Under the influence

Hong Kong has always had a pick and mix attitude towards its legal system, choosing new laws that have been tried and tested in other countries. Peter Gregoire and Aaron Le Marquer report on the impact this could have on insurers

As one of the most free markets in the world, Hong Kong has always been well placed to cherry-pick the best influences from other countries, without also having to take the accompanying chaff. This approach has enabled Hong Kong to enjoy an underground without the delays, a rugby tournament without the cold weather and an international airport without the hassle of getting to it.

No part of Hong Kong is sheltered from the international influences it chooses to adopt, the insurance market least of all. However, as Hong Kong seeks to set its sights on adapting a further raft of external legal influences for use in the territory, how will these impact on insurers competing for business going forward?

The principle of international cherry-picking has long been enshrined in Hong Kong's Basic Law, which permits the territory's Courts to refer to precedents from any other common law jurisdiction when reaching their decisions. Indeed, the Courts have already used this right to flex their muscles in ways that have affected insurers' exposures.

For example, in International Trading Company v Lai Kam Man and Others (2004), the Hong Kong Court of First Instance adopted the position of the High Court of Australia, rather than the English Court of Appeal, by denying a defendant that was sued concurrently in contract and tort the right to raise the allegation of contributory negligence in defence to an action.

In one fell swoop, the Hong Kong professional indemnity market was deprived of a standard mechanism that had been used effectively to reduce their insureds' exposures.

Where the Court of Hong Kong will turn to next to throw off the shackles of previous English precedent can only be guessed at but there are two issues that seem ripe for reform. The first concerns the long-vexed issue of whether a subsequent purchaser of a defective building can sue the person that built it, for loss. The English House of Lords has decided against the purchaser in this regard in Murphy v Brentwood, a position with which the law in almost every other common law jurisdiction has subsequently disagreed - except for Hong Kong, whose courts have yet to decide the question post-June 1997.

With such a volatile property market, an equally volatile construction industry and a situation where it is a rarity for purchasers to have their properties surveyed before signing on the dotted line, it can only be a matter of time before the Hong Kong Courts get an opportunity to provide an answer, though.

The second issue concerns the question of whether barristers are immune from suit for their activities in Court, an issue on which even the English House of Lords has overturned itself by doing away with the immunity but one that has yet to come before the Hong Kong Courts.

Insurers of contractors and barristers, therefore, should watch this space with interest.

Access to justice

Of more direct significance to insurers in Hong Kong, is the proposal from the Law Reform Commission of 14 September 2005 to lift the current ban on lawyers entering into conditional fee arrangements with their clients. The proposal borrows heavily from the English experience. As in England, the driving force behind the recommendation is the need to widen access to justice for those who presently cannot afford it. This is best demonstrated by the astonishing statistic that in 42% of civil trials in the Hong Kong High Court in 2004 at least one of the parties went unrepresented.

In addition, as in England, the proposal recommended that conditional fees - an arrangement in which a solicitor gets an uplift on their fees in the event of success - be introduced in favour of the American contingency fees - where the successful lawyer obtains a percentage of the damages - or the Scottish speculative fee - where the solicitor, in the event of success, is only entitled to charge their normal fee.

The consultation paper making the recommendation emphasised that a conditional fee regime can only work effectively if after-the-event insurance is available to cover the contingency of a litigant losing their case, and thereby becoming liable to pay their opponent's costs. In a market that is already burgeoning with capacity, this may be a business opportunity that insurers would welcome, if the price is right.

Overburdened system

Interestingly, unlike in England and Wales, the consultation paper considers that success fees and ATE insurance premiums should not be recoverable from defeated defendants, something that will provide some comfort to the insurance industry in Hong Kong, which usually finds itself having to defend actions brought against their insureds. The Law Commission's reluctance to impose these increased costs on unsuccessful defendants arises from the fact that ATE insurance premiums and success fee rates are agreed between the plaintiff and the ATE insurance provider and the plaintiff's lawyers respectively.

If these amounts were ultimately to be paid by the defendant, therefore, there would be no financial incentive on the part of the plaintiff, their lawyer or the insurance company to keep the pricing low.

In spite of this, doubts have been raised about whether ATE insurance will become available in Hong Kong at affordable rates. As such, a peculiar hybrid called a Contingency Legal Aid Fund has also been suggested as an alternative. The CLAF would be a self-funding statutory body that would brief out cases to private lawyers, finance the litigation, and pay the opponent's legal costs should the litigation prove to be unsuccessful.

The CLAF would enter into a contingency fee arrangement with plaintiffs, where it would take a percentage of any compensation recovered by the plaintiff. The CLAF would then enter into a conditional fee arrangement with the lawyers it engages on behalf of the plaintiff, paying the lawyers no fee if they lose the case, or their fees plus a success fee if they win.

Applicants to the CLAF would not be means-tested - unlike under the current Legal Aid Scheme, which would continue along side the CLAF - but their cases would be "merits-tested" for suitability for CLAF funding.

Whether the CLAF route or the ATE insurance route are the way forward, very much depends on the Hong Kong insurance industry's ability to provide ATE insurance at affordable rates.

ATE insurance would appear to be the firm preference of the Law Commission, with the CLAF idea a clear fall-back if insurers do not step up to the mark.

More than six years have elapsed since the Woolf reforms altered the rules of court procedure in England and Wales, time enough perhaps for memories of the problems that the reforms were designed to address in the first place to have faded. Not so in Hong Kong, where the overburdened Court system has meant that the speed at which justice is administered remains second only to the cost of pursuing it, in terms of putting litigants off exercising their rights.

Similar reforms have been under consideration for some time now by a working party in Hong Kong, that has kept an eye on the perceived success in England of the Woolf reforms. The Final Report on Civil Justice Reform was released on 3 March 2004, stating - in true cherry-picking fashion - that instead of adopting an entirely new set of rules following the Woolf Reforms, the existing High Court Rules should essentially be maintained with selective amendments grafted onto them.

Implementing recommendations

These selective amendments go a long way to adopting several of the most fundamental principals of the Civil Procedure Rules, including: the introduction of timetables; streamlining of procedures; encouragement of greater openness between parties; and early settlement. The express statement of underlying objectives, presumably somehow different from the overriding objective of the CPR, are also recommended to guide judges and parties in the application of the rules.

A Steering Committee has subsequently been established to oversee the implementation of the recommendations. However, the Committee has remained silent over how long the process of drafting primary and subsidiary legislation, as well as training of judges and support staff, will take.

This seems to be where the most immediate opportunity for insurers seeking to write business in Hong Kong arises. Hitherto, the scheme for providing Hong Kong solicitors with professional indemnity insurance has been based on a mutual fund that provides solicitors with up to a limit of HK$10m (£741,000) per claim, rather like the old Solicitors Indemnity Fund in England. That, however, looks set to change, again following the English example.

The Law Society of Hong Kong has resolved to bring in a Qualifying Insurers Scheme to replace the existing professional indemnity scheme. As the name of the scheme suggests, instead of the old mutual fund providing the first HK$10m of cover, solicitors will be able to obtain cover from any qualifying company.

In order to gain admittance into the QIS pool as a qualifying insurer, an insurer will have to meet a set of criteria that the Law Society is currently developing. Those law firms that are unable to obtain insurance from a qualifying insurer will be put into an Assigned Risk Pool, where punitive premiums will be charged, and if the firm is unable to obtain insurable status after a period of time, they will not be able to remain in the ARP and have to go out of business.

Adequate run off

The Law Society is currently in negotiations with more than 40 insurers many of whom have expressed an interest in the new scheme. The target date for the implementation for QIS is 1 October 2006, having been put back after it was realised the original target date of 1 October 2005 was unachievable.

Much has to be done before then though, including working out such details as: the minimum terms and conditions that QIS will provide; how the claims will be handled; and putting in place an adequate run-off arrangement for the current scheme.

Nevertheless, QIS remains the biggest immediate opportunity for insurers in the Hong Kong market and it is hoped that, when implemented, it will bring with it the increased level of risk management standards for the legal profession that were seen in England and Wales when it went the same way.

As to the future, it is difficult to say what other influences from abroad Hong Kong will adopt and in what measures that will affect the insurance market. Perhaps an educated guess would be the drive for contract certainty that the London Market is currently having to meet, spreading its reach to the South China sea.

Those Hong Kong-based insureds that are directly insured into the London Market may already be feeling the benefit of the drive but will the Office of the Commissioner of Insurance in Hong Kong also want to follow the Financial Service Authority's lead in relation to business written locally?

With it a common practice for local insurers to adapt policies for the Hong Kong market that have hitherto been deployed in other jurisdictions, without having an eye on whether the adaptation is sufficient to meet Hong Kong insureds' needs, this may be a ripe area to be looked into in the future.

- Peter Gregoire and Aaron Le Marquer are both currently working at CMS Cameron McKenna's Hong Kong office.

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