Doctrine of Utmost Good Faith

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Pre-Contractual Duty of Disclosure. What is a 'material fact'? S.18(2):

"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."

Duty of Utmost Good Faith. Principle emphasising this duty, stated by Lord Mansfield in 'Carter v Boehm':

"Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist."

Waiver of duty of utmost good faith. MIA 1906 s.18(3):

'Any circumstance as to which information is waived by the insurer.' - the assured will be under no duty to provide said information.

What is the date, after which the Insurance Act 2015 will apply to contracts of insurance?

13th August 2016

Definition of 'material' under IA 2015:

A circumstance/representation is material if 'it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.

Comparison to the old law. Marine Insurance Act 1906 S.17 (Good Faith):

A contract of insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

Misrepresentations. Marine Insurance Act 1906 S.20(5):

A representation as to a matter of expectation or belief is true if made in good faith.

Section 15 Insurance Act 2015 (Contracting out - Consumer Contracts):

A term of a consumer insurance contract, or of any other contract, which would put the consumer in a worse position is to that extent of no effect.

Section 16 Insurance Act 2015 (Contracting out - Non-Consumer Contracts):

A term of a non-consumer insurance contract, or of any other contract, which would put the insured in a worse position would be in by virtue of that section is to that extent of no effect.

What is the increased risk test?

Adopted by Court of Appeal in Pan Atlantic: Whether a prudent underwriter, if he had known the undisclosed facts, would have regarded the risk as increased beyond which was disclosed on the actual presentation.

Pre-Contractual Duty of Disclosure. S.18 MIA 1906:

Assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract

Proving Inducement. Drake Insurance Plc v Provident Insurance Plc (Held):

At the time of renewal, the insurer could not be said to have induced the contract. The non-disclosure of the speeding ticket would have made no difference to the premium, as it had been settled.

The three tests suggested to define the test of materiality:

Decisive Influence Test Increased Risk Test Mere Influence Test

Proving Inducement. Drake Insurance Plc v Provident Insurance Plc (Legal Issues):

Did the failure to disclose constitute inducement capable of constituting a breach of duty of good faith?

Problems with the increased risk test:

Evans LJ in St Paul Fire & Marine Insurance: 1. The risk may be increased in some respects and decreased in others, and the assured need not disclose any circumstances which diminishes the risk - s.18(3) 2. The duty of disclosure operates both ways because the duty of good faith is reciprocal. Thus, the definition of material is not concerned with the proposer of insurance alone.

Misrepresentations. Marine Insurance Act 1906 S.20 (Misrepresentations):

Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If untrue, the insurer may avoid the contract.

Mere Influence test:

Everything is material to which a prudent insurer, if he were in the proposed insurer's place, would wish to direct his mind in the course of considering the proposed insurance with a view to deciding whether to take it up and on what terms, including what premium to charge.

Misrepresentations. Involnert v Aprilgrange 'The Galatea' (Held):

Held that it was clear that the broker knew its actual value was far less than $13 million. Plaintiff had to prove two things: 1. That the misrepresentation was material; and 2. Induced the underwriter to insure (causation).

Sea glory Maritime Co v AL Sagr National Insurance Co (Held):

Insurers liable to pay. The port detentions were a material fact, however; The insurer had not been induced to agree to the policy by reason of any non-disclosure concerning the vessel's detention history. Drake principle applied: Had the claimants disclosed the detentions, given that they had all been remedied, the insurer would have proceeded to renew cover on the same terms.

Proving Inducement. Drake Insurance Plc v Provident Insurance Plc (Facts):

S approached brokers for insurance for his car; third party, fire and theft for himself and his wife, K. K had suffered an accident before, third party drove into her - settled in her favour after reinsurance. Also, S received a speeding ticket, which he did not disclose when reinsuring. After a collision with a motorcycle, insurer attempted to avoid the contract for breach of duty of good faith.

Recently, the analysis of inducement found in Drake Insurance was applied in what case?

Sea glory Maritime Co v AL Sagr National Insurance Co (2014)

What other element is required to be proven to seek remedy for breach of the duty of utmost good faith?

The insurer must prove that, but for the misrepresentation or non-disclosure, the particular underwriter would not have made the contract, either at all, or on the terms on which it was in fact made.

Section 17 Insurance Act 2015 (Transparency requirements):

The insurer must take sufficient steps to draw the disadvantageous term to the insured's attention before the contract is entered into. The disadvantageous term must be clear and unambiguous as to its effect.

What is the decisive influence test?

To prove materiality it must be shown that full and accurate disclosure would have led the prudent insurer either to reject the risk or accept it on more onerous terms.

Sea glory Maritime Co v AL Sagr National Insurance Co (Facts):

Vessel chartered for carrying crude sulphur. Total loss to fire in February 2009. Insurers denied liability on following grounds: 1. There had been either misrepresentation or non-disclosure as to the management of the vessel. 2. Non-disclosure of the fact that the vessel had been detained on four occasions on Port State Control inspections in respect of deficiencies in fire safety measures. In each case the deficiencies had been remedied.

Misrepresentations. Involnert v Aprilgrange 'The Galatea' (Legal Issue):

Was there misrepresentation? Under s20(5) MIA 1906, had the broker made a representation of belief in good faith?

Misrepresentations. Section 2(2) Misrepresentation Act 1967 (what can the injured party recover?):

Where a person enters a contract as a result of misrepresentation he is entitled to rescind the contract or claim damages arising as a result of the misrepresentation.

Misrepresentations. Involnert v Aprilgrange 'The Galatea' (Facts):

Yacht insured for £13 million. Repeatedly re-insured for new price, until eventually it caught fire. Insurers refused to pay, on grounds of misrepresentation - failure to disclose materially relevant facts that the yacht was worth a lot less.

May the Insurance Act 2015 be varied?

Yes, but only by following a very specific procedure set out is ss15-17.


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