Fuji Finance Inc v Aetna Life Insurance Co Ltd and another
[1996] 4 All ER 608(Judgment by: Morritt LJ)
Between: Fuji Finance Inc
And: Aetna Life Insurance Co Ltd and another
Judges:
Hobhouse LJ
Morritt LJSir Ralph Gibson
Subject References:
Insurance
Contract of insurance
Nature of contract
Capital investment bond
Policy benefits on surrender or on death of life insured
Whether policy an 'insurance on the life of any person'
Whether contract a policy of life insurance
Legislative References:
- Life Assurance Act 1774
Case References:
Archbolds (Freightage) Ltd v S Spanglett Ltd (Randall, third party) - [1961] 1 All ER 417; [1961] 1 QB 374; [1961] 2 WLR 170, CA
Bedford Insurance Co Ltd v Instituto de Resseguros do Brasil - [1984] 3 All ER 766; [1985] QB 966; [1984] 3 WLR 726
Cope v Rowlands - (1836) 2 M & W 149; 150 ER 707
Cornelius v Phillips - [1918] AC 199; [1916-17] All ER Rep 685, HL
Flood v Irish Provident Assurance Co Ltd - [1912] 2 Ch 597, Ir CA
Gould v Curtis - [1913] 3 KB 84, CA
Jones v AMP Perpetual Trustee Co NZ Ltd - [1994] 1 NZLR 690, NZ HC
Joseph v Law Integrity Insurance Co Ltd - [1912] 2 Ch 581, CA
Mahmoud and Ispahani, Re an arbitration between - [1921] All ER Rep 217, CA; [1921] 2 KB 716
Marac Life Assurance Ltd v IR Comr - [1986] 1 NZLR 694, NZ CA; affg (1985) 9 TRNZ 201, NZ HC
National Standard Life Assurance Corp, Re - [1918] 1 Ch 427
NM Superannuation Pty Ltd v Young - (1993) 113 ALR 39, Aust Fed Ct
Phoenix General Insurance Co of Greece SA v Administratia Asigurarilor de Stat - [1987] 2 All ER 152; [1988] QB 216; [1987] 2 WLR 512, CA
Prudential Insurance Co v IRC - [1904] 2 KB 658
Judgment date: 4 July 1996
Judgment by:
Morritt LJ
MORRITT LJ (giving the first judgment at the invitation of Hobhouse LJ). On 24 October 1986 Tyndall Assurance Ltd (Tyndall) issued to the plaintiff, Fuji Finance Inc (Fuji), a company incorporated under the laws of Panama, what it described variously as a life assurance policy or as a capital investment bond (the policy), in consideration of a single premium of £50,000; the life assured was stated to be Gary Robert Tait. The liabilities thereunder of Tyndall were transferred to Aetna Life Insurance Co Ltd on 27 April 1987 and to Windsor Life Assurance Co Ltd (Aetna) on 1 January 1994 pursuant to ss 49 and 50 of the Insurance Companies Act 1982. On 7 July 1994 Nicholls V-C ([1994] 4 All ER 1025, [1995] Ch 122) declared in answer to two preliminary issues directed to be tried by an order of Master Barratt made on 25 March 1994 that the policy was not a policy of insurance within the meaning of s 1 of the Life Assurance Act 1774 and was not rendered unenforceable by s 16 of the 1982 Act. This is an appeal brought with the leave of Nicholls V-C by the two life assurance companies from those declarations. The Secretary of State for Trade and Industry was given leave to intervene by an order of this court made on 12 March 1996. He supports the life assurance companies on the first issue and Fuji on the second.
The policy required Tyndall to maintain certain funds as subdivisions of its long-term business fund. Each of the nine funds represented a broad category of investment as indicated by its name, such as the UK Equity Fund or the Property Fund, and was divided into units of equal value. The policy, which was typical of many such policies issued by Tyndall at the relevant time, linked the benefits payable under it to the value at maturity of the units in the funds to which it was linked. By the terms of the policy the policyholder might switch from one fund to another by giving notice to Tyndall to that effect. Nevertheless, the allocation of units was notional only for the purpose of determining benefits and the assets of the funds remained the property of Tyndall.
The funds were valued periodically on prescribed valuation days so as to determine bid and offer prices for the units therein; the former being the asset value of the unit after certain specified deductions were treated as having been made and the latter being 100/95ths of the bid price. If notice to switch was given then the bid price of the units to be disposed of (less a small amount to cover the administration expenses involved) was treated as invested at the bid price in the units to be acquired on the next following valuation day at the bid prices then ascertained. Such prices were published in the Financial Times on the day following the valuation day.
Mr Tait established in correspondence with Tyndall before the policy was taken out by Fuji a number of relevant matters which he contends became the terms of the policy or of a contract collateral to it. Those claims have still to be determined at the trial of the action, now fixed to commence in March 1997. So far as material for present purposes, such matters relate to the timing of the valuation of the investments in the fund and the time by which switching instructions had to be received. The procedure adopted by Tyndall was to fix the bid and offer prices of the units at between 9 am and 10 am on the valuation day on the basis of data taken from the Stock Exchange data stream at 4 pm the previous day. The prices so ascertained were published in the Financial Times for the following day but switch instructions would be accepted for that valuation day if they were given in writing or by fax before 2.30 pm on the valuation day.
One consequence of this timing, which Mr Tait evidently appreciated, was that the well-informed investor could himself estimate on the morning of the valuation day the approximate bid price which Tyndall would have fixed though it would not be published until the following day. Armed with this information and with knowledge of how the market had moved on the morning of the valuation day the policyholder could give instructions by fax before 2.30 pm on the valuation day for a switch in the certain knowledge that he would thereby make a profit or avoid a loss. Between 24 March 1986 and 24 April 1991 Mr Tait exercised the switch option on behalf of Fuji so as to increase the value of the benefits payable under the policy from £54,089·70 to £1,058,375, an annual average return of 90%.
From and after 24 April 1991 Aetna, then entitled to the business and liable for the obligations of Tyndall, changed the time on each valuation date at which it fixed the prices for the units from 10 am to 4 pm. The later time meant that the publication deadline for the Financial Times to be published on the following day could not be met so that the prices so fixed were not publicised until the next day but one. One result of the change was that thereafter it was necessary for Mr Tait to give instructions to switch by 2.30 pm before the time for fixing the unit prices. In this action, commenced by Fuji by a writ indorsed with a statement of claim issued on 21 April 1993, Fuji claims that such a change of procedure constituted a repudiation of the policy or the collateral contract. The reason, as claimed in para 13, is that the additional 24 hours' delay in the prices at which Aetna had insisted on carrying out switches since 24 April 1991 removed the advantage previously enjoyed so that the average return achieved thereafter was a paltry 8%. Accordingly, on 26 May 1992 Fuji accepted such repudiation, surrendered the policy and received £1,110,758·50 from Aetna. However, in the action Fuji sues for damages for breach of contract, the suggested measure of which is put at a sum equal to the average return of 90% per annum on the policy moneys compounded annually for the rest of the lifetime of Mr Tait. It has been calculated by Aetna that such a sum would be equivalent to the gross national product of the United Kingdom for 460,000 years; though in fact any damage claim established would be limited to the assets of the relevant funds.
Sections 1 and 3 of the 1774 Act provide, so far as material:
'[1] ... no insurance shall be made by any person or persons ... on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest, or by way of gaming or wagering; and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.
3. And in all cases where the insured hath interest in such life or lives, event or events, no greater sum shall be recovered or received from the insurer or insurers than the amount of value of the interest of the insured in such life or lives, or other event or events.'
Fuji accepts that it does not have an insurable interest on the life of Mr Tait in excess of the sum already paid on the surrender of the policy. Thus the policy is void under s 1 of the 1774 Act to the extent that Fuji does not have an insurable interest if it is an insurance on the life of any person; hence the first preliminary issue.
Section 16(1) of the 1982 Act provides:
'An insurance company to which this Part of this Act applies shall not carry on any activities, in the United Kingdom or elsewhere, otherwise than in connection with or for the purposes of its insurance business.'
If the policy was not an insurance on the life of any person then, Aetna claims, it was not insurance at all and, being prohibited by s 16(1), was and is illegal and void; hence the second preliminary issue.
Before turning to these issues it is necessary to set out in greater detail the material terms of the policy. As I have already indicated it is described as a life assurance policy and as a capital investment bond. The initial and only premium was £50,000. As no intermediary was involved Fuji was credited with having paid a premium of £52,770·44, being the sum which, less the usual commission of 5·25%, results in the sum of £50,000. As the premium paid was of an amount which entitled the policyholder to a bonus of 2·5% of the premium paid, the value of the units allocated to the policy was £54,089·70. Early surrender was discouraged by a discontinuance charge designed to recoup the bonus, starting at 2·5% in the first year and reducing by half a per cent a year so as to cease altogether at the end of the fourth year. By condition (10)(g) such charge also applied in the case of the life assured committing suicide within the first year of the policy. The date of birth of Mr Tait, which was not admitted, was given as 21 February 1945. Mr Tait was not required to undergo any medical examination. The conditions indorsed on the policy included the following:
'Definitions
Death Benefit Factor means at the Commencement Date the Death Benefit Factor shown in the Schedule and thereafter it shall be such amount as may be determined under the provisions of Condition (6), provided always that the Death Benefit Factor shall not any time exceed the Factor shown in the Appendix for the attained age of the Life Assured at that time.
Mortality Cost means the expected cost of mortality for a Policy Month calculated as the Death Benefit Factor multiplied by the Value of Units on the Next Valuation Day following the first day of the Policy Month less the Value of Units on such Valuation Day multiplied by one twelfth of such annual rate of mortality as the Actuary deems to be equitable having regard to the then age of the Life Assured, the sex of the Life Assured and the A1967-70 select tables for assured lives published by the Institute of Actuaries or such other tables as may be published subsequently by the said Institute ...
- (5)
- BENEFIT ON DEATH On the death of the Life Assured the Company shall pay the Value of Units on the Next Valuation Day following receipt by the Company of written notification of death multiplied by the Death Benefit Factor at the date of death of the Life Assured ...
- ...
- (7)
- BENEFIT ON SURRENDER At any time after the Unit Allocation Date the Policyholder may by notice to the Company in writing surrender the Policy in exchange for a cash sum equal to the Value of Units on the Next Valuation Day following receipt of the notice reduced by the Discontinuance Charge calculated in accordance with the table endorsed on this Policy (if any) ...
- ...
- (10)
- EXCEPTIONAL CIRCUMSTANCES Where in the opinion of the Company it would, due to exceptional circumstances, be in the interest of other holders of policies linked to a particular Fund for the exercise of any of the options contained in Condition (4), (7) and (8) affecting such Fund to be delayed the Company may by notice in writing to the Policyholder require him to defer the exercise of such option for a period not exceeding six months.'
Though the definition of death benefit factor envisaged that the factor shown in the schedule might be altered under condition (6), that was not a possibility in this case as condition (6) was expressly excluded. In the schedule the death benefit factor was specified as 1.00, though in the brochure advertising such policies it was stated that 'on the death of a single premium account 101% of the bid value of units will become payable'. The former actuary of Aetna gave evidence by affidavit sworn on 17 June 1994 to the effect that the schedule was wrong and that Aetna would have regarded itself as bound to adopt a death benefit factor of 1.01. Nevertheless, the reamended defence served on 14 April 1994 avers that the death benefit factor was 1.00 and there has been no application for leave to amend. Nicholls V-C recorded that the matter had been argued before him on the basis that the preliminary issue should be determined on the assumption that the death benefit factor was indeed 1.00.
With those considerations in mind I turn to the first issue. In his judgment, Nicholls V-C considered the meaning of the words in s 1 of the 1774 Act 'insurance ... on the life ... of any person'. After referring to Prudential Insurance Co v IRC [1904] 2 KB 658, Flood v Irish Provident Assurance Co Ltd [1912] 2 Ch 597n, Joseph v Law Integrity Insurance Co Ltd [1912] 2 Ch 581 and Gould v Curtis [1913] 3 KB 84, he said ([1994] 4 All ER 1025 at 1031, [1995] Ch 122 at 130):
'To be within the scope of this prohibitory section, the contract must be, first, an insurance which, secondly, is on the life of a person. In the Prudential case, Channell J enunciated the essence of an insurance for this purpose: a contract under which a sum of money becomes payable on an event which is uncertain as to its timing or as to its happening at all. The second element ("on the life") requires that the uncertain event is one geared to the uncertainties of life. This reading of s 1 accords with the now well-established understanding of what is meant by life insurance. I appreciate that, as I have already observed, the decided cases were concerned with the application of particular statutory or other definitions concerned with life insurance. However, none of those cases turned on subtle nuances of language. Shining through the cases is a judicial appraisal of the essence of life insurance. Moreover, if one were to seek to compare language, Joseph's case would be indistinguishable. There the company's objects incorporated a reference to the business of life assurance within the meaning of the Life Assurance Companies Act 1870. That Act applied to companies which issued "policies of assurance upon human life". I can see no reason for interpreting the similar expression in the 1774 Act differently from the way the Court of Appeal interpreted that expression in the 1870 Act. Accordingly, in my view, to be within s 1, a sum of money (or other benefit) must be payable on an event uncertain, either as to its timing or as to its happening at all, and that event must be dependent on the contingencies of human life.'
Nicholls V-C then considered the terms of the policy in this case, apart from that relating to the discontinuance charge. He observed that in accordance with conditions (5) and (7) the benefit payable on death or surrender was the same, namely the value of the units on the next valuation day after the company received notification of the death or request for payment. He rejected an argument that because one of the events on which payment was due was death the policy was necessarily one of life insurance on the ground that-
'To be within s 1 the contract must not only be "on life", the contract must also be a contract of "insurance". Accordingly it is necessary to identify the uncertain event which triggers a payment by the insurer. I do not see how an event can be regarded as triggering a payment if there is already in existence, irrespective of the happening of that event, an obligation on the insurer to make that very same payment on request. When the event occurs, the insured acquires nothing he did not already have. Nor, I add, does the insured lose anything.' (See [1994] 4 All ER 1025 at 1032, [1995] Ch 122 at 131.)
Nicholls V-C considered that the absence of any mortality cost deduction confirmed that the formula for calculating the benefits was unaffected by any consideration of the life expectancy of Mr Tait and was therefore consistent with the policy not being an insurance on Mr Tait's life.
Nicholls V-C then turned to the significance of the discontinuance charge. He concluded that an element of insurance on the life of Mr Tait was built in to that provision. He decided nevertheless that this element did not render the policy one of insurance on a life. He took the relevant principle to be:
'If a contract has to be labelled either as a contract of insurance or as not a contract of insurance, then it must be necessary to look at the overall position in the case of a contract with elements of more than one nature. I agree with the suggestion in MacGillivray and Parkington on Insurance Law (8th edn, 1988) para 7 that only where the principal object is to insure can a contract as a whole be called a contract of insurance.' (See [1994] 4 All ER 1025 at 1034, [1995] Ch 122 at 133.)
Applying that principle, he thought that the capital investment bond was not a contract of insurance nor an insurance on the life of any person.
The insurance companies submit that he was wrong. They accept that Nicholls V-C correctly stated the test for the existence of an insurance on the life of any person to be the existence of an obligation to pay 'a sum of money (or other benefit) ... payable on an event uncertain, either as to its timing or as to its happening at all, and that event must be dependent of the contingencies of human life.' They contend that the capital investment bond satisfies that test. First, they rely on condition (5) whereunder the benefit is payable on the death. They submit that it is immaterial that the same sum of money is payable in other circumstances; not least because the right to surrender is dependent on the continuance of life. Second, they rely on the fact that on the death of Mr Tait the benefit is payable forthwith on notification to the insurance company without the insurance company having the right to postpone payment for six months as it has in the event of a surrender and exceptional circumstances within condition (10). Third, they rely on the fact that on death within the first five years (except by suicide in the first year) unlike surrender in the same period, the benefit payable is not reduced by the discontinuance charge. Fourth, they contend that the insurance element constituted by the discontinuance charge confirms the policy as one of insurance when construed as a whole. They submit that the principal object test applied by Nicholls V-C is wrong in law. Finally, they point to the fact that on the death of Mr Tait the policy comes to an end, thereby crystallising the benefits payable thereunder without the option to either party to continue it.
On this issue the Secretary of State supports the insurance companies. He submits that it is not an essential element of a policy of life insurance that the benefit on death or maturity should be more or different from that payable on surrender. He points out that in enacting the 1982 Act and the Financial Services Act 1986, Parliament regarded the activities of insurance and investment as complementary and not as mutually exclusive. Thus, s 1 of the 1982 Act defines long-term business by reference to Sch 1, which includes in para (3) the linked long-term business of effecting and carrying out contracts of insurance on human life where the benefits are wholly determined by reference to the value of property. The 1986 Act indicates a similar view in s 1 and Sch 10, where a contract which is long-term insurance business is also treated, with exceptions, as an investment.
Both the insurance companies and the Secretary of State relied on cases to which Nicholls V-C had not been referred, namely Marac Life Assurance Ltd v IR Comr [1986] 1 NZLR 694, NM Superannuation Pty Ltd v Young (1993) 113 ALR 39 and Jones v AMP Perpetual Trustee Co NZ Ltd [1994] 1 NZLR 690. I think that these cases are of assistance. The authorities to which he was referred in this connection all predate by many years the considerable developments in the nature of the insurance obtainable in the last two decades. These three cases show how the courts of Australia and New Zealand have regarded the newer forms of policy.
In Marac Life Assurance Ltd v IR Comr the Court of Appeal in New Zealand was concerned with whether certain bonds were policies of life insurance for the purposes of the Life Insurance Act 1908, the Income Tax Act 1976 and the Securities Act 1978. The bonds provided for the payment of a single premium. The benefits were (a) the payment of a fixed sum on a particular date if the life assured survived that date, and (b) the payment of a sum equal to the single premium together with bonuses thereon at a percentage rate compounded annually up to the anniversary of the commencement of the policy occurring next after the death if the life assured died before the particular date. The policy conferred an option on the holder to extend it for further periods.
The argument for the Revenue, which sought to establish that the bonds were not policies of insurance, posed as the appropriate test whether the primary or dominant purpose of the bonds was life insurance or investment. The Court of Appeal was unanimous in its conclusion that the bonds were policies of insurance. Its approach is demonstrated by the passage in the judgment of Cooke J, where he said (at 697-698):
'With respect, I agree with Ongley J's conclusion on this part of the case, but not with all his reasoning. Some of his observations suggest that he saw the question as turning on a weighing of what he called the insurance element in the bonds as against what he called the investment element. In these bonds I do not see any such dichotomy or true contrast. In the general sense all life insurance is investment. What distinguishes it from other kinds of investment is that the gain or yield, if there is one, depends on the contingencies of human life. That is the case as regards all these bonds. Under each a fixed sum, being more than the premium, becomes payable to the policy holder or his personal representative (the 10 year bond carrying as well participation in surplus), but the date on which the fixed sum becomes payable depends on whether or not the life assured is continuing. It is true that the sum is calculated by adding to the premium a given percentage, and compounding the resulting figure if necessary; but only if death happens to occur on an exact anniversary of the commencement of the risk will the sum correspond to interest for the actual use of money. No reason is apparent for describing these contracts as anything other than life insurance. In essence they are very closely linked with the contingencies of human life. A contract of life insurance is not the less such because it is for a short term.'
The suggested test of primary or dominant purpose was also rejected. Thus Somers J said (at 715):
'Mr Jenkin accepted that the bonds contained an element of life insurance but submitted that it was necessary to posit a further test to see whether they were in substance life policies. That test he posed as being whether their primary or dominant purpose was life insurance such characteristic being itself determined by the emphasis the parties placed upon it. I am quite unable to accept that. One obvious answer is that there may be no correspondence of emphasis between the parties and that the holder of a bond may have a variety of purposes in acquiring it. Another rests on the ordinary rules about the construction of a contract. In the High Court Ongley J said ((1985) 9 TRNZ 201 at 209): "I have reached the conclusion, however, that the insurance content of the Marac Life Bonds of whatever term, is not properly to be regarded as negligible. It is sufficiently substantial to justify the arrangement entered into between the insurer and the bondholder being regarded as a contract of life insurance." While a case may arise in which that which is called life assurance by the parties proves upon analysis to be something different, I doubt whether an attempted weighing of "insurance content" in the way indicated by the Judge is possible or material. If the contract answers the common test of life insurance which necessarily embraces a risk by the insurer dependent on the length of human life it must I think be characterised as life insurance.'
Accordingly, this case recognised that the investment element of a policy, which has become such a feature of modern insurance, is consistent with its characterisation as a life policy.
In NM Superannuation Pty Ltd v Young (1993) 113 ALR 39 the Federal Court of Australia was concerned with whether the policy in question was a policy 'of life assurance or endowment assurance' within the meaning of the phrase as used in s 116 of the Bankruptcy Act 1966 so as to except it from the property of the bankrupt divisible amongst his creditors. The policy in question arose under an employees' superannuation scheme, which required the employer to fund policies to be issued to its employees by the trustees of the scheme. The events on which benefits were payable included (a) retirement on or after his retirement date as defined, (b) death in employment before the age of 70 and (c) leaving the employment of the employer before the retirement date. In each of those events the benefits were the retirement accumulation as defined, namely the accumulated contributions made by the employer with interest accrued from payment of the contribution to the event in question.
The judge had held by reference to the judgment of Channell J in Prudential Insurance Co v IRC [1904] 2 KB 658 that the policy was not life insurance for there was no element of risk of loss to the insurer. This was rejected by the Federal Court. Hill J said (at 54):
'His Lordship then found the contract in question to be a contract of insurance, whether the benefits payable under it were looked at separately or together. Thus, a contract to pay a sum of money at a particular age was, in the relevant sense, "uncertain" for it was uncertain whether the assured would live to that age. Clearly enough the contract to pay an amount on death would be insurance because, although death was certain, the time of it happening was uncertain. The fact that a larger sum was payable in the event of reaching the prescribed age rather than death, was a matter which his Lordship regarded as immaterial. The requirement of uncertainty, which was referred to by Channell J, was said by the learned trial judge to be uncertainty "as to both profit and loss to the insurer". This was said to be a distinguishing characteristic of a contract of insurance. There is nothing in the comments of Channell J which leads to this conclusion. Indeed, in the present case, the element of uncertainty, in the sense that that word is used by Channell J, is clearly there. The retirement benefit, payable under cl 11, is uncertain because the member may die before reaching the retirement date and thus receive no benefit under that clause. The death benefit, payable under cl 13, is equally uncertain, not in the sense that death is uncertain, but because the time of death is uncertain and that benefit will not be payable if the member retires before the event of death occurs. Equally, the benefit payable under cl 17 is uncertain because it will only be payable if death has not intervened. The fact that the quantum of the benefits is the same does not affect, in my view, the outcome.'
Hill J equated the operation of the right of the policyholder under cl 17 (to payment in the event of leaving employment with that employer before his retirement date) with that of 'a provision that permits cancellation of the policy at any time, or in limited circumstances, with an amount becoming thereby payable to the person insured' (see (1993) 113 ALR 39 at 58). Thus Hill J did not think that either the identity of benefit or the events of retirement or change of employment on which it was payable prevented its recognition as a life policy. His conclusion was that 'the policy is properly to be characterised as a policy of life insurance' (see 113 ALR 39 at 40).
Finally, in Jones v AMP Perpetual Trustee Co NZ Ltd [1994] 1 NZLR 690 the High Court of New Zealand was concerned with whether the policy effected by the trustee company was a policy of life or endowment insurance for the purpose of the investment power of the trustees under the trust deed establishing a superannuation fund. The provisions of the policy were very similar to those of the scheme in NM Superannuation Pty Ltd v Young. Thomas J did not consider that the fact that the same benefit, namely contributions paid plus interest, was payable in the events of disability, retirement or death prevented the policy being recognised as a policy of life insurance.
For Fuji it was submitted that Nicholls V-C was right for substantially the reasons he gave. It was submitted that the payment of the benefit must be dependent on the happening of an event or contingency related to death or survival to a specified age or date. Counsel for Fuji accepted that a right to payment of premiums paid, or some other specified sum on earlier surrender, does not prevent the contract being one of life insurance provided that such right affords 'different and inherently inferior benefits to those payable on the specified event'. He subjected all the cases to which I have referred to a minute, but not over-lengthy, analysis to demonstrate that in each of them the benefits were payable on a life or death-related event and in none of them was the same benefit payable on a surrender at the volition of the policyholder. He contended that, leaving out the discontinuance charge which he submitted was not an element of insurance at all, the terms of conditions (5) and (7) provided for identical rights on both death and surrender. This contract was, in his submission, simply an investment contract dressed up as a life assurance. He also submitted that the provisions of the 1982 Act and the 1986 Act and the regulatory consequences on which the Secretary of State relied were not relevant considerations on the construction and application of the 1774 Act.
Though the argument ranged over a wide area, and I make no complaint on that score, in the end the point is a narrow one. Is the fact that, subject to certain exceptions, the measure of the benefit payable on surrender is the same as that payable on death sufficient to prevent this contract being recognised as 'insurance ... made ... on the life ... of any person'? For my part I do not think that it is.
The essence of life assurance, as emphasised in all the cases, is that the right to the benefits is related to life or death. The obvious case, like condition (5), is where the benefit is payable on death or its notification. But over the years other less obviously life or death-related events have been recognised as sufficient. Thus survival to a given date, as in Joseph v Law Integrity Insurance Co Ltd [1912] 2 Ch 581, or the exercise of an option to determine given only to the personal representatives of the policyholder, as in Re National Standard Life Assurance Corp [1918] 1 Ch 427, being alive and therefore able to retire or leave a specified employment, as in NM Superannuation Pty Ltd v Young (1993) 113 ALR 39, have all been recognised as being sufficiently related to life or death. In this case, as counsel for Fuji accepted, the policy came to an end on the death of Mr Tait so that, subject to notification in the prescribed manner, the benefits then crystallised. Thus the right to surrender was related to the continuance of life, for it could not be exercised by Fuji after the death of Mr Tait. I do not suggest that a policy which contained condition (7) without also including condition (5) would be a policy of life assurance. But I see no reason why a policy which contains both should be denied that character.
If the event on which a benefit is payable is sufficiently life or death-related, then I can see no reason in principle why it should matter if that benefit is the same as that payable on another life or death-related event. That is a matter for the insurer and it is well established that it is not necessary that the insurer should be exposed to any risk at all (see Flood v Irish Provident Assurance Co Ltd [1912] 2 Ch 597n and NM Superannuation v Young). This was evidently the view of Hill J in the last-mentioned case, as demonstrated in the passage I quoted earlier, and I agree with him.
But even if it is necessary that the benefits should differ between one event and another, I do not see any reason why the difference must arise from the description of, or formula for fixing, those benefits. There is no doubt, given the fluctuations in the market, that over the term of the life of Mr Tait the value of the benefits receivable will change from valuation day to valuation day. Except in the case of unusual stability in the market, it is almost inevitable that the value of the benefits payable on death will be different from the value payable on surrender, and the value payable on surrender will vary according to when the surrender occurs.
In my view there is nothing in condition (7) to nullify compliance by condition (5) with s 1 of the 1774 Act which, if it stood alone, is admitted. The various other matters relied on by Aetna confirm this conclusion. Thus Aetna has no right under condition (10) to defer payment on notification of the death of the life assured, on death within the first five years (except by suicide in the first year) the value of the units must be paid in full without the deduction of any discontinuance charge and, as Nicholls V-C observed, the whole policy is 'clothed in the vesture of life insurance', which is at least relevant, though by no means conclusive, to the characterisation of the policy (see [1994] 4 All ER 1025 at 1032, [1995] Ch 122 at 132).
For my part, I would accept the submissions of counsel for Fuji that the scope of and regulatory consequences which might arise under the 1982 Act and the 1986 Act are not relevant to this issue, but that question does not arise in the view that I have taken. Further, I do not accept that Nicholls V-C, by his reference to the principal object of the insurance, indicated that he was adopting some inappropriate test (see [1994] 4 All ER 1025 at 1034, [1995] Ch 122 at 133). Reading his judgment on this issue as a whole it is clear that he was correctly considering the characterisation of the policy as a whole and posing the question whether so read it was a policy of life insurance.
Accordingly, I would allow the appeal on the first issue. On that basis the second issue does not arise. But as concern has been expressed as to both the conclusion of Nicholls V-C and his reasoning, the issue was fully argued and as this case may go further I should express my views on it, albeit shortly. For this purpose it is necessary to assume that the policy was neither a contract of insurance nor an insurance on the life of any person.
Nicholls V-C started by considering the decision of this court in Phoenix General Insurance Co of Greece SA v Administratia Asigurarilor de Stat [1987] 2 All ER 152, [1988] QB 216 in relation to the effect of infringing what is now s 2 of the 1982 Act. He said ([1994] 4 All ER 1025 at 1036, [1995] Ch 122 at 135):
'In the present case the prohibition is against carrying on any "activities" other than those permitted. "Activities" is every bit as wide and comprehensive as the prohibition in the Phoenix case. "Activities", albeit loose and general, is a comprehensive expression in this context. It must be apt to embrace carrying out a non-insurance contract as well as effecting such a contract. For this reason I am unable to draw any sensible distinction between the language of the prohibition in the two sections.'
He then considered whether 'Parliament is to be taken to have intended to strike down all contracts entered into, perhaps unwittingly by the insurer and in good faith by the insured, in breach of s 16'. For the four reasons he then gave he considered that the section did not avoid the policy. The first was that the section implemented European directives (Council Directive (EEC) 73/239 on the co-ordination of laws etc relating to the taking up and pursuit of the business of direct insurance other than life assurance and Council Directive (EEC) 79/267 on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct life assurance) designed only to limit the business activities of insurance companies. The second, and following from the first, was that if an equivalent limitation were incorporated into the insurance companies' memoranda of association the policyholder would still enjoy a substantial measure of protection under ss 35, 35A and 35B of the Companies Act 1985 (as amended by s 108 of the Companies Act 1989). His third reason was that, in contrast to s 2, infringement of s 16 did not involve a criminal offence. He relied, fourthly, on the fact that after the decision of this court in the Phoenix case s 132 of the 1986 Act was enacted to enable the court, in its discretion, to enforce contracts which infringed s 2. No such provision was made in respect of contracts which infringed s 16, which Nicholls V-C considered to be an a fortiori case (see [1994] 4 All ER 1025 at 1036-1037, [1995] Ch 122 at 136-137).
In conclusion Nicholls V-C said ([1994] 4 All ER 1025 at 1037, [1995] Ch 122 at 136-137):
'In my view, these features taken together point to the conclusion that Parliament did not intend that a contract made by an insurance company in breach of the restriction in s 16 should be unlawful and unenforceable. Rather, s 16 is part of a regulatory framework, in respect of which the Secretary of State has wide-ranging powers and responsibilities. The intended remedy for a default by an insurance company under s 16 lies in the powers of intervention conferred on the Secretary of State by the same part of the Act in which s 16 appears. Default under s 16 can trigger an exercise of those powers (see s 37(2)(b)(i)).'
The insurance companies submit that Nicholls V-C was wrong in this conclusion. First, they submit, having rightly concluded that s 16 expressly prohibited the insurer from carrying on the activity in question, it was not open to Nicholls V-C, consistently with the judgment of Kerr LJ in the Phoenix case, to consider the issues of public policy to which he referred. Second, they submit that the considerations to which Nicholls V-C did refer do not lead to the conclusion at which he arrived. They maintain that he misunderstood the purpose and effect of the European directives; that the provisions introduced into the 1985 Act by the 1989 Act cannot be used to construe the 1982 Act; that the existence or otherwise of a penalty for the infringement of s 16 is not material to whether that section prohibits the performance of the obligations undertaken by the insurance company, and that Parliament's treatment of invalidity under s 2 shows that it requires legislation to enable the court to enforce a contract in contravention of s 16.
On this issue Fuji contended that Nicholls V-C was wrong in his initial conclusion that s 16 prohibited the issue of the policy to Fuji but supported his ultimate decision. The Secretary of State supported Fuji on this issue. By agreement between them the argument on this issue was primarily presented by counsel for the Secretary of State.
In essence the argument for both sides commenced with the judgment of Kerr LJ in Phoenix General Insurance Co of Greece SA v Administratia Asigurarilor de Stat. That case concerned the effect of the prohibition then contained in s 2(1) of the
Insurance Companies Act 1974 (now s 2(1) of the 1982 Act) that, so far as relevant, 'No person shall carry on in Great Britain insurance business' without the requisite authority. Insurance business was defined by s 83 (now s 95) as 'the business of effecting and carrying out contracts of insurance'. The purpose of the provision was described by Kerr LJ in these terms ([1987] 2 All ER 152 at 175, [1988] QB 216 at 273):
'The statutory prohibitions are designed to protect the insured by seeking to ensure that undesirable persons are not authorised to carry on insurance business and that authorised insurers remain solvent. Good public policy and common sense therefore require that contracts of insurance, even if made by unauthorised insurers, should not be invalidated. To treat the contracts as prohibited would of course prevent the insured from claiming under the contract and would merely leave him with the doubtful remedy of seeking to recover his premium as money had and received.'
Later he described the problem and the principle to be applied. He said ([1987] 2 All ER 152 at 176, [1988] QB 216 at 273-274):
'The problem is therefore to determine whether or not the 1974 Act prohibits contracts of insurance by necessary implication, since it undoubtedly does not do so expressly. In that context it seems to me that the position can be summarised as follows. (i) Where a statute prohibits both parties from concluding or performing a contract when both or either of them have no authority to do so, the contract is impliedly prohibited: see [Re an arbitration between Mahmoud and Ispahani] [1921] 2 KB 716, [1921] All ER Rep 217 and its analysis by Pearce LJ in [Archbolds (Freightage) Ltd v S Spanglett Ltd (Randall, third party)] [1961] 1 All ER 417, [1961] 1 QB 374 with which Devlin LJ agreed. (ii) But where a statute merely prohibits one party from entering into a contract without authority, and/or imposes a penalty on him if he does so (ie a unilateral prohibition) it does not follow that the contract itself is impliedly prohibited so as to render it illegal and void. Whether or not the statute has this effect depends on considerations of public policy in the light of the mischief which the statute is designed to prevent, its language, scope and purpose, the consequences for the innocent party, and any other relevant considerations. The statutes considered in Cope v Rowlands ((1836) 2 M & W 149, 150 ER 707) and Cornelius v Phillips ([1918] A C 199, [1916-17] All ER Rep 685) fell on one side of the line; the Food Act 1984 would clearly fall on the other. (iii) The Insurance Companies Act 1974 only imposes a unilateral prohibition on unauthorised insurers. If this were merely to prohibit them from carrying on "the business of effecting contracts of insurance" of a class for which they have no authority, then it would clearly be open to the court to hold that considerations of public policy preclude the implication that such contracts are prohibited and void. But unfortunately the unilateral prohibition is not limited to the business of "effecting contracts of insurance" but extends to the business of "carrying out contracts of insurance". This is a form of statutory prohibition, albeit only unilateral, which is not covered by any authority. However, in the same way as Parker J in [Bedford Insurance Co Ltd v Instituto de Resseguros do Brasil] [1984] 3 All ER 766, [1985] QB 966, I can see no convincing escape from the conclusion that this extension of the prohibition has the unfortunate effect that contracts made without authorisation are prohibited by necessary implication and therefore void. Since the statute prohibits the insurer from carrying out the contract (of which the most obvious example is paying claims), how can the insured require the insurer to do an act which is expressly forbidden by statute? And how can a court enforce a contract against an unauthorised insurer when Parliament has expressly prohibited him from carrying it out? In that situation there is simply no room for the introduction of considerations of public policy. As Parker J said in the Bedford case [1984] 3 All ER 766 at 775, [1985] QB 966 at 986: "... once it is concluded that on its true construction the Act prohibited both contract and performance, that is the public policy". (iv) It follows that, however reluctantly, I feel bound to agree with the analysis of Parker J in the Bedford case and his conclusion that contracts of insurance made by unauthorised insurers are prohibited by the 1974 Act ...'
In reliance on this passage Aetna criticises Nicholls V-C in that, as they submit, having rightly put the prohibition contained in s 16(1) into category (iii), he then went on to consider the aspects of public policy which could only enter into the debate if he had put the case into category (ii). For Fuji, it is contended that Nicholls V-C should have put s 16 into category (ii), thereby entitling him to consider the aspects of public policy to which he referred.
It is not clear to me that Nicholls V-C did put the case into category (iii). It seems to me that when one reads his judgment on this issue as a whole it was directed to the consideration of which of the two available categories, (ii) or (iii), it should be put into and that the answer depended on the proper construction of the section in the context of the Act as a whole. At all events it seems to me that that is the first question to be determined.
I have already quoted s 16(1) of the 1982 Act. It was enacted to give effect to the European directives which, in their original form, imposed an obligation on member states to require an insurance undertaking to-
'limit its business activities [to the business of insurance] [to the business referred to in this Directive] and operations directly arising therefrom, to the exclusion of all other commercial business ...'
It is clear that s 16 imposes a unilateral prohibition on the insurance company from carrying 'on any activities ... otherwise than in connection with or for the purposes of its insurance business'. When the definition of insurance business is imported from s 95 it includes the effecting and carrying out of insurance policies. But, as pointed out by counsel for Fuji, it does so in relation to the insurance business to which it is to be confined and not to the proscribed 'activities'. In this respect the case is different from the Phoenix case, for the words of prohibition in that case included the specific and unambiguous prohibition on effecting and carrying out of contracts of insurance without authority. It was from those words that the Court of Appeal derived the necessary implication that the contracts of insurance themselves were prohibited.
The word 'activities' is, of course, very general and is capable of covering the issue of the policy if it were not a policy of insurance. But I do not think that it follows from its width that, as a matter of construction, the prohibition necessarily goes that far. In the Phoenix case the court considered that a prohibition on 'carrying on the business of effecting contracts of insurance' would not have done so. The carrying out of the contract may be collateral to the prohibition (cf Archbolds (Freightage) Ltd v S Spanglett Ltd (Randall, third party) [1961] 1 All ER 417, [1961] 1 QB 374). Accordingly, the first stage must be to ascertain as a matter of construction what is prohibited expressly or by necessary implication. This involves a consideration of the Act as a whole and the mischief it was designed to deal with, not as a consideration of public policy as such but as part of the normal processes of statutory construction.
There are a number of matters which convince me that it is not necessary to imply into s 16(1) any prohibition on making or carrying out contracts outside the permitted limit. The first is the very width of the word used. It is so wide and general that I find it difficult to ascribe to Parliament the intention that anything which fell within the word was to be illegal and void. This is reinforced by the fact that there is no criminal sanction for its breach. Such an omission is, of course, by no means conclusive but the wider the prohibition the more surprising the omission. If the prohibition is as all-embracing as Aetna submits then why are the directors and other individuals responsible for the chaos which must ensue from its infringement not made criminally responsible?
Not only is there no criminal sanction but there is an impressive array of regulatory remedies available to the Secretary of State in the event of an infringement of s 16. He may withdraw authorisation altogether under s 11. Pursuant to s 37(1) he has wide powers of intervention, including the power to direct investments (s 38), to limit premium income (s 41), to require an actuary's investigation (s 42), to accelerate the time for the periodic returns required by other provisions of the Act (s 43), to appoint inspectors (s 43A, 44), to search premises (s 44A) and to wind up the company (s 54). These powers are more than adequate to ensure compliance with s 16.
The purpose of the section, evident from the directives it was intended to implement, was to limit the scope of the undertakings' commercial activities. It is not a necessary implication from that purpose that every contract entered into in carrying on business in the forbidden sphere should be invalidated. Although ss 35, 35A and 35B of the 1985 Act, to which Nicholls V-C referred, were not enacted until 1989, at the time of the enactment of the 1982 Act s 35 of the 1985 Act, which reproduced the provisions originally contained in s 9(1) of the European Communities Act 1972, did apply. That section would give some measure of protection to the person dealing in good faith with the company in the unauthorised field without exonerating the management of the company.
I agree with Aetna that the provisions of s 132 of the 1986 Act cannot assist on the true construction of s 16 of the 1982 Act. First, the former Act is subsequent in time. Second, even if the assumption on which Parliament subsequently legislates may be prayed in aid, it is by no means clear what the assumption was. To this extent I disagree with the judgment of Nicholls V-C.
In my view s 16 on its true construction does not invalidate activities undertaken otherwise that in connection with and for the purpose of its insurance business as defined. There is no express prohibition and in my view, given the purpose and context of the Act and having regard to its other provisions, no necessary implication to that effect either. I agree with Nicholls V-C's overall conclusion. Accordingly, if the second issue arose for decision I would dismiss the appeal on that issue.