Keywords: reduced limitation period, insurance policy, accidental damage, business interruption
In the recent case of Possehl Electronics Hong Kong Limited v. China Taiping Insurance (HK) Co. Ltd, (CACV 9/2014), the plaintiff appealed against the judgment of the Court of First Instance dated 19 December 2013, striking out its claims on the grounds the claims were frivolous or vexatious and otherwise an abuse of process and dismissing the action. The Court of Appeal upheld the Court of First Instance's decision which found the 12 month time limitation clause imposed on the plaintiff to commence legal proceedings or arbitration following the occurrence of loss or damage to be enforceable.
On 4 June 2011, a fire broke out in Possehl Electronics Hong Kong Limited's premises in Tsuen Wan ("Premises"). Prior to the accident, Possehl Electronics Hong Kong Limited ("Possehl") had taken out two policies, respectively an:
- Accidental Damage (Property) Insurance Policy; and
- Business Interruption Insurance Policy
collectively, the ("Policies") with China Taiping Insurance (HK) Co. Ltd. ("Insurer") covering the Premises.
Notification of a claim was given by Possehl under the Policies in relation to the accident. On 1 June 2012, the Insurer rejected the claim under the Policies on the basis that Possehl was in breach of a particular warranty relating to unauthorised building work under the Accidental Damage (Property) Insurance Policy. Given that the Business Interruption Insurance Policy was only triggered upon payment under the Accidental Damage (Property) Insurance Policy, coverage for business interruption losses was also denied (i.e., the material damage proviso). In response, Possehl disputed the Insurer's denial for coverage under the Policies.
On 26 July 2012, Possehl sought to bring the matter to arbitration by issuing an Arbitration Notice. The validity of the Arbitration Notice was disputed. Relevantly, the arbitration clause under the Accidental Damage (Property) Insurance Policy provided that only matters relating to differences in amounts to be paid by the Insurer under that policy should be referred to arbitration.
On 19 December 2012, Possehl initiated litigation proceedings against the Insurer. In response, the Insurer sought to strike out Possehl's action on the basis that it was time barred by the contractual limitation periods under the Accidental Damage (Property) Insurance Policy. More particularly, the Accidental Damage (Property) Insurance Policy required Possehl to: (1) make a claim within 12 months from the happening of the loss or damage; and (2) to commence any action or suit within 3 months after the Insurer's rejection of a claim. The Insurer also continued to dispute the validity of the Arbitration Notice.
At the Court of First Instance, Deputy High Court Judge Whitehead SC struck out Possehl's claim on the ground that the action was barred by general Condition 4(b), in that the action was found to be frivolous, vexatious and an abuse of the process of the Court, and dismissed the action. Possehl then sought to appeal against this decision at the Court of Appeal.
Judgment of the Court of Appeal
The issue before the Court of Appeal was whether under a proper construction, Possehl's claims were plainly unarguable in that they were clearly time barred under Condition 4(b) and/or Condition 12. If so, they were liable to be struck out as being frivolous, vexatious and an abuse of process on the authority of Kanson Crane Services Co Ltd v. Bank of China Group Insurance Co Ltd  2 HKC 602.
Condition 4(b) provided that if no legal action was commenced within three months from the Insurer's rejection of the claim or making of the award by the arbitrator in the arbitration under Condition 7, then all benefit under the Accidental Damage (Property) Insurance Policy shall be forfeited. Condition 12 was a time-bar limitation stating that any legal proceedings or arbitration proceedings had to be commenced within 12 months from the "'happening of the loss or damage'".
It was not disputed that Possehl had not commenced litigation proceedings until 19 December 2012, well after the expiry of the 12 months' period. The Court of Appeal stated that nor could Possehl rely on Condition 4(b), as it also did not commence any action or suit within 3 months from 1 June 2012 (the date of the rejection of the claim).
The argument ran by Possehl was that once the rejection was made, a quantum dispute caught by Condition 7 arose and pending an award by the arbitrator on the dispute, Possehl would be prevented by Condition 7 from commencing any legal proceedings.
The Court of Appeal rejected this argument and held that a total denial of liability was not considered a quantum dispute coming within Condition 7 simply because Possehl sought full compensation and the Insurer was not willing to pay anything. The Court of Appeal held that:
- Possehl's argument had the effect of twisting the clear language and unequivocal effect of Condition 7.
- Possehl's claim was not supported by any authority. In fact, the weight of authorities considering similar worded insurance policies are against such construction as evidenced in Super Chem Products Ltd v. American Life and General Insurance Co Ltd & others  2 All ER 358 (per Lord Steyn).
Accordingly, the Court of Appeal held that Possehl's claims were time barred under the contractual limitation, Condition 12.
This judgment puts it beyond doubt that parties can agree to shorter limitation periods under an insurance policy within which an insured must make a claim or bring an action disputing coverage. Insurers are therefore fully entitled to rely on such policy terms to reject an insured's claim in the event of a breach. Policyholders on the other hand need to be mindful of such reduced limitation periods under their insurance policies.
Originally published 29 January 2015
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