SURVEY RESEARCH CO LTD. v. SENTRY INSURANCE CO LTD.

1982 No. 8838

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The plaintiff, Survey Research Hong Kong Limited, is a member of a group of companies operating extensively in this part of the world. They operate as consultants market research. The group is controlled in Bangkok. It's employees work in different countries in this vicinity. It decided in 1976, to take out group insurance, initially on the lives of its Directors, and then in 1978, on the lives of a wider class of persons including the senior executives. As a result two policies were entered into, but by reason of successive endorsements, there was an increasing area of overlap between the two. In effecting these policies, the plaintiffs used Heath Langeveldt Rollins Limited, insurance brokers, who also carry on practice both in Bangkok and in Hong Kong. Again, as I understand it, the initial instructions took place between the senior management of both companies in Bangkok. The material policies were arranged through the Hong Kong office of the plaintiff, the Hong Kong office of the brokers, with the defendants, Hong Kong insurers.

2. The policy year under both policies expired on 1st August. After 1st August 1981, intermittent discussions followed between the parties as to the state of affairs in the year 1981/82. Whilst those discussions were going on, tragically, the youngest and the newest member of the plaintiff's organization to be included in the policy, Mr. Prentice, died on 27th November 1981. The whole issue between the parties in this case resolves upon the question whether upon that date, the defendants were on risk under these policies or not; were they covered, as the plaintiff's contend either temporarily or by reason of the underlying policies, or were they not covered as the defendants' contend because the policies had lapsed, and what was under discussion was their revival. That is the whole issue which separates the parties.

3. It is therefore necessary at the outset to take a closer look at the policies themselves. They are both in identical terms as far as the printed parts are concerned, and as I said there were so much overlap that it is really possible to concentrate upon one of the policies. I am actually going to concentrate upon the second. The policy starts with what is called a form of application which also seems to rank as the schedule to the policy. The policyholder is the plaintiff. The policy in terms says that this policy "will assure persons who are associated with the policyholder as ..... " and then the defined class follows. In other words, the policy is taken out by the plaintiff as disclose principal on behalf of named assureds in such policy. The anniversary date is given as the 1st of August in each year. The premiums are payable annually in advance. The policy s non-contributory. Then one has details of the class, limitation on amount and what is described as "First Year Rate per M. "

4. When one turns onto the detailed terms in the policy on p.1, one finds this after a preamble in the usual form:

"1.		Coverage. To pay the amount of any assurance as determined by the Schedule of Benefits set forth in the application, on the life of any person assured under this policy. "
"3.		Assured persons. If the assurance is afforded under the non-contributory plan (as this was), the assured persons are those elegible for the assurance. "

This describes the disclosed agency basis I have already referred to. The one comes on to the two crucial parts of the policy for the purposes of this case. The first part is on p. 2.

"	(V)	Policy Period Renewals
		This policy applies only to losses which are incurred during the policy period while the Assured is assured unless otherwise provided in the policy. On the date stated in the application as the end of the policy period (i.e. 1st August) and on each anniversary thereof, this policy is renewable subject to the consent of the company for an additional annual period by the payment of the premium in accordance with the provisions of this policy at the company's premiums in effect at the time of such renewal;" The proviso which follows is not material. So what is required is a "payment" on the anniversary date of a premium "in effect" at the time of such renewal.

5. I then turn on two pages in the policy to page 4, where one finds this, under the heading Premium.

"	1.	Payment
		The first premium hereunder is due on the effective date of this policy and subsequent premiums are due and payable on the first day of each premium period thereafter.
	2.	Grace Period
		A grace period of 31 days following the due date shall be allowed to the policyholder for the payment of each premium after the first. If any premium with respect to the Assured in any class is not paid before the expiration of the grace period, this policy shall automatically discontinue with respect to all persons in such class at the expiration of the grace period. "

and I leave out the immaterial exception.

"As to each class, the policyholder shall be liable to the Company for all unpaid premiums with respect to the Assured in such class for the period including a pro rata premium for the grace period or fraction thereof during which this policy was in force with respect to such Assured. "

6. So you have got a grace period of 31 days for the payment of each annual premium. If that premium is not paid, the policy is automatically discontinued at the expiration of the grace period. But equally automatically the policy continue into the grace period, and the policyholder is liable for the premium payable during such grace period. The next:

"	3.	Premium Calculations
		At the beginning of each policy year, the company shall compute an aggregate premium which shall be the sum of the individual premiums for the assureds calculated according to the table of premium rate then in effect (note the same phase again).
		On the basis of the ages (nearest birthday) then attained by the assured and their respective amounts of insurance. From such computation "(sic, the more appropriate English word is computation)" an average premium rate shall be determined by dividing the aggregate premium by the aggregate amount of assurance then in force, and such average premium rate shall remain in effect and shall be used in calculating all premiums under this policy until a new one is determined. Each premium, during the policy year, shall be calculated by multiplying the amount of assurance in force at the beginning of the premium paying period by the average rate then in effect. "

7. This policy was unusual in this respect in that in each fresh year, a fresh premium calculation had to be made. The person to make it was the company. The company had to compute a premium in accordance with their rates then in the effect, and from that point, do a premium calculation which reflected the particular positions of the various assureds named in the policy, their ages, salaries and so forth. So that this was quite unlike an ordinary life policy, where the premium appears on the face of the policy and remains fixed for the life in being. This required a particular calculation by the company year by year. It is obvious that until that computation was done, nobody knew what the appropriate premium was for the year in question; and none of the earlier provisions that I have dealt with about grace periods or renewal could operate until that occurred. Until that was done, the policyholder did not know what he had to pay.

8. After they were originally written in 1976 and 1978, the policies were duly renewed each year. The renewal process varied in time. In the first two years it succeeded in being completed the following September. The next year 1978/1979, it was October. The year after, it would lasted until the following February. In 1980/81, it was concluded in December. On each occasion, a premium computation was done by the company. Likewise on each occasion, it was done for the forthcoming policy year. The last two computations I have in the bundle are at pages 19 and 49. They are the endorsements for the year 1980/81. From the nature of the policy the rate had to be endorsed each year upon the policy, and each rate was said to be used throughout the policy year. It was so phased, apparently deliberately, not to run into the following year.

9. It was in that state of affairs that 1st August 1981 was reached. The events thereafter fall conveniently into two different periods. Period 1 was 1st August to end October. Period 2 was end October/early November to December.

10. The first period was anticipated by a typical end of year letter from the defendants to Miss Cheung, the lady who was dealing with this matter at the brokers, pointing out that 31st July was about to arrive. The letter was dated 14th July and asked her to provide employee census, employee movement reports which had not yet been filed and up-to-date employees' salaries - all of course to enable the premium computation to be made or checked. On 20th July, Miss Cheung writes to Miss Anita Chan at the plaintiff's Hong Kong office asking for the same information, without, I may say, immediate response. The next thing that happens is that the defendants put together their own up-to-date of employees' list as at 1st September 1981 and pass that to the brokers. It is in turn passed on to the company. The last name in that list is that of Mr. Prentice.

11. Nothing very much seems to have happened during the rest of September and into early October, when Mr. Ho, the Assistant Manager of the defendant company, started looking again at this insurance and did some calculations. He writes on 21st October to the brokers in these terms:-

"	Survey Research Hone Kong Limited - Group Life Insurance Renewal
	Further to our discussion on the renewal of the clients group life coverage, I came up with the following costs.
	Policy: he gives the numbers combined. No. of employees: 21 Total sum assured: HK$6.3 M. Annual premium rate: 2.94% Annual premium: HK$18,522. Guaranteed issue limit: HK$250,000 per life. Proceeds: 1/3 payable to beneficiary directly, 2/3 payable to beneficiary via policyholder. "

There is then a paragraph asking the lady to check their updated list, which is the list I have already referred to, date the 2nd September. It ends up:

        "I look forward to hearing from you on the renewal soon. " This seems to be in the first calculation of a 1981/82 rate that was done. Indeed it was the only calculation that was done. It was for the purpose of combining the policies. Having done his sums, Mr. Ho came to the conclusion that it was silly from the insurance point of view to have two policies. It was going to be much cheaper to have one. He was putting this as a proposal to the brokers under a letter which talks throughout about the "renewal" of this particular cover.

12. At about that time, a meeting took place between Mr. Derek Chan, the defendant's brokerage Sales Manager and Mr. Clive Bate, the Director and General Manager of the brokers. This was because Mr. Bate had just arrived in Hong Kong and was quite new. It was in a sense a "get to know you" meeting which Mr. Chan wanted to use to stir things up a bit. He thought that things were getting altogether too dilatory, in particular with three clients of the brokers. The last sentence of his letter reads like this: "The late renewal cases are, (he names another company) and the Survey Research Hong Kong Limited. I would strongly suggest that the required premium be paid as soon as possible. " No evidence was led by the defendants and so I do not know what Mr. Chan had in mind by the required premium. All I can see from the evidence before me is that there had been no assessment at that date of the required premium under the two policies.

13. That brings me to the end of the first period and to the first crucial question which arises which is what was the position of these policies then. Had they lapsed in accordance with their terms for non payment of the premium on the 1st September or did they still subsist? The position here seems to me to go like this. First, no premium rate had been fixed pursuant to the policy by the defendants for the year 1981/82 in respect of either policy. Two, the 1980/81 rate could not continue beyond 1st August because the endorsements were so drafted to prevent that occurring. There was thus a complete lacuna as far as premia were concerned under the two policies in this renewal/grace period. The company sought to meet that point by inviting me to say that this was all the fault of the policyholder for failing to come up with the details, and that I should imply a term in the policies to that effect. I am quite unwilling to do that. I cannot see that there is any basis here for implying any such term into this very carefully drawn and very complicated insurance policy. Certainly there was no need for it at all. If the company wanted to fix a rate, they could quite readily have fixed the rate upon the basis of the information before them which they themselves set out in the document dated the 2nd September. Equally if they had not wanted to do that, they could have applied the previous years' rate or extended it into that premium year. If one is looking at matters of diligence here, neither party seems to have been any more diligent than the other. No one particularly wanted to bring this matter to a speedy fruition.

14. That is the position under the policy. It is simply confirmed, in my judgment, by the two letters which I have just referred to. The letter of Mr. Ho speaks of renewal from start to finish. I was invited to read renewal as revival on the basis that there was a certain sloppiness of language that can be detected is one or two paragraphs of Macqillivray on this subject. The short answer to that is this. If insurers wish to make it clear that the policy in their view has lapsed, and they are not talking in the ordinary language of renewal but in the language of revival, which from the assured's point of view is fundamentally different, it behoves them to say so, I do not think that that thought was in Mr. Ho's mind at all. You can only combine existing policies, and that is what he was suggesting in this document. The same is true, I think of Mr. Chan, when he was suggesting that the required premium be paid. I do not know, what he had in mind as the required premium, but that terminology is quite inconsistent with having to revive policies which have already lapsed.

15. In my judgment the company by its conduct was keeping these policies alive, both negatively and positively. First it was keeping them alive negatively by not fixing a premium rate. It seems to me that if the company does not operate the terms of its own policy and fix the premium rate which enables certain other things to happen, it is, at least impliedly or inferentially extending the period of the days grace. That is the only way that I can fit this failure within the terms of the policy. Secondly, this is confirmed, I think, by the terms of the two letters that I have just referred to in terms of combining live policies and renewing live policies. The company, no doubt with very good reason, was treating this still as live insurance. Now there is ample authority which says that where insurers do this in the renewal period, they are said to have waived some provision of the contract or are estopped from asserting lapse. I think in the particular terms of this contract, there was a deliberate decision by the company not to operate the premium fixing procedures, the effect of which was to keep the policies alive. That is the label, I think I would prefer in this case, although if I am wrong, waiver would do just as well.

16. So that I reach the position at the end of October, that by reason of these matters, the two separate policies were alive, and that the only new rate then before the broker's for consideration was the new combined rate suggested by Mr. Ho.

17. The next thing that happened, and this is the start of the second period, is that Miss Cheung puts this proposal for combination on the telephone to Anita Chan at the Hong Kong office and is in substance told this: no question about this cover being renewed, but the decision as to whether it is renewed by two policies or one must be referred to the Board in Bangkok. That is not quite as strange as it may seem simply looking at the terms offered. It's easy to say that no sensible the insurer would have thought twice about this. He would obviously have combined the policies; better terms, lower premium. But that is a little simplistic in the context of this case because these various individuals were living in various parts of South East Asia. There were, as I learned problems about exchange control, problems about tax and recoverability in all these various jurisdictions. It was possible that these policies were not simply an historical accident, but were kept separate quite deliberately. It turned out that there was in fact no such reason at all. But both the ladies were sensibly not taking the decision themselves, but were making sure that it was taken by those whose responsibility it was. So that the matter could be considered by the Senior Management in Bangkok, Miss Cheung writes the letter which we have at p.120 on 30th October, setting out a comparison between the old and the new, and pointing out the obvious improvement of the combined policy because it produced first of all, a lower rate of 2.94% as against over 3%, and a better guaranteed issue limit, (in other words basic cover) because that went up from $170,000 to $250,000.

18. Having said that to the client, she then turned her attention to the position of the client under this combined proposal, and was anxious to protect them in that respect too. Miss Cheung get on the telephone again to the defendants, this time to Mrs. May Chu. The purpose of the call is perfectly plain and simple. The clients have got to decide whether they will combine these policies. There is no question about renewing; the only question is whether or not the policies are going to be combined or kept separate. Can you please hold them covered on the proposed combined terms meanwhile, but if they decide not to combine the policies, can they revert back to two separate policies? This is a very obvious and basic question for a broker to ask underwriters in those circumstances. In her evidence, and this was given before a Master and I have had nothing to the contrary, she says that she got the typical anticipated answer from underwriters in such circumstances: 'yes', hold covered and of course they can revert to the two policies if they want to. It would be unbelievable for an underwriter to deny that because he was going to got a higher premium for the same risk.

19. In those circumstances, Miss Cheung writes the letter of 4^th November:-

"	Group Life Insurance
	Further to our telephone conversation, please hold covered the policy at the following terms:-
	1.	No. of employees : 25 (she was misled by the form of the list the
			actual number was 21).
	2.	Total sum insured (again based on 25) : HK$7½ M.
		Annual premium rate : 2.94% (that was the rate in Mr. Ho's letter).
		Annual premium : HK$22,050.
		Guaranteed issued limit : HK$250,000 (that's the new limit).
		Beneficiary provisions : same as in Mr. Ho's letter. Provision about female working directors. As agreed, a provisional premium of HK$22,050 would be charged for the time being. We look forward to receiving the relevant documents as soon as possible. "

That is put forward by the plaintiffs as evidence of this hold covered arrangement. On the 9th November, the same lady writes to the plaintiff's Hong Kong office, in substantially the same terms but with this additional paragraph:- "We know that the above policy has to be approved by your Head Office before issuing renewal policy, please let us have the final confirmation as soon as possible".

20. The first question which arises on that conversation and on those letters is what was the effect of this request to hold covered. The plaintiffs say the letter simply means what it says, please hold the insured covered in the meantime, pending (1) the decision of the board on combination and (2) the renewal formalities being completed, upon the terms of this letter. That they say was what was accepted expressly by Mss. Chu on the telephone, and accepted by necessary inference, by the fact that the defendants never dissented from the terms of this letter, and indeed their next step, if anything, confirmed it.

21. In answer to that, the defendants assert that these letters in fact, achieved nothing at all and certainly no immediate cover. They found themselves upon the paragraph that I have read, not from the letter to them, but the letter to Survey Research, and argue that the whole of this exercise was conditional upon the approval of the board to the combination of the policies. This would have rendered the whole thing pointless and meaningless. By the time the board had approved the policies, some considerable time could have been lapsed, and then in fact, the mechanics of executing the document could have been very short indeed. I have no hesitation in rejecting that contention. I rely basically upon the common sense of this situation. The "please hold. covered devise" is well-known in this market when brokers are asking underwriters to protect their clients whilst certain events are happening, be it the grant of the initial policy or the renewal. In this case, you had renewal on different terms to the old. To suggest that this is totally meaningless flies in the face of common sense in this market.

22. It also suggested that Mss Cheung had no authority to do what she was doing. It was quite obvious that Miss Cheung had no authority to commit the clients to combine the policies. She was being very careful to keep the clients' options open whichever way they decided to go. But it is impossible on the evidence before me, to question the brokers authority to keep the protection alive to enable their clients to make this decision.

23. The next step that happened does no more than confirm my view of these documents, because on 11th November, Mr. Ho sends to Miss Cheung the documentation necessary to implement the combination of the policies. The first is a premium debit note, again wrongly calculated (he is not to blame for this) upon the basis of 25 people. There is then the tentative schedule of beneficiaries which is identical to the earlier schedule, save that a number of starred beneficiaries are brought down from $300,000 to $250,000 which is the basic cover pending medical examination. No medical examination was being sought up to $250,000; it was being required above it. Then there is endorsement 7 of 81 which provides that this No. 2 policy was to be cancelled; the No. 1 policy was to be revised. There were one or two other provisions including the raising of this guarantee issue limit. Again all that documentation is really only consistent with the hypothesis that these policies were being kept alive at this time for the purpose of combination. Having got those documents, Miss Cheung, again to cover herself with the clients, rings Mr. Ho to make sure that the clients' reversion option, as I think she was putting it, was still open i.e. if they decided not to combine could they revert to the two policies. Again she got the obvious answer "but of course".

24. At that stage all was going slowly but without difficulty. Then the first of the two intrusive events occurred which have soured the relationship between the parties temporarily at least. During this time, discussions had been going on between the Senior Management in Bangkok, with the view to rearranging the plaintiff's insurance cover. Those discussion had taken place between the plaintiff's Senior Executive in Bangkok, a Dr. Weldon, and the brokers' Senior Executive in Bangkok, a Mr. Hankins. Various things were being discussed including an increase in this particular life cover, an increase from HK$300,000 to HK$600,000 if such could be obtained, coupled with a profit sharing arrangement which apparently is something which in the context of group policies, some underwriters are prepared to offer. It was a novel concept as far as I am concerned: profit sharing and life cover seem to me to be prima facie a contradiction in terms. As a result of that, Miss Cheung was asked by her boss, Mr. Bate to investigate the market in Hong Kong, and discovered, rather to her embarrassment, that for identical cover China Underwriters Limited were prepared to quote a rate of 2.45%. The broker's embarrassment arose from this. They were then recommending to their clients, combination and renewal at a rate of 2.94%. They now knew that there was available in the market a better rate than that. They would have to disclose that to the client at this particular juncture which could have embarrassing consequences. Therefore they did the obvious thing. They went back to underwriters to see if they could meet the rate and that would get everybody out of their difficulties. At least that was the thinking behind the proposal. So accordingly Miss Cheung is back on the telephone again to Mr. Ho on 23rd November. There seems to be some ambiguity about that she told him which I cannot resolve, but the probability to me is that she said:-

"

(a) (b)

I have gone into the market; I got this rate from China Underwriters 2.45%, can you meet it?"

Mr. Ho then re-did his calculations and two days later on 25th November, rings Miss Cheung back and said 'yes, our rate is 2.45%.'

25. This one would have thought would have led to nothing but smiles all round and renewal at 2.45% if the other intrusive event had not happened. Two days later on 27th November, unfortunately Mr. Prentice died. That unhappily soured the issue as it seems, because when invited to meet the claim, the defendant said no and appeared to have been insensed by the fact that the brokers had gone into the market at all to challenge their original rate. Anyway, the plaintiffs tendered the premium of $18,742 again the wrong premium as is was based upon 25 people. The proper sum has not yet been ascertained. That was kept for a few days and then returned. A new policy was issued under a new number with effect from 28th December which bears striking similarity to the old, and is almost word for word what the renewal would have been, if it has gone through on the revised terms then being offered by Mr. Ho.

26. Now the fist issue which arises in relation to this period is what is the effect of this hold covered arrangement. I having already determined that it was effective as from the 4th of November. Did this survive until 27th November when Prentice died or did it not? The plaintiff's contention here is very simple. They say that it was in force. It was precisely to cover this contingency, however remote, of somebody dying in the intervening period that the request was made at all. They emphasize that this request was quite independent of actual renewal of the policies either in their combined form or as separate policies. This hold covered arrangement was there to cover the intervening position. If renewal had taken place, which I an sure is what would in fact have happened, the whole thing would have been back dated to 1st August and this matter would never have reached Court. Likewise, if renewal had not taken place, it would have left this whole covered arrangement: it would have left the clients liable for the premium up to the date when they decided not to renew but no further. Secondly, the plaintiff say that the agreed rate for this temporary cover, was the rate specified in their letter of 2.94%. But thirdly, it seems to me that they would be entitled to say, although they do not, that as from 25th November when Mr. Ho offered his new rate, that rate became, and I quote "the rate in effect at the time of renewal for the purposes of this renewal" because this was the rate Mr. Ho was offering as from the 1st of August. It therefore became the current renewal rate. Ergo, the plaintiffs argue, for those reasons the defendants were on risk, so that they can, as policyholder, recover the $250,000 minimum under the policy, subject to payment of the appropriate premium difference, whatever that may be, because no one has yet done an accurate calculation.

27. The defendants on the other hand, assert that the hold covered arrangement came to an end by repudiation and acceptance of the repudiation on 25th November. The repudiation they rely upon was not going into the market to discover the other rate but giving this information to underwriter; the repudiation was Miss Cheung ringing up on the 23rd saying what she had done and asking for a lower rate. The acceptance of such repudiation, was underwriters coming up and saying 'yes, you can leave that better rate'. Mr. Mok advanced everything that could be said in this case, it may say so, with great skill and great persuasiveness, but dressing that argument up with an armour of legitimacy, was quite beyond him. I never understood it from start to finish. It was beautifully put across but simply makes no sense at all. I think the kindest thing that I can say is that there was simply no substance in a notional repudiation along those lines. The idea that in some way a broker is repudiating the over by asking the underwriter to better his rate, and the underwriter by accepting that proposal and bettering it, is putting an end to a temporary cover situation is really quite beyond me.

28. I think the tragedy here is that after the event, the insurer's failed as I see it, to distinguish between present and future. They were insensed at the fact that these old clients had gone into the market and I do not think, fully appreciated that they were themselves protected for the present. As far as the future was concerned, there was a remote risk that there might not be a renewal for the rest of the year but that was in fact by the way. They failed to appreciate that there was (and here I think the plaintiffs are right) an essential distinction between the temporary hold cover and the underlying policy cover. They have not advanced any explanations in evidence, but in the explanation advanced by Mr. Chan in a letter of the 4th December, he justifies his company's attitude by saying there was "no commitment to pay the premium". I am not quite sure what premium he had in mind. If by that he means the premium for the whole year I agree with him. There was not. That would only arise on renewal. But plainly there was a commitment to pay the premium for the current period which was then running. There was no way at that time that either the underwriters or brokers could stop the plaintiffs, if they wanted, from saying "cancel this policy as from some date".

29. So, in my Judgment, this hold covered arrangement was effective for the very purpose for which it was entered into, and the company was on risk on 27th November when Mr. Prentice died.

30. Having come to that conclusion on the hold covered issue, it's quite unnecessary for me to go into the much more difficult questions, as to the position of the underlying policies at that stage. One has got lurking beneath the surface all the time, the two separate policies for which there was no premium rate still fixed. Likewise I think there is a great deal of force on the facts in the plaintiff's contention, that a reasonable period for the consideration, still less the acceptance of the revised offer made on the 25th of November, certainly had not expired on 27th November. I am quite satisfied that, but for the death, that is the offer which would have gone through. On those grounds there is a lot to be said on the facts for the suggestion that unless death change the situation completely, the defendants were not entitled to withdraw that offer and refuse to accept it after death.

31. The really difficult problem is what is the effect of death. in this situation. Is it fatal, having regard to the fact that this was a policy written for a number of assureds and that the continuance of all the assured was an essential term in the offer, and the death of one discharged it, or rendered it not capable of acceptance after death, which is to the defendants' point. Or are the plaintiff's right in saying, no, this is a group cover and a group clement as it were carried them home; and the rate was the same for the whole group and was not in fact altered afterwards. As I say this is a very nice point indeed which I am, I think, mercifully spared from answering. Equally I am mercifully spared from answering the point raised by Mr. Mok as to whether the text book writers were right in the contention they advanced that the case of Grover v. Matthews (1910) 2KB 401 was wrongly decided because Hamilton J. (Lord Sumner) got it wrong, because Mr. J.R. Atkin, KC (Lord Atkin) failed to advance the right argument and cite the right authority. That is not a proposition that I was looking forward to trying to resolve at all and I am happy to put it on one side.

32. In my judgment, the temporary cover point is valid and sound and that enables the plaintiffs to recover the sum of $250,000 less the appropriate premium which should be calculated.