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.
Nature of universal life insurance
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.
Inception of this policy
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.