Manulife Prevails in Trojan Horse Case

After a months-long court battle, the loophole one investor found in life insurance contracts has been shut down.

Brent Lewin/Bloomberg

Brent Lewin/Bloomberg

After months fighting an insurance contract lawsuit brought by hedge funds, Manulife Financial has said that a Saskatchewan court has ruled in its favor, the firm announced Monday.

“This important ruling unequivocally supports what insurers, their customers, and regulators already know to be true: the purpose of an insurance policy is to protect the lives of the insured and their families,” said Canadian Life and Health Insurance Association president and CEO, Stephen Frank, in a statement.

At issue in the case were universal life insurance contracts that allowed policyholders to make unlimited deposits. Michael Hawkins, a Canadian farmer, discovered a loophole in the contracts that would allow the policies to be transferred if the policyholder no longer wanted them, which essentially turned universal life insurance contracts into investment vehicles, Institutional Investor previously reported.

[II Deep Dive: A Farmer Found a Trojan Horse Inside an Insurance Contract. Now He Might Bring Down the Canadian Insurance Industry.]

The ruling was issued on Friday, March 15, by Judge Brian Scherman who sits on the Saskatchewan Court of Queen’s Bench, according to Manulife’s announcement. The announcement said that Scherman ruled that the contract “does not provide for unlimited stand-alone investment opportunities.”

Between 2008 and 2010, Hawkins was able to purchase eight universal life insurance contracts, which were owned by Manulife, iA Financial, and Bank of Montreal. The contracts offered 3 percent interest on an unlimited amount of money, bonuses, and other perks, Hawkins told II at the time.


Some allowed policyholders to add beneficiaries over time, which would allow them to exist forever.

The insurers paid out at first, but eventually, the payments stopped coming, II previously reported. Hawkins and his partner, Gary Selke, a former partner in Front Street Capital, tried to work it out with the insurers, but by 2016, they filed legal documents.

Amid the legal hubbub, Selke had filed whistleblower reports on Manulife with both U.S. and Canadian regulators. A trial began in September 2018, and during it, on October 29, Saskatchewan changed regulations to limit premiums a life insurer can receive or accept for certain policies, essentially closing that loophole.

The battle in court went on, but in the end, the insurers prevailed.

“The plaintiffs’ scheme involved investing large amounts of money in insurance policies with the sole objective of earning a return,” according to the Canadian Life and Health Insurance Association. “The ruling states in no uncertain terms that insurance policies cannot be used in this manner.”

iA Financial Group celebrated the news on Monday, noting in an announcement that “life insurance contracts were never intended to be used as deposit accounts and for purposes unrelated to life insurance.” A spokesperson for Bank of Montreal said “we are pleased with the court’s decision confirming our position on the use of universal life insurance policies” via email Monday.

“Insurance policies are not intended to offer an unlimited investment opportunity completely unrelated to insurance coverage,” said association CEO Frank in a statement.