Legal Principles and Relevant Legislation in...

Malaysian Financial Planning Council (MFPC) 9-�

RFP Programme - Module 2 Chapter 9: Legal Principles and Relevant Legislation in Insurance

Chapter 9

Legal Principles and Relevant Legislation in Insurance

Chapter Objectives

Students must be able to:

Understand the Personal Risks a Financial Planner Faces in Conducting the Business

Understand the Basics of Contract Law and its Application to Insurance

Know the Relevant Sections of the Insurance Act, 1996 to Conduct the Business Professionally

Understand the Law of Agency and its Application to Insurance

Differentiate the Unique Characteristics of Insurance Contracts as Opposed to Other Contracts

Understand the Legal Risks Associated with the Law of Tort

Understand the Implications of the Anti Money Laundering Act, 2001.

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9-� Malaysian Financial Planning Council (MFPC)


Chapter 9

Legal Principles and Relevant Legislation in Insurance

Introduction

It is pertinent for financial planners to understand that due to the nature of services provided to clients, they are subjected several different types of risk at the personal level. These risks, if materialized, will have a great impact on the financial planner’s ability to carry on with the business.

These risks include :

a. Legal risk

b. Compliance risk, and

c. Reputation risk

a. Legal risk : This arises when a financial planner has not practiced due diligence and care in the provision of advice to the client, or has performed an illegal act. If the client suffers a loss or damage due to the reliance on such advice, the client may sue the financial planner for such loss and damage. In extreme cases, if proven, it could even subject the financial planner to sanctions by the court (fines and or jail terms) Examples of legal risk can include:

misrepresentation to induce the client to enter into a contract

fraud of premium payments

collusion with the insured to fraud the insurer.

b. Compliance risk : This is the risk of action by the regulatory bodies if there is non compliance with the law, rules, regulations and guidelines. Examples of such risk will include the non-compliance with the provisions of the Insurance Act, 1996, the Anti-Money Laundering and Counter Financing of Terrorism Act, 2001, the insurance industry code of practice. Contravention of the law is punishable by fines and jail terms, if one is found guilty by a court of law, whereas the infringement of the code of practice could lead to sanctions, disciplinary action and even termination.



c. Reputation risk : This risk is associated with the loss of confidence by current and potential clients if there is a loss in the reputation of the financial planner. Such risks can arise from many sources, some examples include:

The financial planner’s conduct and practices

The inability to meet client expectations

Pressure selling

Unethical practices

where the financial planner has been guilty of an infringement of the law

Reputational risk, if materialized, will lead to a loss of credibility and trust in the eyes of customers and can have a very serious impact on ability of the financial planner to carry on with the business.

To ensure that the financial planner is fully aware of such risks and is able to conduct the business in a professional and ethical manner, it is imperative for the financial planner to understand the nature of the life insurance contract and the key provisions of the Insurance Act, 1996, the Anti-Money Laundering and Counter Financing of Terrorism Act, 2001 and the related guidelines of the regulatory associations. This in necessary to ensure the financial planner can build a strong and successful business over the long-term without having to disruption to the business from the risks stated above.

The Insurance Contract

It is necessary for a financial planner to have a sound understanding of the insurance contract in terms of its structure and legal make-up.

a. General Requirements of an Insurance Contract

A contract of insurance is a contract whereby one person (the insurer) agrees to indemnify another person (the insured) against a loss which may arise upon the occurrence of some event or to pay a certain definite amount of money upon the occurrence of that particular event. The potential loss which is being insured against is called the risk that the insured faces. The insurer and the insured enter into a contract of insurance, and the document containing the terms of the contract is called the policy. The insured pays the insurer a consideration, which is the premium, either in the form of a lump sum or a periodical amount.

In Malaysia, contracts are governed by the Contracts Act, 1950 (Revised 1974). However where there are no provisions in the Contracts Act, 1950 (Revised 1974) to deal with a particular subject concerning the law of contract or where the provisions are not exhaustive, then by virtue of the Civil Law Act, 1956, English law can also apply within certain context. Where the Contracts Act makes certain provisions which differ from English law, the provisions of the Contracts act will prevail. In addition, insurance in Malaysia is subjected to the provisions of the Insurance Act, 1996.



Being a contract, an insurance policy to be legally enforceable, must meet certain requirements of a valid contract which are discussed below. . If a contract is deficient in one or more of the requirements specified by law for a valid contract, the contract is void. A void contract cannot be enforced by either party. An example would be an insurance contract where no insurable interest existed at the beginning when the contract is formed.

The requirements of a valid contract are :

�. Offer and Acceptance: For an insurance policy to be valid, the principle of offer and acceptance must be complied with. It is good to look at this distinctly for each category of insurance business:

General insurance : In general insurance, the agent can contractually bind the principal by accepting proposal forms from the client ( offer) and the premiums and issuing a receipt given by the insurer ( the acceptance). This is possible in a general insurance contract as the agent has the power to bind the insurer.

Life insurance : In the case of life insurance, the offer and acceptance rule is slightly different. The agent is not empowered to bind the principal. The applicant makes the offer where he submits the required premiums and the completed proposal form. This is then submitted to the company by the agent. If the insurer accepts the application after considering the risks, the premium is accepted at the standard rate and the policy is subsequently issued. In the case where the insurer decides that the risks do not commensurate with the, the insurer may stipulate some condition(s) before accepting the proposal. In this case the original offer of the applicant has been changed due to the new condition(s) imposed - a counter-offer is now being made to the applicant. The insurer is now the offeror ( person who makes an offer). If the applicant accepts the new condition(s) set by the insurer, an acceptance is deemed to have taken place.

�. Consideration: The second requirement for the formation of a valid contract is consideration. Consideration is the exchange of value between the contracting parties – hence the term valuable consideration. In the case of an insurance contract, the consideration of the insured is the payment of the first and subsequent premiums and the agreement to abide by the conditions set out in the policy. The insurer’s consideration is the promise to fulfill its obligations (promises) under the policy contract upon the happening of an insured event. This could be the payment of losses incurred or to defend a liability lawsuit, depending on the type of policy cover.

�. Legal Capacity: The third requirement is legal capacity of the parties to contract. Under the general rule, an individual must be 18 years old to enter into a contract. The requirement exists by virtue of the Age of Majority Act, 1971. However, under Section 153 of the Insurance Act, 1996, a minor who has attained the age of 10 but not yet 16 can enter into a contract of assurance (life policy) with the consent of the parent or guardian. The Section also states that a minor who has attained the age of 16 can enter into a contract of life insurance in his personal capacity.



�. Legality of Purpose: Another requirement for the formation of a valid contract is the legality of purpose. If the purpose of the insurance was related to an illegal act, it would be against public policy to enforce such a contract. For instance, a drug pusher cannot purchase a policy that pays compensation if enforcement officers seize his “goods”.

�. Consensus ad idem (or Meeting of the Minds): In a normal contract, each party is considered to have sufficient knowledge of the dealings and have come to a “meeting of the minds” in terms of the subject matter of the agreement.

There are some other principles related to an insurance contract that must be understood to appreciated the complexity and technicality of insurance contracts.

�. Utmost Good Faith

In insurance, it is not possible for the insurer to know all there is to know about the applicant’s situation for the evaluation of the risk other than what has been declared in the proposal form. The law, thus, imposes a heavier burden on the applicant in a contract of insurance, requiring the applicant to disclose all material facts to enable the insurer to evaluate the risk prior to the formation of the contract, irrespective of whether such information was requested or not. This is due to the fact that insurance contracts are based on mutual trust and confidence between the insurer and the insured. A duty is therefore placed on the insured as a basis of the contract to disclose all material facts. This is known as the Principle of Utmost Good Faith or ‘uberrima fidei”.

In order to understand this concept clearly, one needs to understand the implications of representations that are made by one party (e.g. the proposer) to the other party in a contract (e.g. the insurer). A representation is an oral or written statement made by the applicant prior to, or contemporaneously with, the formation of the contract. It constitutes an inducement for the insurer to enter into the contract. If the statement is false, a misrepresentation is said to exist – and it can be a basis for the insurer to avoid the contract. The contract is thus a voidable contract. (A voidable contract, is one that for a reason acceptable by the court, may be set aside by one of the parties. The contract is binding until the party with the right to void it decides to exercise that right).

A misrepresentation may provide the basis for rescission only if it is a material fact. The fact is considered material if knowing it will cause the insurer to reject or vary the contract (for example, loading of premiums, exclusion of certain events, hobbies, jobs etc).

The duty of disclosure is contained in Section 150(1) of the Insurance Act, 1996 and is as follows:

Section 150 (1) : Before a contract of insurance is entered into, a proposer shall disclose to the licensed insurer a matter that :

(a) he knows to be relevant to the decision of the licensed insurer on whether to accept the risk or not and the rates and terms to be applied, or

(b) a reasonable person in the circumstance could be expected to know to be relevant.



Breach of Utmost Good Faith

There are four situations in which the utmost good faith principle may be breached, namely;

a. Through non-disclosure, which is the failure of the client to disclose a material fact – intentionally or unintentionally because he considers the fact inconsequential.

Let’s look at a case to illustrate this principle.

(i) Abu Bakar v. Oriental Fire & General Insurance Co. Ltd (1974) 1 M.L.J. 149

Facts of the case :

In his application for fire insurance, the insured was asked the question “For what purposes are the premises occupied?” He answered the question by writing “sundry shop downstairs, dwelling first floor”. A fire subsequently broke out and it appeared that there were four grinding mills for grinding curry powder at the back of the shop.

The insurer denied liability on the ground that the insured had failed to disclose the presence of the four grinding mills at the rear portion of the shop.

It was held that the insurers had not been misled as to the nature of the insurance the insured wished to take and in respect of what goods, and there was no evidence to show that the presence of the grinding mills would increase the risks with respect to the property insured. Therefore the insurers were liable under the insurance policy and there was no breach of utmost good faith.

b. Through concealment, which is the failure of the client to disclose a material fact willfully – probably to cheat his way to get a cheaper insurance cover or to get an insurance cover which otherwise would not be approved.


(i) Goh Chooi Leng v Public Life Assurance Co. Ltd (1964)30 M.L.J. 5.

Facts of the case :

The plaintiff, who was an assignee of a policy issued by the defendants in May 1960. The life assured had died and the assignee claimed for the sum payable on the policy.

The defendants claimed that they were not liable on the policy since the declaration by the assured on the faith of which the policy was issued contained false statements, misrepresentations, concealment ,a nd suppression of the truth. There was medical evidence to show that the assured had been treated for tuberculosis and hospitalized in a tuberculosis ward from November 1958 to March 1959. However, in his declaration when applying for insurance ( in May 1960), in an answer



to a question “Have you ever had advice about your heart or lung or for cough?”, the proposer had answered “No”.

It was held by the court that there was a non disclosure of a material fact and the contract of therefore voidable.

c. Through fraudulent means, which is a premeditated act of supplying false or misleading information on a material fact or with the intention of suppressing such facts.

d. Through innocent misrepresentation, which is the unintentional or accidental giving of incorrect information that misrepresents a material fact.


(i) United Oriental Assurance Sdn. Bhd. Kuantan v. W.M. Mazzarol (1984) 1 M.L.J. 260

Facts of the case :

In this case, the questions in the proposal form in respect of a policy which the assured required for his boat was oddly phrased in that they only required the assured to state the history of accidents to other boats owned by him and not the history of accidents to the boat which was th subject matter of the insurance.

When the insured boat sank at Kuantan, the insurers avoided liability by stating that the assured had failed to disclose that the insured boat had previously met with an accident.

It was held by the court that although no question had been asked in the proposal form about the earlier accident to the insured boat, the said accident was a material fact which had to be disclosed

to the insurers.

Scope of the Principle of Utmost Good Faith

As stated above, a misrepresentation may provide the basis for rescission only if it is a material fact. Section 150(2) and 150(3) of the Act, have defined certain situations in which a fact is not considered as a material fact thus defining the specific category in which non-disclosure will not lead to a voidable contract. These relate to facts or matters that are of minor importance or consequence, like the misrepresentation of age, that are not considered material as they have little or no influence on the decision to issue the contract. These two sections are quoted below for easy reference:

Section 150(2) – The duty of disclosure does not require the disclosure of a matter that:

a. diminishes the risk to the licensed insurer;

b. is of common knowledge;

c. the licensed insurer knows or in the ordinary course of his business ought to know; or

d. in respect of which the licensed insurer has waived any requirement for disclosure.



RFP Programme – Module 2 Chapter 9: Legal Principles and Relevant Legislation in Insurance

Malaysian Financial Planning Council (MFPC)) 9-9

• Section 150(2) – The duty of disclosure does not require the disclosure of a matter that:

a. diminishes the risk to the licensed insurer;

b. is of common knowledge;

c. the licensed insurer knows or in the ordinary course of his business ought to know; or

d. in respect of which the licensed insurer has waived any requirement for disclosure.

• Section 150(3) – Where a proposer fails to answer or gives an incomplete or irrelevant

answer to a question contained in the proposal form or asked by the licensed insurer and

the matter was not pursued further by the licensed insurer, compliance with the duty of

disclosure in respect of the matter shall be deemed to have been waived by the licensed

insurer.

Modification to thePrinciple of Disclosure

Section 150(2), Insurance Act, 1996

The duty of disclosuredoes not require the disclosure of a matter that:

• is of common knowledge

• the licensed insurer knows or in the ordinary course of his business ought to know

• in respect of which the licensed insurer has waived any requirement for disclosure.

• diminishes the risk to the licensed insurer

Section 150(3) – Where a proposer fails to answer or gives an incomplete or irrelevant answer to a question contained in the proposal form or asked by the licensed insurer and the matter was not pursued further by the licensed insurer, compliance with the duty of disclosure in respect of the matter shall be deemed to have been waived by the licensed insurer.

Section 150, Insurance Act, 1996 therefore places a burden on both parties (the insurer and insured) as far as disclosure is concerned.

�. Insurable Interest

Not all risks can be insured. The risk that can be insured must be one that causes a detriment to the insured. Examples of insurable interest will include:

The owner of a car has an insurable interest in the car since he would suffer a monetary loss if the car meets an accident.

A house-owner has an insurable interest in the house since, if the house catches fire or is damaged by floods.

Malaysian Financial Planning Council (MFPC) 9-9


A person has an insurable interest in the life of a spouse as the death of the spouse can affect the financial situation of the dependent spouse.

For life insurance policies, insurable interest must be established at the commencement of the contract. There is no limit set on the extent of the insurable interest in life insurance. Insurable interest is mentioned in Section 152 of the Insurance Act, 1996, but the term ‘insurable interest itself is not defined. The section states that a life policy insuring the life of anyone other than the person effecting the insurance, shall be void unless the person effecting the insurance has an insurable interest in that life at the time the insurance is effected.

The law recognizes certain relationships which are deemed to have insurable interest in relation to another person if that other person is

i. his spouse, child or ward being under the age of majority at the time the insurance is effected,

ii. his employee, or

iii. a person on whom he is at the time insurance is effected, wholly or partly dependent on.

In relation to the third point above, it is not clear however, whether the dependency has to arise from a legal obligation to provide support and maintenance, or would support given voluntarily or from a moral obligation be sufficient to give a presumption of insurable interest? As far as English law is concerned, insurable interest only arises when there is a legal obligation on the part of the person whose life is being insured towards the person who is purchasing the insurance.

For general insurance policies, insurable interest is established at the time of the occurrence of the loss and the insurable interest is limited to the amount of potential loss ( contract of indemnity). The following are examples of how insurable interest could arise: -

(a) Ownership of property;

(b) Trustees in respect of property held in trust for others;

(c) Mortgagees in respect of property held as security for a loan;

(d) Bailees (carriers, inn keepers, pawnbrokers, warehouseman, etc. in respect of property held by them;

(e) Tenants who have covenanted to insure a property;

(f) Losses in respect of leased property;

(g) A person’s liability under Common Law/Statutes.

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�. Proximate Cause

An insurance policy specifies the risk it is to cover and the insurer is only liable if the risk that is insured against has materialized. To make the insurer liable under a particular policy, the insured must be able to show that the loss is within the scope of the risk undertaken by the insurer and the loss was caused directly by the risk insured. It is therefore necessary to show that the loss was caused proximately by the risk insured. Very often, there may be more than one cause acting together to bring about the loss. Where there are competing causes, the courts will usually have the task of determining the actual or real cause of the loss. The proximate cause of a loss is the cause which will naturally lead to the loss in the absence of any intervening cause or factors to interrupt the flow of events. If there is a chain of causation starting with one event (e.g. an accident), each cause being the result of a preceding cause, leading to death, death is said to arise from the primary cause.

Let’s look at two examples to have an understanding of the application of the proximate cause principle.

(i) Smith v. Cornhill Insurance Company (1938) 44 T.L.R. 869.

Fact of the case

The insured was a car owner and the motor policy will pay a certain sum in the event of death of the insured , if death is “ the result solely of bodily injury caused by violent accidental and visible means sustained by the insured whilst riding in …… the insured car”.

The insured sustained severe head injuries resulting in serious damage to the brain when her car went off the road and fell down a ravine. After the accident, she wandered aimlessly through some brushwood before stepping into a stream. The shock of entering the water caused her to die from hear failure.

The insurer refused to pay the sum assured contending that the shock of emersion was an intervening factor and was the real cause of death.

It was held that the accident was the primary cause that led to the sequence of events leading to the shock of emersion and then death by the heart failure. There were no intervening causes. It was an unbroken chain of events.

(ii) Leong Luen Kiew & Anor. v. New Zealand Insurance Cmapny Ltd. (1939) M.L.J. Rep 136

Facts of the case :

The assured bought a personal accident policy which afforded cover for death which is caused by the violent, accidental, external and visible means. The policy added that the death must have been caused by the insured peril independently of any other cause.

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The assured was injured in a motor accident. He died soon after the accident due to shock and from the haemorrhage which followed the bursting of a diseased blood vessel at the base of his ulcer.

The insurer had stated that the death was not caused by the violent, accidental, external and visible means but by the rupture of the blood vessel.

It was held that the insurer was liable as the accident and the rupture was a sequence of uninterrupted events leading to death.

(Note: Here the primary cause of death was the accident)

The Unique Legal Characteristics of Insurance Contracts

Apart from the above common requirements that make an insurance contract legal, there are several distinct characteristics that make a contract of insurance different from other forms of contracts.

The following are the additional unique legal characteristics of insurance contracts:

Aleatory contract

Unilateral contract

Conditional contract

Personal contract

Contract of adhesion

These unique characteristics will be discussed in some detail below:

Aleatory Contract

An aleatory contract is a contract where the value exchanged may not be equal but depends on an event that may or may not occur. For example, the insured may have paid an annual premium of RM500 for a RM100,000 20-year term policy and died one month later. The beneficiary receives RM100,000 from the insurer which is way above the amount paid by the insured as premiums. On the other hand, the insured may have paid the premiums faithfully for the next 20 years and live. In such a case, he gets nothing.

This differs from a commutative contract where the values exchanged by the contracting parties are considered even. For example, if someone buys a house for RM100,000, he will view the value of the house as equal to RM100,000.

Unilateral Contract

In a unilateral contract, only one party to the contract makes a legally enforceable promise. In this case, it is the insurer who makes that promise – i.e. to pay claims when the insured event happens. The insured on the other hand cannot be legally compelled to make premium contribution after he has paid the first premium. Non payment may only cause the policy to

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lapse and the obligation of the insurer to the insured is terminated, but no legal action can be taken against the insured. However, if the insured continue to make payment within the terms stated, the insurer cannot refuse the payments or to terminate cover. Again this differs from most commercial contracts where the contracts are bilateral, i.e. each party to the contract is legally bound by their promise to perform. Non performance by either party may result in the injured party taking legal actions to compel performance or to sue for damages.



later. The beneficiary receives RM100,000 from the insurer which is way above the amount

paid by the insured as premiums. On the other hand, the insured may have paid the

premiums faithfully for the next 20 years and live. In such a case, he gets nothing.

This differs from a commutative contract where the values exchanged by the contracting

parties are considered even. For example, if someone buys a house for RM100,000, he will

view the value of the house as equal to RM100,000.

• Unilateral Contract

In a unilateral contract, only one party to the contract makes a legally enforceable

promise. In this case, it is the insurer who makes that promise – i.e. to pay claims when the

insured event happens. The insured on the other hand cannot be legally compelled to make

premium contribution after he has paid the first premium. Non payment may only cause the

policy to lapse and the obligation of the insurer to the insured is terminated, but no legal

action can be taken against the insured. However, if the insured continue to make payment

within the terms stated, the insurer cannot refuse the payments or to terminate cover. Again

this differs from most commercial contracts where the contracts are bilateral, i.e. each

party to the contract is legally bound by their promise to perform. Non performance by

either party may result in the injured party taking legal actions to compel performance or to

sue for damages.

Five Unique Characteristics of

Insurance Contracts

AleatoryContract

Contract of Adhesion

PersonalContract

ConditionalContract

UnilateralContract

Conditional Contract

A conditional contract, of which an insurance contract is one, means that the insurer’s obligation to pay a claim depends on whether or not the insured or the beneficiary has complied with all the policy conditions. In other words, the conditions of the contract are considered to be part of the consideration by the insured. These conditions are stated as provisions in the policy document that qualify or place limitation on the insurer’s promise to perform. If these provisions are not complied with, the insurer does not have to honor its promise. From the standpoint of the insured, he or she must abide by the conditions to qualify him or her to make claims when a loss occurs.

Personal Contract

Property contracts are personal contracts. Being a personal contract means that the insurance contract is between the insured and the insurer. In strict terms, a property insurance contract does not insure property but insures the owner of property against loss. Since the contract is personal, the applicant for the insurance must be acceptable to the insurer, in terms of the underwriting standard set regarding the character, morals and credit status. Such a contract



normally cannot be assigned to another person, unless the permission of the insurer is obtained. If for instance, a house is sold, the policy does not follow the new owner automatically.

Contract of Adhesion

Insurance contracts are contracts of adhesion, meaning the insured must accept the entire contract with all its terms and conditions that are attached to the policy contract. The insured cannot bargain for the contract to be modified to suit his case. Essentially, the insurer designs and prints the policy, and the insured is compelled to accept the document without insisting on any modification to it. No negotiation is involved between the parties to the contract.

Because the contract contents are in the hands of the insurer, the courts have held that any ambiguity in the contract should be held in the favor of the insured. Because the insurance policy is a contract of adhesion and the insured is required to accept or reject the terms as stipulated therein, the doctrine of ‘presumption of intent’ is rather important in the area of insurance. This doctrine stipulates that a person is bound by the terms of a written contract he or she signs and accepts. The law presumes that the person has read the contract and has agreed to the terms and conditions.

Law of Agency and Associated Legal Aspects

An agent is defined as a ‘person employed to do any act for another or to represent another in dealings with third persons. The person for whom such an act is done, or who is so represented, is called the principal.

Classes of Agent

There are generally three classes of agents. Every agent will fall into one of the three categories:

�. Special Agent – An agent who is appointed to do a specific act or transaction. E.g. A proxy appointed to vote in a general meeting.

�. General Agent – An agent with the power to act within the boundary of the general authority conferred by the principal. E.g. A life insurance agent with power to solicit business but no power to bind the principal.

�. Universal Agent – An agent with unlimited authority and has the same ability to act as the principal legally can competently perform. E.g. a franchise holder.





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Generally an agent’s authority to act on behalf of the principal can be manifested in three ways:

• By express authority

• By implied authority, and

• By apparent authority.

• Express Authority

Express authority, also occasionally called stipulated authority, is authority that is

specifically granted to the agent. The authority can be given orally or in writing. For

insurance agency, the express powers are given by the insurer and the scope of powers is

defined in the agency contract.

• Implied Authority

ThreeCLASSES of

Agents • General Agent

• UniversalAgent

• Special Agent

Authority of an Agent

Generally an agent’s authority to act on behalf of the principal can be manifested in three ways:

By express authority

By implied authority, and

By apparent authority.

Express Authority

Express authority, also occasionally called stipulated authority, is authority that is specifically granted to the agent. The authority can be given orally or in writing. For insurance agency, the express powers are given by the insurer and the scope of powers is defined in the agency contract.

Implied Authority

In addition to those expressly conferred, the agent has certain implied powers to bind the principal. Implied authority is the incidental authority required or reasonably necessary to execute the express authority. It is needed to make the express authority meaningful.

Apparent Authority

Apparent or ostensible authority is a perceived authority – an authority which is not expressly given by the principal but which the law regards the agent as possessing although the principal has not consented to the agent exercising such authority.



Apparent authority is based on the principle of estoppel when the third party has acted in good faith in relying on the agent’s apparent authority. For instance, if an insurer provides a person with certain vestiges of authority, such as a sign board, receipt books, proposal forms, sales manuals, etc., that will lead a third-party to conclude that the agency relationship exists, the insurer will be estopped from denying that the person is not its agent.



In addition to those expressly conferred, the agent has certain implied powers to bind the

principal. Implied authority is the incidental authority required or reasonably necessary

to execute the express authority. It is needed to make the express authority meaningful.

• Apparent Authority

Apparent or ostensible authority is a perceived authority – an authority which is not

expressly given by the principal but which the law regards the agent as possessing although

the principal has not consented to the agent exercising such authority.

Apparent authority is based on the principle of estoppel when the third party has acted in

good faith in relying on the agent’s apparent authority. For instance, if an insurer provides

a person with certain vestiges of authority, such as a sign board, receipt books, proposal

forms, sales manuals, etc., that will lead a third-party to conclude that the agency

relationship exists, the insurer will be estopped from denying that the person is not its

agent.

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Three TYPES of Agent’sAuthority • Implied

Authority

• ApparentAuthority

• ExpressAuthority

Insurance Agent Defined

The Insurance Act, 1996, defines an insurance agent as a person who does all or any of the following :

(a) solicits or obtains a proposal for the insurance on behalf of an insurer

(b) offers or assumes to act on behalf of an insurer in negotiating a policy, or

(c) does any other act on behalf of a insurer in relation to the issuance, renewal or continuance of a policy.

In the life insurance agency system, the agent does not have the authority to bind the insurer. The agent is an intermediary who does the initial sales and presents the proposal of insurance for the approval and acceptance of the life insurer (the principal). Upon approval of the proposal, the agent then provides the after sales services to the policyowner.

However, in the case of general insurance, the situation is slightly different. For many types of policies, the cover note issued by the agent is binding on the insurer.



Agent Filling the Proposal Forms – Legal Implications

Generally, an insurance agent is faced two situations in a sales situation:

The first situation is when the agent is asked by the proposer to help fill the application form, whereby the agent merely fills in the application form with answers supplied by the proposer.

The second situation is when the agent is simply asked what answer is to be expected of a given question.

The question that begs to be answered is the “who does the agent represents?”.

When a proposal form is completed, the answers given in the proposal form would be made the basis of the contract. Thus arising from the two situations mentioned above a number of things can go wrong, for example:

(i) the insured may have given certain answers or information to the agent which the agent omits to record in the proposal form.

(ii) correct information may have been given to the agent but the agent puts in an incorrect answer in the proposal form.

After the form has been completed, the insured is normally required to sign the proposal form.

The courts have consistently held against the insured on the basis that as the insured had signed the proposal form, it must be considered to be the document of the insured, and the insurance agent is the agent of the insured.

This legal position has been dramatically reversed after the Insurance Act of 1996 was introduced. As per Section 151 (1) of the Act, an agent is considered a representative of the insurer when soliciting business. Furthermore, it states that any information or knowledge of the agent will be considered as that of insurer. If for instance, a material piece of information has been disclosed to the agent who has not put it in the application form, the insurer would be considered to possess knowledge of this information – even in actual fact, the agent has also not informed the insurer.

Representations made by Insurance Agent

In making their sales, insurance agents may be tempted to make representations that deviate from the actual benefits of the contract. As a result , many clients are ‘misled’ into buying an insurance policy that does not meet the goal the insurance is originally intended for. The Insurance Act, 1996 has made the insurer accountable for the representations made by their agent in the course of negotiating a sale. There are three sub-sections of the Act that are relevant to our discussion.

Under Section 151(2) of the Insurance Act, “A statement made, or an act done, by the insurance agent shall deem, for the purpose of the insurance, to be the statement made, or act done, by the licensed insurer notwithstanding the insurance agent’s contravention of subsection 150(4) or any other provision of this act.”



Section 150(4) further states that, “No licensed insurer or insurance agent, in order to induce a person to enter or offer to enter into a contract of insurance with it or through him: (a) shall make a statement which is misleading, false or deceptive, whether fraudulently or otherwise; (b) shall fraudulently conceal a material fact; or (c) in the case of an insurance agent, use sales brochure or sales illustration not authorized by the licensed insurer.”

The combination of these two provisions means that every statement, representation or act by the agent or insurer that are used in connection with inducing the client to purchase insurance shall be binding on the insurer. This would clearly include misleading, false or deceptive statements made by the agent that the client has relied on to make the purchase.

In the case where the insured felt that he has been mislead by false or misleading statements by the insurer or agent, he has the option of canceling the contract. This is provided for under Section 150(5) of the Act, which states, “Where a person is induced to enter into a contract of insurance in a manner described in subsection (4), the contract of insurance shall be voidable and the person shall be entitled to rescind it.”

Duty of Disclosure in Sales

To increase transparency in sales activities, the Act (Section 186(1)) provides that an agent of the insurer must disclose to the client three things, namely:

a. The name of the licensed insurer;

b. His relationship with the licensed insurer; and

c. The premium charged by the licensed insurer.

Penalties for Contravention of the Provisions in the Insurance Act

The Insurance Act also imposes severe penalties on insurance agents who contravene any of its provisions. The encompassing section, which covers any contravention by the agent, can be found in Section 203(1), which reads,

“A person who: (a) contravenes or fails to comply with a provision of this Act; or (b) fails to comply with a requirement, notice, order or direction issued by the Minister or by the Bank under this Act or a regulation made under this Act, commits an offence and, where no penalty is expressly provided, is liable on conviction to a fine of five hundred thousand Ringgit or to imprisonment for a term of six months or to both.”

Section 186(1)Section 186(1)





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The Insurance Act also imposes severe penalties on insurance agents who contravene any of its

provisions. The encompassing section, which covers any contravention by the agent, can be

found in Section 203(1), which reads,

“A person who: (a) contravenes or fails to comply with a provision of this Act; or (b) fails to

comply with a requirement, notice, order or direction issued by the Minister or by the Bank

under this Act or a regulation made under this Act, commits an offence and, where no penalty is

expressly provided, is liable on conviction to a fine of five hundred thousand Ringgit or to

imprisonment for a term of six months or to both.”

Negligence and Legal Liability

Basically, a person can commit two classes of wrongs, one is a public wrong, which is criminal

in nature and the other is private wrong, which may be a cause of action against the person for

damages. In case of a criminal wrong, it is a crime punishable under the various statues passed

Agent’s Duty of Disclosure in Sales

Relationship with the licensed insurer

Premium charged by the licensed insurer

Name of the licensed insurer

Section 186(1)

Negligence and Legal Liability

Basically, a person can commit two classes of wrongs, one is a public wrong, which is criminal in nature and the other is private wrong, which may be a cause of action against the person for damages. In case of a criminal wrong, it is a crime punishable under the various statues passed by parliament. Depending on the severity of the violation of the law, these wrongs are punishable ranging from fine, imprisonment to death.

A private wrong, on the other hand, is the violation of the rights of another person. Such a wrong is known as a tort, and the wrongdoer is called the tort feasor. The action taken by a private individual against another who has infringed his rights is called a civil action. In Malaysia, the law of tort is basically derived from English common law. The word tort or tortious liability has many definitions under English common law. One of the definitions stated in Winfield and Jolowicz on Tort is as follows:

“ Tortious liability arises from the breach of a duty primarily fixed by law, this duty is towards persons generally and its breach is redressible by an action for unliquidated damages.”

It is rarely the concern of insurance to deal with criminal behavior or intentional torts as these are against public policy. Hence, to detect potential legal liability of the client, it is necessary for the financial planner to have some working knowledge of the principle of negligence (unintentional torts) found in the law of tort.

Malaysian Financial Planning Council (MFPC) 9-�9


Intentional and Unintentional Torts

Tortuous behavior can be intentional or unintentional. Intentional torts are those behaviors that are carried out in a premeditated manner or with malicious intent. This would include acts like slander, assault and battery. Unintentional torts are those behaviors that are a result of negligence or carelessness. Both types of torts can result in damages payable by the tort feasor. Many of the liabilities incurred by individuals are due to negligence, which fall under the law of tort. Negligence in tort may be defined, as the breach of legal duty to take care, which results in damage, undesired by the defendant, to the plaintiff. Examples of negligence are:

a resident living in a high rise flat places a flower pot on the ledge of a window and it is blown over by strong winds and it hurts someone who is walking below.

a lawyer who has done a poor job in designing a contract which led to a loss by the client, or

a surgeon who left a pair of scissors in the abdomen of the patient

Generally, there is no limit to liability risks. The courts could award exemplary damages amounting to a few Ringgit to millions of Ringgit. The award will, of course be based on the facts before the courts. It is pertinent for a financial planner to understand the relevance of the law of tort to the services that are provided to clients. A financial planner owes the client a duty of care (meaning to provide prudent and diligent advice to the client and to effect the appropriate instruments to give effect to the intention of the client). If for some reason a wrong or defective instrument was built into the solution (for example, the financial planner had drawn up a will but did not get two witnesses to sign or had got a beneficiary to sign the will – thus depriving the beneficiary of the rightful legacy under the will), the financial planner can be sued as he had breached the duty of care that resulted in a loss to the client ( to whom he owed a duty)

Contributory Negligence

Contributory negligence means that the injured party has been hurt partly due to his or her own negligence. This principle is based on the idea that every person also has a duty to look after his own safety, and hence cannot blame others for the damages resulting from his or her personal negligence. Thus, if it can be shown that the person who suffered a loss due to the negligence of another party, also contributed to the severity of the loss or damage, then amount of damages may be mitigated or reduced

In Malaysia, the Civil law Act, 1956 (revised 1972) as per Section 12 of the Act provides that, in the case of contributory negligence, the damages recoverable by the injured party are to be reduced by the court to such an extent as is just and equitable having regard to the claimant’s share of responsibility for the injury. This Law is similar to the principle of comparative negligence developed in the United States to mitigate the damages awarded for loss or injury resulting from negligence.

9-�0 Malaysian Financial Planning Council (MFPC)


Professional Negligence

Professionals like doctors, lawyers, accountant, architects etc are subjected to professional negligence lawsuits in the event there is professional negligence on their part. Not all acts of a professional is the subject of legal liability - only those negligent acts that have caused a breach of the duty and has resulted in damage, loss or injury to a person.

To consider whether a professional has breached his duty, it is necessary to know on what basis the professional was engaged to do the work. If a doctor has done a surgery where all due care had been taken and the patient died – then there is no breach of the duty of care. On the other hand, if the doctor had taken due care in performing the surgery but had been negligent in leaving a scissors in the patient and had stitched up the patient. If it was proven that the patient subsequently died due excessive bleeding as the scissors had pierced some internal organs – then surely there is professional negligence.

Exposure to liability risks arising from professional negligence can be covered by professional

indemnity insurance.

Anti-Money Laundering Act, �00�

Background

In response to the increasing concern over money laundering, the Financial Action Task Force on money laundering (FATF) was established in Paris in 1989 to develop a coordinated international effort to combat money laundering FATF is an inter-governmental body whose purpose is to establish international standards, and develop and promote policies, both at national and international levels, to combat money laundering (ML).

The initial forty Recommendations have been endorsed by more than 130 countries and these recommendations have established the guidelines for international anti-money laundering standards.

There are increasingly sophisticated combination of techniques, such as the increased use of legal persons to disguise the true ownership and control of illegal proceeds, complex layering in transactions locally and internationally, an increased use of professionals to provide advice and assistance in laundering criminal funds, have prompted the FATF to review and revise the Forty Recommendations into a new comprehensive framework for combating money laundering.

In October 2001 the FATF expanded its mandate to deal with the issue of the financing of terrorism and took the important step of creating the Eight Special Recommendations on Terrorist Financing. These recommendations contain a set of measures aimed at combating the funding of terrorist acts and terrorist organizations and are complementary to the 40 Recommendation implemented earlier. A further recommendation was introduced on October 24, 2004 – thus creating the “�0 + 9” principles of anti-money laundering and counter-terrorism funding.



In Malaysia, in line with the revision, amendments to the Anti-Money Laundering Act (AMLA) and Penal Code were made to cover terrorist financing. The said amendments have been passed by Parliament on 20th November, 2003 and gazetted as law on 25 December, 2003. The Minister of Finance has appointed a competent authority in the Financial Intelligence Unit (‘FIU’) to oversee the implementation of those recommendations. The FIU is responsible for:

Receiving and analysing information and reports from any person.

Sending reports and information from reports to enforcement agencies.

Sending information derived from an examination to an enforcement agency.

Compiling statistics and records.

What is Money Laundering?

Money laundering has been defined to cover situations where a person:

Engages, directly or indirectly, in transaction that involves proceeds of an unlawful activity

Acquires, receives, possesses, disguises, transfers, converts, exchanges, carries, uses, removes from or brings into Malaysia proceeds of any unlawful activities

Conceals, disguises or impedes the establishment of true nature, origin, location, movement, disposition, title of, rights with respect to, or ownership of proceeds of an unlawful activity

Participate in, be an accomplice in, attempt to, aid to, exhort to, facilitate or provide counsel regarding any of the acts referred to in the above previous points.

Where :

As may be inferred from objective factual circumstance, the person knows or has reason to believe, that the property is proceeds from an unlawful activity; or

In respect of the conduct of a natural person, the person without reasonable excuse fails to take reasonable steps to ascertain whether or not the property is proceeds from any unlawful activity.

Money Laundering is a crime. It is the act of converting money gained from illegal activity into money or investments that appear to be legitimate so that its illegal source cannot be traced. In short, it is converting illegal money into legal money

Any person who engages in, attempts to engage in or abets the commission of money laundering, commits an offence and would be liable to a fine not exceeding RM5 Million or imprisonment of not more than 5 years or both.



Financing of terrorism can be defined as the wilful provision or collection, by any means, directly or indirectly, of funds with the intention that the funds should be used, or in the knowledge that they are to be used, to facilitate or carry out terrorist acts. Terrorism can be funded from legitimate income. Financing of terrorism will include the following:

Providing or collecting property for carrying out an act of terrorism

Providing services for terrorism purposes

Arranging for retention or control of terrorist property

Dealing with terrorist property.

It is important to understand the implications of these definitions. Money laundering hides the proceeds of illegal activity through various transactions to make it legal, whereas, terrorist financing

usually uses legal money for illegal purposes.

How Money is Laundered?

The money laundering process can generally be summarized as comprising of three stages:-

a) Placement

In the initial or placement stage of money laundering, the criminal introduces his illegal profits and ill-gotten gains into the financial system. This is the physical disposal or dealing of the initial proceeds derived from illegal activities.

Examples would include payment of premiums for policies, including top-ups especially for single premium policies, buying valuables and insuring them, getting certain individuals to purchase policies and then subsequently assigning the policies to the money launderer.

b) Layering

After the funds have entered the financial system, the second stage takes place. In this phase, the criminal engages in a series of conversions or movements of the funds to distance them from their source. The illicit proceeds are separated from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide an appearance of legitimacy as well as anonymity.

Examples would include borrowing against insurance policies, termination of policies and sale of units in investment- linked products. In the case of general insurance reporting that the valuables have been lost and making a claim.

c) Integration

When layering succeeds, the criminal proceeds have been successfully laundered, i.e. cleaned and are regarded for all intent and purposes as legitimate funds and are then reintroduced i.e. - integrated back into the financial system through investment in businesses, purchase of assets.



In money laundering activities, life insurance and non-life insurance can be used in different ways by money launderers and terrorist financiers. The vulnerability depends on factors such as (but not limited to) the complexity and terms of the contract, distribution, method of payment (cash orbank transfer) and contract law. Insurers should take these factors into account when assessing this vulnerability. This means they should prepare a risk profile of the type of business in general and of each business relationship.

Examples of the type of life insurance contracts that are vulnerable as a vehicle for laundering money or terrorist financing are products, such as:

investment-linked or with profit single premium contracts

single premium life insurance policies that have cash value

fixed and variable annuities

(second hand) endowment policies.

When a life insurance policy matures or is surrendered, funds become available to the policyholder or other beneficiaries. The beneficiary to the contract may be changed − possibly against payment − before maturity or surrender, in order that payments are made by the insurer to a new beneficiary. A policy might be used as collateral to purchase other financial instruments. These investments in themselves may be merely one part of a sophisticated web of complex transactions with their origins elsewhere in the financial system.

Non-life insurance money laundering or terrorist financing can be seen through inflated or totally bogus claims, e.g. by arson or other means causing a bogus claim to be made to recover part of the invested illegitimate funds. Other examples include cancellation of policies for the return of premium by an insurer’s cheque, and the overpayment of premiums with a request for a refund of the amount overpaid. Money laundering can also occur through under-insurance, where a criminal can say that he received compensation for the full amount of the damage, when in fact he did not.

Examples of how terrorism could be facilitated through property and casualty coverage, include use of worker’s compensation payments to support terrorists awaiting assignment and primary coverage and trade credit for the transport of terrorist materials. This could also imply breach of regulations requiring the freezing of assets.

Money laundering and the financing of terrorism using reinsurance could occur either by establishing fictitious (re)insurance companies or reinsurance intermediaries, fronting arrangements and captives, or by the misuse of normal reinsurance transactions. Examples include:

the deliberate placement via the insurer of the proceeds of crime or terrorist funds with

reinsurers in order to disguise the source of funds

the establishment of bogus reinsurers, which may be used to launder the proceeds of

crime or to facilitate terrorist funding



the establishment of bogus insurers, which may be used to place the proceeds of crime or terrorist funds with legitimate reinsurers.

Implications of AMLA for the Financial Services Industry

There are several core areas that have been identified by Bank Negara Malaysia that must be addressed by the financial institutions in the implementation of AMLA/CFT. These areas are:

1. The roles and responsibilities of the Board of directors, Senior Management, Business units, Functional heads, Branch Managers and the Compliance Officer are spelt out by the Bank Negara Guidelines. These duties deal with implementation Bank Negara guidelines and requirements of AMLA/CFT, where the company must formulate and implement policies to detect, prevent and report incidences of money laundering. The duty includes the audit of processes, responsibilities, policy implementation etc to ensure that any incidence of suspicious transactions involving money laundering is quickly brought to the attention of the management and subsequently reported to the FIU.

2. The second area deals with the exercise of customer due diligence (CDD). Every reporting institution (company) must conduct CDD and obtain satisfactory evidence and properly establish in its records, the identity and legal existence of any person applying to do business with it. The following must be noted:

CDD must be done if there is a suspicion of money laundering

DD must be done when the customer is not willing to provide any information requested

The institution should not commence business, or in the case of existing business terminate such business and lodge a suspicious transaction with the FIU.

Verification of documents relating to customers’ identity (Know Your Customer Policy) must be undertaken.

3. Another area of importance of the id recognizing and reporting of suspicious transactions. Examples of suspicious transactions include:

At the front end :

Proposal not proportionate to proposer financial standing.

Individual/ Corporate proposer who is reluctant to provide personal/corporate details.

Purchase many small amount certificate/ cover involving cash payment > RM50K and cancel them at the same time.

Cases exceeded threshold and meet the criteria of the red flag indicator

Frequently changing insurer.



Different home & mailing address.

The client from abroad who is seeking for a lump sum investment, who offers to pay by foreign currency.

Insurance policies with premiums that exceed the client’s apparent means.

The prospective client who does not wish to know about investment performance but does enquire on the early cancellation/surrender of the particular contract.

a change in beneficiaries (for instance, to include non-family members, or a request for payments to be made to persons other than beneficiaries)

payment by banking instruments which allow anonymity of the transaction

The client source(s) of funds is not clear or not consistent with the customer’s apparent standing.

At the back end :

Claims paid to persons other than next of kin & with no reasonable extent of insurable interest.

Series of policy loan applications & payments within a short period of time.

Large payment and request for payment to unrelated 3rd party or other country.

Willing to pay contribution on high risks cases that have high chances of claims or application rejection.

4. It is incumbent on the company to maintain the records of all transactions with the customers to ensure that in the event of a suspicious transaction (one involving money laundering or financing of terrorism), the audit trail is not broken. Thus, it is necessary for the company to maintain all records and documents for a minimum period of 6 years from date of conclusion of the transaction or after the business relations with the customer has ended. If the records are subjected to any on going investigation or prosecution, they shall be retained for a longer period unless directed otherwise by the FIU. The retained documents and must be able to create an audit trail of the individual transactions. Records must be capable of being retrieved without undue delay and are acceptable under s3 of the Evidence Act, 1950. All staff should be made aware of their responsibilities in respect of reporting and detection of AML/CFT suspicious transactions. There is a RM1million fine or 1 year imprisonment or both ( sec.17 of AMLA) for those found guilty.

Implications for the Financial Planner

Bank Negara has stipulated the following as far as the intermediary is concerned.

the reporting institution ( company) must TAKE A RISK BASED APPROACH in ensuring that its insurance and takaful agents receive initial and on-going training on AML/CFT.



the agents must be made aware of their legal responsibilities , the AML/CFT policies and procedures, in particular the CUSTOMER ACCEPTANCE POLICIES and the requirement for the verification, records, suspicious transactions and reporting to the compliance officer

Insurance intermediaries − independent or otherwise − are important for distribution, underwriting and claims settlement. They are often the direct link to the policyholder and therefore intermediaries should play an important role in anti-money laundering and combating the financing of terrorism. The FATF Recommendations allow insurers, under strict conditions, to rely on customer due diligence carried out by intermediaries. The same principles that apply to insurers should generally apply to insurance intermediaries. The person who wants to launder money or finance terrorism may seek an insurance intermediary who is not aware of, or does not conform to, necessary procedures, or who fails to recognise or report information regarding possible cases of money laundering or the financing of terrorism. The intermediaries themselves could have been set up to channel illegitimate funds to insurers. In addition to the responsibility of intermediaries, customer due diligence ultimately remains the responsibility of the insurer involved.



Self Assessment

1. A private wrong is a violation of the rights of another person, and such a wrong is known as a ____________; and the wrong doer a ___________________.

A. crime; criminal

B. liability; risk taker

C. penalty; criminal

D. tort; tort feasor

2. ________________ are those tortuous behaviors that are carried out with malicious intent.

A. Intentional torts

B. Unintentional torts

C. Negligence

D. Professional negligence

3. ________________ means that the injured party has been hurt partly due to his or her own negligence.

A. Intentional negligence

B. Unintentional negligence

C. Contributory negligence

D. Professional negligence

4. When an agent fills a proposal form from the client, who is he acting for under the Insurance Act 1996 as per Section 151 (1)?

A. For the Insurer - principal

B. For the client

C. For himself

D. For the beneficiary of the client



5. If insurance agent, Jeffery makes a fraudulent statement to induce his client to buy a policy, his statement is deemed to be the statement made by the _____________________, under Section 151(2) of the Insurance Act 1996.

A. agent himself

B. agent’s manager

C. principal-insurer

D. CEO of the company

6. To increase transparency in sales activities, the Act (Section 186 (1)) provides that the agent of the insurer must disclose to the clients three things. Choose which are the following things.

I. The name of the insurance agency the agent works under

II. The name of the licensed insurer

III. The agent’s relationship with the licensed insurer

IV. The premiums charged by the licensed insurer

A. I only

B. I, II and III

C. II, III, & IV

D. All the above

7. The insurance agent’s authority to act on behalf of the principal can be in the following ways:

I. Express authority

II. Implied authority

III. Apparent authority

IV. Secret authority

A. I only

B. I,II and III

C. I and II only

D. All the above

Malaysian Financial Planning Council (MFPC) 9-�9


8. In agency law, ______________________ is the incidental authority required or reasonably necessary to execute the _____________ of the principal.

A. Express authority; implied authority

B. Implied authority; express authority

C. Apparent authority; implied authority

D. Implied authority; Apparent authority

9. Section 153 of the Insurance Act, 1996, a minor may enter into a contract of life insurance on the following condition.

A. Reached age 9 with no consent from parent or guardian

B. Reached age 10 with no consent from parent or guardian

C. Reached age 9 and obtained consent from parent or guardian

D. Reached age 10 and obtained consent from parent or guardian

10. Raymond Mah is a hard drug pusher. To protect himself, he asked his agent to insure all his goods including the illegal drugs. The agent told Raymond, the goods cannot be insured. What is the reason for the rejection for insurance?

A. Illegal purpose – is against public policy to promote illegal activities

B. No insurable interest exist

C. The agent is wrong, the drugs can be insured

D. Insurance Act 1996 specifically forbids dealing with drug pusher

Answesr: 1-D, 2-A; 3-C, 4-A, 5-C, 6-C, 7-B, 8-B, 9-D, 10-A

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