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The jeweller Insureds need to be careful if they wish to successfully make a claim under a policy. This article examines the recent Court of Appeal decision of Richfine Development Ltd t/a Keng Fai Jewellery v Hugh Rupert Rivington [2009] HKCU 583 which discusses warranty breaches and waivers of a Lloyds jewellers’ block policy. When the Policy became due for renewal, Anglo’s agent visited the office premises of Richfine with a pre-completed proposal form. During the meeting, Richfine’s director informed Anglo’s agent that Richfine was stocking 50% less gold than what was listed in the original Policy. Anglo’s agent assured the director that there was no need to amend the proposal form as gold trading posed less risk and renewed the Policy based Background Richfine Development Ltd (Richfine) operated a on the information provided when the Policy was first entered into in 1998 (the Renewed Policy). wholesale jewellery business which took out a Lloyds jewellers’ block policy with Lloyds Syndicate (HRR), through a Hong Kong agent, Anglo East Surety Limited (Anglo). A jewellers’ block policy is an “all risk” coverage for hazards and risks involved in the jewellery industry. As with all policies, the Insurer is required to list out exclusions for coverage. Typical risks that are covered in such policies include burglary, robbery, shoplifting, grab and run, fire and accidental damage. The claim Richfine later made a claim under the Renewal Policy in the sum of HK$6,199,343 for consequential loss suffered as a result of a robbery. HRR refused to pay the claim on the basis that Richfine had breached a warranty contained in a ‘basis’ clause of the proposal form which related to the agreed standards of transactional record keeping. HRR alleged that “[Richfine]’s records were inadequate… [Richfine] could not satisfactorily justify any element Court of first instance decision The crux of the issue was what constituted a ‘proper record’. At first instance, the court, taking into The entering of the policy In order to facilitate obtaining insurance coverage, at least two meetings took place between a representative from Anglo and a director from Richfine. Thereafter, the director took out policy cover on behalf of Richfine via Anglo, with HRR for a period of one year in 1998 (the Policy). of its claim by producing sufficient contemporary records supported by invoices and purchase notes… [Richfine] did not keep proper records… [Richfine] has been in breach of warranty from the date of the Proposal Form. Therefore, the policy never incepted and as a consequence [Lloyds] was never on risk…”. Accompanying the letter of rejection was a cheque in the sum of HK$46,700, being the insurance premium for the Renewal Policy. consideration the relative size, family-run nature and operational practices of Richfine, concluded that the record keeping methods were “appropriate to the prevailing circumstances” and held that no warranty had been breached. The Court of First Instance also held that the policy was valid because proper record keeping was not a warranty or condition precedent to liability. Even if it were a warranty, Anglo, having inspected the accounting papers, invoices and other documents and having indicated that Richfine’s related keeping system was satisfactory when the Policy was entered into, and being aware that the original system was in operation and made no indication that this was unsatisfactory when the Policy was renewed, Anglo (as the Insured’s agent) had waived any breach of warranty brought about by Richfine’s substandard record keeping. 6
The court of appeal decision HRR appealed to the Court of Appeal where the Court of First Instance decision was reversed. The Court of Appeal judge held that Richfine had breached the warranty of keeping proper records and HRR had not waived the warranty; and as a result dismissed Richfine’s claim under the Renewed Policy (see reasoning below). The extent of the warranty Richfine argued that proper record keeping could not be regarded as a warranty in consideration of it being granted insurance coverage. Tang VP was of the opinion that proper record keeping in this context could only mean proper records would be maintained. Proper record keeping could not be satisfied even if the Insured honestly believed the records to be proper. Reinsurers reassured The main legal issue on appeal was whether Richfine was in breach of a warranty, as a condition precedent to liability, arising by reason of a “basis” clause in the proposal form. What is a “basis” clause? This principle was explained by Viscount Haldane in Dawsons Ltd v Bonnin (1922). Viscount Haldane said that “when answers are declared to be the basis of the contract this can only mean that their truth is made a condition exact fulfilment of which is rendered by stipulation foundational to its enforceability… the insured cannot recover unless he can show that he has performed his part, for his performance has been made the condition of performance by the other party”. Keeping proper records Tang VP agreed with Branson J in Shoot v Hill (1936) that “it is the essence of the matter that the underwriters should, if a claim arises, be able to look at the book and see whether the man who is claiming so much for his stock has got the stock and what he paid for the stock”. Tang VP ruled that the requirement of proper record keeping had to be viewed in the context of a proposal for insurance, the commercial purpose of which was the obtaining of insurance and that the findings of the learned judge were marred by his view that the warranty only required proper records for the Richfine’s family business. Waiver Having heard Counsels’ argument, Tang VP concluded that having the authority to fill in the proposal form on behalf of an Insured would not clothe the agent with actual or ostensible authority to waive any flaw/defect in Richfine’s accounting system. As for imputation of knowledge, unless Richfine had told the agent that if a claim arises, the underwriters would not be able to look at the books and see whether Richfine had got the stock and what it paid for, the agent could not be said to have waived the warranty. Conclusion This case illustrates that Insureds must be aware of the extent of the obligations they undertake, particularly when a breach of those obligations will prevent the inception of the policy, resulting in refusal to meet a claim under the insurance policy. Hailien Tam Trainee Solicitor h.tam@kennedys.com.hk The House of Lords recently handed down its much-anticipated judgment in the Lexington v Wasa case. In what is good news for reinsurers, the appeal was allowed and clarity provided to reinsurers on the scope of their back-to-back cover. Lexington provided property damage cover to the Aluminium Company of America (Alcoa) between 1st July 1977 and 1st July 1980. Lexington entered into a contract of reinsurance with Wasa for the same three-year period. Both the contract of insurance and reinsurance were losses occurring / occurrence policies. Alcoa was ordered by the US Environmental Protection Agency to remove waste caused by pollution going back as far as 1942. Following this order Alcoa began proceedings in the state of Washington against various insurers who were on cover between 1956 and 1985 seeking a declaration of entitlement to insurance coverage in respect of the clean up costs. The Washington Supreme Court held that the direct insurance was governed by Pennsylvanian law (where Alcoa was incorporated) and ordered Lexington to pay Alcoa the full remediation costs for pollution that occurred at Alcoa’s sites, including that which occurred before and after Lexington was on cover, on the basis that at least some of the damage occurred between the Policy years of July 1977 and 1980 when Lexington was on risk. Lexington settled Alcoa’s claim for US$103 million and sought to recover from Wasa who had been the reinsurer on risk for the period in question. The reinsurance contract incorporated the terms of the direct policy and was subject to a full reinsurance clause containing a follow the settlements provision, however, it did not contain an express choice of law. Although the reinsurance policy did not contain an express choice of law, both parties accepted that English law applied. Wasa brought proceedings in London seeking a declaration that the reinsurance contract was governed by English law and it was therefore only liable for the costs of remedying damage, which occurred during the three-year period of reinsurance, and not the damage, which occurred before or after that period. The judge at first instance agreed with Wasa and Lexington appealed to the Court of Appeal. Court of Appeal In 2008, the Court of Appeal, allowed Lexington’s appeal held that where insurers agreed that policies of insurance and reinsurance provided for back-to-back cover for the same period on the same conditions, the same or equivalent wording should be interpreted in both the insurance and reinsurance contract, unless 7
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