Equitable Life Assurance Society v Hyman

Where a policy gives a policy-holder a guaranteed annuity rate and an option to take an alternative annuity, the contractual annuity increased by any Related Bonuses must provide the basis for calculating the alternative benefit. The insurer cannot declare different Related Bonuses according to which contractual option the policy-holder exercises, because that would make the value of the annuity surrendered differ from the value used to calculate its capital equivalent. A wide discretionary power to declare bonuses remains subject to the contract and its proper purposes. The appeal was allowed and the bonus decisions had to be reconsidered.

The Society issued retirement annuity policies containing guaranteed annuity rates, final bonuses and options to obtain an alternative annuity from the Society or another provider. When market annuity rates fell below the guaranteed rates, the Society declared smaller final bonuses for policy-holders taking the guaranteed annuity and larger bonuses for those taking an alternative benefit.

The representative policy-holder challenged that practice as contrary to the policy and, alternatively, as an improper exercise of the directors’ discretion under Article 65 of the Society’s Articles. The Vice-Chancellor upheld the practice. The central issues on appeal were whether differential final bonuses were contractually permissible and whether the directors had lawfully exercised their discretion.

1. Appeal allowed. The Society’s differential final bonus declarations were not permissible under the policy. The matter was to be reconsidered by the Society.
2. The policy entitled the policy-holder to the annuity calculated by reference to Table B, increased by any Related Bonuses. If the policy-holder elected an alternative benefit, he renounced that annuity as so increased and received its Policy Annuity Value.
3. Per Lord Justice Waller, the contractual structure required the Society first to determine the annuity plus Related Bonuses which would be payable if the guaranteed annuity were taken, and then to calculate the capital equivalent of that same figure. The Society could not use one amount when the benefit was taken as an annuity and another when calculating the Policy Annuity Value. Differential Related Bonuses were therefore impermissible.
4. Per Lord Woolf MR, the final bonus, once declared in respect of the annuity, was a Related Bonus for the purposes of calculating the Policy Annuity Value, even if the policy-holder selected an alternative benefit. The Society could not avoid that result by changing the wording of its declaration.
5. The absence of a contractual right to a final bonus did not authorise its declaration for the collateral purpose of making one contractual option less attractive. The Society retained discretion as to the amount of any bonus, but that discretion had to be exercised consistently with the policy.
6. Lord Justice Morritt dissented. He considered Article 65 sufficiently wide to permit differential bonuses, that the practice breached no express or implied contractual term, and that the directors had acted in good faith for proper reasons.

• Court of Appeal: The appeal from the Vice-Chancellor was allowed by Woolf MR and Waller LJ; Morritt LJ dissented.
• Chancery Division: Sir Richard Scott V-C upheld the Society’s differential or conditional bonus policy and made declarations in its favour on 9 September 1999.