Introduction

The District Court of the Hong Kong Special Administrative Region (the Court) recently provided a ruling that is of practical significance to the insurance industry in Cheung Kwan Wah v China Ping An Insurance (Hong Kong) Company Limited (2012) KKDC 802. The Court had to decide whether information not disclosed on an insurer's proposal form by the insured was material information; and whether, if the undisclosed information was in fact material, the insurer had waived the duty to disclose.

Facts

In order to secure comprehensive motor vehicle insurance with the defendant, the plaintiff completed the defendant's motor vehicle insurance proposal form (the proposal form). The defendant accepted the proposal form and a private car insurance policy was duly issued.

The plaintiff's motor vehicle was subsequently damaged in an accident and he incurred a cost of US$ 678,600 (almost ZAR 6 million) in respect of repairs. The defendant declined to indemnify the plaintiff on the grounds of material non-disclosure of the specific information on the plaintiff's proposal form:

In 2003 and 2005, respectively, disqualification orders had been issued against the plaintiff in terms of the Road Traffic (Driving-offence Points) Ordinance, Cap 375; and the plaintiff had received three fixed penalty tickets (two in 2008 and one in 2009) for the offence of speeding.

The arguments

The plaintiff argued that the above-mentioned information did not constitute material information, and even assuming it did, the defendant waived the duty to disclose the information in light of the questions posed in its proposal form.

The defendant argued that the plaintiff had a duty to disclose since the information was material to the insurer's consideration of his application for the policy. In addition, as the information was material, the duty to disclose existed independently of the proposal form.

The proposal form

In the middle section of the proposal form, the insured was required to answer five questions by ticking "yes" or "no" boxes. Question 3 reads:

"Have you or any person who to your knowledge may drive the Motor Vehicle been convicted of any of the following driving offences during the last 3 years: Speeding, careless driving, dangerous driving, or driving whilst under the influence of alcohol."

Towards the bottom part of the proposal form, there is a "declaration" section, in which the plaintiff declared, in so far as it is relevant to this application, that:

"The Motor Vehicle will not be driven by any person who to [the Plaintiff's] knowledge does not hold a full valid driving licence or has been disqualified from holding such driving licence."

The Test of Materiality

The test of materiality of undisclosed information was laid down by the Privy Counsel in Mutual Life Insurance Co of New York v Ontario Metal Products Co Ltd [1925] AC 344 at 351 - 35:

"…it is a question of fact in each case whether, if the matters concealed or misrepresented had been truly disclosed, they would, on fair consideration of the evidence, have influenced a reasonable insurer to decline the risk or to have stipulated for a higher premium."

Application

In respect of the disqualification records, the Court held that it was clear that the defendant did not regard any traffic contraventions that took place more than three years prior to the date of the proposal form as material. The ruling was based on the fact that, where a time frame was included in any given specific questions asked by the defendant in its proposal form; it was confined to a period of three years prior to the date of the proposal form.

The fixed penalty records clearly fall within the three year limit. In this regard, the Court held that if fixed penalty records were disclosed, it would not have influenced a reasonable insurer to decline the risk or to have stipulated for a high premium as the insurance risk to a motor vehicle that may be imposed by any fixed penalty tickets on speeding is comparatively low. In fact, the risk is so low that the defendant did not find that it warranted including a specific question on this aspect in the proposal form.

Waiver of disclosure

The plaintiff argued that even assuming that the disqualification and fixed penalty records was material information, the defendant had effectively waived the duty to disclose the fixed penalty records in light of the questions contained in the proposal form, in particular question 3.

The Court cited the following statement with approval:

"…if it was intended that an assured should answer matters even though he is being questioned about them, I would expect a different form of statement from the one to which I have just made reference. I would have expected something to be said which clearly indicated to a proposer that, although they had not been asked any specific question about the matter, if there was something which was relevant to the risk which they knew of, but which was not covered by the questions, they should still deal with it, and leave a space for them to do so." [Hair v The Prudential Assurance Co Ltd [1983] 2 Lloyd’s Rep 667]

Therefore, the requirements of (i) a clear indication to the insured and (ii) leaving a space for disclosing information in the proposal form, as laid down above, are lacking in the defendant's proposal form. As such, the plaintiff was not bound to disclose the disqualification records or fixed penalty records, even if this amounted to material information, as it fell outside the scope of the specific questions asked in the proposal form.

Conclusion

The Court held that the undisclosed information was not material. In addition, because of the manner in which the proposal form was drafted, the defendant effectively waived the plaintiff's duty to disclose. The defendant was ordered to pay the plaintiff the costs incurred in respect of repairs to his motor vehicle.

Written by Lucienne van Romburg, Associate at Webber Wentzel