OCI publishes Questions & Answers on establishment of IIA
On 6 October 2011, the Office of the Commissioner of Insurance (OCI) published a set of Questions & Answers, which are intended to provide clarification on various issues relating to the establishment of an Independent Insurance Authority (IIA) in Hong Kong. The Questions & Answers focus on some of the more controversial issues including the IIA’s disciplinary mechanism and the regulation of the insurance intermediary activities of banks.
The disciplinary mechanism
Insurance intermediaries in Hong Kong are currently supervised by three self-regulatory organisations (SROs), namely, the Insurance Agents Registration Board (IARB) under the Hong Kong Federation of Insurers, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association. The three bodies handle complaints against individual intermediaries and are able to impose disciplinary sanctions where necessary. The Questions & Answers confirm that in establishing the IIA reference will be made to the disciplinary systems currently employed by the SROs and attempts will be made to merge the regimes. However, there is no intention to introduce stricter sanctions.
Regulation of insurance intermediary activities of banks
The Hong Kong Monetary Authority (HKMA) regulates the banks and is capable of sending complaints to the IARB. Approximately 30 per cent of all insurance products are sold through banks. Bank staff selling these products are registered with the IARB, who supervise their conduct and deal with complaints. At present, the HKMA is unable to discipline bank employees and there is no system in place to deal with the distinct nature of bancassurance.
In July 2010, it was suggested that the HKMA should regulate insurance products sold through banks. However, numerous respondents raised concerns regarding the potential risk of double-standards and inconsistent disciplinary decisions. Subsequently, the Government put forward a proposal, under which the IIA will be primary and lead regulator for all insurance intermediaries and the only regulator able to set requirements and standards of conduct. The HKMA will work closely with the IIA who will delegate specific powers to assist with the regulation of the intermediary activities of banks.
The Questions & Answers reinforce the “single regulator” concept and state that there will be “one regulator for one industry”. That means the IIA will regulate the whole of the insurance industry, including the sale of insurance products through banks. In terms of bancassurance, the IIA will have the power to carry out joint inspections with the HKMA, and when carrying out investigations, the IIA will have the power to involve the HKMA. Where the HKMA carries out an investigation on behalf of the IIA, it will be accountable to the IIA and has no power to impose any disciplinary sanctions.
For further information: Establishment of an Independent Insurance Authority: Questions and Answers
For further information, please contact Marie Kwok in Hong Kong.
Can there be an employment relationship between an insurance company and an insurance agent?
In the insurance industry, it is common for insurance companies to use freelance agents to sell insurance products to their customers. Insurance companies intend these agents to be categorised as independent contractors, as opposed to employees. In a recent case, an insurance agent engaged by the Prudential Assurance Company requested judicial determination as to whether she was engaged as an employee or an independent contractor. Leung Suk Fong Peggy v The Prudential Assurance Company Limited represents the first case in which the court has been asked to determine the nature of the relationship between an insurance company and an insurance agent.
In Peggy Leung, the plaintiff was engaged by Prudential as an “insurance agent” under a written agreement, which contained an express provision stating that “[i]t is... expressly agreed and understood that nothing under this Agency Agreement...is intended or intended to be construed as being capable of giving rise to an employment contract or contract of service". On termination of the agreement, the plaintiff lodged a claim with the Minor Employment Claims Adjudication Board against Prudential for outstanding wages, statutory holiday and annual leave pay on the basis that she was an employee. The board found that she was not an employee and dismissed her claim. The plaintiff then lodged an appeal at the Court of First Instance.
On 30 September 2011, the Court of First Instance decided in favour of Prudential, holding that the plaintiff was an independent contractor rather than an employee. In reaching its decision, the Court adopted the approach set out in the leading case, Poon Chau Nam v Yim Siu Cheung, in which Mr. Justice Ribeiro PJ of the Court of Final Appeal held that "the modern approach to the question of whether one person is another’s employee is therefore to examine all the features of their relationship against the background of the indicia developed in the … case-law with a view to deciding whether, as a matter of overall impression, the relationship is one of employment, bearing in mind the purpose for which the question is asked. It involves a nuanced and not a mechanical approach".
In particular, the Court of First Instance considered the following eight factors when determining whether the plaintiff was engaged by Prudential as an employee:
- the extent of control by the insurance company;
- whether the insurance agent bore any financial risks;
- whether the insurance agent was an integral part of the company's organisation;
- whether there was mutual obligation to work and to provide work;
- who provided the equipment;
- incidence of tax and insurance obligations;
- the parties’ own view as to the relationship; and
- the traditional structure of the trade in the insurance industry.
In the past, the Hong Kong Courts tended to find that there was an employer-employee relationship if the work provided was done as part and parcel of the employer’s organisation. However, in Peggy Leung, whilst the plaintiff was found to be an integral part of Prudential, the Court did not give much weight to this in the overall context. The Court considered that the fact that Prudential did not provide work to the plaintiff, who had to look for her own business and clients was a strong factor against any suggestion of an employment relationship. The Court also took into account, amongst other factors, that no employment relationship between an insurance company and its agents existed in the traditional structure of trade in the insurance industry.
Whilst the issue as to whether an employment relationship exists will need to be considered on a case by case basis, the Court of First Instance’s decision in Peggy Leung is a welcome precedent for the insurance industry and legal advisers which confirms the nature of the relationship between an insurance company and an insurance agent.
For further information, please contact Wynne Mok or Ada Li in Hong Kong.
Business interruption insurance - an update on New World Harbourview Hotel Company Limited v Ace Insurance Limited (HCA 46/2007, CACV 97/2010, FAMV No. 6 of 2011)
Business interruption insurance (also known as business income insurance) is designed to protect the insured from the loss of income resulting from an interruption of business. In general, business interruption insurance is not sold as a stand alone policy. It is usually included in a comprehensive packaged policy or is combined with property insurance which provides an indemnity in respect of material damage to the subject matter and also business interruption loss flowing from such damage.
There are various kinds of business interruption insurance available which are tailored for policyholders in different industries. Specific business interruption insurance is designed for hotels and similar establishments to provide cover for losses arising from an outbreak of disease. In this context, the Court of First Instance and the Court of Appeal have considered business interruption claims arising from the outbreak of Severe Acute Respiratory Syndrome (SARS) in New World Harbourview Hotel Company Limited v Ace Insurance Limited. Permission has been given for a further appeal to the Court of Final Appeal.
The plaintiffs (all belonging to the New World Group) own or operate convention centres, hotels, car parks and related businesses. Each of the plaintiffs was insured under one of two "Composite Mercantile Policies" issued by the defendant insurers. The plaintiffs claimed under the policies for loss suffered following the outbreak of SARS in Hong Kong in 2003. The defendants accepted in principle that the plaintiffs were entitled to be indemnified under the policies, but there was dispute as to the duration of the cover. The policies provided coverage for actual loss sustained from "notifiable human infectious or contagious disease occurring within 25 miles of the Premises".
When SARS became a “notifiable” disease
The question was the date on which SARS became a "notifiable" disease. There was an outbreak of a pneumonia-like disease in Guangdong in late 2002 and early 2003 and this was reported by the Hong Kong media on 10 February 2003. On 11 February 2003, the Hospital Authority set up a Working Group to consider how to deal with Severe Community-Acquired Pneumonia (CAP) cases. On 13 February 2003, the Hospital Authority asked hospitals to report CAP cases. On 21 February 2003, a Mainland visitor checked into the Kowloon Metropole Hotel, and on 27 March 2003, it became mandatory in Hong Kong under the Quarantine and Prevention of Diseases Ordinance (the Ordinance) to report SARS cases. The patient subsequently died and in mid-April 2003 was confirmed as having had SARS. The insurers asserted that the start date for the cover was 27 March 2003, when notification became mandatory whereas the insured claimed that SARS became notifiable either on 13 February 2003 or on 21 February 2003 at the latest.
The Court of First Instance, by a judgment dated 8 April 2010 ruled in favour of the insurers considering that the period of indemnity began to run on 27 March 2003 when it became mandatory to report SARS cases to the Government under the Ordinance. The Court of First Instance went on to hold that in calculating "Standard Revenue" (defined as "the revenue realised during the 12 months immediately preceding the date of the damage"), it was permissible to take into account the 12 months immediately preceding 27 March 2003, which included a short period in which SARS was not notifiable but had nevertheless affected revenue.
In relation to “Loss Period” (which is defined as "the period during which the Revenue of the Insured Business has been affected in consequence of Damage from the date of loss to the resumption of the business and thence 180 days"), the Court ruled that where a business ceases, the Loss Period initially runs from the date of loss to the time when the business resumes. Upon resumption, the business is covered for any additional loss of revenue arising in the ensuing 180 days. In this case where the business did not close but continued through the currency of an insured peril, the business was only covered for a period of 180 days. The initial period from date of loss to date of “resumption of the business” was irrelevant and inapplicable.
The plaintiffs appealed and the Court of Appeal, by a Judgment dated 8 October 2010, upheld the policy interpretation adopted by the lower court.
On 26 August 2011, the Court of Final Appeal granted leave to the Plaintiffs to appeal on the following question of law:-
"Whether, in common form and widely issued policies of the type in question, the provision of insurance cover in respect of loss sustained “as a result of notifiable human infectious or contagious disease” is limited to cover losses resulting from infectious diseases which are by statute compulsorily notifiable or whether such cover extends to losses caused by diseases subject to administrative reporting requirements although not backed by statutory sanctions."
It remains to be seen how the Court of Final Appeal will resolve the issue. Although this case focuses on a specific kind of business interruption insurance, it will show how the courts in Hong Kong interpret policy wording in general. It will be interesting to see whether they follow recent English cases which allow for the disregard of literal language in favour of commercial considerations.
We previously reported on this development in September 2010 (for further information, please refer to Insurance updater 22 September 2010).
For further information, please contact Winnie Lee in Hong Kong.
Government issues proposed amendments to the Competition Bill
On 18 October 2011, the Hong Kong Government released a briefing paper outlining proposed amendments to the Competition Bill.
Under the proposals, only four types of so-called "hardcore" conduct (price fixing, market sharing, limiting production and bid-rigging) will attract fines. Sanctions for “non-hardcore” conduct can only be imposed if parties ignore warning notices, which will be issued by the Competition Commission. The maximum fine has also been revised and is now capped at 10 per cent of sales achieved in Hong Kong for the duration of the infringement, up to a maximum of three years.
In response to concerns expressed by SMEs, the Government’s new proposal will contain an exemption relating to non-hardcore anti-competitive arrangements (amongst undertakings or when decided by trade associations) where the aggregate turnover of the parties involved is below HK$100 million. Similarly, parties whose annual turnover falls below HK$11 million will be exempt from the rule on the abuse of market power. In addition, stand-alone rights of private action and merger activities are now expressly excluded from the Competition Bill. Interested parties had until 8 November to submit their views on the latest Government proposals.
For further information: Bills Committee on Competition Bill: Responses to Concerns on the Competition Bill
Please click here to request a copy of the Norton Rose briefing on the latest Government proposals.