By: Anjanay Pandey
INTRODUCTION
In Insurance contracts, an essential element is Utmost Good Faith.[1] The phrase is borrowed and derived from the Latin expression Uberrimae fidei (or urberrima fides). The principle imposes a duty of full disclosure and any material misrepresentation, whether or not intentional, serves to void the policy ab initio.[2]
The insurance contracts being contracts of good faith, require the disclosure of facts, which are known to the parties to the contract themselves.[3] In essence, the aspect of Utmost Good Faith is so relevant that in want of this element an insurer’s liability is voidable at his option.[4]
The duty of good faith is of a continuing nature in as much no material alteration can be made to the terms of the contract without the mutual consent of the parties[5] and both, the assured and the insurer have an obligation to disclose all the material facts.[6] The insurer cannot subsequently demand additional premium[7] nor can he escape liability by contending that the situation does not warrant the insurance cover.[8]
In practical terms, the issue which pervades the duty of good faith can be reduced to the following question: how can the ordinary insured, whether acting in a private or commercial capacity, untutored in the niceties of insurance law, be expected to know what particular circumstances are material and would, therefore, influence the prudent underwriter (person assessing the risks and often deciding the insurance premium)?[9]
In the recent cases decided in the past decade, the English courts have refined the disclosure duty while laying considerable emphasis on the mutuality of the requirement of good faith by giving content to that borne by insurers. This process is a rebalancing exercise.[10] As in the past century, the courts had adopted an unequivocal stance in permitting avoidance for non-disclosure across the range of insurance, both consumer and commercial, without regard to notions of fairness, proportionality, or whether there was actual inducement.[11]
JURISPRUDENCE: DOMINATED BY LEGISLATURE OR JUDICIARY
The doctrine of uberrimae fidei has its origins in the earliest days of marine insurance when the insurance underwriters’ only source of information came from the shipowners and merchants whose cargo sailed on the ships.[12] By the time of Elizabeth I, London started to dominate the global market for marine insurance (continued till the present day.[13]) and with the expansion of the English maritime trade in the sixteenth and seventeenth centuries, English law imported and adapted European Code law and practice to meet the needs of this growing industry.
One of the most important figures during this transitional period in English law was Lord Mansfield, who famously articulated the duty of good faith in the landmark case of Carter v Boehm.[14] In his opinion, Lord Mansfield explained that “insurance is a contract upon speculation” and that “the special facts upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only.”[15] The underwriter calculates the risk based upon the insured’s representations and disclosures, and there exists an assumption of no undisclosed circumstances that might materially affect that risk.
Thus, Lord Mansfield limited the pre-contract duty of disclosure to ‘special’ (material) facts within the ‘private’ knowledge of one of the parties. Without such disclosure, there could be no meeting of the minds concerning the risk to be underwritten, regardless of whether either party actually intended fraud. As it turned out, the facts allegedly concealed from the underwriters in Carter were found to be matters of public knowledge and that the insured was under no good faith duty of disclosure. However, later the consensus amidst the jurists and legal scholars grew that the word ‘void’ should be substituted by voidable.[16]
By the end of the eighteenth century, English law had come to embrace three established principles of the duty of Utmost Good Faith.[17] Firstly, the duty required both truthful representations and voluntary disclosure of material facts. Secondly, the duty operated without regard to the fraudulent intent or knowledge of either party thereby making innocent misrepresentations and nondisclosures, breaches. Thirdly, no causal relationship between the misrepresentation or non-disclosure and the loss was required.[18]
Coming to the central question, which is who dominates the issues with regards to the application of the principle of Utmost Good Faith. A simple answer can be given that since the principle itself is a product of case-law, it is majorly driven by the same itself. At best the Legislature trails behind the judiciary, formalizing and codifying the principles that are set up by the courts. This is true in case of England, whose judiciary has delved a lot into the issue of Good Faith. The requirement was made part of the statute in the Marine Insurance Act.[19] The same is the case with Australia since it is also part of the Commonwealth and has taken the tenets of the legal principle in question from England.[20] Even in the case of America, it is clear that the principle of Good Faith that exists is borrowed from the English jurisprudence[21] and the same goes for India[22]. Thus, we can conclude that the important factor is the jurisprudence set by the court and not the one decided by the Legislature as in this particular scenario, the legislature merely trails behind the jurisprudence of this principle.[23]
WIDENING THE DUTY TO DISCLOSE
One of the most interesting issues that are coming up these days delves into the aspect of Post-Contract Duty to Disclose. To put perspective on this issue, we have to understand another contentious issue in another time. This was the issue of whether the Insured was to disclose facts to the underwriters which were a matter of public record. The original decision in the Carter Case[24] held that since the alleged disclosure was a matter of public record, the case goes in favour of the Insured and not the Insurer. This step can be interpreted to mean that there is an additional duty on the part of Underwriters to access all the relevant risk-related information about a particular insurance claim before entering into the Insurance contract. However, the scope of this Principle of Good Faith was widened later.
In Lindenau v Desborough[25] for example, the court held that the Insured was required to disclose “every material circumstance within their knowledge.”[26] The appropriate test was not whether the insured believed a particular circumstance to be material, but whether it was in fact material.[27] This means, of course, that an insured’s ‘failure’ to disclose facts it considers to be immaterial might be construed to be a breach of the duty of utmost good faith, if the insurer, or a court, later determines that such information is “in fact material.” This decision is a patent example of the court widening the scrutiny it can exercise to examine whether a fact is particular. There is a clear departure from the rule set in the Carter Case, which focused more on the intention of the Insured to misrepresent. Now the intention of the Insured does not matter if the court deems it so, either by examination of the merits of the case or by way of persuasion of the Insurer.
However, we see that the scope of the legal principle was further widened in the coming cases before the English Courts. This aforementioned duty of disclosure was subsequently empowered by the judiciary to be held applicable even in scenarios where the particular undisclosed facts were a part of the public record and might have been investigated by the underwriter.[28] Schoenbaum, a reputed jurist in the field has opined that “this ruling is arguably contrary to Lord Mansfield’s statement in Carter v Boehm that the assured need not disclose facts which may be investigated by the underwriter.”[29] Nevertheless, even though such disclosure was not required for a meeting of the minds concerning the risk to be underwritten-the rationale underlying the original formulation of the duty of utmost good faith-an insurer claiming ignorance of a material circumstance undisclosed by an insured could void the policy for breach of the duty of good faith.
Continuing this trend, later cases expanded the duty of disclosure to include facts extrinsic to the risk insured, such as the character (moral hazard) of the insured.[30] Some cases focused on the Criminal History of the Insured such as the history of convictions.[31] And even requiring the disclosure of a person’s criminal history, including the criminal charges levied upon them.[32]
POST-CONTRACTUAL DUTY TO DISCLOSE
There has been considerable debate over whether the duty of utmost good faith continues beyond the precontract period.[33] Professor Clarke argues “that the duty of good faith continues throughout the contractual relationship. In particular, the duty of disclosure, most prominent prior to contract formation, revives whenever the insured has an express or implied duty to supply information to enable insurers to make a decision. Hence, it applies if the cover is extended or renewed. It also applies when the insured claims insurance money; he must make “full disclosure of the circumstances of the case”.[34]
In Black King Shipping Corp v Massie (The ‘Litsion Pride‘)[35], for example, the court held that “the duty of utmost good faith applied with its full rigour” to disclosures required after the conclusion of the contract.[36] The Litsion Pride involved the failure of the vessel’s owners or their brokers to disclose the fact that the ship was trading and travelling in an active war zone. The vessel was struck by an Iraqi missile, and the owners presented a fraudulent claim to the underwriters that misrepresented the location of the vessel at the time of the damage. The court found the owners to be guilty of making fraudulent claims and of making a fraudulent misrepresentation. The court ruled that this enabled the underwriters to deny coverage and to void the policy altogether.
The Litsion Pride case symbolises the zenith of the post-contract duty of utmost good faith and the subsequent case-law is retreating from the apogee created previously.[37] In Manifest Shipping Co v UniPolaris Insurance Co (The Star Sea),[38] for example, the court recognized a “clear distinction … between the pre-contract duty of disclosure and any duty of disclosure which may exist after the contract is made.” Acknowledging that the solution to avoidance in the post-contract situation “is in practical terms wholly one-sided,” the court elaborated that “the assured’s duty of good faith” should not be “used by the insurer as an instrument for enabling the insurer himself to act in bad faith.” The court concluded that, in order to find a post-contract breach of the duty of utmost good faith, an underwriter would have to show that an insured made a claim fraudulently.
LIMITS OF POST CONTRACTUAL DISCLOSURE
The subject of an insured’s post-contract duty of good faith was revisited in K/S Merc-Scandia XXXXII v Lloyds Underwrites (The Mercandian Continent)[39]. The claim of Post Contractual Fraud came up when the underwriters provided the court with a forged document produced by the Insured while undergoing a disputed claim. The underwriters wanted the court to declare the policy void subject to the fact that production of a forged document meant that Insured had violated the principle of Utmost Good Faith. The court held that it would only be appropriate to invoke the remedy of avoidance “in circumstances where the innocent party would, in any event, be entitled to terminate the contract for breach.” To this end, “(A) the fraud must be material in the sense that the fraud would have an effect on the underwriters’ ultimate liability.., and (B) the gravity of the fraud or its consequences must be such as would enable the underwriters, if they wished to do so, to terminate for breach of contract.”
Another important case to be considered in terms of post-contract disclosures is that of Rego v. Connecticut Placement Facility[40]. In this case, the court rendered its judgment on one of the disputed claims and rejected some contentions of the Insured. The Insurers then went ahead to claim that the Insurer had acted fraudulently and thus demanded that the entire insurance contract be declared void. This was rightfully rejected by the court and it observed that “it would be inconsistent with the normal function served by a trial to permit the insurer to await the testimony at trial to create a further ground for escape from its contractual obligation”.
The position of limits on the usage of avoidance on the basis of breach of Utmost Good Faith can be seen to be solidifying. One clear example is the case of Versloot Dredging BV v HDI Gerling Industrie Versicherung AG[41] wherein the court stated that any fraudulent statements made that are not affecting the merits of the case should not be the grounds for the underwriters to invoke the Utmost Good Faith Principle.
CONCLUSION
In the present matter, it can be reasonable to expect “a very high degree of openness” at the formation stage of the contract but not once the contract has been made. Another issue being that it would be wrong to hold “that post-contract there is a similarly extensive obligation to disclose all facts which the insurer has an interest in knowing and which might affect his conduct.” Similarly, it must be acknowledged that the post-contract duty “is not colored by the extent of the duty owed by the assured pre-contract.” It does not require disclosure of all material circumstances, as does the pre-contract duty. If it did, there would be difficult questions of materiality involved.
It must also be noted that the only way in which the inequality between the Insured and the Insurer in terms of the avoidance/enforcement of claim on the basis of the veracity of disclosures or vice versa must be through certain methods ascertainable by a jury and completely based on merit. There should not be a situation wherein one side (underwriter) gets to prove something in court and then claim to avoid the entire contract altogether. This is a recurring pattern that must be stopped. The courts must realize that once the parties approach the court, their rights are sealed and that merely because the court does not agree with the findings of the Insured or finds them to be erroneous/fraudulent, it must not enforce the principle as is. It must look into the merits and then assess the situation properly. Especially when the court is the driving force behind the evolution and application of this legal principle, it must shy away from over-zealous approaches to good faith.
[1] Donald O’may, Marine Insurance Law and Policy 35 (1993).
[2] Schoenbaum, Admiralty and Maritime Law 197,422 (2d 1994).
[3] ICFAI University Press, Insurance Law and Regulations (2002) 1 107.
[4] ‘Insurance Law Regulations in India’ (Nishith Desai Associates) <http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Insurance_Law_-_Regulations_in_India.pdf> accessed 12 July 2018.
[5] United India Insurance Co Ltd v MKJ Corpn (1996) 6 SCC 428.
[6] Indian Marine Insurance Act 1906, s 21(a).
[7] Hanil Era Textiles Ltd v Oriental Insurance Co Ltd (2001) 1 SCC 269.
[8] United India Insurance Co Ltd v MKJ Corporation (1996) 6 SCC 428.
[9] ‘Good faith in Insurance Contracts’ (Shodhganga) <http://shodhganga.inflibnet.ac.in/bitstream/10603/124342/6/06_chapter%203.pdf> accessed 13 July 2018.
[10] WISE Ltd v Grupo Nacional Provincial SA (2004) EWCA Civ 962.
[11] Lambert v Co-operative Ins Soc’y (1975) 2 Lloyd‘s Rep 485.
[12] Fed Ins Co v PGG Realty 538 F Supp 2d 680, 687 (SDNY 2008).
[13] Schoenbaum (n 5) 12; But see: Dr. Baris Soyer, ‘Marine Warranties: Old Rules Ibr the New Millennium?’ in D. Rhidian Thomas (ed), The Modern Law of Marine Insurance (2002), para 5C.3.
[14] Carter v Boehm 97 Eng Rep 1162 (KB 1766).
[15] See id at 1164.
[16] Patrick JS Griggs, ‘Coverage, Warranties, Concealment, Disclosure, Exclusions, Misrepresentations, and Bad Faith’ (1991) 66 Tul L Rev 423, 424.
[17] Thomas J Schoenbaum, Key Divergences Between English and American Law of Marine Insurance: A Comparative Study 12 (1999).
[18] Joel v Law Union & Crown Ins Co 2 KB 863 (CA 1908).
[19] British Marine Insurance Act 1906, ss 17-19.
[20] Insurance Contracts Act 1984, s 28 (Commonwealth).
[21] Jeffery B Struckhoff, ‘The Irony of Uberrimae Fidei: Bad Faith Practices in Marine Insurance’ 29 Tul Mar LJ 287 (2005).
[22] ‘Insurance Law and Practice’ (The Institute of Company Secretaries of India) <https://www.icsi.edu/docs/webmodules/Publications/9.3%20INSURANCE%20LAW%20AND%20PRACTICE.pdf> accessed 13 July 2018.
[23] M’Lanahan v Universal Ins Co 26 US (1 Pet) 170 (1828); Industrial Promotion & Investment Corpn of Orissa Ltd v New India Assurance Co Ltd (2016) 15 SCC 315.
[24] Carter v Boehm 97 Eng Rep 1162 (KB 1766).
[25] Lindenau v Desborough 108 Eng Rep 1160 (KB 1828).
[26] Id at 1162.
[27] Id.
[28] Bates v Hewitt 2 LR-QB 595, 601 (1867).
[29] Schoenbaum (n 17).
[30] Lonides v Pender, 9 LR-QB 531, 539 (1874).
[31] Lambert v Co-operative Ins Soc’y Ltd [1975] 2 Lloyd’s Rep 485, 487 (CA).
[32] Inversiones Manria SA v Sphere Drake Ins. Co [1989] 1 Lloyd’s Rep 69, 70 (QB).
[33] Martin Davies, ‘Insured’s Post-Contract Duty Uberrimae Fidei’ 32 J Mar L & Com 501 (2001).
[34] Malcolm A Clarke, The Law of Insurance Contracts(2nd ed, 1994), para 27-1A .
[35] Black King Shipping Corp v Massie [1985] 1 Lloyd’s Rep 437 (QB) (The ‘Litsion Pride’).
[36] K/S Merc-Scandia XXXXII v Lloyd’s Underwriters [2001 ] Lloyd’s Rep 563 (CA).
[37] Struckhoff (n 21).
[38] Manifest Shipping Co v UniPolaris Insurance Co (The ‘Star Sea’) [2001] 1 Lloyd’s Rep 389 (HL).
[39] K/S Merc-Scandia XXXXII v Lloyd’s Underwriters [2001] Lloyd’s Rep 563 (CA).
[40] Rego v Connecticut Placement Facility 593 A 2d 491 (Conn 1991).
[41] Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45.
(Anjanay was one of the founding editors of The RMLNLU Law Review Blog. He also served as an editor for 2017-18. He is currently a student at Dr. Ram Manohar Lohiya National Law University.)
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