Fuji Finance Inc v Aetna Life Insurance Co Ltd

Chancery Division 07 July 1994

Case Analysis
Where Reported
[1995] Ch. 122; [1994] 3 W.L.R. 1280; [1994] 4 All E.R. 1025; [1995] L.R.L.R. 490; [1994] C.L.C. 723; [1995] Pens. L.R. 21; (1995) 92(2) L.S.G. 35; Times, July 21, 1994Independent, September 15, 1994

Case Digest
Subject: Insurance Keywords: Insurance contracts; Life insurance Summary: Contract; Life insurance; capital investment bond; benefits payable on surrender or death of assured; whether contract a policy of life insurance Abstract: The court ruled on preliminary issues relating to the nature of an insurance contract, namely whether: 1) a policy constituted an insurance policy and if so whether it was a policy of life insurance pursuant to theLife Assurance Act 1774 s.1, and 2) if the policy was neither an insurance policy nor a life policy it was enforceable as a contract under the Insurance Companies Act 1982 s.16. Held: Where an insurance contract provided for the amount insured to be payable on demand by the insured, not just following his death, and those amounts were the same, the contract did not

conform with the requirements of s.1 of the 1774 Act and was therefore not a life policy. In the instant case FF's contract with ALI was more in the way of an investment policy as FF did not have sufficient insurable interest in the life of the insured, or at least only in the actual insured value not the profits which accrued on the policy. The fact that the policy did not fall within s.1 did not, however, automatically render the contract void for lack of insurable interest. The Vice Chancellor rejected ALI's argument that the contract was unenforceable because FF was bound by s.16(1) of the 1982 Act to limit its business to insurance, and as the contract in question was not one of insurance it contravened the law, on the grounds that Parliament could not have intended all contracts entered into in good faith in breach of s.16 to be struck down. Judge: Sir Donald Nicholls, V.C. Counsel: For FF: Nicholas Underhill Q.C. and Robert Powell-Jones. For ALI: Nigel Davis Q.C. and Lindsey Stewart Solicitor: For FF: Peter Sewell & Co. For ALI: Hartwig (Croydon)

Fuji Finance Inc. v Aetna Life Insurance Co. Ltd. and Another
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Chancery Division 7 July 1994

[1993 Ch. F. No. 7891] [1995] Ch. 122

Sir Donald Nicholls V.-C. 1994 June 27, 28, 29; July 7 InsuranceLife insuranceValiditySame sum payable on death of assured as on surrender of policyWhether payable "on the life of any person" Whether policy contract of life assuranceWhether policy void Life Assurance Act 1774 (14 Geo. 3, c. 48), s . InsuranceContractIllegalityStatutory prohibitionInsurance company carrying on business otherwise than in connection with insurance business Issue of investment policyWhether policy unenforceable Insurance Companies Act 1982 (c. 50), s. 16 The plaintiff company took out a policy described as a policy of life assurance with an insurance company whose business was shortly thereafter taken over by the defendants, the life insured being that of T., who was concerned in the management of the plaintiff. Under the policy a sum calculated by reference to the price of units currently allocated to the policy was payable on the death of the life assured or on its earlier surrender. The policy provided that on a surrender within the first five years the amount payable was to be reduced by a discontinuance charge. The plaintiff paid a single premium of 50,000, which was applied to secure units in a variety of internal funds administered by the insurance company. The policyholder had the option to switch units allocated to his policy between the funds. By taking advantage of the defendants' procedure for fixing the price of the

units the plaintiff was able to increase the surrender value of the policy from 50,000 to over 1m. in six years. The defendants then altered the procedure for switching units so that the plaintiff was unable to continue to make profits as before. The plaintiff claimed that by altering the terms of the switching procedures the defendants had committed a repudiatory breach of contract and surrendered the policy. The defendants paid the plaintiff the *123 surrender proceeds, which amounted to 1,110,758. The plaintiff brought an action for damages for breach of contract. Trial was ordered of the preliminary issues whether the policy was a policy of life insurance within section 1 of the Life Assurance Act 1774 1so as to be void because the plaintiff had no insurable interest in the life of T., or, if not, whether it was unenforceable under section 16 of the Insurance Companies Act 1982 . 2 On the trial of the preliminary issues:Held: (1) that to qualify as a policy of insurance on the life of a person a sum of money or other benefit had to be payable on an event uncertain as to its timing or as to its happening at all and dependent on the contingencies of human life; that, since the same sum was payable on surrender of the policy as on the death of T., the policy was not a contract of insurance on the life of T.; that only where the object of a contract as a whole was to insure could it be categorised as a contract of insurance, and the insignificant element of insurance introduced into the policy by the operation of the discontinuance charge on voluntary surrender within the first five years was insufficient to convert a contract of an essentially different nature into one of insurance; and that, accordingly, the policy was not rendered void by section 1 of the Life Assurance Act 1774 (post, pp. 130F-G, 131C-G, 133C-E, 134B). Prudential Insurance Co. v. Inland Revenue Commissioners [1904] 2 K.B. 658 considered. (2) That, since the policy was not a contract of insurance, it had been issued by the insurance company in contravention of section 16 of the Insurance Companies Act 1982; but that a policy issued in good faith, albeit in breach of the section, was not thereby rendered unlawful and unenforceable (post, pp. 134F, 136A, G, 137A). Phoenix General Insurance Co. of Greece S.A. v. Halvanon Insurance Co. Ltd. [1988] Q.B. 216 , C.A. considered. The following cases are referred to in the judgment:

Flood v. Irish Provident Assurance Co. Ltd. (Note) [1912] 2 Ch. 597 Gould v. Curtis [1913] 3 K.B. 84, C.A. . Joseph v. Law Integrity Insurance Co. Ltd. [1912] 2 Ch. 581, C.A. . National Standard Life Assurance Corporation, In re [1918] 1 Ch. 427 Phoenix General Insurance Co. of Greece S.A. v. Halvanon Insurance Co. Ltd. [1988] Q.B. 216; [1987] 2 W.L.R. 512; [1986] 1 All E.R. 908 ; [1987] 2 All E.R. 152 , Hobhouse J. and C.A. . Prudential Insurance Co. v. Inland Revenue Commissioners [1904] 2 K.B. 658

The following additional cases were cited in argument:

Medical Defence Union Ltd. v. Department of Trade [1980] Ch. 82; [1979] 2 W.L.R. 686; [1979] 2 All E.R. 421 Paterson v. Powell (1832) 9 Bing. 320 Smith v. Anderson (1880) 15 Ch.D. 247, C.A. .

PRELIMINARY ISSUES On or about 28 October 1986 Tyndall Assurance Ltd. ("Tyndall"), an insurance company, issued a policy described as a policy of life assurance to the plaintiff, Fuji Finance Inc., in consideration of a single premium of *124 50,000 paid by the plaintiff. On or about 27 April 1987 the first defendant, Aetna Life Assurance Co. Ltd., took over the undertakings and liabilities of Tyndall pursuant to sections 49 and 50 of the Insurance Companies Act 1982 . By a petition made pursuant to those sections on 16 December 1993 certain liabilities of the first defendant including its liabilities to the plaintiff in respect of the policy of 28 October 1986 became the liabilities of the second defendant, Windsor Life Assurance Co. Ltd. By a statement of claim dated 11 April 1994 and re-amended pursuant to the leave of Master Barratt on 25 March 1994 the plaintiff sought against the defendants damages for breach of contract in relation to the policy of life assurance of 28 October 1986. By their re-amended defence the defendants denied that the policy was a policy of life assurance and averred that it was unenforceable because it contravened section 16 of the Insurance Companies Act 1982 . On 25 March 1994 Master Barratt further ordered trial of the preliminary issues (1) whether the policy in the amended statement of claim issued on or about 28 October 1986 was or was not a policy of insurance; (2) if the policy was a policy of insurance, whether the policy was a policy of life insurance within the meaning of section 1 of the Life Assurance Act 1774 ; and (3) if the policy was not (a) a policy of insurance or (b) a policy of life

insurance within the meaning of the Act of 1774 whether it was unenforceable under section 16 of the Insurance Companies Act 1982. The facts are stated in the judgment. Nicholas Underhill Q.C. and Robert Powell-Jones for the plaintiff. It is the essence of a contract of insurance that the payment of benefit is dependent on the happening of an "event." In the case of life assurance that event is either the death of the life assured ("whole life" assurance) or his survival to a specified age ("endowment" assurance): seePrudential Insurance Co. v. Inland Revenue Commissioners [1904] 2 K.B. 658 ; Gould v. Curtis [1913] 3 K.B. 84 ; Joseph v. Law Integrity Insurance Co. Ltd. [1912] 2 Ch. 581 and Medical Defence Union Ltd. v. Department of Trade [1980] Ch. 82 . That position is not in principle altered by a right to recover premiums or some other specified sum by way of surrender prior to the specified event. Subject to the discontinuance charge, the rights of the insured were not affected in any way by the event supposedly insured against, i.e. the death of the life assured. That was because there was no death benefit under the contract (the multiplier being 1), and accordingly no "mortality cost:" indeed the right to vary so as to include a death benefit subsequently had been excluded. The death of the life assured was merely the terminus of a period during which the plaintiff could cash in the fund (in whole or in part) at any time; and the distinction between rights on surrender and rights on death was wholly empty. Therefore there was simply an investment contract dressed up as a life assurance contract. The discontinuance charge is purely ancillary and cannot by itself change an investment contract into a contract of insurance. There is no evidence that Tyndall "carried on" activities of a kind prohibited by section 16(1) of the Insurance Companies Act 1982. Even if *125 it did, the effect of a breach of section 16 was not to render the contract unenforceable. The concept of "carrying on" an activity requires an element of repetition and continuity: see Smith v. Anderson (1880) 15 Ch.D. 247 , 277-278. The evidence showed only that on a single occasion Tyndall entered into a contract which was not a contract of insurance. Even if there had been a breach of section 16 that would not render the contract unenforceable: the assured relies on the principles set out in Phoenix General Assurance Co. of Greece S.A. v. Halvanon Insurance Co. Ltd. [1988] Q.B. 216 . Nigel Davis Q.C. and Lindsey Stewart for the defendants. A satisfactory definition of a "contract of insurance" may not be capable of being evolved: see Medical Defence Union Ltd. v. Department of Trade [1980] Ch. 82 , 95.

There are, however, three requirements (see Prudential Insurance Co. v. Inland Revenue Commissioners [1904] 2 K.B. 658 , 663): (1) the contract must provide that a sum of money, or a monetary equivalent, will be paid on the happening of a specified event; (2) there must be uncertainty as to the happening of such event; (3) there must be an insurable interest in the insured which ordinarily connotes that the event is prima facie adverse to the interests of the assured. [Reference was also made to Gould v. Curtis [1913] 3 K.B. 84 ; Halsbury's Laws of England , 4th ed., vol. 25 (1994 Reissue), pp. 10-11, para. 2; Chitty on Contracts , 26th ed. (1989) vol. 2, pp. 917-918, para. 4204 and Medical Defence Union Ltd. v. Department of Trade [1980] Ch. 82 , 98 et seq.] Strictly, perhaps the third "requirement" is a precondition to claiming on what otherwise, under the first two requirements, would be a valid contract of insurance: see the Life Assurance Act 1774 and Paterson v. Powell (1832) 9 Bing. 320 . Given these criteria, the policy was plainly a contract of insurance. It only failed to be a valid contract of insurance because of the lack of an insurable interest on the part of the plaintiff in the life insured. At the heart of the plaintiff's case is the allegation that the policy was only a "policy of investment" and not a policy of insurance. But it is a non sequitur to suggest that because a policy may be styled an investment it cannot be an insurance contract. On the contrary, the mere fact that an insurance policy may, in practice, be an investment of itself in no way shows that it is not an insurance policy. Life insurances can be styled investments: indeed, they are so designated in the Financial Services Act 1986 (see section 1(1) and Schedule 1, Part I, paragraph 10) and life insurance policies may be subject to the Rules of the Securities and Investments Board: see Schedule 10, paragraph 5(3) . [Reference was also made to Birds, Modern Insurance Law , 3rd ed. (1933), p. 7.] The plaintiff places reliance on the fact that the death benefit factor was stated to be 1.00 in the schedule to the policy and the view that the amount payable on the death of the life assured would have been the same as if the policy had been surrendered. But that does not of itself displace the fact that the policy (apart from there not being an insurable interest) fulfilled the relevant requirements of insurance. There is no requirement, in principle or on authority, that the value of the benefit payable under the policy must, as compared to surrender, be greater on death. There is no reason in principle why there should be; nor do any of the authorities even suggest that it is relevant: see Prudential Insurance Co. v. Inland Revenue Commissioners [1904] 2 K.B. 658 ; Joseph v. Law Integrity Insurance Co. Ltd. [1912] 2 Ch. 581and Flood v. Irish Provident Assurance Co. Ltd. (Note) [1912] 2 Ch. 597 . In any event, the argument overlooks the fact that, in the case of surrender within the first five years, the benefit would be lower than the

benefit payable on death. Thus, the policy was not simply an investment policy but also a policy of insurance within the ambit of the Life Assurance Act 1774: see Joseph v. Law Integrity Insurance Co. Ltd. [1912] 2 Ch. 581 , 594; Prudential Insurance Co. Ltd. v. Inland Revenue Commissioners; Gould v. Curtis and In re National Standard Life Assurance Corporation [1918] 1 Ch. 427 . If the policy was not a contract of insurance it was issued in contravention of section 16 of the Insurance Companies Act 1982 and was therefore illegal and unenforceable: see Phoenix General Insurance Co. of Greece S.A. v. Halvanon Insurance Co. Ltd. [1988] Q.B. 216 . Underhill Q.C. replied. Cur. adv. vult. 7 July. SIR DONALD NICHOLLS V.-C. handed down the following judgment. In recent years many life insurance companies have devised increasingly sophisticated forms of policies designed to make them attractive as investments. Potential investors are wooed with the advantages of these policies: they are tax efficient, they offer protection against inflation and, unlike the traditional forms of life policies, money can be withdrawn instantly and regularly so as to give the policyholder a source of income. This case concerns one such policy. The case has a most unusual background. In short, the policy in question enabled the policyholder to switch the units allocated to his policy between several funds. For a reason I will explain, the policyholder was able to make switches in circumstances where he always gained and never lost; indeed, every investor's dream. So the policy increased phenomenally in value. The policy appreciated in value at an annual average rate of 90 per cent. compound, which equals a tenfold increase every four years. The policy was taken out in October 1986, and a single premium of 50,000 was paid. In less than six years, by June 1992, the policy had soared in value to over 1m. The insurance company then changed its switching procedures. The policyholder claimed this was a repudiatory breach of contract and surrendered the policy. The surrender proceeds amounted to 1,110,758, and these were paid. The policyholder was not satisfied. He launched this action for damages. The amount of damages being claimed is at large. The insurance company says that, if the policy had continued to appreciate at the same rate for the expected lifetime of the life assured, the damages

could amount to 252 thousand trillion. This is equivalent to the gross national product of the United Kingdom for 460,000 years. In fact, the damages could not exceed the value of the relevant funds of the company. Even so, the sums involved must be very substantial. The insurance company denies it has committed any breach of contract. One of its defences is that the policy is null and void under *127 section 1 of the Life Assurance Act 1774 . A preliminary issue has been directed on this point, and on a further point concerning the effect of contravention of section 16 of the Insurance Companies Act 1982 .

The policy
Before I turn to the Act of 1774 I must put a little more flesh on the bones. Mr. Gary Robert Tait is a sophisticated investor. In 1986 he looked closely at some policies, called Investment Account, being marketed by Tyndall Assurance Ltd. Under these policies sums were payable on the death of the life assured or the earlier surrender of the policy. Either way, the sums payable were calculated by reference to the value of the units then allocated to the policy. The value of the units was the measure, although the amount payable was not necessarily equal to that value. Depending on the circumstances and requirements of a particular policyholder, the amount payable on death might be more than the current value of the policy units. The sum payable on death might, for instance, be 1.5 times the value of the policy units. In short, the way these policies worked was this. The value of the policy was linked to the price of units of internal funds of Tyndall, these internal funds being identified subdivisions of Tyndall's long term business fund. The names of the funds indicate their content. I mention some of them: U.K. equity fund, property fund, fixed interest fund and index-linked fund. The prices of units in the funds were based upon the value of the assets constituting the funds. In some cases, such as the North American Equity and Far Eastern funds, the assets were themselves units in a corresponding unit trust, or more than one unit trust, managed by an associated company of Tyndall. The assets in the internal funds were not the property of the policyholder. Units in the funds were notionally allocated to the policy as a means of calculating the value of the policy. A feature of the policies was a "switch" option. This option entitled the policyholder to direct Tyndall to convert units of an internal fund allocated to the policy to units of another fund. Suffice to say, switching instructions given by 2.30 p.m. on, say, Tuesday were carried out at prices published in Wednesday's Financial Times. Tyndall fixed those prices at 10 a.m. on

Tuesday. They were based on the prevailing stock market prices, in the case of the U.K. equities and fixed interest stocks. So an investor who was wellinformed about the movement of prices on the stock exchange could do his own calculations. By this means he could know, after 10 a.m. and before 2.30 p.m. on Tuesday, the approximate price Tyndall would have fixed at 10 a.m. on Tuesday as the value of the units in some of the funds. He could calculate this for himself, even though the prices struck by Tyndall would not be published until the following day. So, when he gave a switching instruction at 2 p.m. on Tuesday, he was in effect switching at known prices. By this means he could make profits and avoid losses. Mr. Tait is the prime mover behind a Panamanian company, Fuji Finance Ltd. In October 1986 Fuji took out a policy with Tyndall, called a Capital Investment Bond. Before doing so, Mr. Tait checked with Tyndall that he had correctly understood the switch option procedure. Fuji paid a single premium of 50,000. The life assured was Mr. Tait. He *128then operated the switch option procedure to great effect, as already mentioned. In March 1987 Tyndall's long term business was transferred to Aetna Life Insurance Co. Ltd. Fuji's policy was not a particularly large one at the outset. But, as the value of the policy grew and the number of switches increased, adverse effects were felt by other policyholders. Some complained about the poor investment performance of the funds. In 1990 Aetna undertook a review of its procedures. In April 1991 the procedures were revised. Mr. Tait was told that in future, in order to improve the equitable treatment of all policyholders, Aetna was changing the time at which prices for units in the internal funds would be struck from 10 a.m. to 4 p.m. So, in future, an instruction given by Mr. Tait at 2 p.m. on Tuesday would not be carried out by reference to values already determined. This led to Fuji's claim that Aetna had committed a repudiatory breach of contract. In turn, this was followed by Fuji surrendering the policy and commencing this action. On 31 December 1993 Aetna's long term business was transferred to Windsor Life Assurance Co. Ltd.

The Life Assurance Act 1774

The Life Assurance Act 1774 renders null and void life insurances, and certain other insurances, in which the insured does not have an insurable interest. This Act, perhaps surprisingly, is the statute which still governs this aspect of life insurance. The mischief at which the Act was aimed, as recited in the Act, was that by experience it had been found that making insurances on lives or other events in which the assured had no interest "hath introduced a mischievous kind of gaming." Section 1 provides:

"no insurance
shall be made by any person . . . on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person . . . on whose account such policy . . . shall be made, shall have no interest, or by way of gaming or wagering; and . . . every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever." (Emphasis added.) In the present case Fuji, the policyholder, accepts that it had no insurable interest in Mr. Tait's life, at any rate to a greater amount than the 1.1m. paid to Fuji when the policy was surrendered. The area of dispute is whether, having regard to its terms and conditions, Fuji's policy is an "insurance on the life" of Mr. Tait for the purposes of section 1. The insurance company, now Windsor, claims that the policy is within the section and is void accordingly. Fuji asserts the contrary.

"Insurance on the life of any person"

Surprisingly, there seems to be no authority in which the meaning of the key phrase in section 1 "insurance . . . on the life . . . of any person" has been directly considered. However, there are several cases in which similar or more widely drawn expressions under other statutes have been addressed. Foremost among these is Prudential Insurance Co. v. Inland Revenue Commissioners [1904] 2 K.B. 658 . The question concerned the stamp duty payable on a policy under which a specified sum was payable *129 on the life assured attaining 65 years of age, or a lesser sum on his earlier death. Channell J. held this was stampable as a policy of life insurance within the meaning of section 98 of the Stamp Act 1891 (54 & 55 Vict. c. 39) . Under that Act a policy of life insurance is defined as "a policy of insurance upon any life or lives or upon any event or contingency relating to or depending upon any life or lives . . ." That case is well known for Channell J.'s exposition of what is meant by "insurance." In short, and subject to one point I need not mention, he described insurance, at p. 663, as a contract whereby a sum of money or some other benefit is payable upon the happening of an event which involves a degree of uncertainty, either as to the happening of the event or as to the date on which the event will occur. In that case the policy, considered as a whole, satisfied those criteria. Further, the endowment aspect, even if considered separately, fell within the statutory definition of a policy of life insurance, because money was thereby made payable on a contingency relating to life, the contingency being the insured living to age 65.

Next, chronologically, was the decision of the Irish Court of Appeal in 1910 in Flood v. Irish Provident Assurance Co. Ltd. (Note) [1912] 2 Ch. 597 . The importance of this case, for present purposes, is that it brought out that a contract may be a contract of insurance even though the insurer trades without any risk. The sums payable under the policy, and the amounts payable on the uncertain event, may be so arranged that in purely financial terms the insurer cannot lose. In that case the question was whether a number of policies were outside the objects of the company as "policies of assurance upon or in any way relating to human life." The company issued policies for fixed sums payable at the end of a certain number of years if the life assured were still living, in return for the periodical payment of premiums, with a provision that in the event of earlier death a percentage of the premiums would be repaid. Holmes L.J. observed, at p. 601, that the insured would have done better to lodge the amount paid as premiums in the Post Office Savings Bank from which he or his personal representatives could withdraw the full amount at any time with interest. Despite this, the court held that these were policies of assurance. Further, and plainly, the policies fell within the description of policies of assurance "upon or in any way relating to human life." Accordingly the policies were ultra vires the company. Two years later a similar point came before the English Court of Appeal, in Joseph v. Law Integrity Insurance Co. Ltd. [1912] 2 Ch. 581 . The question was whether certain policies fell outside the company's objects, which excluded life insurance within the meaning of the Life Assurance Companies Act 1870 (33 & 34 Vict. c. 61). In return for periodic payments, sums were payable at stated intervals if the insured were still alive. If he died before a payment date, the premiums paid since the last payment date were returned. In the court below the policies were held not to be policies of life insurance; they did not insure against risk, the premiums were fixed irrespective of the average duration of life and irrespective of the age or health of the insured, and the contract was properly described as a means of enabling thrifty persons to accumulate a sum of money by small savings: see 107 L.T. 538 , 540. The Court of Appeal reversed this decision. Although the Act of 1870 did not expressly *130 define life insurance, that expression was to be understood as including insurance whereby a sum of money is payable on the happening of a contingency depending on the duration of human life. The policies in that case satisfied that test. Accordingly they were ultra vires. The same approach was adopted by the Court of Appeal in Gould v. Curtis [1913] 3 K.B. 84 . An insurance policy provided for payment of 200 on the death of the life assured within a stated period of years, and 100 if he were alive at the end of the period. The question was whether this was an

insurance by the taxpayer "on his life" within the meaning of section 54 of the Income Tax Act 1853 (16 & 17 Vict. c. 34) . The court held that it was. All three members of the court observed that "on his life" imports the notion of payment being dependent on the contingency of human life. The phrase includes the case where payment is contingent on survival as well as the case where payment is contingent on death: see Sir Herbert Cozens-Hardy M.R., at p. 92, Buckley L.J. at pp. 94-95, and Kennedy L.J., at p. 97. I return to section 1 of the Act of 1774: "no insurance shall be made . . . on the life of any person . . ." 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. InPrudential Insurance Co. v. Inland Revenue Commissioners [1904] 2 K.B. 658 , 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 section 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 v. Law Integrity Insurance Co. Ltd. [1912] 2 Ch. 581 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 Act of 1774 differently from the way the Court of Appeal interpreted that expression in the Act of 1870. Accordingly, in my view, to be within section 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.

The application of section 1 to this policy: the death benefit

I now turn to apply section 1, as so understood, to Fuji's policy. The two key provisions are conditions 5 and 7. Condition 5 reads: "Benefit on death. On the death of the life assured, the company shall pay the value of the units on the next valuation day following *131 receipt by the company of written notification of death, multiplied by the death benefit factor . . ."

Condition 7 reads: "Benefit on surrender. At any time . . . the policyholder may by notice in writing to the company 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 . . ." In the present case the death benefit factor was one. (That is the figure stated in the policy, and the parties agreed I should decide the preliminary issue on this basis. There may be some question that this figure was a mistake.) Accordingly, and leaving aside for the moment the discontinuance charge, there was no difference at all between the amount payable on request and the amount payable on death. In both cases the benefit payable was the same. In both cases the sum payable was the value of units on the next valuation day after the company received notification of the death or the request for payment. How, then, is this policy to be characterised? The insurance company submitted that under condition 5 a sum was payable on the death of Mr. Tait, and that is decisive. The fact that the policy might be surrendered earlier on terms yielding an equivalent payment is neither here nor there. The manner in which the sums payable on death or on earlier surrender were quantified is irrelevant for present purposes. I am unable to accept this approach. To be within section 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. Here, Fuji could at any time have called for payment of a cash sum equal to the value of the units allocated to its policy. On Mr. Tait's death all that happened was that the policy came to an end, and the same cash sum became payable whether or not Fuji wished to be paid out. I do not see how the fact that the policy was ended by Mr. Tait's death can turn this contract into a contract of insurance if otherwise it would not be such. The death of Mr. Tait, like the death of anyone else, is uncertain as to its timing although certain as to its happening. But, under this policy, the happening of that uncertain event did not impose, for better or for worse, an obligation on the insurer to pay an amountotherwise not payable. Nor did the death relieve

the insurer from its subsisting obligation to pay the current value of the policy units on request. Expressed in slightly different language, the position is that under this policy Fuji paid 50,000 to Tyndall as an investment. That, of itself, is neutral. That, of itself, gives no assistance in deciding whether the contract was a policy of insurance. The policyholder could determine the contract at any time by calling for payment of an amount fixed by a formula unrelated to anything save the current value of the units attributed to the *132 policy. The contract was also determined automatically on Mr. Tait's death or, more strictly perhaps, when Tyndall was told of his death. In that event, the sum payable was calculated according to the identical formula applicable throughout the whole period of the contract. That is not a contract of insurance. The death of Mr. Tait had no effect on the amounts payable or receivable by the parties. I recognise that Fuji's policy was clothed in the vesture of life insurance. This does not advance matters. This clothing would have been altogether appropriate if the death benefit factor had exceeded one. (In saying this, I am not to be taken as expressing a view on what would be the position if the death benefit factor had been 1.01, a figure canvassed in the course of the submissions.) Had the death benefit factor exceeded one, references to the life assured, his age, the health questionnaire, mortality cost, and so forth, would have been appropriate. But those references in these standard form documents do not assist if, on a proper analysis of the parties' rights and obligations under this particular policy, the policy is not a contract of insurance at all. In the present case there was no mortality deduction built into the calculation of benefits payable. That is because, as I have indicated, Mr. Tait's life was not being insured. The sums payable did not vary according to whether Mr. Tait was then alive or dead. However, speaking in more general terms, it would be wrong to conclude that a mortality deduction from the benefits payable is an essential feature of a contract of life insurance. The presence of such a deduction is one indicium of life insurance, but the absence of such a deduction does not prove the opposite. Depending on the way the benefits are calculated, the insurer may not need to build a mortality deduction into the calculation. As already discussed, a policy may be a policy of life insurance even though the insurer cannot lose. It is not an essential feature of a life insurance policy that the terms place the insurer at risk of loss in certain events. However, the absence of a mortality cost calculation in Fuji's policy is relevant in so far as it confirms that the formula for calculating the policy benefits was unaffected by any consideration of the

life expectancy of Mr. Tait. The mode of calculating the benefits is consistent with the policy not being an insurance on Mr. Tait's life.

The application of section 1 to this policy: the discontinuance charge

So far I have left altogether on one side the provision in condition 7 that, on surrender, the amount payable was to be reduced by a discontinuance charge. No such reduction was made on payment on death under condition 5. The discontinuance charge arises in this way. Tyndall was, naturally enough, concerned to attract larger rather than smaller single premiums. So it offered an incentive to those who paid larger sums, by initially allocating policy units on a sliding scale according to the size of the premium. For premiums up to 10,000, the initial allocation of units was 100 per cent. or less. Above 10,000 the initial allocation exceeded 100 per cent. At the top end were premiums exceeding 25,000. The percentage of initial premium allocated to units in such cases was 102 per cent. Tyndall was also concerned to recoup allocations made in excess of 100 per cent. *133 in the event of the policyholder ending the policy within five years. In the event of discontinuance within the first year after payment of the premium paid, Tyndall clawed back the whole of the bonus, that is, the whole of the percentage allocated in excess of 100 per cent. The clawback diminished by per cent. for each completed year. So, in a case such as Fuji, where there was an initial allocation of 102 per cent., the clawback diminished year by year until the policy had been in existence for five complete years. From then on there was no discontinuance charge. The effect of these provisions in Fuji's case was that, for the first five years of the policy, there was a difference between the amount payable on surrender and the amount payable on death. In the latter event, save in the case of suicide within the first year, no discontinuance charge was deductible if payment had fallen due on Mr. Tait's death. But, if Fuji had surrendered the policy within five years, a percentage of the units allocated to the policy, varying from 2 per cent. in the first year to per cent. in the fifth year, would have been deducted and retained by Tyndall. Clearly, there is an element of insurance on the life of Mr. Tait built into this provision. In the event of his death within five years, Tyndall became obliged to pay a larger sum than it was obliged to pay if Fuji had chosen to surrender the policy at that time. Even so, I do not think this can sensibly lead to the conclusion that Fuji's policy is a contract of insurance on Mr. Tait's life. What happened is that, to reflect the advantages larger premiums

had for Tyndall, Tyndall allocated a bonus in such cases. Those who paid large premiums received a marginally greater (up to 2 per cent.) allocation of units. Tyndall was concerned that those who received these bonuses should not be able to cash them in straight away: hence the discontinuance charge. I do not think the presence of such a charge, for the period and the amount involved in Fuji's policy, is sufficient to alter the character of this policy which, in all other respects, is not a contract of insurance. It cannot be that the presence of a minor and insignificant element of insurance suffices to turn a contract otherwise of a different nature into a contract of insurance. 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 McGillivray and Parkington on Insurance Law, 8th ed. (1988), p. 7, that only where the principal object is to insure can a contract as a whole be called a contract of insurance. I do not overlook Neville J.'s decision in In re National Standard Life Assurance Corporation [1918] 1 Ch. 427 . There the court had to decide whether several classes of policies constituted policies on human life within the definition in section 30 of the Assurance Companies Act 1909 : "any instrument by which the payment of money is assured on death . . . or the happening of any contingency dependent on human life." Under the third class of policies, in return for payment of annual premiums fixed sums were payable at the end of a stated period of years. Those amounts were payable irrespective of whether the life assured was still alive. The only contingency in the policy relating to the life of the life assured was that his personal representatives had the option to surrender the policy within six months of the policyholder's death, in which case all the premiums *134 were returned. Neville J. held that this right of termination, exercisable only by the personal representatives, was a "contingency dependent on human life," and accordingly the policy fell within the statutory definition of life assurance. I need not embark on a consideration of whether that case was correctly decided. Suffice to say, the option featured in that case was much more central to the parties' bargain than the discontinuance charge on voluntary termination within five years in the present case. For these reasons, in my view Fuji's policy is not within section 1 of the Act of 1774 as an insurance on the life of Mr. Tait. Accordingly it is not rendered void by that section because of the absence of a sufficient insurable interest in Mr. Tait's life. I add a footnote on this aspect of the case. I have characterised Fuji's policy as not a contract of insurance despite the presence of an element of insurance. The case was argued before me on the footing that the policy as

a whole has to bear one label or the other. I am not to be taken as disagreeing with this approach, but I add this regarding a contract containing both insurance and non-insurance elements. If, in such a case, and contrary to this approach, it is only the insurance element which is void in the absence of an insurable interest, that would still not assist the insurance company here. In the instant case the insurance element was confined to the first five years of the policy. The matters in issue in this action have nothing to do with that aspect of the policy.

The Insurance Companies Act 1982

The defendants have another string to their bow. Tyndall was an insurance company. As such it was required by statute to restrict its business to insurance. Section 16(1) of the Insurance Companies Act 1982 provides: "An insurance company . . . shall not carry on any activities . . . otherwise than in connection with or for the purposes of its insurance business." The defendants submitted that if, as I have held, Fuji's policy is not a contract of insurance, Tyndall should not have issued the policy. Having being issued in contravention of the statute, the policy is not enforceable. No question about repayment of premiums arises, because Fuji received 1.1m. when it surrendered the policy. The effect of the statutory prohibition, it was submitted, is to preclude Fuji from claiming damages for breach of the terms and conditions of the policy. In my view, Tyndall was prohibited from issuing Fuji's policy by section 16. This section restricts insurance companies to the business of insurance. An insurance company will need to enter into many transactions which are not themselves contracts of insurance. The company will need to obtain premises, employ staff, acquire equipment and so on. These activities are carried on for the purposes of its insurance business or in connection with that business. However, matters stand differently when the company enters into a contract whose raison d'tre is that it is a contract of life insurance. In such a case, whether the statute is breached depends simply on whether, indeed, the contract is an insurance contract or not. If not, the insurance company has trespassed beyond its permitted bounds and into forbidden territory, however attractive the other territory may be and however well the two territories can be combined.
*135

The Act of 1982 does not spell out the consequences of a failure to comply with section 16, beyond stating that such a default is not a criminal offence on the part of the insurance company: see section 71(7) . Accordingly, this case raises the not unfamiliar question of whether, by necessary implication,

the statute intended to strike down as illegal and unenforceable a contract entered into by one party, here the insurer, in breach of a prohibition aimed at him alone. On this I have the benefit of the guidance provided by the Court of Appeal in Phoenix General Insurance Co. of Greece S.A. v. Halvanon Insurance Co. Ltd. [1988] Q.B. 216 . In that case the court was concerned with a prohibition in section 2 of the Insurance Companies Act 1974 (now replaced by section 2 of the Act of 1982) against carrying on an insurance business unless duly authorised. The material words are "no person shall carry on . . . insurance business . . ." Insurance business is defined as the business of "effecting and carrying out contracts of insurance" of the relevant classes. Kerr L.J. observed that in such a case, of a unilateral prohibition, it does not necesarily follow that the contract itself is impliedly prohibited so as to render it illegal and void. He said, at pp. 273-274: "Whether or not the statute has this effect depends upon 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 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 consideration [sic] 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.' . . . 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." 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.

*136

Despite this I am not persuaded that, in the case of section 16, 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 section 16. In reaching this conclusion I have taken into account several matters. First, section 16 appears to have been enacted in order to give effect to Directives of the Council of the European Communities of 24 July 1973 and 5 March 1979. These two Directives, 73/239/E.E.C. and 79/267/E.E.C ., were concerned to harmonise the legislation of member states in order to facilitate insurance business and, at the same time, provide adequate protection for insured parties. To these ends the Directive of 1973 obliged member states to require that any relevant undertaking should "limit its business activities to the business of insurance and operations directly arising therefrom to the exclusion of all other commercial business:" see paragraph 1(b) in article 8. The Directive of 1979 contained an equivalent provision. That appears to be the genesis of section 16. Secondly, and following on from this, it is to be noted that if a company were to incorporate such restrictions into its own constitution, persons dealing with the company would still acquire a substantial measure of protection in respect of their transactions with the company: see sections 35, 35A and 35B of the Companies Act 1985 as amended. Such persons would not be left, high and dry, without adequate recourse against the company which entered into the contract. Thirdly, as already mentioned, the Act of 1982 expressly provides that a default under section 16 is not a criminal offence. This is in marked contrast to a breach of section 2: see section 14 . Section 2 is in Part I of the Act. Section 16 is in Part II, headed "Regulation of insurance companies." Under Part II the Secretary of State is given wide powers of intervention in the affairs of an insurance company. He is also given power to modify Part II, including section 16, in relation to particular companies. Finally, I note that Parliament has revisited these provisions in the light of Phoenix General Insurance Co. of Greece S.A. v. Halvanon Insurance Co. Ltd. [1988] Q.B. 216 . Section 132 of the Financial Services Act 1986 now gives the court a discretion in certain circumstances to allow a contract made in contravention of section 2 of the Act of 1982 to be enforced. Parliament has made no such provision regarding section 16, although if contracts made by an insurance company in breach of section 16 are unenforceable the case for equivalent treatment for such contracts must be even stronger than the case for contracts made in breach of section 2.

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 section 16 should be unlawful and unenforceable. Rather, section 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 section 16 lies in the powers of intervention conferred on the Secretary of State by the same Part of the Act in which section 16 *137 appears. Default under section 16 can trigger an exercise of those powers: see section 37(2)(b)(i) . For these reasons, my conclusion is that, although the Fuji policy is not a policy of insurance within the meaning ofsection 1 of the Life Assurance Act 1774 , it is not unenforceable by virtue of the provisions of section 16 of the Insurance Companies Act 1982.

Representation
Solicitors: Peter Sewell & Co. ; Hartwig, Croydon . Declaration accordingly. (S. W. )

1. Life Assurance Act 1774, s. 1 : see post, p. 128E. 2. Insurance Companies Act 1982, s. 16(1) : see post, p. 134E. 2012 Sweet & Maxwell

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