Utmost Good Faith

Old law- s17 Marine Insurance Act 1906

"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"

s18(2) Marine Insurance Act

"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"

R Hasson

"the doctrine is in error in assessing the strength of the parties with regard to knowledge. The doctrine assumes that the insured is in a better position because he has more knowledge than the insurer, but possession of greater knowledge, puts he insured in a weaker position since he does not know which parts of that information the insurer wishes to have"

Decorum Investments Ltd v Atkin, The Elena G

- D had not failed to disclose factors material to risk and was therefore entitled to be indemnified by A under a marine insurance policy in respect to loss of a yacht - A contended that D had failed to disclose factors which were material to the assessment of risk to the yacht, namely that the vessel was beneficially owned by G, a prominent Russian businessman who was at risk of physical attack - burden is on the underwriter to prove that the insured failed to disclose facts - must disclose facts known to him that would be regarded as material by the underwriter - The case highlights the need for insurer's to make their own enquiries regarding ownership interests where the insured is a corporation

St Paul Fire & Marine Ins Co v McConnell Dowell Contractors Ltd

- issues with proving inducement 3 underwriters gave evidence of inducement, a 4th was not called to give evidence - Had the 4th company shown inducement - The court said technically it cannot be inferred in law from proved materially, although there may be cases that it is so obvious that it can justify inference of fact that they were induced, but it is only prima facie, one may be rebutted by counter-evidence"

Fix LJ in Drake Insurance

- the doctrine of good faith should be capable of limiting the insurer's right to avoid in circumstances where that remedy, which has been described in recent years as draconian, would operate unfairly

Drake Insurance v Provident

- the issue was whether the right to avoid was limited by good faith three points were made: 1) examples where Lord Hobhouse's principle of fair dealing has been exercised to prevent insurer from utilising prima facie right to avoid are not to hand 2) it has been appreciated that, once an insured has been found wanting in good faith in the matter of pre-contactual non-disclosure, it is likely to be hard to conclude that the same doctrine of good faith itself prevents the insurer from exercising his right to avoid 3) on the whole English commercial Law has not favoured the process of balancing rights and wrongs (proportionality)- instead it seeks a stricter and simpler test for certainty

Berger v Pollock

Factual example of issue in Pan Atlantic - shipment of steel moulds from Aus to London - the insurer would not have been entitled to a higher premium if they were informed held: 'prudent' insurer in s18 means 'prudent and actual insurer' - if the information was disclosed the same deal would have been reached - lacked inducement of the underwriter

Economides v Commercial Union

Greek student brought content insurance; he was covered for £12,000 - there was a distinction between ordinary contents and 'valuables' - asserted that the level of valuables was less that £4k - parents came to stay. Value of insured property increased to £16k - Mother brought her jewellery, more than £30k worth - it was stolen in a burglary - First instance judge: "the commercial reality and common sense" required the plaintiff here as the representer to have objectively reasonable grounds for his belief; honesty alone was not enough

James Davey

How is it that the insurer can be acting contrary to the doctrine of good faith by exercising rights gained under that same doctrine? - There is otherwise a potential inconsistency in the doctrine of utmost good faith giving rights with one hand and taking them away with the other. - Too often insurers have claimed, and been given, special treatment under the doctrine of utmost good faith. They must either accept the application of a functionally equivalent standard to limit their own behaviour, or face the reduction of those privileges

Manifest Shipping v Uni- Polaris, The Star Sea

Is there a post-contractual duty of good faith - Lord Clyde; the superficial meaning of s17 cannot be correct - need to adopt a flexible construction of UGF Lord Hobhouse- held there was no duty like in s18 which would operate post-contractually - an inevitable consequence in the post-contractual situation is that the remedy of avoidance of the contract in practical terms would become wholly one-sided - s17 is only justified in formation of the contract - "The courts have consistently set their face against allowing the assured's duty of good faith to be used by the insurer as an instrument for enabling the insurer himself to act in bad faith."

Pan Atlantic

Lord Mustill - the inequality of knowledge has made a special duty to make accurate disclosure of sufficient facts to restore balance and remedy to the injustice holding to the underwriter to speculation which he had been unable to fairly assess" - people who behave carefully deserve remedy - can only seek remedy if you can prove that you would have used the information had it been disclosed and come to a different contract

Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd

Mutuality of utmost good faith obligation - has not regularly been invoked to provide the insured with a remedy other than return of premiums

Lord Hobhouse in The Star Sea

Post- contractual duty of good faith; "Such authorities show that suitable caution should be exercised in making any extensions to the existing law of non-disclosure and that the courts should be on their guard against the use of the principle of good faith to achieve results which are only questionably capable of being reconciled with the mutual character of the obligation to observe good faith."

Kausar v Eagle Star Insurance

Staughton LJ - "avoidance for non-disclosure is a drastic remedy. It enables the insurer to avoid liability once he has discovered it is a bad bargain. The insured is left without protection which he thought he paid for- there should be some restraint on the operation of the doctrine"

AXA v Arab Ins Group

Tested what was held in Pan Atlantic - Materiality; the assured's duty is essentially a duty to make a fair presentation of the risk to the insurer... the assured complies with the rule if he discloses sufficient to call the attention of the underwriter to the matter in such a way that, if he desires further information, he can ask for it. Sufficient to put underwriter on enquiry - Inducement; in order to be entitled to avoid the contract; they must prove on balance of probabilities that he was induced to enter into the contract by material non-disclosure - to prove inducement the insurer or reinsurer must show that the non- disclosure was an effective cause of entering the contract on the terms on which he did, he must show at least that but for the relevant non-disclosure, he would not have entered the contract on those terms - but he does not have to show it was the sole effective cause in doing so

The North Star

There was an investigation of fraud - hadn't told the insurers that they were under investigation - non-disclosure - but the owners had been cleared of fraud; they were proven innocent so should not be able to deny liability for the claim - investigation of fraud is a material circumstance Waller LJ- difficult to balance interests, may have increased premiums unfairly. there is no smoke without fire and turn the placement down or at the very least rate the policy to take into account allegations - "there is no smoke without fire" - unlikely that an underwriter would ever give evidence that they wouldn't not have taken the circumstance into account and difficult to see judges not accepting that evidence - most likely be uninsured either way

Pan Atlantic Ins Co v Pine Top Ins

discussion on the limitations of s18(2) - "influence the judgment of a prudent insurer; a prudent insurer is a hypothetical, reasonable insurer - what of actual insurer (subjective) - not part of statutory test, but inducement added as common law test - now requires evidence that actual insurer was influenced, in addition to impact on hypothetical insurer - both objective and subjective tests are required

Brotherton (No2)

does the underwriter have UGF duties post-contactually? Suggestions in the Columbian press that they were lending money for political reasons - the rumours were not disclosed about how the business was being operated - the insurer said they would have wanted to know they were operating corruptly if there is a non-disclosure theft should be entitled to avoid the contract - underwriter didnt have to prove they were acting in good faith Mance LJ- it would be an unsound set to introduce a principle which would enable the insured either not to disclose intelligence which a prudent insurer would regard as material - In cases where an allegation of serious personal criminality is made, the insured is likely to know the veracity of the allegations. To be clear: it is not whether the insured will be convicted that increases the risk, it is whether the offence was actually committed.

Banque Financière de la cite SA v Westgate Insurance Co

fraudulent scheme to secure loans, secured on gemstones - bank loaned against the insurance policies, but those policies were ineffective as not properly arranged by the broker - had not informed the banks Steyn J- The principle of utmost good faith imposes meaningful reciprocal duties, owed by the insured to the insurers and vis versa, it seems anomalous that there should be no claim for breach where that is the only effective remedy - Slade J- rejected the award of damages; 1) there was no existing head of damages 2) no need to prove actual harm 3) statute provides for avoidance as remedy 4) effects on insureds

J Lowry

how can the ordinary insured be expected to know what particular circumstances are material and therefore would influence the prudent insurer - there have been creation of judicial mechanisms to control Utmost Good Faith: 1) requirement of inducement 2) insurers shouldn't take a passive role - if they are then they are waiving their right to full disclosure 3) scrutiny over prolonged duty

"influence the judgment"

judgment has two meanings : a) thought process- the exercise of your mind- influencing that would mean to change thought process b) final result- the outcome would be different - different ways to measure the impact a) "decisive factor" test b) "relevant factor" test - Lord Mustill (majority)- the duty of disclosure extended to all matters which would have been taken into account by the underwriter when assessing the risk; doesn't matter if it changed the end result or not - influence the thought process Lord Lloyd (minority)- "would influence the judgment of a prudent insurer' points to something more than what the prudent insurer would want to know, or to take into account. At the very least it points to what the prudent insurer would perceive as increasing, or tending to increase the risk" Lord Lloyd favoured a more narrowed approach

Pre- contractual disclosure

s18 MIA 1906- the 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"