A Gotcha Contract that Could Cost Insurers BillionsMosten Investment LP v Manufacturers Life Insurance Company, 2019 SKQB 76 (CanLII)
It's unusual for a contract law case to keep the reader on the edge of the seat, but this unusual case reads like a thriller. Along the way, Justice Scherman of Saskatchewan’s Court of Queen’s Bench delivers a masterful lecture on the evolution of Canadian contract law interpretation in his 154-page long decision. Unusually, the judge did not summarize his conclusion at the beginning. He weighs the competing arguments in the balance, giving each side a careful hearing, and the reader is kept in suspense until many pages into the long report.
Spoiler alert: The judge found in favour of Manulife, and against the applicant who argued that it could put an unlimited amount of money into an insurance fund and earn a high rate of interest. However, the decision is under appeal.
A life insurance contract that could be worth billions?
This contract dispute may not be quite as extreme as the one concocted by Shakespeare in the Merchant of Venice, but it probably surpasses anything in previous Canadian legal history.
In Saskatchewan (unlike most other provinces) it is legal for an investor or speculator to buy an insurance contract from the original policyholder. This is what was done by an actuary who secured a group of hedge fund investors to back him up. The insurance policy is now owned through a limited partnership known as Mosten Investment LP, the applicant in this lawsuit.
The contract in dispute is a life insurance contract entered into in 1997 between a Saskatchewan physician and a predecessor of Manulife. The contract provides that the policyholder can prepay the life insurance premiums, and the prepayments will earn interest at a minimum rate of 4 percent. That was a modest rate in 1997, but in today’s market, where government bonds pay interest rates near zero, the ability to invest unlimited amounts of money with a highly rated company such as Manulife and receive 4 percent could be a bonanza.
The contract is unambiguous in stating that the policyholder can put in additional premiums and earn 4 percent on the accumulated funds. There is also no dispute that there is nothing in the contract stating that there is any limit on the amount of additional premiums that the policyholder can put in. The contract allows unlimited withdrawals from the fund, but with 30 days notice required for withdrawals over $200,000. From the applicant’s perspective, it’s an open and shut case.
The decision hangs on the meaning of one word
Those who take the position that a contract should be interpreted based on its “plain meaning” may not like this decision, which is now under appeal to the Court of Appeal.
However, the reality is that a contract does not have a plain meaning unless all the words in it are precisely defined. As Jimmy Page told us long ago, sometimes words can have two meanings. In this case, the key question is the meaning of the word “premium” in reference to the money that a subscriber pays into an insurance policy.
The legal question here also displays a certain tension between different principles in contractual interpretation. The judge placed a lot of emphasis on the Supreme Court’s decision in Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53. That decision stands for the principle that
 … the interpretation of contracts has evolved towards a practical, common sense approach not dominated by technical rules of construction, with the overriding concern being to determine “the intent of the parties and the scope of their understanding.”
The judge strained to reconcile the decision in Sattva with the later decision in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC 37, which might have pointed to a different conclusion in this case.
The contract in the present case, as it was in Ledcor, is an insurance contract with a standard pre-printed form provided by the insurer. There is a principle in such a situation that ambiguities should be interpreted against the interests of the one who wrote or proffered the contract: known as contra proferentem in Latin.
However, the decision in Ledcor does allow a middle ground. If a provision in the contract is at first sight ambiguous, the court can use rules of interpretation to resolve the ambiguity, rather than turning to contra proferentem. These rules of interpretation should lead to an outcome that is consistent with the reasonable expectations of the contracting parties (Ledcor, para. 63).
Justice Scherman largely sidestepped the problem of ambiguity by concluding that the word "premium" needs to be understood according to its meaning in the context of insurance, and a premium is a payment for buying insurance protection, and not for buying an investment fund.
 Manulife says that in the context of an insurance policy, “premiums” has a well understood meaning that restricts premiums to monies paid for insurance…. the insured cannot pay into the policy investment monies that do not have the character of being premiums.
The judge agreed with Manulife that the word premium is a “term of art” in the insurance industry, with a well understood meaning in that industry. It therefore needs to be defined based on that meaning in the present contract. In reaching this conclusion, he drew authority from IFP Technologies (Canada) Inc. v EnCana Midstream and Marketing, 2017 ABCA 157, a case decided by the Alberta Court of Appeal two years earlier, albeit one that dealt with oil rather than insurance:
 IFP dealt with the interpretation of contracts in the oil and gas industry and the meaning to be given to the phrase “working interest” in those contracts. In its decision, the Court of Appeal held that the term “working interest” was a legal term of art that had an accepted meaning and usage in the oil and gas industry and interpreted the contracts in question using that accepted meaning and usage.
Conveniently, IFP also addressed a situation that was analogous to the insurance contract not putting any limit on the amount of premiums to be paid in. The rule asserted in IFP is that, if the existence of a right to do something is implausible, the absence of an explicit prohibition of it in the contract is immaterial:
It is an improper leap for a court to conclude that because something has not been expressly forbidden under a contract, it follows that it is permitted. That is not necessarily so. There are many things parties to a contract cannot do even if they are not expressly prohibited. As the Supreme Court noted in BCE Inc. v 1976 Debentureholders, 2008 SCC 69 at para 71,  3 SCR 560, reasonable expectations “looks beyond legality to what is fair, given all of the interests at play” to address conduct that is “wrongful, even if it is not actually unlawful.” (para. 138 of IFP, cited at para. 122 by Justice Scherman).
Therefore, while the policy allows the policyholder to increase the amount of insurance on his own life by paying higher premiums, the amount of insurance that the policyholder is willing to buy ultimately sets a limit on the amount of premiums that he can prepay. On this interpretation, there can be no unlimited right to pour money into the fund in order to earn that phenomenal interest rate of 4 percent.
Stage 2 analysis of the purpose of the contract, just in case
The analysis of the meaning of the contract is Stage 1. If no ambiguity is found in the contract, there is no need to go beyond that.
However, for completeness and in case he was wrong about Stage 1, Justice Scherman also undertook a Stage 2 analysis of the purpose of the contract. On this analysis as well, he found that Manulife would win. Though contra proferentem may favour the applicant to some extent, based on Ledcor it can be argued that it does not justify an extreme deviation from commercial reality. If the word "premium" was given the meaning claimed by the applicants, it might be grossly contrary to the intention of the insurer in entering into the contract:
… [L]iteral meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties
Saskatchewan’s regulatory amendment did not help the insurers
It appears that there was some influential lobbying of the Saskatchewan government by the insurance industry. In October of 2018, shortly before Justice Scherman was due to release his decision, the government amended a regulation to the Saskatchewan Insurance Act to define the word "premium" and give it exactly the meaning that the insurance companies wanted it to have in this case:
‘life insurance premium’ means the premium under a contract for life insurance but does not include any amount paid, transferred, credited or deposited to a side account;
Manulife argued that this is a declaration of the meaning of the word that applies both to the past and the future. If that were true, it would render all the rest of the case moot.
The judge rejected this argument. First, there is nothing on the face of the regulation to indicate that it was intended to have retrospective effect. Even if the Lieutenant-Governor in Council had intended that, the judge held that it did not have that power. Regulations are made under the authority of primary legislation, and there was nothing in that legislation permitting regulations to apply retroactively.
There is a well accepted principle about this in statutory interpretation. Laws can be changed retrospectively, but this is unfair to those who are adversely affected by it. Therefore, if the legislature wants to do something so draconian, it has to be very clear that it is being done with due deliberation:
 A significant presumption of legislative intent that is engaged here is the presumption that the legislature does not intend to limit or interfere with the rights of its subject leading to the principle that legislation which has the potential consequence of curtailing the civil and property rights of citizens is strictly construed. As stated by Estey J. in Morguard Properties Ltd. v City of Winnipeg, 1983 CanLII 33 (SCC),  2 SCR 493 at 509:
... the courts require that, in order to adversely affect a citizen’s rights, whether as a taxpayer or otherwise, the Legislature must do so expressly. ... The resources at hand in the preparation and enactment of legislation are such that a court must be slow to presume oversight or inarticulate intentions when the rights of the citizen are involved.
Of course, the judge himself ruled that “insurance premium” does mean, and has always meant, what the regulation now says it means. Therefore, the judge’s decision about the regulation had no immediate impact, but it could be of some consequence in the appeal.
The judge concluded that a “gotcha” kind of contract should not be upheld. This is a case in which the applicant has spotted a bug in the contract, and is attempting to exploit it to extract a large amount of money from the insurer. The judge’s position is that Canadian contract law should not allow contracts to be treated like a computer program where there is only one possible answer to a question. Instead, his position is that contracts must be interpreted holistically in terms of what the contracting parties “objectively” intended.
That can create a complicated judicial decision-making process in discerning an objective intention when it concerns something to which neither party actually put its mind at the time the contract was entered into. As this case winds its way through the appeal process, it should provide further judicial guidance on how to deal with contracts with curious pitfalls that nobody anticipated.
Peter Spiro is principal of Spiro Law P.C. with a focus on strategic legal research support for complex litigation matters.
 In addition to the lawsuit against Manulife, two other essentially identical claims were brought by the same investor group against two other insurance companies with similar policies. All three cases were dealt with by the judge at the same time.