August 2024
The Insurance Ordinance and the rules, guidelines and codes of conduct issued by the Insurance Authority under it (which collectively make up “the insurance regulatory framework”), regulate and impose requirements on insurance companies and licensed insurance intermediaries on how they conduct their insurance business and advise, arrange and fulfil obligations under insurance policies sold to policy holders. The insurance regulatory framework does not, however, impose obligations on the public to buy insurance. For the most part, although highly recommended, the decision on whether or not to buy insurance is a voluntary one.
There are, however, certain exceptions to this that emerge from legislation on other topics of public interest that make it compulsory for insurance to be purchased by members of the public in certain situations (known as “compulsory insurance”). The two main compulsory insurances in Hong Kong can be found in the areas of employment and driving.
The Employees’ Compensation Ordinance (Cap.282) compels employers to have an Employee Compensation Insurance Policy in force in respect of the employees that it employs (so that if the employee is injured in a workplace accident, for which the employer is liable, there is valid insurance protection in place to pay compensation). An employer who fails to comply commits a criminal offence and may be subject to a fine and imprisonment for up to 2 years.
The Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap.272) prohibits the use of a vehicle on the road unless there is in force a Third Party Risk Insurance Policy. Again, failure to comply is a criminal offence risking exposure to fine, disqualification from holding/obtaining a driver’s licence and imprisonment of up to 12 months.
Whilst the nature of compulsory insurance is to impose the primary obligation on the employer or vehicle user to buy the insurance, the insurance regulatory framework imposes obligations on authorized insurers which offer these types of insurance to treat customers fairly, in offering, arranging and servicing such policies (per section 10 of Guideline 10 on Corporate Governance).
In recent months, cases have been brought to the IA’s attention whereby employers have been charged and fined for not having a valid Employee Compensation Insurance Policy in place at the time of the Labour Department’s inspection of the employer’s place of business. Whilst it was the employer’s primary responsibility to make sure it had purchased the policy, one of the root causes of the failure was the omission of the employer’s servicing insurance agent to pass on the renewal notice for the insurance policy to the employer (resulting in the employer not renewing the policy in a timely manner).
The authorized insurers which issued the renewal notices, it turned out, had the practice of only issuing the notices to their insurance agents (rather than to the policy holders directly) and expected those agents to distribute them to the policy holders concerned.
Whilst it is the case that, under section 90 of the Insurance Ordinance, licensed insurance agents when carrying on regulated activities have regulatory duties to act fairly and in the best interests of policy holders or potential policy holders, it remains the case that, as a matter of law, they are agents of the authorized insurers which appoint them. If an authorized insurer sends a renewal notice to its insurance agent to deliver onto the policy holder, that renewal notice cannot be said to have been sent to the policy holder, until the agent delivers it. (Until it is delivered to the policy holder, it is at best an internal communication between the insurer and its agent).
With the principle of “treating customers fairly” in mind, we consider that authorized insurers should adopt better practices for issuance of their renewal notices (particularly for compulsory insurance coverages). We set out these best practices below:
Authorized insurers writing compulsory insurance coverages should send renewal notices directly to policy holders, to notify them when the current policy is expiring and to renew the policy (if an offer of renewal is being made). If an offer of renewal is not being made, then a non-renewal notice should be sent to the policy holder directly (well in advance of the expiry date – see best practice 2). Even if the authorized insurer has a tied agency force, relying solely on insurance agents to distribute the renewal notices is not best practice: certainly copy the agent in, so he or she can follow up (see best practice 3 below), but the best practice is to send the notice directly to the policy holder. In the case of compulsory insurance policies, this would facilitate the policy holder’s duty to comply and achieve the public protective objective of making these insurances compulsory. In the case of all insurances, this would bring attention to policy holders of the need to renew, so they have seamless insurance protection in place enabling the insurance industry to perform its vital social function.
An exception to sending renewal notices out to policy holders directly would only be justifiable if (a) the policy holder is represented by a broker company (broker companies unlike insurance agents, at law, do represent the policy holder); (b) the documented terms of dealings between the insurer and the broker company make clear that the broker company will deliver the renewal notice to the policy holder; and (c) it is clear that the broker company’s appointment by the policy holder remains current at the time the renewal notice is to be issued.
This is obvious, but always worth emphasizing. Insurers should send out renewal notices to policy holders sufficiently in advance of the existing policy expiry date. The same goes for notices of non-renewal. Customers must be given sufficient advance time prior to expiry to source a different cover.
Insurers who “target” to do this on, say, only 7 days’ written notice (because the black letter of their insurance policies permit them to do this) bring disgrace on the insurance market. Anything less than six weeks would raise question marks about whether the policy holder is being treated fairly (and the IA may have to consider whether the insurer is carrying on business in a way likely to be prejudicial to policy holders, per the definition of “misconduct” in the Insurance Ordinance).
Sending renewal notices direct to policy holders, does not mean cutting the servicing agents (or broker company, if the renewal notice has been sent directly to the policy holder) out of the picture altogether. On the contrary, best practice would include copying them in or informing them that the renewal notice has been sent so that they can assist customers in their policy renewal decision.
The above best practices are principally for authorized insurers carrying on general insurance lines of business (which include providing compulsory insurance) to consider and follow. Many insurers already follow these obvious principles as they are a means of putting the treating-customers-fairly-principle into practice. For those that do not, we suggest you start bringing your practices into line.