FORTIS INSURANCE CO (ASIA) LTD v. LIU BETTY

DCCJ 408/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 408 OF 2007

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BETWEEN

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J U D G M E N T

1.  The Defendant (“Liu”), was an Agency Manager of the Plaintiff, Pacific Century Insurance Company Limited (“the Company”) which has subsequently become Fortis Insurance Company (Asia) Limited.  The Company has terminated the relationship with Liu and now seeks to recover the advanced payments made when recruiting her.  Liu denies liability and counterclaim for wrongful termination.

Background

2.  Liu used to be an agent of another insurance company, AIA.  Liu joined the Company with effect from 1 November 2005.  For this purpose, the Company and Liu entered into an Agent’s Contract for Selling Long Term Insurance Business (“the Agent’s Contract”) and an Agency Manager’s Contract.

3.  Clause 10.2 of the Agent’s Contract provides that:

“This Agreement may be terminated by the Company forthwith without the need for any prior notice if …… (e) the Agent commits any dishonest or fraudulent act or any criminal offence or any of the Agent’s conduct in the opinion of the Company is prejudicial to the Company’s interests or may adversely affect the Company’s reputation ……”         (emphasis added)

4.  Clause 7(a) of the Agency Manager’s Contract provides that:

“…… This Agreement may also be terminated by the Company immediately without prior notice:-

(i) in the event of fraud or dishonesty of the Manager or any breach of trust or any of the provisions of this Agreement or his agent’s contract by the Manager; or

(ii) ……

(iii) ……

(iv) if the agent’s contract of the Manager with the Company is terminated for whatever reasons;

(v) ……”  (emphasis added)

5.  For the purpose of her recruitment, the Company and Liu also entered into a Side Agreement dated the same date as the above contracts.  It was pursuant to the Side Agreement that the Company made various payments in advance to Liu.

6.  By letter dated 29 November 2006, the Company terminated the Agent’s Contract and the Agency Manager’s Contract with Liu.  The Company’s case is that in arranging the submissions of various applications for life insurance policy for her husband in 2006, Liu committed act of dishonesty or act prejudicial to the Company’s interest within the meaning of clause 10.2(e) of the Agent’s Contract.  The Company was therefore entitled to terminate the Agent’s Contract, and the Agency Manager’s Contract as well, with immediate effect.

7.  Liu contends that the termination was wrongful and puts forward a counterclaim for commissions and bonuses.

8.  The Company has prepared a list of issues and Liu has filed her written comments.  Broadly, the dispute lies in the following respects:

(1) the insurance applications of Liu’s husband in 2006;

(2) clause 10.2(e) of the Agent’s Contract;

(3) the Company’s claim; and

(4) the counterclaim.

The insurance applications of Liu’s husband in 2006

9.  Within a fortnight after she joined the Company in November 2005, Liu arranged the submission of her husband’s application to the Company for a medical insurance policy called TOPMED.  The Company refused that application in the same month.

10.  There is no dispute that in her position, Liu could arrange the submission of application for life insurance for the Company’s consideration to accept without requiring the applicant to undergo a medical examination.  This was however subject to the limit of the proposed insured sum being not in excess of HK$200,000 – the so-called ‘non-medical (免驗身) limit’.  Any application for insured sum in excess of this ‘non-medical limit’ would entail medical examination of the applicant for the purpose of the Company’s consideration.

11.  On 25 May 2006, Liu submitted an application of her husband for life insurance with an insured sum of HK$300,000 (“the 25/5 Application”).  It was made clear in the application form that this was submitted as a ‘non-medical’ application.  But since the insured sum exceeded the ‘non-medical limit’ applicable to policies solicited by Liu, medical examination of Liu’s husband was arranged to take place at the clinic of one of the Company’s designated medical examiners, Dr Thomas Chan, on 29 May 2006 at 1 pm.

12.  However, on 26 May 2006, Liu submitted another application of her husband for life insurance, only this time the insured sum was reduced to HK$200,000 (“the 26/5 Application”).  This was expressly submitted in replacement of the 25/5 Application.

13.  In both the 25/5 Application and 26/5 Application, Liu’s husband invariably declared that he “has not EVER had or been told to have or been treated for …… diabetes……”.

14.  The evidence is that the 26/5 Application was submitted to Liu’s office at about 5 pm that day (Friday) and was eventually received by the New Business Department of the Company at about 2.01 pm on 29 May (Monday).  As the insured sum was within the ‘non-medical limit’, the Company also approved the 26/5 Application in the afternoon of 29 May 2006.

15.  The fact was that Liu’s husband, accompanied by Liu, did attend the medical examination on 29 May 2006 as already arranged.  More importantly, the result of the examination was consistent with diabetes.  A microscopic urinalysis was called for and its result on the following day also confirmed the diagnosis.

16.  The examination result available on 29 May 2006 was made known to Liu and her husband.  They actually collected the medical report from Dr Chan on the same day.  However there is no dispute that Liu has never handed in the report or disclosed the examination result to the Company.

17.  Together with the 26/5 application, initial premium equivalent to 2 months’ premium was paid in advance.  However, no further premium has been paid and the policy has been let to lapse.

18.  In September 2006, Chan Kit Yan (“Chan”), the Regional Director of the Company, was reviewing Liu’s performance.  Liu was subsequently made aware of the need to improve the persistency ratio of the insurance policies solicited by Liu.  This, according to Chan, related to the reinstatement of the policies solicited by Liu that have lapsed.

19.  On 29 September 2006, Liu did submit an application of her husband for the reinstatement of the approved but lapsed life insurance policy (“the Reinstatement Application”).

20.  Liu’s husband has been seeing Dr Chan for his diabetic condition since May 2006.  Dr Chan provided details of these consultation in his report dated 29 August 2008.  However Liu positively declared under the section on ‘Evidence of Insurability’ in the Reinstatement Application that he has not had, among others, diabetes “during the past 5 years”.  Such declaration of his health condition must be false.

21.  Chan gave evidence that the above matter came to light when the Company also managed to obtain the medical information from Dr Chan in late October 2006.  The contemporaneous internal email correspondence and documents evidence that.

22.  On 20 November 2006, Chan and Liu’s immediate superior (surnamed Cheung) met with Liu at the Company’s office.  Liu was asked to explain.  Apparently not satisfied with Liu’s explanation, another meeting was held on 22 November 2006.  During the meeting, Liu handed in her English letter of explanation (“the 22/11 Letter”).

23.  Liu stated in 22/11 Letter that the 26/5 Application was submitted before she accompanied her husband to attend the medical examination.  The reduction of the insured sum to HK$200,000 was purely the decision of her husband after considering his ability to afford.  The application form was filled in by her husband and both he and Liu had no knowledge about his true health condition until after the medical examination in the afternoon of 29 May.

24.  Regarding why Liu has failed to submit the medical report or to disclose the result of the examination to the Company, Liu admitted in the 22/11 Letter that she was negligent and inadvertently forgot to do so.  She further explained that this was partly due to her frequent and hectic business trips to the Mainland.  She asked the Company for lenient treatment of her case.

25.  According to Chan, she gave Liu a further chance to explain and suggested that Liu might want to write in Chinese to better express herself.  Liu did and came up with her Chinese letter on the following day (“the 23/11 Letter”).

26.  In the 23/11 Letter, Liu further explained that due to her concern about her husband’s condition, she has not returned to the office for many days since 29 May and therefore has failed to submit the medical report to the Company.  She was not aware that the Company has approved the 26/5 Application.  Again she apologised and asked for lenient treatment.

27.  The Company eventually decided to terminate the Agent’s Contract with Liu with immediate effect.  Hence the letter of termination dated 29 November 2006.

Clause 10.2(e)

28.  The above background is not controversial.  The question is whether Liu was dishonest in submitting the 25/5 Application, the 26/5 Application or the Reinstatement Application by way of false declaration of her husband’s health condition or alternatively, whether the Company considered that this was prejudicial to its interest for the purpose of clause 10.2(e).

29.  There was no employer-employee relationship between the Company and Liu.  Clause 1.3 of the Agent’s Contract made that clear.  However, Mr Ma for the Company borrowed the analysis in the authorities concerning summary dismissal in the context of an employment relationship to explain the following:

(1) What amounts to dishonesty is a question of fact and degree.

(2) The degree of dishonesty capable of giving rise to summary dismissal is very low.  The standard of proof is the civil one, though the more serious the allegation, the stronger the evidence should be before the allegation could be said to be proved.

(3) The dishonesty may arise out of a single incident or the cumulative effect of a series of incidents.

(4) The employer is entitled to rely on dishonest conduct of the employee, though not known at the time of the termination.

30.  In the present case, the Company no doubt expects its agents to discharge their duties in good faith and with diligence.  Clause 1.5 of the Agent’s Contract and clause 1 of Schedule 3 of the Agent’s Contract reflect that.  Similar provisions exist in the Code of Practice for the Administration of Agents (Part F, paras. 71 and 75) referred to in clause 1.5 of the Agent’s Contract.

31.  Prior to joining the Company, Liu has had years of experience in the field and has attained the status of what is known in the industry as a ‘Million Dollar Round Table Honour’.  In the Company, Liu held the position of Agency Manager which means she led a line of insurance agents.  Liu should therefore need no reminder of her duty.

32.  Prior to submitting the applications in May 2006, Liu must have some concern about her husband’s overweight problem.  In his application for TOPMED medical insurance in November 2005, Liu’s husband actually declared that he had once applied for life insurance policies with AIA, which imposed substantial loadings probably as a result of his overweight problem.  As mentioned above, the Company has also refuxed to accept his application for medical insurance in November 2005.  According to his declaration in his applications in May 2006, he still weighed 95 kg at his height of 175 cm.

33.  Liu must also know that by submitting the application for insured sum within the ‘non-medical limit’, medical examination of the applicant could be avoided.  Mr Ma submitted that the reduction of the sum insured from HK$300,000 in the 25/5 Application to HK$200,000 in the 26/5 Application was precisely to bring the application within the ‘non-medical limit’ so as to avoid the medical examination of her husband.

34.  In the 22/11 Letter and in court, Liu explained that her husband decided to reduce the insured sum so that this would be more affordable.  In court, Liu explained that they were then concerned about their negative equity and debt to repay.

35.  I share Mr Ma’s scepticism about such explanation.  According to the applications, Liu’s husband was a businessman earning HK$50,000 per month.  Liu agreed in court that she had already discussed the intended coverage of the insurance and the premium with her husband prior to the submission of the 25/5 Application.  The reduction in the sum insured from HK$300,000 to HK$200,000 only led to a difference of about HK$300 per month.  It is incredible that Liu’s husband somehow changed his mind overnight about his ability to afford the HK300 monthly premium difference.

36.  In my view, Liu can hardly deny that she intended to make use of the ‘non-medical limit’ for her husband’s application.  But the real problem of Liu’s case lies in what she has done and has omitted to do after actually attending the medical examination on 29 May 2006.  The diagnosis of diabetes was necessarily relevant, if not adverse, to her husband’s application.  Nevertheless, she has kept the Company in the dark about this.

37.  Liu suggested that it should be Dr Chan, being the designated examining doctor, to submit the medical report to the Company directly.  The responsibility was not hers.  But this is contradicted by what Chan stated in her evidence.  This is also contradicted by her own admission in the 22/11 Letter and the 23/11 Letter to the Company.

38.  Liu explained that upon learning about her husband’s condition, she and her husband formed the view that whether the 26/5 Application would be approved or not, the Company would not entertain her husband’s future claim under the policy (or in her words “無得做” or “做唔到”).  They decided to let the policy lapse upon non-payment of premium after the first 2 months.  I find it difficult to understand.

39.  First, this does not sit well with her claim that she had no idea that the 26/5 Application has been approved.  The fact was that Liu has never received the Company’s notification that the application was refused.  Nor has any part of the 2 months’ premium paid in advance been refunded to her husband.  It should be noted that when her husband’s application for medical insurance in November 2005 was refused, he did receive from the Company written notice of that together with the refund by cheque.

40.  Secondly, I take what Liu meant was that the Company might seek to repudiate the policy in the future for false declaration or material non-disclosure, even if the 26/5 Application was approved.  But if Dr Chan has passed on the examination results to the Company, as Liu believed, and there was indeed no sign of the Company refusing to accept the application, I wonder how Liu and her husband would have formed such belief that the Company might repudiate the policy as alleged.

41.  Thirdly, once a policy applied for has been issued, the Company would be exposed to liability to meet any claim submitted by the insured under the policy.  What Liu suggested would mean that insofar as her husband’s policy was concerned, it would be up to her or her husband to decide whether to let the policy lapse or to keep it alive.  For an agent responsible for the policy to suggest that such approach was acceptable is in my view alarming.

42.  When it comes to the submission of the Reinstatement Application, Liu simply has no excuse.  Against the above background, it defies understanding for Liu’s husband to declare in the Reinstatement Application that he has not had diabetes “during the past 5 years”.  For the purpose of filling in the application forms, Liu as the responsible agent was supposed to go through the questions in the form with her husband.  I do not think she did that.  In any event, Liu endorsed her husband’s declarations by signing as a witness to the applications.  Liu cannot attribute all the blame to her husband.  In court, Liu had to concede that she was negligent.

43.  In my view, Liu’s explanation is less than credible.  Her suggestion that the Company was making up excuses (or in her words “在雞蛋內找骨頭” and “莫須有”) is just regrettable.  Notwithstanding her past performance and the compliments of her clients in her favour, a conclusion that some dishonesty existed in her arrangement of the submission of her husband’s insurance applications to the Company would not be faulted.  Yet for the purpose of clause 10.2(e) of the Agent’s Contract, proof of dishonesty is not a must.

44.  I have no doubt that the Company formed the conclusion that Liu’s conduct, even if without dishonesty, was prejudicial to its interest.  The contemporaneous internal correspondence and the evidence of Chan evidence that.  Objectively, the circumstances of this case explained above justify the Company’s such conclusion.

45.  What the Privy Council said in Jupiter General Insurance Co Ltd v Ardeshir Bomanji Shroff [1937] 3 All ER 67 at 74C-F may well explain a situation like the present case:

“…… It must be remembered that the test to be applied must vary with the nature of the business and the position held by the employee, and that decisions in other cases are of little value.  We have here to deal with the business of life insurance.  A mistake in accepting a risk may lead to a very considerable loss, and repetition of such mistakes may lead to disaster.  The undertaking is one in which the undertaking of each individual risk is necessarily hazardous, and it is only by unremitting care and prudence that the business could profitably be carried on.  If an officer of a life insurance company, whatever his motive may be, withholds from his superiors information which will in all probability lead them to refuse a risk, and a fortiori if it is one of exceptional character and magnitude, it would seem to be very difficult for his superiors to be confident that he will, in the future, properly carry out the important duties entrusted to him.  In other words, if a person in charge of the life assurance department, subject to the supervision of superior officers, shows by his conduct or his negligence that he can no longer command their confidence, and if, when an explanation is called for, he refused apology or amendment, it seems to their Lordships that his immediate dismissal is justified.”

46.  I find that the Company has legitimately exercised its contractual right to terminate the relationship with Liu with immediate effect on 20 November 2006 pursuant to clause 10.2(e) of the Agent’s Contract.  It follows that the Agency Manager’s Contract was also terminated with immediate effect.

The Company’s claim

47.  Pursuant to the Side Agreement (Section 1, clause 1), the Company has paid to Liu in advance for her recruitment a total sum of HK$434,216.  The advanced payment consisted of (a) an up-front advance of HK$144,740 and (b) a monthly guaranteed allowance of HK$24,123 for 12 months from 1 November 2005 (Section 1, clause 2).  The qualifications for the entitlement to these payments absolutely were also stipulated (Section 1, clauses 3 and 7).

48.  Section III of the Side Agreement contains the general terms including:

           Clause 2

 “Upon the termination of the Agent’s Contract and/or this Side Agreement for any reason by notice or otherwise, the arrangements in respect of the Advance Payment and the Performance Bonus as set out in this Side Agreement shall terminate automatically.  The Company’s obligation to pay any Advance Payment and Performance Bonus shall then cease.”

                                                                (emphasis added)

Clause 3

“Notwithstanding anything contained herein, or implied to the contrary, the Agent shall forthwith repay to the Company all the Advance Payment and Performance Bonus received if:-

(a)     The Agent’s Contract is terminated for any reason before the expiration of the First Year or within 24 months thereafter; or……”

                                                                                (emphasis added)

 Clause 4

“Such amounts as referred to in clause 3 of Section III, clause 3 of Section II and clause 7 of Section I above shall be due and payable on demand at the absolute discretion of the Company.  In the event that the Agent fails to pay all or any part of the balance of such amounts on demand, interest shall be charged on such balance at the rate of 3.3% per month as from the date of demand.”                                                  (emphasis added)

49.  The wordings of the above provisions are clear.  It entitles the Company to withhold advance payment and performance bonus, if unpaid, and to recover those already paid to the agent, upon termination of the agent’s contract for any reason.  The Company’s entitlement does not depend on its having to justify the termination save and except in accordance with the contractual terms.

50.  Yuen Oi Ling (“Yuen”) is the Senior Officer of Agency Administration of the Company.  She gave evidence that the total sum of HK$434,216 paid pursuant to the Side Agreement consisted of the up-front advance of HK$144,740 and monthly guaranteed allowance for 12 months in the total sum of HK$289,476.  The payments are evidenced by Liu’s acknowledgement and the Company’s documents.

51.  Yuen also explained the following:

(1) Liu signed an authorisation on or about 23 January 2006 whereby she agreed that upon termination of the Agent’s Contract, the Company has the right at all times to use her benefits on the ending balance of her Agents’ Deferred Incentive Scheme to offset against any debt, obligation or liability due or owing or likely to become due or owing by her to the Company.

(2) The records showed that Liu’s benefit under the above scheme as at 29 December 2006 amounted to a net sum of HK$11,132.26 payable on 16 January 2007.

(3) Liu was also entitled to outstanding commission in the sum of HK$6,711.51 payable on 20 December 2006.

(4) As at 17 January 2007, the amount due and owed by Liu to the Company was therefore HK$(434,216 – 6,711.51 – 11,132.26) = HK$416,372.23.

52.  Yuen’s evidence was not effectively challenged during the trial.  I accept her evidence.  I therefore find that Liu is liable to repay the sum of HK$416,372.23 to the Company.

53.  The Company’s written demand to Liu dated 6 December 2006 had yet to take into account the above deductions.  Though asked to award interest from 17 January 2007, I simply award interest at the contractual rate from the date of writ (which was 3 days later).

The counterclaim

54.  The counterclaim, as pleaded, consists of the follows:

“(i)  年終應付之報酬HK$144,740;

(ii) 本人已銷受保單之佣金;

(iii) 兩年未付所欠本人的總額而所產生的利息;

(iv) 本人年終應收的花紅;

(v) 其他一切堂費等等”

55.  (i) above should be referring to the performance bonus; (ii) to the commission; and (iv) to the year end production bonus.

56.  The Agent’s Contract contains the following terms:

           Clause 6.1(a)

“(i)  For the services to be rendered by the Agent under this Agreement and subject to the provisions of Clause 6.1(b), the Agent shall be entitled to remuneration calculated in accordance with schedules 1 and 2 (the “Schedules”).  The commission rates for services not specified in the Schedules shall be determined by the Company in its absolute discretion from time to time.

(ii) The Company reserves the right at any time to revoke, alter, add, amend or modify the Schedules by notice in writing to the Agent.

(iii) subject to clause 11, commissions, bonuses, allowances and/or other remuneration (if any) are payable only during the time when this Agreement is in full force.

(iv)   Without prejudice to the generality of clause 6.1(a)(iii) and for the avoidance of doubt:-

(aa) if any commission, bonus or allowance is payable based on or by reference to the amount of premium, no such commission, bonus or allowance nor any part thereof (whether on a pro-rata basis or otherwise) will be payable in respect of any premium actually received by the Company at any time on or after the date of the termination of this Agreement;

(bb) where any bonus or allowance is payable monthly or otherwise periodically, no such bonus or allowance nor any part thereof (whether on a pro-rata basis or otherwise) will be payable for any month or relevant period (as the case may be) if this Agreement is terminated at any time before the end of that accounting year or the specified time (as the case may be);

(cc) where any bonus or allowance is payable at the end of an accounting year or at any other specified time, no such bonus or allowance nor any part thereof (whether on a pro-rata basis or otherwise) will be payable if this Agreement is terminated at any time before the end of that accounting year or the specified time (as the case may be).”    (emphasis added)

Clause 11.3

“In the event of termination under Clauses 11.2(b) to 10.2(k), payments of commission, bonus or allowance will be stopped forthwith (whether or not they are accrued).”                                    (emphasis added)

57.  Liu could not actually substantiate the counterclaim as a matter of law or evidence.  In view of this court’s findings, there is no basis for the counterclaim.  Section III, clauses 2 and 3 (above) provide the clear answer to Liu’s claim for the absolute entitlement to the advance payment and the performance bonus.  Yuen also explained, which was not effectively challenged, that upon termination of the Agent’s Contract in the circumstances of this case, Liu is not entitled to any year-end production bonus.

58.  The counterclaim has to be dismissed.

Order

59.  Judgment is entered against Liu for the sum of HK$416,372.23 with interest thereon at the monthly rate of 3.3% from the date of writ until payment.  The counterclaim is dismissed.  I make a nisi order that Liu shall pay the costs of this action which shall be taxed, if not agreed, with certificate for counsel.  This costs order shall become absolute in the absence of application within 14 days to vary.

60.  The hearing was conducted in Chinese for the benefit of Liu.  In view of the documents and issues involved, I decide to produce this judgment in English.  Arrangement for interpreter’s assistance to Liu, if required, may be made for the purpose of handing down of this judgment.