requirements or Insurance Code of Conduct. This amendment gave

protection to consumers for the first time in China.

On 28 February 2009, the National People’s Congress resolved to further amend the Chinese

Insurance Law. This was the second significant revision since the Insurance Law was first

enacted in China on 1 October 1995. The amendment took effect on 1 October 2009 and

constitutes a comprehensive reform of Chinese Insurance Law.

The amendment focuses on five major areas of insurance law including:

(a) insurance contracts;

(b) insurance companies;

(c) insurance intermediaries;

(d) the management of insurance companies; and

(e) the supervision of the insurance industry.

One significant amendment is the clarification and protection of the rights and interests of

policyholders. The amendment has imposed a time limit on an insurer to terminate an

insurance contract on the ground that the relevant policyholder has not made full and

151 Stated-owned company means a company owned by the Chinese government.

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accurate disclosure notwithstanding whether the non-disclosure or misrepresentation is

innocent or fraudulent.

Article 16 of the Insurance Law aims to clarify the insurers remedies where an insured fails

to disclose truthful information at the time of applying for a policy. It also makes a

distinction between whether the circumstance where an insured has concealed the truth

through fraud as opposed to negligence. In cases where the insured committed insurance

fraud by wilfully concealing the truth, the insurer has the right to cancel the policy without

paying any claims or refunding paid premiums. In other cases where the insured failed to

make a truthful disclosure through negligence, the insurer has the right to cancel the policy

without paying any claims but is required to refund paid premiums.

The applicant must truthfully disclose all information in respect of the subject matter

insured as the insurer may require. If the applicant intentionally or through gross

negligence fails in its duty of disclosure and these facts would be sufficient to affect the

decision of the insurer to underwrite the risks or raise the insurance premium, the insurer

may cancel the contract and is not liable to indemnify the insured (unless the insurer had

knowledge that an honest disclosure was not made). If the applicant’s failure to disclose is

intentional, the insurer does not have to return insurance premiums.

Such a termination right is required to be exercised within 30 days on two grounds:

(a) after the insurer is aware of the breach;

(b) or two years from the signing of the relevant insurance contract, whichever is earlier.

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However if the insurer is aware that the applicant has not made full and accurate disclosure

at the time of signing the relevant insurance contract, it may not rely on such ground to

terminate the contract. In addition, if a life policy has been existed over two years, the

insurer would have lost the contestability automatically; the insurer may not cancel the

policy and must honour the claim.

This change has gone from one end that the insurer can terminate the contract ab initio if

non-disclosure or misrepresentation is proved, to the other end that no remedy is available

for insurer to terminate the contract after the contract has been operated over two years.

The rationale behind this amendment was that the regulator try to encourage insurers to

conduct adequate due diligence during the first two years. The insurers are given two years

to carry on all necessary steps for investigation. It was believed that during those two years

period, insurers would have sufficient time to investigate or rectify any deficiency or

mistakes made by their customers. If an insurer fails to have conducted the appropriate

customers due diligence, they need to bear the lost when later non-disclosure or

misrepresentation was discovered in claims.

In addition, the insurer must conduct a determination on a claim in a timely manner, or

within 30 days in complex circumstances, after receiving a claim from a policyholder or a

beneficiary. The time limit will also apply to claims raised by customers before the

implementation of the revised Insurance Law; and 1 October 2009 is to be the

commencement date for calculating the time limit.

Where an insurance contract concluded prior to the implementation of the revised

Insurance Law is considered to be null and void by application of the laws then prevailing

but would be effective by application of the revised Insurance Law, the Interpretation

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stipulates that the provisions of the revised Insurance Law shall apply, thus rendering the

contract effective.

This change certainly promotes a culture of consumer protection, but in reality, this has

created a problem for life insurers in practice in view of the fact that most non-disclosures

or misrepresentations can only be discovered at the time of claims being lodged and most

claims for life insurance are made generally after the period of two years.

It is noted that the American Council of Life Insurers submitted its comments and

recommendations to the CIRC in relation to the proposed amendments of the Insurance

Law prior to their enactment. In particular, it was pointed out that an insurer should be

allowed to cancel a policy after the contestability period of 2 years if the insured has

committed insurance fraud by willfully concealing the truth. No solution has been provided

to insurers and the effectiveness of this change is still subject to market testing at the

moment.

Other key amendments made by the amended Insurance Law (is listed below for reference

although there are not directly relevant to the topic researched in this paper) are:

(a) The power of the China Insurance Regulatory Commission (CIRC) to supervise and regulate insurance companies with inadequate levels of solvency has been strengthened. The amended Insurance Law, for the first time, allows insurance companies to use their funds to invest in 'immovable assets' (which is not defined but presumably includes real estate). Investments by insurance companies in bonds, shares and units in securities investment funds are also permitted. The CIRC is further authorized to draft implementation rules that are expected to give details of regulation regarding these investments.

(b) The amended Insurance Law imposes stricter requirements on an insurance company's 'major shareholders' when establishing new insurance companies. However, it does not provide a definition on a "major shareholder" in the amended insurance law. It seems that these qualification requirements will apply mainly to major domestic shareholders of insurance companies as the

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qualification requirements for foreign investors of the foreign-invested insurance companies are set out in the Administrative Regulations on Foreign Invested Insurance Companies. It is necessary that major shareholders, directors, supervisors and senior management satisfy qualification requirements for setting up an insurance company.

(c) There is tightened control of the Related Party Transactions (RPT). The CIRC has set out the approval and filing requirements for foreign-invested insurance companies and domestic insurance companies respectively with regard to certain RPTs. A shareholder may be forced by CIRC to sell its interest in an insurance company if it is deemed to have damaged the interests of the insurance company or endangered its solvency level as the result of entering into related transactions. The Amended Insurance Law gives its recognition of such practice and has elevated the CIRC's power in regulating RPTs to a national law level.

(d) The amended Insurance Law provides that an insurance company can take the form of a limited liability company. According to the existing insurance laws and regulations, a domestic insurance company must be a joint stock company or a wholly state-owned company. A foreign-invested insurance company, on the other hand, can be a limited liability company. The Amended Insurance Law removes such company form restrictions. As such, a Chinese domestic insurance company may now take the form of a “limited liability company”, in addition to the other corporate form of “company limited by shares”.

(e) The previous Insurance Law provided that insurance companies require

giving priority to insurance companies established in China when it comes to reinsurance has been removed in the amended Law. This step is consistent with China's commitments for entry to the World Trade Organization. However, the Provisions on the Administration of Reinsurance Business specifically require that a direct insurer, when handling contract reinsurance and temporary reinsurance to reinsurers, must offer to at least two professional reinsurers in China no less than an aggregate of 50 per cent of the risks to be reinsured before it can offer such business to overseas insurers (the 50 per cent Restriction Rule). It remains unclear if and when the CIRC will further liberalize and abolish such 50 per cent Restriction Rule to reflect the spirit of non-discrimination against cross-border reinsurance business under the Amended Insurance Law.

The revised Insurance Law has been well received by the market so far as it has expanded

investment channels available to insurance companies and broadened their permitted

scope of business. The Interpretation stipulates that disputes arising from insurance

contracts concluded prior to the implementation of the revised Insurance Law will be dealt

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with according to the provisions of the laws in effect at the time such contracts were

concluded unless such laws did not provide for the matters under dispute, in which case the

provisions of the revised Insurance Law will apply.

Where an insurance contract is concluded prior to the implementation of the revised

Insurance Law, but an act or incident such as the assignment of the subject matter insured,

an insured event, claim adjustment or subrogation occurs after the implementation of the

revised Insurance Law, the provisions of the revised Insurance Law shall apply.

In summary, under the revised Insurance Law, customers are better protected in a number

of ways. The Interpretation extends the application of these mechanisms to insurance

contracts concluded or claims raised before the implementation of the revised Insurance

Law.

Customers may have found it difficult to receive insurance compensation in the past as

insurance companies could delay the compensation procedure by requiring additional

supporting documents again and again. The revised Insurance Law provides that upon

receiving a claim, where the insurer deems the supporting evidence or materials

insufficient, the insurer must make a one-off notification to the applicant for additional

documents. This new rule will apply in the future, regardless of the execution date of the

insurance contracts.

5.1.4 Conclusions

There are some areas where the Chinese insurance regulator is still lenient in granting

licenses for insurers in China.

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Those areas include:

(a) health insurance;

(b) liability insurance; and

(c) agriculture insurance.

Increased medical costs as a result of the government ‘reform of medical care’ over the past

decade have contributed to the support by the CIRC of this type of insurance business.

The Chinese government has also been troubled by workplace safety problems which have

coincided with its rapid economic development. This has led to liability insurance being

strongly advocated by the government so as to ensure fair compensation to workplace

accident victims.

Agriculture insurance is being developed as a way to tackle the ‘three rural issues’

(countryside, farmers and agriculture). However, pressure of profitability has made most

insurers retreat from unprofitable agricultural business. As a result, this type of insurance

business is also strongly encouraged by the CIRC.

It is within the above framework that the Chinese insurance industry, with the import and

adaptation of international finance and expertise is reforming and developing its insurance

law system. It is apparent that the Chinese government intends to regulate the insurance

market according to international standards. The rules and instructions outlined in the

Insurance Law adopt many common law principles.

The parties to an insurance contract are given clear direction by the codified Insurance Law

as to their respective duties. The parties are encouraged to settle a claim rather than submit

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any disputes to arbitration or the court for legal action. Standard policy wordings prepared

by the CIRC stipulate that all disputes arising between the insured and the insurer must be

settled through friendly negotiations. Judges tend to use mediation to resolve any dispute

before real legal proceedings commence.

However, as to how these rules are construed and applied in Chinese courts or how they will

operate in the Chinese insurance market, is still open to conjecture. There are no instances

of claims ever having being decided or recorded by Chinese courts, nor case precedent

being applied by any courts or regulatory authorities.

There are no official dispute resolution services in China for insurance disputes or claims. It

is well understood that any disputes relating to claims or other insurance issues are settled

between the parties with the assistance of regulatory arbitrators in a confidential manner.

The operation of insurance laws in China is still evolving. The regulators in these jurisdictions

are not yet very experienced in regulating the insurance markets. The regulatory systems

continue to be reformed following the growth of the insurance market.

Generally, insurance disputes are, with the encouragement of the regulator, settled. The

regulator generally provides conciliator and conference facilities in order for the parties to

negotiate. The settlement process is confidential and not recorded in any official

documents. It is unlikely for any claims to become disputes and to be dealt with in civil

courts. This is due to the culture of doing business in China which values business reputation

higher than a company’s legal rights. An article152 published recently in Taiwan Republic of

152 Taiwan Modern Insurance Magazine, Volume 10, 2006

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China in relation to the insurer’s position on claims concludes that insurers are in a “no win”

situation when they have claims disputes with the insured.

The following extract is taken from the article and translated by the writer:

“… … In fact, disputes on claims could result from many complex reasons. Sometimes the facts make it clear it is not the insurers’ responsibility to compensate. However, when parties use their legal rights to fight for a claim, the insurers are always the losers no matter how the judgements would be made by the courts. It was because if the insured was awarded money for the claim, the insured would not be grateful to the insurers for the money they were awarded. If the insureds lost the case, they would rubbish or spread rumours to damage the insurers’ reputation. The damage an insurer suffers by the negative opinions or the criticisms of the insureds sometimes cannot be calculated by a monetary figure… … Therefore insurance companies should never neglect or ignore the reputational damages suffered by their dispute with the insureds on claims… …”153

There is no doubt that China are catching up with the international standards for regulating

the insurance industry. Their legal systems (including their insurance regulatory regime) has

already improved with the revised Insurance Law and its continue development in the near

future. Both regulator and the insurers are working together with the intention to achieve

further for this common goal.

153 Ibid, at 94-95

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5.2 INSURANCE LAW OF HONG KONG

5.2.1 The Hong Kong Legal System and the Source of Law

The insurance laws and legal systems in Singapore and Hong Kong are very similar to the

extent that both of them follow the British common law system. Journalists have

commented that Singapore and Hong Kong are twins in many aspects including their

political and legal systems.

Hong Kong first became a British colony in 1897 after the Peoples’ Republic of China

officially lost its Opium Wars. The Treaty of Nanking in 1842 ceded Hong Kong Island to

Britain and Britain was further given Kowloon and Stonecutter's Island in 1860. In 1898, the

British finally acquired the new territory of Hong Kong on a 99 year contract.

The British introduced its common law system to Hong Kong after it regained administration

of the colony. Since then the development of the legal system in Hong Kong has strictly

followed the British common law system. The common law principles still dominates the

legal operation of civil matters in Hong Kong courts notwithstanding that sovereignty has

now changed hands.

On 1 July 1997, the Peoples’ Republic of China resumed the exercise of sovereignty over

Hong Kong. Hong Kong became a Special Administrative Region (“the SAR”) of the Peoples’

Republic of China from then. The principle of "one country, two systems" enshrined in the

Basic Law means that Hong Kong's previous legal system has continued in place as the

foundation of the law whilst the change of sovereignty is reflected in the Hong Kong Special

Administrative Region’s new status as a part of the Peoples’ Republic of China.

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The preparation of enacting the Basic Law started in 1984, 14 years Before Chinese

government retained the sovereignty in 1997. Chinese government by then has made the

decision that Hong Kong was to keep the common law system for 50 years beyond 1997.

When it was announced in 1997 that the continuance of the judicial system of Hong Kong,

that was the English common law system would be guaranteed to continue until the middle

of 21 century, it stabled the political uncertainty and strongly welcomed by the politician

and the legal professionals in Hong Kong.

Prior to the Chinese government taking political power over Hong Kong, a special law similar

in effect to a Constitution and named the Basic Law for SAR was developed. The Basic Law

was enacted by the National People's Congress in accordance with the Constitution of the

People's Republic of China. The Basic Law was promulgated on 4 April 1990 and took effect

on 1 July 1997 which officially announced the establishment of the HKSAR.

All governmental systems and policies practised in the SAR must be based on the provisions

of the Basic Law and no other law enacted by the legislature of the SAR may contravene the

Basic Law which includes:

(a) the social and economic systems;

(b) the system for safeguarding the fundamental rights and freedoms of its residents;

(c) the executive, legislative and judicial systems; and

(d) the relevant policies.

Under the Basic Law, all the laws previously in force in Hong Kong (that is, the common law,

rules of equity, ordinances, subordinate legislation and customary law) shall be maintained.

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National laws of the People's Republic of China are not to be applied in the SAR with the

exception of laws related to defence and foreign affairs and listed in Annex III to the Basic

Law.

In Hong Kong, the common law is essentially operated in courts of the SAR and other

common law jurisdictions. While it is flexible and adaptable, the doctrine of precedent often

makes it difficult for judges to change the well-established legal principles. The most

distinguishing hallmark of the common law is reliance on a system of case precedent, not

restricted to judicial decisions generated within any single jurisdiction, but case law from all

jurisdictions throughout the common law world.

Article 84 of the Basic Law provides that the courts of the SAR may refer to the precedents

of other common law jurisdictions. In addition, the Court of Final Appeal and the Judiciary of

the SAR is given power to invite judges from other common law jurisdictions to participate

in the judicial processes.

In addition, Hong Kong has a Legislative Council, similar in its role to the Congress of the

United States of America, which has the authority to make additional laws that only apply in

Hong Kong. The vast majority of statute law in force in Hong Kong is made locally and

contained in the Laws of Hong Kong. A great deal of subsidiary legislation is made under

delegated powers. The principal branches of the civil law embodied from the common law

system include contract, tort, property, administrative, family and revenue law.

5.2.2 Insurance Companies Ordinance (Cap 41)

Insurance contracts are governed by the common law principles of contract and it is subject

to the application of case law precedent. The formation of the insurance contract is largely

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derived from principles at common law. Whilst the common law principles are still the main

source of authority governing insurance contracts, statutes have reformed those legal

principles to better meet the needs of the local insurance markets.

The Insurance Companies Ordinance (ICO) is the principal legislation which regulates the

carrying on of insurance business and governs the administration of insurance institutions in

Hong Kong. There are two other important legislative regimes, namely the Marine Insurance

Ordinance (Cap 329) (MIO) and the Code of Conduct for Hong Kong Insurers.

MIO mainly regulates marine insurance business, but some provisions in the MIO have been

held by Hong Kong courts to be applicable to insurance business other than marine

insurance business154.

The Code of Conduct for Hong Kong Insurers prepared and issued in May 1999, is specifically

required under section 67 of ICO, by the Hong Kong Federation Insurers (HKFI). It is highly

regarded as an approved regulatory guidance for insurers. It also applies to individual

policyholders and the insured in their private capacity. Although the Code is not fully

enforceable by Hong Kong courts it has enormous persuasive effect upon insurers and

underlines what is considered good business practice in the industry. The major objective of

the Code of Conduct for Hong Kong Insurers is to promote a self-regulatory regime which

forms an integral part of the Government's prudential regulatory framework. The Code is

implemented and monitored by the HKFI.

154 Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485

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In Hong Kong, there is no official definition in the ICO as to what constitutes a non-

disclosure or misrepresentation by the insured. Section 17 of the MIO defines a contract of

marine insurance as:

A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith is not observed by either party, the contract may be avoided by the other party.

Section 18 (3) of the MIO further provides that in what circumstances, matters need to be

disclosed by the insured.

(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.

(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

(3) In the absence of inquiry the following circumstances need not be disclosed, namely:

(a) any circumstance which diminishes the risk;

(b) any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;

(c) any circumstance as to which information is waived by the insurer;

(d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

(4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.

(5) The term "circumstance" includes any communication made to, or information received by, the assured.

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This provision is identical to the corresponding provisions of the Singapore Marine Insurance

Act.

As discussed previously, section 18 of the Singapore Marine Insurance Act sets out four

general rules which apply to a contract of marine insurance. These rules also apply in Hong

Kong.

(a) Subsection (1) approves the remedy for the insurers to avoid a contract ab initio in the event of breach of duty of the utmost good faith provided by common law.

(b) Subsection (2) confirms the common law “prudent insurer” test for

determination of material fact. (c) Subsection (3) requires insurers to make further inquiries for matters under

the specific description of “circumstances”. (d) Subsection (1) reinforces that the duty of disclosure applies “before the

contract is concluded.”

The above four general rules have been examined by case law in Hong Kong.

Authorities have established that the provisions of utmost good faith in the MIO apply to all

insurance products: Pan Atlantic Insurance Co v Pine Top Insurance Co.155

The principle of uberrimae fidei, also applies to the parties to an insurance contract in Hong

Kong. The insured is obliged to tell the whole truth to the insurer so it can be fair in its

assessment of the risk underpinning the relevant insurance policy. Since the insurer

calculates premiums and makes policy terms based on the information provided by the

insured; the insured is expected to truthfully disclose all “material facts” in the pre-

contractual stage.

155 [1995] AC 501 This case concerned a reinsurance dispute in a shipping context and the court held that the material non-disclosure must have induced the making of the contract in the sense that the insurer would not have made the same contract if it had known the matters in question.

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It was recognised in Hong Kong that although the duty of utmost good faith applies to both

parties to an insurance contract in practice, a breach of this duty is much more likely to be

committed by the insured rather than the insurer.

Material fact is defined in section 18 (1) of the MIO as a fact that would influence the mind

of a prudent underwriter, in deciding whether to insure a risk and on what terms to insure

it. This ‘prudent underwriter’ test has been settled by a line of authorities.

In Lai Chui Kar Poa Helen v American International Assurance Co. (Bermuda) Ltd156, The

court was invited to comment on the question of whether the defendant insurer was

entitled to avoid liability on the basis of non-disclosure of material facts by the insured.

Jones J in citing Lambert v Co-operative Insurance Society Ltd, 157 adopted the view

expressed by the Court of Appeal in England that the proper test to decide what was

material was “that which would influence the mind of prudent insurer”.

His Honour further stated that where non-disclosure is alleged the onus of proof is on the

defendant insurers to prove on the balance of probabilities:

(a) the facts not disclosed were material;

(b) they were within the knowledge of the insured; and

(c) the insured did not communicate them to the insurer.

The standard for the test of materiality is whether a prudent and experienced insurer might

be influenced in his judgment if he knew of the fact misstated or withheld. The phrase

‘influence the judgment of a prudent insurer’ means no more than would have ‘an effect on

the mind of the insurer in weighting up the risk’.

156 [1985] 2 HTC 689 157 [1975] 2 Lloyd’s Report 485

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It should be noted that materiality depends on all circumstances at the time the contract is

made, that is, the time the insurer is deciding whether or not to accept the risk and the

terms to apply, rather than the time of investigation of the risk. This is provided for by

section 18(1), an insured’s duty of disclosure comes to an end when the contract of

insurance is completed.

Section 18.2 of the MIO has codified the common law test of “Prudent Insurer” as:

“Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.”

Section 18 (3) of the MIO sets “circumstances” which are not required for to be disclosed

voluntarily. The court has laid down the rule that insurers have the obligation to make

further inquiry if they wish to have such information and it is not sufficient for an insurer to

show that a prudent insurer would not make further enquiries before accepting the

proposal: Mutual Life Insurance Co of New York v Ontario Metal Products Co Ltd.158

Unlike Singapore, the proposal must be in a “prescribed form” for insurer, there are no legal

requirements by either common law or legislation in Hong Kong in terms of making an

application of an insurance policy. However, it is a common practice for the insurers to do it

at their convenience. It is also for advertising purpose that some insurers have included

promotion material and other information in the forms.

The function of the proposal forms are treated differently for different types of risk insured.

Proposal forms are also known as applications and are invariably used for individual life

insurance contracts.

158 [1925] AC 344

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For accident insurance, information captured in a proposal form is generally the only

information the insurer will require. However for fire insurance, only relatively small risks

are likely to be accepted solely on the basis of a completed proposal form.

It is agreed in the Hong Kong insurance market that a carefully designed proposal form will

have maximum efficiency in eliciting the required information thus helping staff of insurance

companies to better assess the risk and decide upon further action in an efficient way. It is

largely recognized that it could invite disaster if the proposer was permitted to choose his or

her own style of presenting the necessary personal information. At the foot of the form

where the insured affixes his or her signature sometimes with a stamp, a 'declaration clause'

is usually included stating that the information provided by the insured will form the basis of

the contract.

As there is no prescribed form with respect to ‘proposal forms’, the style and presentation

of proposal forms varies from one company to another. The basic format used by most

companies is a type of questionnaire which contains a list of questions, although the

questions are often not exhaustive. Information not covered by the questionnaire needs to

be disclosed if it is relevant for the insurers to assess the risk. However, in practice, a court is

very reluctant to accept information as material if it is not covered in the proposal form.

Although there is no prescribed format for the ‘proposal form’, the Code requires that the

insurer needs to ask questions in plain language and explain to the insured how the

questions should be answered when a proposal form is used.

Part II of the Code of Conduct for Hong Kong Insurers provides that:

Article 11 Matters which insurers generally consider to be material to the particular type of insurance being considered should be the subject of

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clear and specific questions in the proposal forms produced for that type of insurance.

Article 12 Insurers should avoid asking questions which would require the knowledge of certain facts which the average applicant would be unlikely to possess

Article 13 If supporting underwriting questionnaires are used, the questionnaire should ask questions in plain language and contain a clear instruction that:

(a) the answers will be considered in conjunction with any answers provided by the applicant in the Application Form; and

(b) the same obligations in terms of accuracy and honesty apply.

It is common practice that if a proposal form requires the insured to disclose material facts,

a statement is included in the declaration, or prominently displayed on the form or in that

document. It is well accepted that the declaration forms part of the contract in the

insurance industry in Hong Kong.

The HKFI held that such statements have two purposes in the process of assessing the

application. Their view is codified in Article 10 Part II of the Code of Conduct for Hong Kong

Insurers.

The purposes are:

(a) explaining the consequences of a failure to disclose all "material facts" (that

is, facts relevant to the insurers' decision whether or not to provide coverage) and highlighting the fact that, in addition to the specific questions asked in the proposal, the applicant for insurance must also include any facts that an insurer would regard as likely to influence the insurer's assessment and acceptance of the proposal; and

(b) warning that if the applicant is uncertain as to whether or not particular information is material, these facts should be disclosed.

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Therefore, when the proposal form concludes with a declaration from the proposer, it

constitutes a warranty that all information given in the proposal form is complete and true.

Therefore, a proposer of a particular type of insurance must exercise utmost diligence when

completing the proposal.

It is different from Australia in that Hong Kong courts recognise a distinction between

insurance representations and warranties. Representations need only be substantially

correct. Any breach must relate to something material to be relevant. Warranty goes

further. They must be strictly and literally complied with, and they must appear in the

policy document directly or by reference. Any breach of a warranty gives the insurer the

right to repudiate the policy.

A definition for a warranty is contained in section 33 of the MIO as an essential condition

that the parties must comply with.

Section 33 provides:

(a) A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.

(b) A warranty may be express or implied.

(c) A warranty, as above defined, is a condition which must be exactly complied with, whether it is material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.

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Where a breach of a warranty in relation to a past or present fact is identified, the breach is

regarded as occurring at the inception of the policy and the insurer is therefore entitled to

reject all claims made by the insured under that policy.

Section 56 of the ICO addresses the issue of misrepresentation and misleading or deceptive

conduct by making it a criminal offence for any person to provide the misleading statements

or false information. The maximum penalty is a fine of $200,000 Hong Kong dollars and/or

imprisonment for 12 months in the case of an individual.

Section 56 provides:

(1) Any person who, by any statement, promise or representation which he knows to be false, misleading or deceptive, or by any dishonest concealment of material facts, or by the reckless making (dishonest or otherwise) of any statement, promise or representation which is false, misleading or deceptive, induces or attempts to induce another person to enter into or offer to enter into any contract of insurance commits an offence and is liable to a fine at level 6 and imprisonment for 12 months.

(2) Any person who causes or permits to be included in:

(a) any notice or statement or certificate served or furnished or sent out; or

(b) any document or copy of any document deposited, under any provision of this Ordinance

a statement which he knows to be false in a material particular or recklessly causes or permits to be so included any statement which is false in a material particular commits an offence and is liable to a fine of $200,000 and, in the case of an individual, to imprisonment for 2 years.

It is interesting to note that from reading section 56 it is not clear whether this section

applies only to persons employed by insurance companies or to the insured as well. This

ambiguity is created by the legislation itself in the way that section 6 of the ICO states:

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“… … no person shall carry on any class of insurance business in or from Hong Kong except:

(a) a company authorized under section 8 to carry on that class of insurance business;

(b) Lloyd's;

(c) an association of underwriters approved by the Insurance Authority.”

The use of the word “any person” instead of “a company” or “Lloyds” or “an association of

underwriters” suggest that the section applies to the individual insured as well as the

insurer. This interpretation is consistent with the objective of the ICO that is to “regulate the

carrying on of insurance business” and “for matters incidental thereto or connected

therewith”.

Unfortunately, the ambiguity created by the ICO has not been officially clarified by courts

yet as there have been no matters in this regard before the courts. Up to date, there have

not been any cases confirming whether s56 applies to a policyholder or insured with respect

to:

(a) a statement, promise or representation to be false, misleading or deceptive;

(b) dishonest concealment of material facts; and

(c) a statement or promise as representation made with reckless disregard for the accuracy thereof.

In Hong Kong, the duty of utmost good faith applies to three areas:

(a) the duty of disclosure;’

(b) representation; and

(c) warranty.

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The duty of disclosure under the principle of utmost good faith extends to cover the:

(a) duration of the duty;

(b) revival of the duty;

(c) policy provisions; and

(d) disclosure by the broker.

Material changes in the risk before the contract is binding therefore must be disclosed. The

duty of the insured to disclosure relevant information remains a continuing duty throughout

the policy period. Any material changes in circumstances should be notified immediately by

the insured to the insurer or insurance intermediary. The obligation to reveal material facts

operates throughout the process of arranging the insurance.

The duty applies upon renewal and in the event of any proposed policy changes requested

by the insured.

An increase in risk during the currency of the policy does not have to be revealed in

common law as applied by Hong Kong courts. However, under the relevant legislation,

structural alterations in relation to fire insurance; a more hazardous occupation regarding

personal accident insurance and a change in the system of check as to fidelity guarantee

insurance all need to be disclosed to the insurers.

The most common breaches of utmost good faith in Hong Kong may be classified as the

following.

(a) non-disclosure – the breach occurs though a genuine oversight or because the insured honestly did not think the information was material;

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(b) concealment – the breach is a deliberate attempt to mislead the insurers and could constitute fraud if the information concealed was so important;

(c) innocent misrepresentation – a breach involving incorrect material

information, but supplied without fraudulent intent; and (d) fraudulent misrepresentation – a breach by the deliberated submission of

false information relating to a material matter with an intention to cheat.

The insurer bears the onus of proof in relation to an allegation of a non-disclosure or

misrepresentation by the insured. Evidence will have to be adduced to establish that a

prudent and reasonable insurer might be influenced in its assessment of the risk if the fact

misstated or withheld were known to it.

With respect to non-disclosed information or untrue statements given by the insured, if an

insurer wants to rely on its own responses to the presentation of the risk, it is wise for it to

identify that other insurers operating in the same market would have undertaken the same

underwriting practices: Drake Insurance Co v Provident Insurance Co.159

As indicated previously, it is not only the question of materiality that has to be dealt with

when determining whether an insurer can repudiate an insurance policy. The crucial point

for the insurer is to establish that the policy was induced by reason of the insured’s failure

to disclose the material fact. The burden of proof is borne by the insurer to demonstrate

that had the facts not been misstated or withheld, it would not have written the risk at all or

on the terms ultimately agreed. Unless the underwriter can establish that a different

outcome in terms of risk assessment would have occurred had the facts be fairly presented,

it cannot be said that there has been inducement.

159 [2004] Lloyd’s Report 268

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Notwithstanding the above situation, in Hong Kong, insurers are generally reluctant to bring

any insurance claim disputes to court in particular if the ground of claim is related to the

duty of disclosure under the principle of utmost good faith. Other than the onus of proof,

there are other reasons for the reluctance of insurers to litigate their disputes.

The major reasons include:

(a) the public interest;

(b) legal costs;

(c) the lengthy litigation process

(d) the time limitation for certain policies; and

(e) the Code of Conduct for Insurers.

Public interest is arguably the most important of these concerns. In a competitive market

like Hong Kong, business institutions including insurance companies must take public

opinion into consideration. Breaches of the utmost good faith by the insured are usually

waived by the insurer as insurers do not wish to harm their reputation with customers in the

insurance market and with the financial and insurance regulators.

The issue of legal costs and the usually lengthy litigation process are also important factors

which prevent the insurer from bringing such matters to court. Legal costs often prove

impossible to recover from the insured notwithstanding a verdict in favour of the insurer.

Therefore, for commercial reasons, an insurer would prefer to settle the claim with the

insured.

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Another obstacle for insurers is the expiration of the contestability period. Under the ICO

claims cannot be contested after 2 years from the date of the inception for life insurance

policies except in cases of fraud (which in practice is extremely difficult to establish).

The Code of Conduct for Hong Kong Insurers does not recommend litigation in certain

circumstances. Article 24 of the Code provides that in principle, the intention of the industry

governing body HKFI, is to encourage its members not to decline a claim made by the

insured on the ground of a breach of:

(a) non-disclosure - article 24 (a);

(b) misrepresentation - article 24(b); and

(c) warranty - article 24 (c).

Article 24 reads:

“An insurer should not refuse a claim by a policyholder:

(a) on the grounds of non-disclosure of a material fact which the policyholder could not reasonably have been expected to disclose, or if the insurance was issued without the policyholder being requested to submit a proposal;

(b) on the grounds of misrepresentation unless this is a deliberate or negligent misrepresentation of a material fact, provided that this does not apply to marine or aviation policies; or

(c) in the absence of fraud by the policyholders, on the grounds of a breach of warranty or condition if the loss is unrelated to the breach.”

In Hong Kong, it is considered that “an insurer who is excellent in everything except in

handling claims will be regarded by the general public as not good at all.”160 Therefore, the

need to uphold a good reputation of the insurance company will generally outweigh the

160 D. S Hansell, Principles and Practice of Insurance, 1st Ed, 2003, the Insurance Institute of Hong Kong at 81

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desire to decline a claim (even when there are legitimate grounds to do so) in the Hong

Kong insurance industry.

In most cases, the insurer will consider making an ex gratia payments even when it is clear

that the insured has failed to disclose the material fact or not complied with the duty of

utmost good faith.

An ex gratia payment is made out of grace or sometimes on commercial reasons, e.g.

intermediary relationship management in order to retain the business and maintain a good

reputation (with regulators and the public). The insurer would rather “sacrifice” its legal

right to avoid being criticized for being too harsh or unreasonable on insureds. The insurer

will insist on making an ex gratia payment on the bases of without admission of liability.

There are other commercial and political reasons for insurers who are willing to resolve

claims on an ex gratia basis.

These include:

(a) “relying on a technical breach of policy provisions may give the appearance of harshness and an unsympathetic attitude;

(b) a liberal, even generous, approach to claim settlements constitutes very good

advertising and is excellent “PR” (public relationship) for the company; (c) a reputation for unsympathetic claim handling would soon impact upon the

future acquisition and retention of business; and (d) it could reap considerable benefits for years thereafter.”161

In Hong Kong, any breach of the duty of utmost good faith by the insured, innocent or

otherwise, gives the insurer the right to avoid the insurance contract ab initio: Winter v Irish

161 D S Hansell Principles and Practice of Insurance, 1st Ed, the Insurance Institute of Hong Kong 2003 at 84

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Life Assurance Plc162; Bates v Hewitt163; Dawsons v Bonnin164 and Ng Kai Hau v The Oriental

Fire & General Insurance Co Ltd.165 Although courts continue to apply the common law legal

regime in relation to insurance matters, when it comes to insurance claims, the decision of

the insurer is often made based on business objectives, market considerations or the public

interest.

The duty of utmost good faith underpinning insurance law in Hong Kong has been the

subject of intense scrutiny by the legal profession and various consumer groups. It is

interesting to note that the operation of the principle of utmost good faith is criticized as

being too biased in favour of insurers notwithstanding that most insurers do not like to

decline claims on that basis.

5.2.3 Hong Kong Insurance Law Reform

Arguably current insurance law in Hong Kong operates unjustly with respect to insureds in

some respects. One source of injustice is the limited understanding of the English language

for many residents of Hong Kong and recently, many people immigrated from the People’s

Republic of China. In view of the difficulties of language in Hong Kong, Law Reform has been

considered by the Hong Kong Law Reform Commission.

This report, published in January 1986, sought to provide policyholders with safeguards

against abuse. It has two parts and the first part of the report considered the existing law

governing the disclosure of material facts by an insured person to the insurer. The law

required a person seeking insurance to disclose all "material facts" to the insurer. Failure to

162 (1995) 2 Lloyds Law Reports 274 163 (1867) L.R. 2 QB at 604 – 606 164 (1922) 2 A.C 413 165 91975) HCA 3130

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do so would entitle the insurer to avoid the insurance contract. The definition of a material

fact, however, was one which a prudent insurer would consider material. The report

recommended that a contract of insurance should not be rendered voidable or

unenforceable by reason of non-disclosure of a fact unless that fact was material to the

particular contract of insurance and the insured knew, or a reasonable man in his

circumstances ought to have known, that the fact not disclosed was material to the insurer

in relation to the particular contract of insurance.

As a result of this Law Reform, a number of recommendations have been made by the Hong

Kong Law Reform Commission in relation to those issues.

In 1986, the Law Reform Commission of Hong Kong was asked to examine some existing

laws with a view to law reform. In its report, the Law Reform Commission of Hong Kong

identified some issues of concern. In particular, the Commission of Hong Kong was

concerned that in Hong Kong many people were not fully conversant with the English

language and may be misled by inaccurate translations.

The scope of the problems in relation to the insurance law the Law Reform Commission of

Hong Kong identified were:

(a) Non-disclosure;

(b) Misrepresentation;

(c) Warranties; and

(d) Basis of contract clause.166

166 The Law Reform Commission of Hong Kong Report 1986 Topic 9 Chapter VII, published in 1984, Hong Kong

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In approaching the question of reform, the Law Reform Commission of Hong Kong was

conscious of the international nature of the insurance industry and the difficulties which

might be caused by the adoption in Hong Kong of measures out of step with insurance

practice elsewhere.

This report, published in January 1986, sought to provide policyholders with safeguards

against abuse. The first part of the report considered the existing law governing the

disclosure of material facts by an insured person to the insurer. The law required a person

seeking insurance to disclose all "material facts" to the insurer. Failure to do so would

entitle the insurer to avoid the insurance contract. The definition of a material fact, however,

was one which a prudent insurer would consider material. The report recommended that a

contract of insurance should not be rendered voidable or unenforceable by reason of non-

disclosure of a fact unless that fact was material to the particular contract of insurance and

the insured knew, or a reasonable man in his circumstances ought to have known, that the

fact not disclosed was material to the insurer in relation to the particular contract of

insurance.

The Law Reform Commission of Hong Kong subsequently made its recommendations in

relation to the above issues.

Recommendation on Non-disclosure

It was recommended that:

“A contract of insurance should not be rendered avoidable or unenforceable by reason of non-disclosure of a fact unless that fact was material to the particular contract of insurance and the insured knew, or a reasonable man in his circumstances ought to have known, that the fact not disclosed was material to the

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insurer in relation to the particular contract of insurance. The insured should be assumed to know of any fact which could have been ascertained by reasonable inquiry and would have been so ascertained by a reasonable man proposing to enter into the contract of insurance in question.”167

Recommendation on Misrepresentation

It was recommended that:

“No contract should be rendered violable or unenforceable by reason of misrepresentation unless the misrepresentation was material to the insurer in relation to the particular contract of insurance and

(a) the misrepresentation was fraudulent; or

(b) the insured knew, or a reasonable man in his circumstances ought to have known, that the statement was material to the insurer in relation to the particular contract of insurance.”168

Recommendation on Warranties and Basis of Contract Clauses

It was recommended that:

“Where any proceedings are taken in court in respect of a difference or dispute arising out of a contract of insurance, the court should be empowered to disregard a failure by an insured to observe or perform a term or condition of the contract of insurance if it is just and equitable in all the circumstances so to do and if the insurer has not been materially prejudiced by the failure.

Any ‘basis of contract clause’ should be ineffective to the extent that it purposes to convert into a warranty any statement by the insured as to the existence of past or present facts, whether contained in a proposal form or elsewhere.”169

Recommendation in relation to Proposal Forms

It was recommended that:

167 Ibid, Para 7.03 168 Ibid, Para 7.04 169 Ibid, Para 7.05 and 7.06

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“All proposal forms be required to bear a boldly printed warning in both English and Chinese to the effect that a failure to disclose all facts which the insurer may think relevant to his assessment of the risk may lead to avoidance of the policy… … A printed warning in both English and Chinese should appear on all renewal; notices, stressing the need to reveal all changes in circumstances since the time of the original proposal… …If there is a failure to comply with the requirements concerning warning notices on proposal forms and renewal notices, the insurer shall not be entitled to rely in any proceedings in court arising out of the policy on any failure by the insured to disclose any material fact unless the court is satisfied that the insured has not been prejudiced by the insurer’s failure to comply.

Where a proposal form is used, an insured should as a matter of good insurance practice receive a copy of his completed proposal form at the time the policy is granted wherever practicable… … A Chinese summary of the cover provided under an insurance contact should be provided in every case… … As a matter of good insurance practice, wherever practicable an insured should be supplied with a copy of any warranty on which the insurer intends to rely and this should be supplied in both English and Chinese… … Any exemptions specified in the insurance policy should be drawn specifically to the attention of the insured by providing him with details of such exemptions in English and Chinese.”170

The above recommendations were considered to have scope to resolve some issues

identified in the current insurance laws, it was subsequently enacted in July 1994 by the

Insurance Companies (Amendment) (No. 3) Ordinance (1994).

5.2.4 Conclusions

Having examined the present state of the insurance law in Hong Kong, and having had the

benefit of studying the Law Reform Commission of Hong Kong on the subject of insurance

law, it can be concluded that the law as it stands in Hong Kong offers scope for unfairness to

insureds by imposing onerous legal duties in order to adequately secure risk protection.

On the other hand, the situation is reversed when it comes to claims. The market operates

in a way that an insurer is unlikely to fully enforce the duty imposed on the insured by the

common law and the legislation.

170 Ibid, Para 7.07 and 7.08

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Major reasons have been discussed before for this response including:

(a) competitiveness of the market,

(b) the industry’s business strategy on “good reputation”,

(c) the commitment of being the good corporate citizens, and

(e) the strong consumer protection law.

The extract below is taken from the message contained in the Commissioner of Insurance’s

2005 Annual Report which illustrates the Insurance Authority’s view about the insurance

industry.

“The recent series of human and natural catastrophes around the world have demonstrated that apart from being an important economic sector in its own right, insurance performs a vital function in social development by protecting communities and businesses against risks and unpredictable events. A successful and well developed insurance industry will not only contribute to economic growth, but will also help society to better manage its risks and provide the necessary financial assistance for individuals and businesses to tide over their difficulties and mitigate the damage in the event of accidents and disasters.”

The Hong Kong Insurance Authority’s view may well result in further strengthening of

consumer protection in Hong Kong in the near future.

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6. SUMMARY OF THE SCOPE OF ANALYSE AND COMPARISON

Australian insurance laws were reformed in the 1980s following the successful

implementation of the ICA. It appears to have significantly improved the insured’s position

in many respects. The proposed amendments in the 2010 Bill have further clarified some

ambiguities and enhanced the modern insurance law so that a “fair balance is struck

between the interest of insurers, insureds and other members of the public”.171

The Law Reform Commission of the United Kingdom is noted to propose reform in its

insurance law by incorporating additional insurance provisions. Singapore insurance law

might be follow suit when United Kingdom will have amended its insurance laws.

The revised Insurance Law of the People’s Republic of China has significantly improved the

Chinese insurance law. It granted the Chinese insurance regulator China Insurance

Regulatory Commission increased power of enforcement and intervention against the

wrong doing of directors and shareholders of the insurance companies. The revised

insurance laws aim to enhance the consumer protection provisions and restore the

confidence of other members of the public.

Having considered the Australian and nominated Asian–Pacific countries insurance laws, the

following view of the writer is summarised in light of concerns that were raised in the

discussion.

(a) the insurers’ right to avoid an insurance contract under the non-disclosure or misrepresentation sections in the Act for the Australian insurers is more limited and difficult to apply; compared with the similar provision or principles in the Asian-Pacific jurisdictions under the operation of either their common law principles or their legislative regimes;

171 Preamble to the ICA

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(b) the interpretation of the insurance law by courts in Asian-Pacific jurisdictions is much more favourable for insurers in term of the non-disclosure or misrepresentation; while in Australia, the insured has more options under the Act for their breaches when the legal proceedings are in progress;172 and

(c) in Asian-Pacific jurisdictions, there are more remedies available for breach of utmost good faith by the insured for insurers both at common law and under the relevant legislation; while in Australia, the remedies is considerably limited for insurers as there are only available under ICA.

In light of the summary above, the following key issues have been identified under the

different insurance laws. Some of the issues identified apply to insurance contracts

generally while others are specific to one particular jurisdiction only. The analysis is focused

on the comparison of the insurance laws in all jurisdiction discussed in this paper.

(a) The statutory duty outlined in subsection 25 (5) of the Singapore Insurance Act 2002, sets out a lower standard for insurers on the requirements of notification to the insured about their duty of disclosure than the one imposed by section 22 of the ICA. It is sufficient for Singaporean insurers if they inform the insured that they are required to disclose material facts to insurers pursuant to the statutory duty in the prescribed form. The insurer is then in a strong position to deny a claim has issues involving non-disclosure or misrepresentation by the insured. Under section 22 of the ICA, the Australian insurer face a more onerous burden – they need to specifically advise the insured as to what needs to be disclosed in order to rely on the provisions of section 21. In addition to notify the prospective insureds of the general nature and effect of the duty of disclosure, the proposed amendments impose a further requirement for insurers to remind prospective insureds that their duty of disclosure continues until the time that the policy commences.

(b) The statutory penalty under subsection 25 (6) of the Singapore Insurance Act 2002 is much serious and extensive (both civil and criminal) for insurers of Singapore in the event that an insurer fails to comply with this requirement. An insurer in the worst case scenario might be sentenced for criminal offence if failing to comply with the statutory duty under subsection 25(6). On the other hand, in Australia, the insurer only loses its rights to void the policy if they fail to comply with section 22 of the ICA. There is no other penalty (civil or criminal) under the ICA for the Australian insurers.

172 Sections 31 and 33 of the ICA

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(c) The statutory duty of disclosure imposed on the insured in Singapore is much serious and broader than the statutory duty imposed by section 21 of the ICA for the insured in Australia. The test for materiality in Singapore for insured is the “prudent insurer” which is a much higher standard than the “reasonable person” test applicable to the insureds under the Australian law.

(d) The statutory obligation imposed on the insured in Singapore is much harsher than the one imposed on the Australian insured. The Insurance Act 2002 Singapore prescribes a strict obligation to the insureds and the consequence of failure to comply with this obligation, namely failure to disclose any information material to the insurer’s assessment of risk, could result in the insured “receive nothing from the policy.”

(e) Relief for the Australian insurer in relation to the breach of the duty of disclosure or misrepresentation under the utmost good faith is much restricted. Generally, the ICA provides no relief for an insurer with the right to avoid a policy ab initio for innocent non-disclosure by the insured. With respect to the fraudulent non-disclosure by an insured, in practice, it is unmanageable for an insurer to satisfy the onus of proof for the fraudulent non-disclosure or misrepresentation. In addition, the courts are given authority under section 31 of the ICA to disregard avoidance if the court is satisfied that it would be harsh and unfair for an insured or a beneficiary of a policy not to get paid under the policy even if an insurer has successfully proved the fraud by the insured.

(f) China arguably has imposed two insurance legal systems in relation to manage disputes and claims under the principle of utmost good faith. The Chinese Insurance Law 1995 governing all policies entered in China other than in those entered in Hong Kong, and the common law system for insurance policies entered in Hong Kong. The insurer could potentially run a case against an insured for breach of duty of utmost good faith in Hong Kong courts for a contract entered in mainland China to avoid that 2 years rule provided in the Insurance Law if the policy does not specifically states which law applies to that particular policy as Hong Kong now is part of China. No case has been tested in this way yet.

(g) The newly reformed Chinese Insurance Law has proposed changes to that an insurer is only entitled to terminate an insurance contract in existence for two years unless the policyholder has committed fraud by wilfully concealing the true age of the insured party. There is no other ground allowed for an insurer to terminate an insurance contract other than fraudulent non-disclosure of the true age of the insured. Other fraudulent non-disclosure for example, if an insured party wilfully concealed his or her medical conditions, will not provide insurer with rights to terminate an insurance contract after a policy has been incepted over two years. This change has received large criticism from the Chinese insurance industry. Submission from the industry representative identified that failure to include provisions providing insurers

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with lawful rights of termination of an insurance contract on fraudulent non-disclosure will expose insurers to substantial risk of insurance fraud as life insurance has become more widely available which will in turn cause the cost of life insurance to rise.

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7. CONCLUSIONS

The insurance industry is fundamental to the financial security of individuals, businesses and

local communities. Insurers must be able to obtain fair profit on committed capital to

encourage and sustain investment in the industry. Without a fair return, insureds will

ultimately suffer from restricted product choice. Regulation involves higher compliance

costs will impact on the commercial behaviour of the industry and inevitable compliance

costs will be passed on to customers.

It is true that a strong, secure and competitive insurance market needs sound prudential

regulation. Therefore, a good legal system no matter whether it is based on legislation,

common law or civil law, should promote a fair balance between the interests of insureds

and insurers.

Part IV of the ICA with the proposed amendments in relation to issues of non-disclosure and

misrepresentation under the duty of utmost good faith certainly sets out a higher

compliance standard for insurers in Australia than its counterparties in other Asia-pacific

countries. Section 21 of the ICA in practice does not provide insurers with a safe harbour in

dealing with the insureds’ non-disclosure or misrepresentation.

In some cases, even an Australian insurer has succeeded in arguing fraudulent non-

disclosure, section 31 of the ICA operates as a backup provision for the insured.

Section 33 further provides that remedies under sections 28 and 29 are the only remedies

for the insurer with respect to non-disclosure or misrepresentation under the ICA.

Therefore, common law remedies are excluded in Australia. It can be concluded in general

119

that in Australia insurers are left with limited remedies for claims made in relation to non-

disclosure or misrepresentation under the ICA.

Having said above, no matter how comprehensive a legal system is, it cannot provide a

solution for every legal issue for every party. In reality, industry needs to develop its own

strategy to manage gaps in the legal system.

Therefore, the following is recommended for insurance companies operating in Australia as

a self-protection in dealing with non-disclosure and misrepresentation issues with insureds.

(a) Careful present information to policy proposer in relation to disclosure requirements under section 22 of the ICA.

(b) Clearly explain to proposers what kind of information needs to be disclosed to the insurer in order to assess the risk to be insured.

(c) Carefully design the policy application form to avoid using the catch all questions.

(d) The questions for the proposer to answer in the application form need to be specifically pointed to the relevance of the subject matters.

(e) Broad questions in the application form should be avoided as they will not help and possibly hinder an insurer when it comes to claims.

(f) Exclusion clauses should be incorporated in the application form whenever it is possible.

(g) Clear examples of situations that will not be covered should be given as example.

(h) The legal department of the business should work with underwriters and actuaries before the policy is issued rather than getting involved at the later stage when a claim is received.

(i) Recognise that the policy application is a living document that should be subject to ongoing review and update particularly in accordance with any new rulings and change of Prudential Standards or Regulatory Guides published by the industrial regulators173.

173 Australian Prudential Regulation Authority (APRA); Australian Securities and Investments Commission (ASIC)

120

In conclusion, the application of the ICA in Australia will always be subject to the party’s

duty of utmost good faith. The breach of utmost good faith will constitute a breach of the

ICA which entitles the innocent party to commence the legal proceedings.

However, in light of the discussion and analysis of the insurance laws in this research, the

writer forms a strong view that to comply with the legal and regulatory requirements from

both parties is the best way to prevent or avoid the unnecessary potential issues in an

insurance contract. Laws should be regarded and used to prevent problems from

happening, rather than used to fight or defend a litigation process for an insurance dispute.

Litigating an insurance dispute sometimes does not provide the ideal outcome for a

business entity (insurance companies), because the business objectives of a business entity

need to include its profit making determinations and practical elements.

The writer has formed a strong view during the practice as a Legal and Compliance Counsel

in various insurance and banking sectors that a business entity should always seek from its

business operations before considering seeking legal proceedings when encounter a dispute

on any claim issues. Legal proceeding for any insurance disputes should be used only when

there is no other solution available.

A business entity should also learn to protect the company’s interest by way of monitoring

and enhancing the business solutions in its operating procedures, policies and process. In

addition to complying with all laws, a business entity should at all times actively comply with

the regulatory requirements imposed by the industrial regulators.

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