9.6 Assignment Notice, Priority and Creditor Rights

Study Focus

Priority among assignments or pledges turns on written notification to the insurer. An assignee or pledgee is paid before a nominee to the extent of its rights.

Legal Formalities and Statutory Requirements for Valid Assignment

For an assignment of a life policy to be legally valid and enforceable in Malaysia, it must comply with the requirements of the Civil Law Act 1956, the Financial Services Act 2013, and common law rules.

Mandatory Formalities

1. Written Instrument: Under Section 4(3) of the Civil Law Act 1956, an assignment of a debt or other chose in action must be in writing, signed under the hand of the assignor. An oral assignment of a life policy is legally ineffective.
2. Valuable Consideration or Proper Deed: The assignment must either be supported by valuable consideration (such as a loan disbursement or purchase price) or executed under seal / expressed for natural love and affection.
3. Formal Written Notice to the Insurer: The assignor or assignee must deliver formal written notice of the assignment, accompanied by the original or certified copy of the assignment deed and the policy document, to the insurer's registered office.
4. Insurer's Written Acknowledgment: Under Malaysian insurance practice, upon receiving notice of assignment, the insurer must record the assignment in its official register and issue a written acknowledgment of receipt. Until the insurer receives formal written notice, it is not bound by the assignment and may lawfully pay policy benefits to the registered policyholder without liability to the unnotified assignee.

The Priority Rule: Dearle v Hall (1828)

A critical legal doctrine tested in the PCEIA is the determination of priority among competing assignments. Where a dishonest or careless policyholder executes multiple assignments over the same life insurance policy to different parties:

• The Rule in Dearle v Hall (1828), now reflected for policy moneys in Schedule 10, Paragraph 7(2): Legal priority among competing assignees is NOT determined by the date on which the assignment documents were executed. Instead, priority is determined strictly by the date and order in which written notice of assignment is received by the insurer.
• Good Faith Requirement: An assignee can only claim priority based on earlier notice if they acted in good faith and had no actual or constructive notice of an earlier assignment at the time they took their own assignment.
• PCEIA Scenario: If Encik Kumar executes an assignment to Bank A on 1st March, and executes a second assignment of the same policy to Bank B on 15th March. If Bank B serves formal written notice to the insurer on 20th March, whereas Bank A delays serving notice until 25th March, Bank B has absolute legal priority over Bank A, provided Bank B had no knowledge of the prior transaction.

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Impact of Assignment on Existing Nominations

Schedule 10 of the FSA 2013 states how an assignment interacts with a nomination.

1. An Assignment Does Not Revoke a Nomination

Under Paragraph 3, a nomination is revoked only by the death of all the nominees, written notice to the insurer, or a later nomination, and not by any other act, event or means. An assignment therefore does not, by itself, cancel a nomination. Instead, Paragraph 7 decides who is paid first.

2. Assignee or Pledgee Is Paid Before the Nominee (Paragraph 7(1))

Where policy moneys have been assigned or pledged as security, the assignee or secured party has priority over the nominee, even under a trust nomination. The insurer pays the assignee what it is entitled to under the assignment or security and pays the balance to the nominee.

• Example: Encik Hafiz has nominated his wife and also conditionally assigned his RM 580,000 policy to his bank to secure a loan with RM 120,000 outstanding at his death. The bank receives RM 120,000 and his wife, as nominee, receives the RM 460,000 balance.

3. Several Assignments or Pledges (Paragraph 7(2))

Where more than one person is entitled under an assignment or security, their rights rank by the date on which written notice was given to the insurer, treating assignments and pledges as one class. This is the statutory form of the rule in Dearle v Hall.

4. Assigning a Policy Subject to a Trust Nomination (Paragraph 5(5))

A policy owner who has made a trust nomination in favour of a spouse, child or parent cannot assign or pledge the policy, or surrender or vary it, without the written consent of the trustee. Where the nominees are minors and no trustee has been appointed, the trustee is the minor's other parent, or failing that the Public Trustee or a nominated trust company, and that trustee must consent.

5. Using an Assignment to Benefit a Non-Family Nominee

A nominee who is not a spouse, child or parent receives the money only as an executor under Paragraph 6. If the policy owner wants such a nominee to keep the money personally, the owner must assign the policy benefits to that nominee, as the nomination form must warn (Paragraphs 2(4)(a) and 6(3)).

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Creditor Rights and Bankruptcy

Creditors' rights against a life insurance policy depend on its nomination and assignment status.

1. Trust Policies Under Paragraph 5 of Schedule 10

• Protected from the deceased's debts: Policy moneys paid under a trust nomination do not form part of the deceased policy owner's estate and are not subject to the owner's debts (Paragraph 5(2)).
• Owner's control is restricted: During the owner's lifetime, the policy cannot be surrendered, varied, assigned or pledged without the trustee's written consent (Paragraph 5(5)), which keeps the policy value for the trust beneficiaries.
• Fraud on creditors: If a creditor proves that the policy was effected and the premiums paid with intent to defraud that creditor, the creditor is entitled to a sum equal to the premiums paid out of the policy moneys, but not to the rest of the benefit (Paragraph 5(6)).

2. Policies Without a Trust Nomination

• If there is no trust nomination, the death benefit forms part of the deceased's estate and is available to pay the deceased's debts, whether it is paid to an executor-nominee under Paragraph 6 or to the executor or administrator under Paragraph 8.
• During the owner's lifetime, a policy with a cash value is part of the owner's property. If the owner is adjudged bankrupt under the Insolvency Act 1967, that property vests in the Director General of Insolvency, who may realise it for the creditors.

3. Absolutely Assigned Policies

• An absolutely assigned policy belongs to the assignee, so the assignor's creditors generally have no claim on it. An assignment made to defeat creditors can, however, be challenged under the provisions of the Insolvency Act 1967 that set aside voluntary settlements and fraudulent preferences made shortly before bankruptcy.