The Court of First Instance held in Ma Kim Ying v Manulife (International) Limited (HCA 1989/2008) that the incontestability clause was not applicable because of fraudulent misrepresentations by the life insured in the proposal form.
In late 2004, the plaintiff ’s husband, Mr. Wong Shiu Tong (“the deceased”), applied for a life insurance policy from Manulife in the sum of HK$2 million. In the proposal form, the deceased declared he was a Hepatitis B carrier since 2000. He did not disclose that he was suffering liver cirrhosis. He died in mid-2007 from liver failure. Manulife refused to pay the death proceeds and rescinded the policy on the basis the deceased had fraudulently not disclosed and misrepresented his true medical condition.
The Court accepted Manulife’s arguments and dismissed the plaintiff ’s claim. Judgment was also entered for Manulife’s counterclaim to rescind the policy.
At the time of application for the policy, the deceased knew his condition was more serious than a mere Hepatitis B carrier. The court was of the view the deceased’s failure to declare such information amounted to dishonest misrepresentation. The failure to disclose was also material, since it induced the defendant to underwrite the risk and issue the policy.
Of significance, the Court found the plaintiff was not able to rely on the “incontestability clause” in Clause 14 of the policy, which stated:
“The Owner’s or the life insured’s failure to disclose any fact or their misrepresentation of any fact within their knowledge that is material to the insurance (and it is not disclosed by the other party) will not, in the absence of fraud, render this policy voidable by the Company after it has been in force during the life insured’s lifetime for two years from its date of issue...”
Applying the test in Derry v Peek (1889) 14 App Cas 337, the court considered that civil “fraud” was proved as the deceased’s representations as to his health was made dishonestly, or in Lord Herschell’s words, “...knowingly or without belief in its truth or recklessly, careless whether it be true or false...”. This is to be distinguished from the situation of lack of care, for example, where a representor makes a statement which he believes is true but was careless in ascertaining the truth. As the deceased’s failure to disclose the material information and the misrepresentation were deemed fraudulent, Manulife could avail itself of the fraud exception in Clause 14.
The court also found the deceased’s dishonesty amounted to breach of warranty, since he declared the answers given in his application were true to his best knowledge and belief, when in fact they were not. The court considered the deceased’s breach of warranty automatically brought an end to the policy.
Interestingly, the court did not consider whether the incontestability clause limited the insurer’s right to discharge itself from liability under the policy by reason of the breach of warranty. Although the point was academic (in light of the court’s finding of dishonest misrepresentation), it is unfortunate this issue was not given more attention since there is limited judicial authority on the point. There are old English authorities which suggest where an insurer has stated the policy is incontestable, breach of warranty cannot be relied upon. As such cases rarely proceed to trial, it will be some time before the issue arises for consideration again.
When considering whether they can avail themselves of the fraud exception in the incontestability clause, insurers need to carefully weigh up whether the non-disclosure or misrepresentation made by the representor when procuring the policy was “fraudulent”. Mere lack of care to ascertain the truth will not suffice. It must be established that the representor had no actual belief in the truth of the representations or that he was reckless as to the truth.