Dorsey McPhee v Colina Insurance Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lord Woolman,Lord Leggatt,Lord Stephens |
| Judgment Date | 02 March 2023 |
| Neutral Citation | [2023] UKPC 8 |
| Court | Privy Council |
| Docket Number | Privy Council Appeal No 0106 of 2021 |
[2023] UKPC 8
Lord Hodge
Lord Leggatt
Lord Stephens
Lady Rose
Lord Woolman
Privy Council Appeal No 0106 of 2021
Hilary Term
From the Court of Appeal of the Commonwealth of The Bahamas
Appellant
Daniel Feetham KC
Rowan Pennington-Benton
(Instructed by Sheridans)
Respondent
Jawdat Khurshid KC
James Bailey
(Instructed by Reynolds Porter Chamberlain LLP (London))
In August 2003 Dorsey McPhee, an attorney in The Bahamas, took out a $150,000 life insurance policy (all sums are in Bahamian dollars and have been rounded up). Soon afterwards Mr McPhee applied to convert the policy to a ‘universal life insurance policy’. The insurer accepted his proposal and issued a new policy in October 2003. Colina Insurance Ltd took over the insurer's rights and obligations as from 1 January 2004.
The policy continued for ten years. Colina increased the charges each year. On 18 August 2014 Colina sent him a notice of pending cancellation. It stated that Colina had not received payments required to ensure that the policy remained in force and, unless he remedied matters, the policy would lapse on 7 September 2014. Mr McPhee did not comply with that requirement. Instead he tendered payment the following day. Colina maintains that he was too late — the policy had already lapsed.
Mr McPhee contends that the increases were unlawful. There was no contractual underpinning to justify what Colina had done. In these proceedings, he seeks declaratory orders and damages. He submits that, rather than a shortfall, the policy had a cash surrender value in excess of $7,000 in September 2014. Accordingly, it did not lapse.
After trial, the Supreme Court of The Bahamas (Charles J) found in favour of Colina. The Court of Appeal upheld her judgment. Both courts held that the increased charges were justified and that the policy lapsed on 7 September 2014. Mr McPhee appeals to the Board with the permission of the Court of Appeal.
Universal life policies originated in the United States in the 1970s. They have twin aims: flexibility and tax-efficiency. Typically, they operate as follows. The net premiums (after tax) are paid into a savings account. From there the insurer deducts sums to meet the cost of the insurance, together with other miscellaneous charges.
Because the cost of insurance is linked to the policyholder's age, the premiums at the outset will exceed the deductions. Later, the position will reverse. By then, however, there should be an accumulated surplus in the account to meet any shortfall or to cover a missed premium payment.
In advance of the conversion to a universal life policy, the insurer sent Mr McPhee an application form, which contained a policy illustration and an owner's statement. It drew attention to five points. First, the illustration had to be reviewed with the policy. Second, the illustration assumed that the premiums would be paid as scheduled. Third, the policy would be for a “yearly renewable term”. Fourth, the “cost per $1,000 of coverage increases annually”. Fifth, the owner's statement contained “important explanatory notes”.
The material parts of the owner's statement can be summarised as follows:
-
(i) All the illustrated values depended on several factors and were not guaranteed.
-
(ii) The premium payments required to keep the policy in effect might be higher or lower than those illustrated.
-
(iii) Any changes in the insurance amount, in the cost of insurance option, or in the death benefit, would be based on (a) the rates in effect and (b) the insured's attained age at that time.
-
(iv) No death benefit would be payable in the event of a policy lapse.
Mr McPhee signed the owner's statement on 5 September 2003. In doing so, he confirmed that he had “reviewed this entire illustration” and it had been explained to his satisfaction. His insurance adviser signed on the same date, likewise confirming that he had (i) reviewed the illustration, (ii) explained it to his client's satisfaction, and (iii) given him a copy.
The owner's statement stated that the illustration was not a contract nor an offer to provide insurance and that the terms of the policy should prevail. It was not, however, superseded because the policy contained the following term:
“This policy, the application (a copy of which is attached), any amendments agreed to in writing and any subsequent application for change or reinstatement of this policy form the entire contract between you and us.”
The “application” must refer to the earlier document signed by Mr McPhee, encompassing the form, the policy illustration, and the owner's statement. Put short it is an “entire agreement” clause of wider scope than usual.
The policy defined five key terms (here put in lower case to aid readability):
| “account value” | the amount of net premiums plus earnings paid less monthly deductions taken out of the policy to cover all benefits |
| “guaranteed cost of insurance” | the deduction from the account value used to pay for the insurance under this policy |
| “lapse” | the termination of the life insurance coverage due to nonpayment of monthly deductions |
| “monthly deductions” | the deduction made each month from the account value to pay for all benefits under this policy |
| “reinstatement” | the restoration of a lapsed policy |
Some features of the policy require explanation. First, Mr McPhee could request to change the guaranteed cost of insurance “to the level rate applicable to his … attained insurance age in the table”. Next, the policy lapsed 30 days after the account value was insufficient to pay the monthly deductions. But that was not the whole story. There was a 30 day grace period during which the policy remained in force.
Finally, the policy allowed Colina to reinstate a policy within three years of the date of a lapse if it received: (i) satisfactory evidence of insurability; (ii) sufficient premium to cover all past due monthly deductions, plus interest; (iii) the greater of the target premium and the monthly deductions due in the next three months; and (iv) any amounts borrowed on the policy, plus interest. There was an important fifth condition. Mr McPhee had to comply with “any additional company requirements in effect on the date of application for reinstatement”.
The initial quarterly premium rate was $528, which Mr McPhee had to pay on the ninth day of February, May, August and November. Colina made an initial monthly deduction of $97 from the investment account. That comprised the guaranteed cost of insurance ($75), a waiver of premium on disability ($13), and an administration charge ($9). The waiver of premium yielded benefits if Mr McPhee became disabled in specific circumstances. It is not material for present purposes.
Colina maintained a ledger recording each transaction relating to Mr McPhee's policy. It shows that the guaranteed cost of insurance rose from $75 in 2004 to $204 and then $224 in 2014, with two increases in 2006 ($108 then $115).
Colina increased the monthly deductions (i) on an annual basis from 2006 onwards, (ii) on the five occasions it says it reinstated the policy, and (iii) in particular, by applying a one-off ‘plus 75% rating’ in 2006. It is useful to map the increases against the dates when the policy lapsed and was reinstated:
(It is not clear how the policy could have lapsed on 18 January 2006, which is the same date as the reinstatement, but those are the concurrent findings of fact.)
| Lapse | Reinstatement |
| 8 December 2005 | 18 January 2006 |
| 18 January 2006 | 21 June 2006 |
| 8 October 2009 | 1 February 2010 |
| 8 August 2013 | 2 October 2013 |
| 9 December 2013 | 17 February 2014 |
From 2005 until 2014, Colina provided Mr McPhee with annual statements. They showed the opening fund balance, the premiums paid, the monthly deductions, any withdrawals, premium tax, interest earned, the closing fund balance, the surrender charges, and the cash surrender value. They made the financial position clear — the account was not performing in line with expectations.
On 18 February 2014, Colina sent a notice of pending cancellation to Mr McPhee. It reminded him that although premiums had been paid up to November 2013, insufficient payments had since been made and the policy would lapse if he did not rectify matters by 7 March. He cured the problem by making a payment on that date. Three days earlier, however, he had written to Colina to raise two matters. He stated that it was in breach of contract by charging him a “mortality tax”. He also asked it to confirm that his policy had a cash surrender value of at least $5,654. Colina replied on 1 April giving a full account seen from its perspective:
“… we have interpreted … “mortality tax” to refer to the contractual mortality charges or cost of insurance (COI) … In accordance with your request, we have conducted an in-depth review of this matter. Our findings and response(s) are summarized below: …
iii. the COI is a calculated amount that pays for the life insurance benefit of the universal life policy …
iv. the COI option for your policy is the yearly renewable term (YRT). This COI option is based on the life insured's attained age, sex, smoking status and current rate class. The YRT COI increases every year on the policy anniversary date. The policy will remain in force as long as the target premium is paid quarterly when due, no loans or withdrawals are taken and the minimum interest rate is earned.
v. A review of your account history highlights several periods when premiums were not paid when due. Subsequently back premiums were paid, but these amounts were not...
To continue reading
Request your trial