Home

CHAPTER 4

THE LABYRINTH

4.10.8Bonus : An Absolute Necessity — Definitely Not a Gratuity
Print

As with the evaluation of Encashment and other elements of the Policy, the end meaning of Bonus can only be determined by incorporation of the ‘rules and resolutions’. (See Section 4.9.1.)

The legal implications of the failure by First National and Irish Life to disclose and explain the bearing of these ‘rules and resolutions’, as previously discussed in Section 4.10.5 (b), (c) and (d) in relation to Encashment, equally apply in relation to Bonus as defined in the policy documents.



 

An unrelenting quest to find out just ‘What the hell is going on here?’, spurred by each successive diminution of my ignorance, ultimately elicited, from First National / Irish Life, a complete month by month breakdown of the Investment / Fund Value process. (See Section 4.9.2.)


(a)


A contrasting study of the meaning of the term ‘% per annum’, as applied to the assumed growth rate for the Endowment Mortgage Fund and as applied to the interest rate charged on the Endowment Mortgage Loan, revealed the fact that the term ‘% per annum’ had two different meanings within the text of the Endowment Mortgage Quotation.


The fact that the term ‘% per annum’ has two different meanings within the text of one document (the Endowment Mortgage Quotation), and ultimately within the terms of the consequent Contract, is contrary to the accepted rules of construction of a contract.

The failure by First National and Irish Life to bring to our attention and explain the fact that the term ‘% per annum’ has two different meanings within the context of the Endowment Mortgage Contract is also in breach of their respective duties of care; it constitutes Negligent Misrepresentation.

This misrepresentation (i.e. their silence) is in resonance with their failure to comply with the statutory requirement to indicate the Annual Percentage Rate of Charge (APR), and further masks the manner in which they charged interest on the Mortgage Loan. (This will be discussed further in Chapter 6: The Cost of Credit.)

In such circumstances, it could well be argued that the ‘Contra Proferentem Rule’ should apply, and that the First National Building Society should be limited to compounding the interest (charged on their Mortgage Loan) as though the ‘% per annum’ interest rate quoted was the Annual Percentage Rate (APR).

This would apply a single meaning to the term ‘% per annum’ within the text of the Endowment Mortgage Quotation, the interpretation being applied against First National (the proferens) and to the benefit of the borrower. At the very least, because First National failed to draw attention to the actual APR on their Mortgage Loan, they should be limited to compounding their interest charge on a monthly basis. (Again, the impact of these interpretations will become evident in Chapter 6: The Cost of Credit.)

(See Section 2.2.1: The Construction of a Contract.)


(b)


Both First National and Irish Life were in breach of their respective duties to disclose (a fiduciary relationship duty in the case of First National, and a special relationship duty in the case of Irish Life) the following material facts (see
Section 4.9.2 above) known to them to be likely to affect the decision of my wife and I to enter into an Endowment Mortgage Contract with them.

(i)

They failed to disclose the material fact that the Projected Surplus After Loan Repaid could only be achieved (based on the assumed net growth rate of 9.75% p.a.) IF Bonus Units were added over the last 5 years of the Endowment Policy Term.

(ii)

They failed to disclose the material fact that the Early Repayment Term was wholly DEPENDENT (based on the assumed net growth rate of 9.75% p.a.) on Bonus Units being added, over the first 3 years and 8 months of the last 5 years of the Endowment Policy Term in the case of the 15 Year Endowment Mortgage (see Appendix 1/3) actually chosen by my wife and I, and over the first 3 of the last 5 years of the Endowment Policy Term in the case of the 20 Year Endowment Mortgage Quotation (see Case 1 of Appendix 1/2) represented to me at our pre-contract meeting.

(iii)

They failed to disclose the material fact that, based on an assumed net growth rate being achieved (this being 7% p.a. in the case of the 15 Year Endowment Mortgage actually chosen by my wife and I), the Repayment of the Mortgage Loan itself was wholly DEPENDENT on Bonus Units being added over the last 5 years of the Endowment Policy Term.


But these material facts also have a significant bearing on the nature of the Major Risk (i.e. the Repayment of the Mortgage Loan) sought to be covered under the Endowment Mortgage Contract and on the Value of the Endowment Policy throughout the Mortgage Term.


They are facts that would certainly be taken into account by any prudent borrowers when deciding whether or not to enter into such a Mortgage Contract with Irish Life.

Irish Life were, therefore, also bound to disclose these material facts to my wife and I, by reason of the reciprocal (Uberimma Fides) duty to disclose incumbent upon them. They failed in this duty.

Note! Again, in cases where the Endowment / Life Assurance Contract has been sold by an ‘independent financial adviser’, remember that an Uberimma Fides duty to disclose is an express duty of Law!

(See Section 2.3.4: The Duty to Disclose and Silence as a Misrepresentation. See also Section 2.8.1: The Right to Revoke the Contract, and Section 2.8.3: The Measure of Damages as a result of a successful Action based on the Common Law liability under Negligent Misrepresentation.)


(c)


The failure by First National and Irish Life to disclose the above material facts relating to Bonus ensured concealment of further undesirable circumstances that could befall the borrower opting for an Endowment Mortgage.
They effected concealment of a Major Risk associated with the value of a claim under the Endowment Policy. It is only in the latter stage of the Endowment Mortgage Contract (even if the assumed growth rate is achieved) that the Endowment Mortgage Fund value will begin to equate to the Repayment Mortgage Cumulative Principal Repaid value, for equivalent net cash outflows. (This fact will be clearly shown in Chapter 10.)

Therefore, again, as with Benefits, the greater ‘Sleight of Hand’ is that, by their failure to disclose a Major Risk Burden intrinsic to their Endowment Mortgage Contract (i.e. the Necessary DEPENDENCE ON Bonus to achieve the Projected Surplus AND Loan Repayment), they have effected concealment of a Major Risk-Free Attribute of the Repayment Mortgage Contract —— in that, with the Repayment Mortgage, NO SUCH DEPENDENCE EXISTS.

Again, their failure to disclose ensures that the WEIGHT associated with this Attribute of the Repayment Mortgage is denied effect on the Decision Scales when the borrower is choosing between an Endowment Mortgage and a Repayment Mortgage.

Again the borrower is deceived ———— because the non-disclosure of the defects of the Endowment Mortgage has effected an Active Concealment of the fact that the Repayment Mortgage has no such defects.


The stench of mala fides is rife.

(See Section 2.3.2 : Fraudulent Misrepresentation. See also Section 2.8.1: The Right to Revoke the Contract, and Section 2.8.2: The Measure of Damages as a result of a successful Action based on the Common Law liability under Fraudulent Misrepresentation.)


Note!
For those situations where Policy Values throughout the Policy Term and/or at Maturity are dependent on the allocation of Annual Bonus and/or Terminal Bonus —— and whether such Bonus is guaranteed, or dependent on other factors, or is discretionary —— all such matters will constitute material facts likely to affect the borrower’s / investor’s decision to enter into the Contract. Where such material facts have not been fairly disclosed to the borrower / investor, the various issues raised in (b) and (c) above will clearly have comparable relevance.


(d)


The Policy Fee charge of £2.00 per month (see Section 4.9.2) further reduces the amount of the premium payments actually invested in the Endowment Fund. It is an additional burden imposed on the policyholder that further limits the value of the policy. To be given contractual effect, it should have been brought to the attention of my wife and I prior to or at the time of contract. It was not. (See Section 2.2.2: The Exemption Clause. See also Section 2.2.3: The Standard Form Contract.)

The Policy Fee charge also constitutes a material fact relevant to the contract. As such, it should have been disclosed by First National / Irish Life prior to or at the time of contract. (See Section 2.3.4: The Duty to Disclose and Silence as a Misrepresentation)

Note! In case you may think that £2.00 per month is a paltry sum, know this! Based on a growth rate of 9.75% p.a. net, a £2.00 per month investment has an end-of-term value of £810.17 over 15 years, and £1470.71 over 20 years. Relative to the much touted Projected Surplus After Loan Repaid ‘Benefits’ pertaining to the Endowment Mortgage, these are very significant amounts. (See Appendix 1/3 and Appendix 1/2.)

 

Copyright © 2013, 2014 John O'Meara. All Rights Reserved.