Suicide at 14 months, an undisclosed psychiatric history and an outstanding policy loan
Mr Cheung, aged 42, applied for a whole life policy with a sum assured of HK$5,000,000 and a 20-year premium payment period. The annual premium is HK$95,000. In the application he answered 'No' to questions asking about mental illness, hospital treatment and suicide attempts. In fact, he had been diagnosed with major depressive disorder three years earlier and had been hospitalised after a suicide attempt. The policy contains a suicide exclusion for the first 12 months, an indisputability clause stating that after two years from issue the policy cannot be contested except for fraud or non-payment of premium, and a standard policy loan provision. Fourteen months after issue, Mr Cheung dies by suicide. At the time of death a policy loan of HK$120,000 plus accrued interest is outstanding, and the cash value is HK$180,000. The insurer has obtained the medical records and is considering its position. The agent who wrote the case knew from a casual conversation that Mr Cheung 'had been through a bad patch' but did not ask further.
1. Explain whether the insurer is liable to pay the HK$5,000,000 death benefit, dealing separately with the suicide exclusion and the non-disclosure.
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The two issues must be analysed separately.
1. Suicide exclusion. The clause is a time-limited contractual defence. It applies only to death by suicide within the stated period, here 12 months from issue. Mr Cheung died at 14 months, so the exclusion has expired and the insurer cannot refuse the claim merely because the death was self-inflicted. On this point alone the death benefit would be payable.
2. Non-disclosure. The application asked directly about mental illness, hospital treatment and suicide attempts, and the answers were false. A diagnosis of major depressive disorder with hospitalisation and a prior suicide attempt is material: a prudent underwriter would at least investigate further, and would likely decline, load the premium, or impose terms. The duty of utmost good faith requires the applicant to disclose material facts known to him, and that duty continues until the contract is formed. The two-year indisputability clause does not assist Mr Cheung during the first two years; it only restricts contest after two years, and fraud is normally carved out even then. Within the first two years the insurer may rescind for material non-disclosure.
3. Outcome. Avoidance is an election, not automatic. The insurer must decide within a reasonable time and loses the right if it affirms the contract, for example by continuing to accept premiums with knowledge of the facts. If it avoids, no HK$5,000,000 is payable and the usual result is rescission with a refund of premiums under the policy's terms. A further risk for the insurer is that the agent's knowledge of the 'bad patch' may be imputed to the insurer, which could weaken an avoidance defence. Overall, the claim turns on the non-disclosure, not on the suicide.
2. If the insurer avoids the policy, explain how the outstanding policy loan and the premiums should be dealt with. If instead the claim is paid, explain the effect of the loan and the cash value.
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If the policy is avoided. Rescission aims to restore both parties to their pre-contract positions. The insurer returns the premiums paid, subject to any provision in the policy permitting deduction of the cost of cover or expenses. The policy loan of HK$120,000 plus accrued interest must be repaid out of that refund, because the loan was advanced against the policy's cash value and the insurer is entitled to set it off. The beneficiary receives nothing. The insurer cannot both retain all premiums and pursue the estate for the full loan without accounting for the refund; the loan agreement and the policy's avoidance clause determine the exact mechanics. The cash value is not separately payable on avoidance.
If the claim is paid. The death benefit replaces the cash value; the beneficiary does not receive both. The insurer deducts the outstanding loan and accrued interest from the HK$5,000,000 and pays the balance. The cash value of HK$180,000 is relevant only to the loan security and to any surrender or non-forfeiture calculation, not to the death claim. In practice the insurer should provide a settlement statement showing the sum assured, the loan deduction and the net amount.
3. Identify the agent's failures at the application stage and the risks in his conduct now that the claim is being investigated.
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At application. When the client mentioned that he had 'been through a bad patch', the agent should have asked follow-up questions and advised him to disclose the diagnosis, the hospitalisation and the suicide attempt. He should not have accepted a bare 'No' to the mental-health questions without probing, and he should not have completed or influenced the answers. He should have recorded the conversation in his file notes. Failing to do so breaches the requirements to act with integrity and with due care and skill, and may amount to aiding a non-disclosure.
Now. The agent must not contact Mr Cheung's family or the beneficiary to coach them, alter records or discourage them from cooperating. He must cooperate fully with the insurer's investigation, produce his file notes and answer questions truthfully, and report the matter to his principal agency. He should not discuss the claim with the family. The risks are disciplinary action by the Insurance Authority, termination by the agency, and possible civil liability. The insurer may also treat the agent's knowledge as its own knowledge, which affects its ability to avoid the policy.