Good Faith
7.1 Existence and Nature of the Duty
Underlying all stages of the relationship between insured and insurer is an important sub-stratum of obligation, the reciprocal duty of good faith. Mainly cases focus on the duty of the insured, it being “an essential condition of the policy of insurance that the underwriters shall be treated with good faith, not merely in reference to the inception of the risk, but in the steps taken to carry out the contract.”400 This was said in 1904 but nearly a century later, in The Star Sea,401 Lord Hobhouse confirmed that “utmost good faith is a principle of fair dealing which does not come to an end when the contract has been made” and quoted a distinguished judge of an earlier generation as saying that the obligation of good faith rests on the insured “throughout the currency of the policy.”402
This resonates with more general rules of contract law in England, there being a “positive rule of the law of contract that conduct of either [party] which can be said to amount to … bringing about the impossibility of performance is itself a breach.”403 This rule has also been stated in more positive terms, as a duty of cooperation, that, when
it appears that both parties have agreed that something shall be done, which cannot be effectually done unless both parties concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.404
With regard to insurance contracts, however, English law was unsettled, on whether the continuing duty of good faith rests on an implied term of the contract or whether it arises independently of the intention of the parties and by operation of law, until the decision of the House of Lords in The Star Sea,405 which pointed to the latter.406 Orthodoxy maintains that there is no general duty of good faith in English contract law,407 however, in Socimer,408 concerning not a contract of insurance but a contract to value assets, Rix LJ referred to a general “requirement of good faith and rationality.” That is precisely what implicit good faith deals with, and he stated: “Commercial contracts assume such good faith, which is why express language requiring it is so rare.”409
The “content of the obligation to observe good faith has a different application and content in different situations,” said Lord Hobhouse in The Star Sea, noting that the duty of utmost good faith applies only until the contract is concluded.410 However, a duty of good faith, in the sense of a duty to disclose information, continues throughout the contractual relationship at a level appropriate to the moment.411 In particular, a duty of disclosure revives whenever the insured has an express or implied duty to supply information to enable the insurer to make a decision.412 There is also a suggestion (but not a decision) that the duty might operate in other cases such as performance by the insured of a duty to give notice of loss.413 However, in such instances any material falsehood in the notice is likely to be repeated in a subsequent claim in respect of that loss and to be categorized as a breach of utmost good faith in the claim.414
Such a duty might well be thought to apply when the contract requires the insured to notify the insurer of any alteration in the risk, so that the insurer can decide whether to exercise an option to cancel the cover;415 or when the insured seeks to rely on a “held covered” clause. However, in New Hampshire v MGN,416 the Court of Appeal approved the view of the lower court that the duty of good faith does not trigger obligations of disclosure of matters affecting risk during the period of cover, except in relation to some requirement, event, or situation expressly provided for in the insurance contract to which the duty of good faith attaches.417
Uncontroversially, the duty of good faith applies when the insured makes a claim.418 Moreover, in view of the generally mutual character of the duty (above 1), it is at least arguable that the insurer owes a corresponding duty to the claimant, for example, a duty to disclose adjusters’ reports. If an insurance claim by the insured is settled, the compromise embodied in the settlement must be bona fide and honest.419 Prior to settlement, if, for example, a claim is not paid as presented but resisted in certain respects, such as the amount due, this is not necessarily rejection of the claim but may well be part of the process of compromise; it is well settled that in these circumstances parties to the compromise owe a good faith duty of disclosure.420
Thus, in The Star Sea