Insurance - Juen, Jeat, Nic & Nair

June 2, 2023

Illegality and Attribution

On 18 January 2023, the Court of Appeal upheld the High Court’s decision allowing a takaful operator’s claim against loss adjusters appointed by the operator for breach of contract. The loss adjusters contended that the takaful operator could not recover damages for breach of contract because it was bound by the illegal acts of its own employee. JJNN acted for the takaful operator.

The arguments at the High Court and the Court of Appeal centered on whether the illegal “contract” between the takaful operator’s employee and the loss adjusters’ employee had “tainted” the contract between the insurer and the loss adjuster with illegality, resulting in the contract being illegal, void, and unenforceable. In this regard, the concepts of vicarious liability, illegality, attribution, and agency were canvassed before the Court.

After a full trial, the High Court allowed the takaful operator’s claim, holding that the contract between the takaful operator and the loss adjuster was legal, valid, and enforceable. The Court of Appeal affirmed the decision of the High Court.

Factual Background

The takaful operator had issued 12 takaful certificates to 12 different participants, providing cover for loss or damage to property as a result of fire. Following the issuance of the certificates:

(1) Fire loss or damage claims were submitted to the takaful operator in respect of all 12 certificates.

(2) The takaful operator appointed the loss adjusters to investigate each of these claims.

(3) The loss adjusters purportedly carried out the investigations and submitted the report of these investigations to the takaful operator.

(4) On the basis of these reports, the takaful operator paid out over RM1.3 million to the 12 participants.

It was subsequently discovered that that the investigation reports submitted to the takaful operator were all fakes and forgeries in that, (1) most of the premises at which the fires allegedly occurred did not even exist and (2) where the premises did exist, there had not been any fires. It later became clear that there had been a “rogue” employee working for the takaful operator and another “rogue” working for the loss adjusters. The fraudulent scheme had been worked out between these 2 individuals, who subsequently disappeared.

The takaful operator brought an action against the loss adjuster for breach of contract, on the basis that it had paid over RM1.3 million based on the fictitious investigation reports submitted to it by the loss adjusters. The loss adjusters brought third party proceedings against the 12 participants for being part of the fraudulent scheme.

High Court

At the trial, the loss adjusters contended that the claim should not be allowed because the contract between takaful operator and the loss adjuster was tainted by illegality. The loss adjuster also contended that the takaful operator ought to be “vicariously liable” for the its employee’s conduct.

The High Court disagreed with the loss adjuster’s contentions and found that the contract was legal and enforceable.

In arriving at this decision, the High Court observed that the doctrine of vicarious liability was irrelevant as there had been no tortious claim brought by the loss adjusters against the takaful operator’s employee. The Court observed that, if the loss adjusters was contending that its contract with the takaful operator was illegal because of the actions of the takaful operator’s employee, the appropriate principle to consider was the doctrine of attribution.

Under the principle of attribution, the loss adjusters would not be held responsible for the takaful operator’s losses if they were caused by takaful operator’s employee if that employee's conduct could be “attributed” to the takaful operator.

In allowing the takaful operator’s claim, the High Court applied the House of Lord’s decision in Rolls & Stone Ltd (In Liquidation) v Stephen Moores (a firm). In that case, the Court had employed the concept of the “directing mind” of a company, finding that the fraudulent conduct of a director could be treated as the conduct of the company or to be attributed to the company if the individual was the “directing mind” of the company.

Applying this principle, the High Court found that the employee’s actions could not be attributed to the takaful operator as the employee was not the “directing mind” of the takaful operator.

The Court also considered attribution from a principal-agent point of view but was of the view that an agent who acts against its principal’s interests cannot be said to be acting within his authority. The Court also held that an agent’s knowledge should not be attributed to his principal where the knowledge relates to the agent’s own breach of duty to his principal.

Finally, the High Court noted that the “very thing” argument also applied to the present case: illegality should not be raised to defeat a claim where the damage was caused by fraud which was the “very thing” the defendant was appointed to investigate in the first place.

In allowing the takaful operator’s claim against the loss adjusters, the Court also allowed the loss adjusters’ 3rd party claims against the 12 participants, who had participated (no pun intended) in the fraudulent scheme.

Court of Appeal

On appeal, the loss adjusters held steadfast to their position that the takaful operator ought to have been found vicariously liable for its employee’s actions.

The loss adjusters also contended that the High Court had erred in relying on Stones & Rolls Ltd, which has been criticised in more recent decisions by the Supreme Court of the United Kingdom. The loss adjusters asserted that the UK Supreme Court’s judgment in Singularis Holdings Ltd (in liquidation) v Dajwa Capital Markets Europe Ltd was now the prevailing law on the concept of attribution.

On the point of vicarious liability, the Court of Appeal affirmed the High Court’s finding that vicarious liability could not be used as a defence in the manner advanced by the loss adjusters (i.e., as a defence to a breach of contract, in the absence of any claim against a principal tortfeasor)

On the issue of illegality and attribution, on the takaful operator’s behalf, we argued that the that the High Court would not have reached a different conclusion even if it had applied the Singularis instead of Stones & Rolls.

In Singularis, the plaintiff company brought an action against an investment bank for making payments from moneys held to its account to 3rd parties. These payments were made on the instructions of a director and the sole shareholder of the plaintiff. The claim brought against the investment bank was for breach of its “Quincecare” duty of care (an implied term of a contract between a bank and its customer that the bank would use reasonable skill and care in executing customer orders).

The issue in Singularis Holdings Ltd was whether such a claim would be defeated if the instructions were given by the company’s director and sole shareholder who was the “dominant influence over the affairs of the company”. The UK Supreme Court was not inclined to apply the “controlling mind” or “dominant influence” test used in Stones & Rolls. Instead, the Court employed a “context and purpose” approach to attribution.

In applying this approach, the UK Supreme Court declined to attribute the fraudulent acts of the company’s director and sole shareholder to the plaintiff company. The Supreme Court held that:

“The context of this case is the breach by the company's investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the judge put it, to 'denude the duty of any value in cases where it is most needed' (para [184]). If the appellant's argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.”

Similarly, we argued that the “context” in the present case was the breach by the loss adjusters of its contractual duty towards the takaful operator. The “purpose” of that duty was to protect the takaful operator against incorrectly paying out on claims, which was the very thing that took place. Therefore, to attribute the employee’s fraud to the takaful operator would be to denude the loss adjusters’ duty of any value in cases where it is most needed. Therefore, the employee’s fraudulent actions ought not to be attributed to the takaful operator.

After hearing lengthy submissions from both parties, the Court of Appeal dismissed the appeal and upheld the decision of the High Court. In delivering its decision, the appellate Court did not provide its views on the doctrines of illegality and attribution. As of the publication of this article, the grounds of judgment are unavailable. Without the benefit of written grounds, it will be interesting to see how the doctrine of attribution (in the context of an “illegality” defence) will be treated and applied by the Courts moving forward, particularly with regard to the UK Supreme Court’s approach in Singularis.

Authors: Harish Nair and Casper Tey

Published by JJNN in Dispute Resolution, Insurance

Tags: attribution, illegality, insurance, loss adjuster, singularis, takaful, vicarious liability

April 18, 2023

Insurable Interest in Life Insurance – Yes, but When?

Insurable interest is one of the most fundamental concepts in insurance law and is not without its share of criticism and discombobulation. For the uninitiated, in the realm of life insurance, insurable interest in simple terms (if there is such a thing) is the interest one person has in another person’s life in that it would prejudice that first person financially or emotionally if that other person were to come to harm or death. Cue the discombobulation.

On the surface, the concept of insurable interest can appear to be straightforward although there are pundits who would disagree. Malaysian legislation does not definitively define the term “insurable interest”, but the Financial Services Act 2013 (and the Insurance Act 1996 and the Insurance Act 1963 before that) does enumerate the categories of persons in whose lives one is deemed to have insurable interest. The focus of discussion in this article, however, relates to the timing requirement of insurable interest.

Before delving into the Malaysian position, the origins of the concept, i.e., the English law on insurance, ought to be considered briefly to shed some light on the importance of insurable interest. In the nascent years of English insurance, anyone could effect insurance on anything or anyone. With no parameters or safeguards of any sort, it is not difficult to see how this form of insurance can be abused. One could effect insurance on the life of a debilitated stranger and claim monetary benefit upon the demise of said stranger and, in the early days of insurance, this sort of practice mutated insurance contracts into gambling or wagering contracts. One bets with an insurer on the chances of an event occurring (e.g., death of a stranger) and then later claims the amount wagered upon occurrence of said event; in some cases, said event would even be deliberately brought about for financial gain.

English legislators, in an endeavour to curb such depravity, introduced the concept of insurable interest in the Life Assurance Act 1774 (“LAA 1774”). The LAA 1774 provided that the person benefitting from an insurance must have insurable interest in the life or event insured and, if insurable interest is absent, the insurance is void. Additionally, the insured can recover no more under an insurance policy than the value of the insurable interest.

This meant that A, for example, who intends to effect insurance on the life of B, must have insurable interest in B’s life, otherwise the insurance would be void; also, the amount of moneys payable to A under the insurance must be no more than the value of A’s interest in B’s life.

However, the LAA 1774 stopped short of prescribing how long the insurable interest had to last or whether the insurable interest had to subsist after insurance had been effected. There was room for interpretation and some English Courts took the position that all that was required was for insurable interest to exist at the point the insurance was effected so that A could still go on to receive the insurance proceeds upon B’s demise despite A no longer having any insurable interest in B’s life at any time after the inception of the insurance.

Two prominent cases in which the English Courts tussled with whether this ought to be the case are Godsall v Boldero (1807) 9 East 72 and Dalby v India and London Line Assurance [1843-60] All ER Rep 1040.

In the case of Godsall v Boldero, a creditor effected insurance on the life of his debtor for the amount of the debt. After the debtor died, his executors settled the entire debt. Nevertheless, the creditor made a claim for moneys under the insurance. The insurer denied the creditor’s claim, reasoning that there was no more debt (i.e. no prejudice against the creditor and in essence, no insurable interest). The Court found in favour of the insurer and ruled that the insurance was substantially a contract of indemnity insuring against the loss of the debt. The Courts in Godsall v Boldero concluded that insurable interest should exist at time of the insured event and that the insurance was a contract of indemnity.

This decision was overruled by the Court in Dalby v India and London Line Assurance. In the case of Dalby, an insurance policy was effected on the life of the Duke of Cambridge with insurance company Anchor Life Assurance Co which subsequently applied for reinsurance with the defendant reinsurers for said insurance policy. Sometime before the Duke died, the insurance policy effected on his life was cancelled. Anchor Life, however, continued to pay premium for the reinsurance and went on to make a claim for the reinsured sum from the defendant when the Duke eventually died. The defendant rejected the claim on the basis of the absence of insurable interest at the time of death; sure enough, Anchor Life itself did not pay anything upon the death of the Duke as there was no insurance. Despite this, the Court found in favour of Anchor Life, stating that:

the requirements of the LAA 1774 insofar as insurable interest was concerned would be satisfied if the person effecting the insurance policy had an insurable interest in the life assured at the time of entering into the policy; it was not necessary that such insurable interest continue until the death of the life assured; and
life insurance was not indemnity insurance, but simply a contract for the insurer to pay the sum insured upon occurrence of the insured event in consideration of premium which had been continuously paid by the insured.

This decision is not without its critics and one could offer several reasons for this. After cancellation of the policy on the Duke’s life, Anchor Life stopped receiving premium and was no longer bearing the risk of insuring the Duke. How the Court could think it correct that Anchor Life should be paid the reinsurance moneys when the very basis of the reinsurance had ceased (or, in other words, Anchor Life no longer had any insurable interest) simply because Anchor Life had continued to pay premium is anyone’s guess. Some critics even take the view that this decision in fact legitimizes the wagering and gambling the law had sought to curb.

Nevertheless, this progress of insurable interest in English law has been reflected in Malaysian legislation as well; first in the Insurance Act 1963, then in the Insurance Act 1996 and, finally and currently, in the Financial Services Act 2013.

Section 40 of the Insurance Act 1963 most closely mirrored the position in the LAA 1774 and the position taken in Dalby. Section 40 provided that a life policy shall be void unless the person effecting the policy has an insurable interest in the life of the insured at the time the insurance is effected, and the moneys to be paid under the policy shall not exceed the amount of insurable interest at the time the insurance is effected.

This section was later amended and rephrased in the Insurance Act 1996 and renumbered as section 152. The effect of the amendment was that, not only was there a requirement that insurable interest must exist at the time the insurance was effected, but the policy moneys payable upon the insured event, or where the policy moneys were payable in instalments, the discounted value of all future instalments under the life policy, could not exceed the amount of insurable interest at the time of such insured event. For illustration’s sake, using the A & B scenario used earlier, if after A effects a policy on B’s life, A loses its insurable interest in B’s life or has a diminished insurable interest in B’s life, A would not receive anything or receive an amount not more than that diminished interest in B’s life respectively when B dies.

The section 152 provision on insurable interest, with reference to policy moneys payable in instalments specifically, made sense especially for the creditor-debtor category of insurances. A creditor has insurable interest in the life of its debtor; the debtor owes the creditor money and therefore the debtor’s being alive and able to pay the debt is in the interest of the creditor. A creditor can then effect a life insurance policy on the life of the debtor and the amount can be ascertained as well – the insured sum would be the sum the debtor owes the creditor.

Say, for example, the debtor owed the creditor RM12,000 and an arrangement is made whereby the debtor pays RM1,000 each month to the creditor. The creditor effects insurance on the debtor’s life with the total sum insured of RM12,000 and, in sync with the creditor and debtor’s payment arrangement, the sum insured of RM12,000 decreases by RM1,000 every month in correspondence with the decreasing value of the debtor’s debt. However, during the 7^th month, the debtor manages to pay off the entire debt and then dies in the 8^th month. The fact is, with the debt fully settled, there is no more money due to the creditor and therefore no more insurable interest, but based on the agreement between creditor and insurer, RM5,000 is the sum insured in the 8^th month.

Under section 40 of the Insurance Act 1963, the creditor would be entitled to be paid the sum of RM5,000 because it does not matter that there was no insurable interest at the point of death of the debtor; the insurance policy was valid because there was insurable interest at the inception of the policy and therefore the insurer would simply pay the sum insured. Therein lies the disconnect – the creditor, although effecting the insurance to safeguard his interest in the debt of RM12,000 in the first place, stands to receive a windfall of RM5,000 having already been paid the entire debt in the 7^th month.

However, under section 152 of the Insurance Act 1996, the moneys payable under the policy must not exceed the amount of insurable interest at the time the insured event occurs; the insurable interest at the point of death of the debtor in the 8^th month being 0, the moneys payable not exceeding the amount of insurable interest at that point would also be 0.

Against the backgrounds of moral hazard considerations and general public policy frowning on wagering, one would have thought of section 152 as being a statutory override to the principles laid down in Dalby and that insurers would have legislative support for not paying out at all or in full to a creditor policy owner whenever the value of the insurable interest was extinguished or lessened as at the point of death of a debtor life assured. Oddly enough, particularly in regard to Mortgage Reducing or Decreasing Term Assurance, Malaysian insurers have been known to want to pay in full, i.e., the sum assured as at the point of death, despite the debt having been settled in full or reduced due to pre-payment of instalments. Perhaps because of the one-time payment of premium for the entire term of cover right at the commencement of cover, Malaysian insurers have adopted the stance that, the risk having been paid for in full in advance, they should honour what they agreed to pay when the agreement was first entered into.

There have, of course, been issues as to who the proceeds ought to be paid to; the creditor policy owner, not being owed any more debt by the deceased debtor life assured, and not wanting to be accused of unjust enrichment, declines acceptance of the moneys by proclaiming it no longer has any interest in the insurance; due to the privity of contract rule, payment to the estate of the deceased is also not possible as the insurer would not receive a valid discharge in law thereby. However. these issues can provide fodder for a separate article altogether; in any event, they purport to have been dealt with by the Financial Services Act 2013.

Cue the Financial Services Act 2013 and a reversion to the Insurance Act 1963: paragraph 3(1) of Schedule 8 to this Act repeats the requirement for insurable interest at the time the insurance is effected but makes no mention whatsoever as to whether insurable interest needs to subsist at the time of the event giving rise to a claim. The natural inference from the omission is that Dalby should apply so that it does not matter whether there is still insurable interest at the point of occurrence of the insured event. Whether this has been done to accord with what insurers were already practising despite section 152 of the 1996 Act is not something the legislators will readily admit to.

Spousal insurable interest is also affected by when insurable interest is required. Similar to the English position, in Malaysia, one is deemed to have insurable interest in the life of his or her spouse. But suppose one effects insurance on the life of his or her spouse and later divorces said spouse. Insurable interest no longer exists and suppose also that the marriage breaks down to a point that the person who effected the policy is convinced that it is only logical to do away with the former spouse. And suppose also that murder is arranged and cannot be traced back to the policy owner because, under public policy, one is not able to benefit from one’s own wrongdoing, especially that of the illegal and bloody kind. Under the current law, in this scenario, it would appear that the person who effected the policy would stand to receive the moneys payable under the insurance.

This is not to say that the law as it is currently is an incentive for former spouses with violent, vengeful intentions to carry out the deed, or that insurable interest alone is an effective deterrent against murder. Rather, the point of this discussion is really whether any policy owner should benefit from the death of an individual they no longer have any insurable interest in.

The overriding concern in the two scenarios mentioned, creditor-debtor and spouses, is moral hazard – where insurable interest has ceased, should a creditor be allowed to make a profit and should an individual be allowed to benefit monetarily from the death of a former spouse?

On the one hand, there is the argument that life insurance is not indemnity insurance and that the value of a human life or the benefit derived from human relationships cannot be quantified or limited, but what if creditor-debtor insurances, despite being effected on the life of a debtor, worked on an indemnity basis? After all, the purpose of the insurance on the debtor’s life is to ensure that the creditor is not left with an unpaid debt in case the debtor dies before settling the debt. Further, in this scenario, the amount of insurable interest is quantifiable and capable of being proven to a tee.

To take it a step further, one could also argue radically that life insurance should, perhaps, be contracts of indemnity. It is conceded that there cannot be a limit on the value of the insurable interest one places on their spouse, but when the insurable interest ceases to exist, when the policy owner is deemed to not suffer prejudice, emotional, monetary or otherwise, upon the death of that former spouse, it could be argued that the policy owner should not stand to benefit from said death.

Any concerns of premiums paid continuously since the inception of the policy with an expectation to receive the sum insured upon occurrence of insured event can be addressed by making it compulsory for policy owners to notify insurers of a divorce or other change in insurable interest. Alternatively, insurers could automatically be notified by the relevant authorities upon finalisation of the divorce, then premiums would no longer be collected and the policy should terminate immediately due to lack of insurable interest.

Certain insurers are not perturbed by this lack of requirement of insurable interest at the time of payout; having calculated and accepted the risk of insuring the life assured, insurers are generally ready to make that payout and their priority would be to do so correctly in accordance with the law. On the flipside, there are creditors, mostly institutional and for accounting reasons perhaps, that do not accept the surplus moneys payable under policies where debts have been settled, even when the insurer insists on paying. Therefore, it would be worthwhile for a change to legislation insofar as when insurable interest is required is concerned if it will mean a leaner, more efficient system of insurance. If nothing else, an ex-spouse bent on a quick kill for profit may rethink his or her strategy if there is nothing to be got from murder most foul.

Authors: Christopher Foo and Jessie Lim

Published by JJNN in Insurance, News & Views

Tags: insurable interest, insurance law, life insurance

December 9, 2022

Claim by Life Insurer for Refund of Commissions and Bonuses

The JJNN team of Christopher Foo, Juen Chong and Emeline Khoo recently succeeded in a claim for a life insurance company client who brought an action in Court against its ex-agent and former agency manager for a refund of commissions and bonuses paid on 2 policies which were cancelled.

The KL High Court rejected the defence that cancellation of insurance policies could only be done during the statutory cooling-off period of 15 days.

The defence contention that the right to clawback did not survive the termination of the agency agreement was similarly rejected as the agreement in question had been drafted sufficiently widely to provide for survival.

A counter-claim by the defendants for loss of income allegedly suffered as a result of having been blacklisted with LIAM because of the moneys owing by them to our insurance company client was dismissed.

Published by JJNN in Insurance, News & Views

Tags: contract law, insurance law

May 26, 2022

Limitation Period for Claim for Total & Permanent Disability benefits

Our Christopher Foo, Chong Juen Quan and Emeline Khoo succeeded today in opposing an application for leave to appeal to the Federal Court.

The Plaintiff had sought leave to appeal against a judgment of the Court of Appeal affirming a decision of the High Court which struck out the Plaintiff’s claim on the basis that he was statutorily time-barred.

The Plaintiff commenced action in the High Court against our client, a life insurance company, for Total and Permanent Disability benefits under several policies after our client had rejected his claim. The primary issue before the High Court and the Court of Appeal was when the 6-year limitation period began to run.

Both the High Court and the Court of Appeal agreed with our submissions that the Plaintiff’s cause of action accrued on the date of his submission of his claim for Total and Permanent Disability benefits to the insurer and not when the insurer rejected his claim.

The Federal Court did not see it fit to grant the Plaintiff’s application as it was of the view that the questions posed by the Plaintiff did not meet the threshold of Section 96 of the Courts of Judicature Act 1964. In the circumstances, the decision of the Court of Appeal on this issue stands.

Published by JJNN in Insurance, News & Views