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09 December 2014
In Hua Tyan Development Ltd v Zurich Insurance Co Ltd, the Court of Appeal decided in favour of the insurer in respect of a claim arising from the insured's breach of warranty under a marine insurance contract.(1) One year later, the Court of Final Appeal has upheld the Court of Appeal's decision by ruling that the insurer's liability under the contract was discharged due to the insured's breach of the warranty.(2)
Hua Tyan Development Ltd applied to Zurich Insurance Co Ltd for marine insurance coverage in respect of a shipment of a cargo of logs from Malaysia to China by the carrying vessel. The insurer accepted the application and issued a marine cover note incorporating the following deadweight warranty: "Warranted year built of the vessel not over 30 years. Warranted Deadweight not less than 10,000". The policy replacing the cover note specifically identified the vessel as "MV Ho Feng No 7".
The vessel sank during a voyage and the cargo of logs was totally lost. The insured party claimed the insured value of around US$1.5 million from the insurer. The insurer denied liability and rejected the claim on the basis that the insured was in breach of the deadweight warranty, as the vessel's deadweight capacity was less than 10,000 tonnes.
Court of First Instance
The trial judge decided in favour of the insured by holding that the deadweight warranty should not apply, as there was a clear inconsistency between the naming of the vessel and the deadweight warranty. The trial judge held that the intention of the parties was to ensure effective insurance cover for the cargo of logs carried by the vessel, notwithstanding the deadweight warranty.
The trial judge rejected the insurer's defence that the insured had breached the duty of disclosure by failing to disclose the actual deadweight capacity of the vessel, as this information was readily available on the Internet and could be easily accessed by the insurer.
Court of Appeal
The Court of Appeal allowed the insurer's appeal, overruled most of the trial judge's findings and decided that there was no inconsistency between the naming of the vessel in the policy and the deadweight warranty, and that it was the intention of the parties to provide insurance coverage subject to fulfilment of the deadweight warranty.
Further, the Court of Appeal was not persuaded that the insurer had actual or presumed knowledge of the deadweight capacity of the vessel, and found that the insurer should not be fixed with such knowledge – whether actual or presumed – even if the information could be easily obtained by the insurer on the Internet. Insurers are not presumed to know something about insured property merely because it has been published in the media, even when they are marine insurers and the information is published in a specialist media forum targeted at the maritime community.(3)
Court of Final Appeal
The Court of Final Appeal dismissed the insured's appeal, emphasising that "where a marine insurance warranty is breached, the insurer is without more discharged from liability; in other words there is an automatic discharge from liability". It held that the insurer should not be prevented from insisting that the insured fulfil the conditions stipulated in the deadweight warranty just because the insurer was aware of the name of the vessel.
The Court of Final Appeal noted that the question of knowledge was the key to the success of the appeal. The court assumed that if the insured had succeeded in proving the insurer's knowledge of the vessel's deadweight capacity, its appeal would succeed. However, and in all circumstances of this case, the Court of Final Appeal held that the insured had failed to adduce sufficient evidence to establish the prima facie case that the insured had such knowledge concerning the vessel.
The fact that such information was reasonably available to the insurer did not affect the operation and effectiveness of the deadweight warranty. The court held that the information was useful in assisting the court to arrive at the true construction of the policy and its terms, but that the information could not, on its own, be used to undermine or nullify the effect of a clear term in the policy.
The court concluded that "quite simply, the Deadweight Warranty was breached and there was no answer to that". As a result of the insured's breach of the deadweight warranty, the insurer's liability under the policy was discharged.
This latest Court of Final Appeal decision has been welcomed by insurers, as it provides considerable certainty and clarification by upholding strict compliance with the terms in the insurance contracts.
Insurers are not obliged to perform due diligence to discover material facts concerning the insured simply because those material facts are easily discoverable in the public domain. This provides an extra layer of protection to insurers, which should not be under a duty to enquire about the insured. In fact, it is the responsibility of the insured to disclose material facts to the insurer so as to minimise the risk of the insurer's liability being discharged due to non-compliance of certain terms under the contract.
Insurers are reminded that their liability under an insurance contract should not be discharged upon the insured's breach of contract if they have actual or presumed knowledge of material information which contradicts the subject matter of the contract, or if they have waived – expressly or impliedly – the need for the insured to comply with certain contractual terms.
(1)  HKCU 1858. For further details, please see "Court of Appeal overturns ruling on duty of disclosure".
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