#4924 - Insurance Duty Of The Utmost Good Faith - Insurance Law

Insurance Duty of the Utmost Good Faith (DUGF)

Origin: Carter v. Boehm; Created by Lord Mansfield. UWs claimed they were not given sufficient details on just how vulnerable a fort in Sumatra was to attack by the French. They are argued the risk was not properly disclosed to them.

Rationale: An insurance contract is based upon speculation. Therefore the contracting party who has the knowledge of the risk has a DUGF to disclose any features that make the risk more likely. However, they have no duty to disclose anything that makes the risk less likely, is already known by the public generally or that a skilled underwriter should know.

Codification: S.17 Marine Insurance Act 1906 (MIA): Insurance contracts ‘based upon the utmost good faith’. The DUGF is effectively one of honesty and fairness.

• Pinetop v. Panatlantic; H of L held that the s.17 statutory codification applies to both marine and non-marine risks.

It is a mutual duty owed by both parties. The parties can agree to limit the application of this duty; i.e. by waiving negligent or non-deliberate breaches. Consequence of breach is avoidance by the other party.

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Placement Duties Owed by the Insured and Agents Placing Risk on their Behalf

Insured: Situation – When trying to procure a contract of insurance (either by agent or directly) the insured must disclose knowledge when drafting a proposed cover. The DUGF is owed until the contract is entered into.

• S.18(1) MIA: ‘Assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known (or deemed to be known) by the assured’. Failure = avoidance.

• ‘Known’ under s.18 = Four types of knowledge. 1) Actual. 2) Attributed. 3) Constructive knowledge – deemed to know something they are ought to.

4) The insured has an ‘agent to know’s’ knowledge.

• S.20(1) MIA: ‘Every material representation made by the assured, or his agent, to the insurer during negotiations for the contract and before the contract is concluded, must be true’. Failure = avoidance.

• S.20(2) MIA: ‘Material’ = Must influence the judgment of a prudent underwriter in fixing a premium or deciding to take on a risk.

• S.20(4) MIA: Representation as to a matter of fact = True if substantially correct.

• S.20(5) MIA: Belief = True if made in good faith; i.e. believed to be true.

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The Insured’s Agent

Situation: An agent who is employed by the insured to place the contract of insurance owes a DUGF to the underwriter he places the risk with. So in an oral presentation of a risk to an underwriter there must be a ‘fair presentation’ of that risk.

Quotation: Before getting a premium quotation from an underwriter the broker agent should explain all risks.

Following insurance market: Each placement with an underwriter is a separate contractual negotiation so there is a separate DUGF owed to each party. A non-disclosure or misrepresentation will be committed if this does not happen.

• S.19 MIA: The agent must disclose to the insurer all material circumstances.

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What does ‘Materiality’ mean?

• S.18(2) and 20(2) MIA: ‘Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk’. This is both an objective and subjective test.

Objective test: - Pinetop v. Panatlantic; The fact in question has to be one which a prudent underwriter would have wanted to know as it would have influenced their underwriting decision (I.e. premiums or term) but not necessarily decisively. Essentially it has to be a fact that increases the risk that the underwriter agreed to bear.

Evidence: An expert (an experienced underwriter who has been insuring risks in the London market) has to show that the fact would have influenced him. Evidence from the actual underwriter in the case is not required.

Subjective test: Generally if the fact is material it is assumed to have influenced the underwriter’s decision. It is good to get evidence from the actual underwriter to show that they were induced by the misrepresentation to underwrite the risk and otherwise would have reached a different decision.

The burden of proof is on the underwriter for both tests.

Issues:

1. Matter looked at from the insurer’s perspective.

2. Does it have to be a matter of decisive importance for the insurer deciding not to take on the risk or just something they would have liked to have known?

3. It is conceptually difficult to understand how an underwriter could be induced by a non-disclosure. However, most failures can be classed as both a non-disclosure and a misrepresentation.

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Effect of Breach of the DUGF

If you misrepresent or fail to disclose something material then the consequences are:

• The insurer has a right to avoid; i.e. a right to rescind the insurance contract so that it was never in place. This right arises once the insurance cover is in place and the insurers become aware that a non-disclosure or misrepresentation of facts took place in the presentation of the risk to them.

• Insurers must elect to avoid the contract. If they delay in that election then they have arguably affirmed the contract and lose their right to avoid.

• Loss of an insurer’s right to avoid occurs because of delay, accepting further premium or issuing a notice of cancellation of the risk within the policy terms; i.e. waiver. The solution here is that insurers reserve rights for non-disclosure. This gives them time to investigate and decide whether to avoid.

• Avoidance is an equitable right. It will not prejudice third parties who have subsequently acquired an interest in the insurance who has not party to the breach of the...