Dorsey McPhee v Colina Insurance Ltd (Bahamas)

By a majority, the Privy Council held that a universal life policy using a yearly renewable term rate authorised annual increases in the cost of insurance. An incorporated policy illustration confirming that the cost per $1,000 increased annually reinforced that construction. The reinstatement clause also permitted additional charges where its conditions were engaged. The majority considered the evidence sufficient to justify the deductions and held that the policy lapsed on 7 September 2014.

Lord Leggatt and Lord Stephens dissented. They would have required the insurer to prove the contractual rates and held that the evidence did not do so. They also considered that reinstatement could not permit an unexplained unilateral increase in a guaranteed charge.

Mr McPhee held a universal life insurance policy issued in 2003. Colina increased the monthly cost-of-insurance deductions, including annual increases and a one-off increase after an alleged lapse and reinstatement in 2006. The policy later lapsed after the account value became insufficient to meet the deductions.

After trial, the Supreme Court of The Bahamas found for Colina, holding that the increases were contractually authorised and that the policy lapsed on 7 September 2014. The Court of Appeal upheld that decision. The appeal concerned whether the policy authorised the increases, whether the one-off increase could be imposed on reinstatement, and whether the relevant contractual and factual requirements were established.

Majority. Lord Woolman delivered the majority judgment. The Board advised that the appeal be refused.

1. The policy distinguished between a yearly renewable term rate and a level rate. The former necessarily increased as the insured aged, while the latter was fixed. The policy therefore authorised annual increases in the guaranteed cost of insurance. The signed policy illustration formed part of the entire contract and, in any event, was admissible as part of the factual matrix. It confirmed that the cost per $1,000 of coverage increased annually. Since the contractual terms were unambiguous, the contra proferentem rule had no application: Burnett or Grant v International Insurance Co of Hanover Ltd [2021] UKSC 12.
2. The reinstatement provision permitted Colina to impose additional company requirements in effect on the date of an application for reinstatement. That power included increased charges on reinstatement.
3. The Board did not finally determine which party bore the burden of proving contractual entitlement to the deductions because the point had not been fully argued. Even if the burden lay on Colina, the trial judge was entitled to find the deductions justified. Relevant matters included the rejection of fraud, the acceptance of Colina’s witness as knowledgeable and sincere, documentary evidence showing annual increases, and the absence of a challenge that the figures reflected the appropriate risk group. The unexplained 2006 lapse and 75% rating remained a mystery, but the evidence and concessions supported the finding that a lapse occurred and that a surcharge could be imposed.
4. The majority treated the contract and cancellation notice as pointing inevitably to 7 September 2014 as the lapse date, in accordance with the contractual lapse period.

Dissent. Lord Leggatt and Lord Stephens would have allowed the appeal. They considered that the insurer, asserting a right to deduct charges, bore the burden of proving its contractual entitlement and the facts supporting it. By analogy with Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80, failure to challenge earlier statements did not by itself prevent the insured from disputing liability.

• The policy authorised annual increases in principle, but Colina did not prove the rates in the incorporated table or that its actual increases matched them.
• The dissenting judges construed the policy as providing one 30-day grace period, so that it lapsed on 8 November 2005 on the assumed account figures. Condition 5 of the reinstatement clause required pre-existing and communicated company requirements. It could not confer an arbitrary power to impose a higher guaranteed charge. The reasoning in Paragon Finance Plc v Nash [2001] EWCA Civ 1466 supported that conclusion.
• No evidence showed an application for reinstatement, a communicated requirement, or agreement to vary the policy. The one-off July 2006 increase was inconsistent with the contract. The dissenting judges would have required the account value to be recalculated using the initial monthly charge of $74.62.

• Privy Council: In [2023] UKPC 8, the majority refused the appeal from the Court of Appeal; Lord Leggatt and Lord Stephens dissented.
• Court of Appeal of the Commonwealth of The Bahamas: upheld the judgment of the Supreme Court of The Bahamas.
• Supreme Court of The Bahamas: after trial, found for Colina, holding that the increased charges were justified and that the policy lapsed on 7 September 2014.