Malaysia – RHB Islamic Bank Bhd v AmGeneral Insurance Bhd.

Background facts

 

The first Plaintiff, Veheng Global Traders Sdn Bhd (“Veheng”), had taken out fire material damage policies and fire consequential loss policies from the first defendant, AmGeneral Insurance Bhd, and the second defendant, Sun Life Malaysia Takaful Berhad (collectively “the Defendants”). Following a fire at its premises, Veheng made claims under the policies.

 

The second Plaintiff, RHB Islamic Bank Berhad (“RHB Bank”), was the mortgagee of one of the policies after having granted a financing facility in favour of Veheng. The policy included a “mortgage clause” or what is commonly known as “the standard New York mortgage clause”.

 

The Defendants resisted the Plaintiffs’ claim essentially on the basis:

 

• The fire was deliberately caused or occasioned by wilful acts of Veheng or with connivance of Veheng and, as such, the Defendants were entitled to repudiate liability;

• Veheng had used fraudulent means or device to obtain benefit under the policies and, as such, had failed to observe the terms of the policies; and

• RHB Bank had no locus standi to sue the Defendants based on the mortgage clause in the Deed of Assignment executed between Veheng and RHB Bank.

   

Findings of the High Court2

 

The High Court found the Defendants liable on two of the policies.

 

In assessing whether Veheng had acted fraudulently, the High Court applied the test in Asean Security Paper Mills Sdn Bhd v CGU Insurance Bhd3 and held that the standard of proof for civil proceedings for commission of crime was that of beyond reasonable doubt and not on a balance of probabilities. The High Court was not satisfied on a standard of beyond reasonable doubt that the arson was linked to Veheng.

 

Regarding RHB Bank’s claim, the High Court found that RHB Bank had the right to sue the insurers by virtue of the mortgagee clause in the Deed of Assignment.

 

Findings of the Court of Appeal4

 

The Defendants appealed to the Court of Appeal primarily on the basis that the High Court had erred as follows:

 

• In finding that arson was not linked to Veheng and, in so doing, applied the wrong standard of proof for civil proceedings for commission of crime by not following the decision of the Federal Court in Sinnaiyah & Sons Sdn Bhd v Damai Setia Sdn Bhd5;

• In finding that there was no breach of warranties by Veheng; and

• In holding that RHB Bank was entitled to sue by virtue of the mortgagee clause in the Deed of Assignment.

   

The Court of Appeal allowed the Defendants’ appeal and set aside the High Court judgment.

 

On the issue of the standard of proof for fraud in civil proceedings, the Court of Appeal held that Sinnaiyah was the state of the law even prior to the High Court decision. Applying Sinnaiyah, the Court of Appeal held that commission of crime in civil proceedings must be proved on a standard of balance of probabilities. Applying the standard of balance of probabilities, the Court of Appeal was satisfied that the arson was caused or occasioned by wilful acts of Veheng or with connivance of Veheng and that the lodgment of false invoices by Veheng tainted Veheng’s whole claim under the policies.

 

On the issue of breach of warranties by Veheng, the Court of Appeal held that Veheng must strictly comply with the warranties under the policies. Strict compliance of the warranties is a condition precedent to the insured’s right to claim and the insurer’s obligation to pay.

 

On the issue of whether RHB Bank had the right to sue, the Court of Appeal held that RHB Bank had no locus standi to sue for the proceeds of the policy. The Court of Appeal reasoned that the mortgagee clause in the Deed of Assigment cannot confer the right to sue the insurers on RHB Bank. Further, there was a prohibition of assignment of the policies and Veheng was not in a position to assign the proceeds of the policies to RHB Bank without the Defendants’ consent.

 

The Court of Appeal also held that given that the Defendants were entitled to repudiate the liabilities under the policies by reason of Veheng’s fraudulent conduct, it would be against public policy to allow RHB Bank to claim.

 

Findings of the Federal Court

 

RHB Bank appealed to the Federal Court on, amongst others, the following questions of law:

 

• Whether a mortgagee clause which is a standard clause in all fire policies, where a mortgagee’s interest is noted, confers the mortgagee with the right/locus to sue the insurer to recover any loss caused by the fire?

• Does it offend public policy for an innocent mortgagee to be paid on the Mortgagee Clause when the insured is in breach of the policy and the Mortgagee Clause explicitly provides that the insurer be subrogated to the rights of the mortgagee and can recover that loss from the insured?

• Other than the terms set out in the Mortgagee Clause is there any obligation on the mortgagee to comply with other terms and conditions of the policy of insurance?

   

The Federal Court, in allowing the appeal, observed that the Mortgagee Clause was a “standard mortgagee clause” and was not merely a “loss payable” clause.

 

The Mortgagee Clause created a separate and independent contract of indemnity between the mortgagee and the insurer, such that any finding of fraud against the insured does not diminish the mortgagee’s right to indemnity. The validity and entitlement of the mortgagee to the insurance proceeds must be assessed on the conduct of the mortgagee alone. As there is a right of subrogation and the insurer has the right to bring a suit against the insured, the payment of the proceeds of the policies to the mortgagee will not offend public policy.

 

Conclusion

 

The Federal Court decision makes it clear that a mortgagee clause in an insurance policy creates a separate and independent contract between the mortgagee and the insurer and clothes the mortgagee with the necessary privity to sue in his own name under the policy. The mortgagee therefore has the right to sue for the insurance proceeds.