Investment via Insurance Bond not an Insurance Contract

In Governey v Financial Services Ombudsman [2016] IESC 78, Supreme Court, 21 December 2016 the Supreme Court considered whether an investment, made by Mr Governey in 2006 in "the Kennet Centre Geared Property Fund" (the Fund) was in fact an insurance contract.

Background

The Fund was a unit-linked fund managed by Anglo Irish Bank and investment in the Fund was to be made through insurance policies issued by Anglo Irish Assurance Company Limited (Anglo). The Fund was to acquire units in a Trust, which, in turn, was to acquire a shopping centre known as "the Kennet Centre" in Newbury in England. Mr Governey made an investment of €500,000 in the Fund through a single premium Investment Bond, the life assured being Mr Governey.

In November 2010 Mr. Governey made a complaint to the Financial Services Ombudsman (FSO) that the contract entered into by him with Anglo was an insurance contract to which the principle of utmost good faith applied, including a fundamental duty to disclose all material facts, and that such duty had been breached.

The FSO issued his Finding on 23 July 2012. His conclusion was that the complaint had not been substantiated. He stated that he was satisfied that Mr. Governey was "an experienced investor". He also referred to certain statements in the investment documents that investors might lose all of their investment and the investment was high risk.  The FSO found that Anglo had not misrepresented the nature of this investment and there was no material non-disclosure of risk.

High Court

Mr Governey appealed to the High Court seeking:

(a) an order setting aside the Finding and in lieu thereof an order directing Anglo to return the premium of €500,000 paid by him; or

(b) in the alternative, an order remitting the Finding to the Ombudsman for review.

Mr Governey's complaint was that Anglo had acted unlawfully in failing to comply with its legal obligation of uberrima fides (utmost good faith).  In particular, he alleged that Anglo failed to disclose the allegedly material facts which should have been disclosed:

(a) that Anglo had been advised by Savills that a nearby shopping centre represented a risk to the Kennet Centre;

(b) that Anglo had been advised that Newbury was a town in long-term decline; and

(c) that a statement in Anglo's brochure in relation to the Kennet Centre to the effect that 19% of the rental income therefrom was subject to a break or expiry within the next five years was incorrect, as the correct figure was in the region of 36%.

The High Court dismissed Mr Governey's appeal and he subsequently applied for and was granted leave to apply to the Supreme Court on a point of law.

Supreme Court

While Clarke J identified five issues on which Mr Governey had met the appeal threshold, Laffoy J considered that the core question of law before the Court was whether, given that Mr Governey's investment in the Fund was given effect to by an Investment Bond, which was characterised as being in the form of a life assurance policy, Anglo owed a duty of utmost good faith to Mr Governey or a much greater degree of obligation of disclosure than might otherwise have been the case.

In addressing this core question, the Court had regard to the contract documentation between Mr Governey and Anglo. These documents made clear that Mr. Governey would get a return on his investment either –

(a) by way of encashment once the Fund matured, which would probably not be before the intended five year period, or such further period at the discretion of Anglo, had elapsed, or

(b) in the event of the death of the life assured while the Investment Bond was still in force, by the payment of the death benefit at the time and on the basis of the valuation provided for in the documents.

Anglo argued that the life insurance aspect of the investment was structured in the manner it was to facilitate a tax efficient investment structure for investors, with the relevant risk for the purpose of the insurance contract being the life of the investor. It argued that the insurance policy did not extend to the underlying commercial risks associated with the Fund and the material facts which Mr Governey contends should have been but were not disclosed to him did not relate to the risk insured, his life. In this context, Anglo submitted that no duty of utmost good faith arose as a matter of law.

The Court noted that it was crucial to identify precisely the substance of the contractual arrangement between the parties.  It held, taking into account the entirety of the contractual relationship between Anglo and Mr Governey the contract entered into was not, in substance, a contract of insurance. In substance it was a contract under the terms of which Mr Governey was to invest a sum of money in the Fund managed by Anglo and to receive a return on the investment in accordance with the terms of the contract documents. Apart from that, the facts which Mr Governey contended were material facts which were known to Anglo and which he contends should have been, but were not, disclosed to him, which related to the potential future value of the Kennet Centre, were not material to the risk covered by the Investment Bond, the death of Mr Governey, while the Investment Bond was in force.

The Court held that as there was no duty of disclosure on the part of Anglo to Mr Governey in relation to the potential future value of the underlying asset of the Fund, the Kennet Centre, there was no basis for Mr Governey's claim that he was entitled, on the grounds of the alleged material non-disclosures, to repudiate the contract and to recover the sum of €500,000 invested by him on the appeal.

For further information please contact Paula Mullooly or your usual contact in A&L Goodbody. 

Date Published: 10 January 2017