The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

An attorney yesterday split the highest court in the Bahamian judicial system down the middle with his ultimately unsuccessful challenge to the country’s largest life and health insurer.

Dorsey McPhee managed to persuade two of the Privy Council’s five law lord judges to back his argument that Colina Insurance Company, the subsidiary of the BISX-listed parent, had “unlawfully” increased the charges for his $150,000 universal life policy every year and that coverage did not lapse. He did this despite pushing “a hopeless argument” and advancing baseless fraud claims - actions that “did himself no favours”.

The only problem was that the three-strong majority found for Colina, rejecting his appeal and, in so doing, upholding the previous Supreme Court and Court of Appeal verdicts that both favoured the insurer. The Privy Council’s ruling has its roots in events that began almost two decades ago, when Mr McPhee took out life insurance coverage in August 2003 with the then-Canada Life.

His policy was subsequently converted to universal life, with new coverage issued in October 2003. Shortly afterwards, Colina acquired Canada Life as part of a major consolidation that took place in the Bahamian life and health insurance sector at that time, when the former bought out a number of rival operators.

“The policy continued for ten years. Colina increased the charges each year,” the Privy Council’s majority verdict stated. “On August 18, 2014, Colina sent him a notice of pending cancellation. It stated that Colina had not received payments required to ensure that the policy remained in force and, unless he remedied matters, the policy would lapse on September 7, 2014.

“Mr McPhee did not comply with that requirement. Instead, he tendered payment the following day. Colina maintains that he was too late - the policy had already lapsed. Mr McPhee contends that the increases were unlawful. There was no contractual underpinning to justify what Colina had done. In these proceedings, he seeks declaratory orders and damages. He submits that, rather than a shortfall, the policy had a cash surrender value in excess of $7,000 in September 2014. Accordingly, it did not lapse.”

Mr McPhee’s initial quarterly premium rate was $528. Colina made an initial $97 deduction from his policy’s investment account that covered the $75 guaranteed cost of insurance, a $13 waiver of premium on disability and a $9 administration charge. The waiver provided benefits for the attorney if he became disabled.

“Colina increased the monthly deductions on an annual basis from 2006 onwards; on the five occasions it says it reinstated the policy; and, in particular, by applying a one-off ‘plus 75 percent rating’ in 2006,” the Privy Council noted, while voicing surprise that Mr McPhee’s policy at one-time was shown as being reinstated on the same day it lapsed - an impossibility.

“From 2005 until 2014, Colina provided Mr McPhee with annual statements. They showed the opening fund balance, the premiums paid, the monthly deductions, any withdrawals, premium tax, interest earned, the closing fund balance, the surrender charges and the cash surrender value. They made the financial position clear - the account was not performing in line with expectations,” the Privy Council said.

“On February 18, 2014, Colina sent a notice of pending cancellation to Mr McPhee. It reminded him that although premiums had been paid up to November 2013, insufficient payments had since been made and the policy would lapse if he did not rectify matters by March 7.

“He cured the problem by making a payment on that date. Three days earlier, however, he had written to Colina to raise two matters. He stated that it was in breach of contract by charging him a ‘mortality tax’. He also asked it to confirm that his policy had a cash surrender value of at least $5,654.”

Colina responded by stating that Mr McPhee had lost interest income when he failed to make timely premium payments and, as a result, the insurer could not guarantee the $5,654 cash surrender value. Mr McPhee hired Desmond Edwards as his attorney to probe the cash surrender value, and Colina produced data showing his account had a $54 credit balance at April 30, 2014.

“On August 18, 2014, Colina sent another notice of pending cancellation after the account value was insufficient to meet the quarterly premium due on August 9. This was because, as at July 9, 2014, the account value was $140, while the monthly deductions totalled $201,” the Privy Council said.

“It warned Mr McPhee that the policy would lapse if he did not make payment of the premium by September 7, 2014. Mr McPhee did not make payment on that date. Instead, he tendered the premium the next day.” The majority verdict said the key issues to determine were whether Colina was allowed under the policy terms to increase the monthly charges, if these rises were justified and whether they resulted in the lapse.

The Privy Council majority found that Colina “had the right to apply an annual uplift” and impose any additional requirements it desired to reinstate the policy if it lapsed. While the 2006 lapse and 75 percent surcharge “remain a mystery”, they added that there was a consistent trend of lapses to justify the life and health insurer’s actions, thus dismissing Mr McPhee’s appeal.

However, in their dissenting judgment, Lord Leggatt and Lord Stephens argued that the heart of the dispute lay in whether Colina was allowed under the policy terms to increase the monthly charges or insurance costs and also implement the one-off rise in 2006.

Finding that the burden of proof lay with Colina, not Mr McPhee, because the savings account that was part of his universal life policy functions as a bank account, the two dissenting judges said the insurer’s failure to produce its yearly renewable rates went beyond a technical issue.

“It raises real uncertainty about how Colina was in fact deciding what annual increase to make throughout the period when the policy was in force, including the final year when Mr McPhee was challenging the basis of the yearly increases. Thus, on 9 August 2014, just a few weeks before on Colina’s case the policy lapsed, the monthly charge made by Colina for the guaranteed cost of insurance was increased from $204.13 to $223.99,” they found.

“Unless Colina either had a copy of the table or knew what it contained, it could not apply the correct increase. The same applies to every yearly increase made. The failure of Colina to show what the contractual yearly rates were indicates either incompetence in its conduct of this case or that Colina was not in fact applying the contractual rates but was using some other, perhaps current rather than historic, rating table.”

As for the 75 percent on-off increase in the insurance charges in July 2006, the two judges said Colina’s pleaded case failed to “give any coherent explanation for what actually happened”. They described the one-off increase as “unfounded” and “contrary to the terms of the policy”.

“Mr McPhee did himself no favours in the courts below by making allegations of fraud with no proper basis, sacking his legal representative at the start of each hearing and representing himself, and advancing a hopeless argument that the yearly renewable rate that he had agreed to pay for the cost of life insurance was a fixed level rate which did not increase from year to year,” the two dissenting Privy Council judges said.

“But unmeritorious litigants can sometimes have the law on their side. Mr McPhee put squarely in issue the entitlement of Colina to make the increases in the monthly guaranteed cost of insurance charges that were made yearly and also, as a one-off, in July 2006.

“Colina - on whom the burden of proof lay - adduced no evidence at all to show that any of these increases was in an amount authorised by the terms of the policy, and the one-off increase made in July 2006 has been exposed as inconsistent with the policy terms. It follows, in our opinion, that the appeal should be allowed and the account value recalculated on the basis of the initial monthly guaranteed cost of insurance of $74.62.”