Good faith and the duty of disclosure in marine insurance law
26
Good faith and the duty of disclosure in marine insurance law
Ping-Fat Sze
Counsel, Doctors’ Commons, Norfolk Island
(Australia)/Adjunct Professor of Asia International
Open University, Macao
Dedicated to a great scholar of public international law; an ardent promoter of the rule of international maritime law in the twenty-first century.
The UK Marine Insurance Act 1906 (MIA) is said to be a restatement of the law of marine insurance as applied in both continental Europe and the British Empire as at the 1870s and 1880s.1
The MIA remains the basic law on marine insurance for the common law world although, in recent years, some jurisdictions (such as Australia) proposed reforms in this area of law and practice.2 By virtue of s. 17 of the MIA, a contract for marine insurance is a contract based on the utmost good faith (uberrima fides) and either the insurer or the assured may avoid the contract if the other party does not observe the utmost good faith.
By way of comparison, the marine insurance law of civil law jurisdictions may be classified, according to Dr J.-S. Rohart,3 either as applying Art. 348 of the French Code of Commerce 1807 to annul the insurance contract in case of any non-disclosure or misrepresentation affecting the insurer’s assessment of the risk (that is, quite regardless of the good faith, bad faith or negligence on the assured’s part)4 or subjecting the availability of relief – if any – for breach of
1 T.-L. Wilhelmsen, ‘Duty of disclosure, duty of good faith, alteration of risk and warranties’, CMI Yearbook 2000 (Antwerp: CMI, 2000), p. 339.
2 See, e.g., ALRC Review of the Marine Insurance Act 1909 (Canberra: Australian Government, 2001). As to proposals to reform the law of general insurance in England, see C. Butcher, ‘Good faith in insurance: a redundant concept?’ [2008] JBL 375; B. Soyer, ‘Reforming the assured’s pre-contractual duty of utmost good faith in insurance contracts for consumers: are the Law Commissions on the right track?’ [2008] JBL 385.
3 J.-S. Rohart, ‘The doctrine of “utmost good faith” in the marine insurance law of some civil law countries’, CMI 35th International Conference, Sydney, 1994, p. 2.
4 E.g., Belgium, Germany and the Netherlands. As to Germany, see, e.g., the HGB, arts. 808 and 809. However, the ADS has modified the legal position by imposing a supplementary premium in proportion to the increase in risk where the non-disclosure or misrepresentation was committed without negligence.
the duty of disclosure to the question of whether the assured has acted in good faith, negligently or rather, out of fraud (bad faith).5
This chapter examines the duty of disclosure from both the common law and civil law perspectives. The relevant law and practice necessarily varies from one jurisdiction to another and, for practical reasons, our discussion is confined to England – as far as concerns the MIA – and, for comparative purposes, France and Norway.6
Good faith and the duty of disclosure
The doctrine of good faith is generally reputed to have derived from the precepts of Roman and canon law, with a strong moral flavour.7 It provides the foundation of all obligations in the civil law system.8 As for the common law, however, it was not until the eighteenth century that ‘good faith’ was formally recognized as the prerequisite for ‘all contracts and dealings’.9 Such recognition was short- lived, nevertheless, insofar as ‘the commercial and mercantile law of England developed in a different direction preferring the benefits of simplicity and certainty which flow from requiring those engaging in commerce to look after their own interests’.10 In contemporary English law, the doctrine of good faith is rendered applicable by case law or statute in a limited number of circumstances.11
It is also worth noting that the common law concept of ‘good faith’ may differ from its Continental counterpart. While civil lawyers would, for example, identify ‘good faith’ (bona fides) with the absence of bad faith (mala fides) or gross negligence (culpa lata)12 and exacta diligentia (or diligentia maxima) with the duty expected of a bonus pater familias (thus putting both care and honesty together),13 it is clear that, in common law, ‘a thing is deemed to be done in good faith when
5 E.g., France, Italy and Spain. Before the Insurance Act 1980, Spain followed the French Code of Commerce 1807 whereas France reformed her maritime law in 1967 (incorporated in art. 172.2 of the Code des Assurances).
6 For a useful summary of the law and practice of various jurisdictions (both common law and civil law), see, e.g., op. cit., Wilhelmsen, fn 1, pp. 347 et seq.
7 See generally, J. Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford: Clarendon Press; New York: Oxford University Press, 1991).
8 See, e.g., the French Civil Code, art. 1134; the Italian Civil Code, arts 1366 and 1375.
9 Carter v. Boehm (1766) 3 Burr. 1905.
10 The Star Sea [2001] 1 Lloyd’s Rep. 389, p. 399, per Lord Hobhouse.
11 See Bell v. Lever Brothers (1932) AC 161, p. 227, per Lord Atkin; P. F. Sze and K. L. Choy, The International Encyclopedia of Contract Law – Hong Kong (The Hague: Kluwer Law International, 2001), para. 8; however, the doctrine of ‘good faith’ has been accepted as part of US law: see, e.g., the UCC, art. 1–201. There is a tendency for its general recognition in some other common law jurisdictions such as Australia: see, e.g., the Trade Practices Act 1974 (Cth.), s. 52.
12 See e.g., the Italian Civil Code, art. 1892; cf.: the German ADS, art. 20(1). But diligentia maxima is compared to culpa levis as opposed to culpa lata in ‘diligentia quam suis rebus’: see, e.g., P. Stein (ed.) Buckland’s Textbook of Roman Law from Augustus to Justinian, Cambridge: Cambridge University Press, 1963, p. 556.
13 Ibid., pp. 500 and 504 et seq.
it is in fact done honestly, whether it is done negligently or not’14 whereas ‘negligence’ (culpa) as a separate, distinct and unified concept denotes generally the failure to:
take reasonable care to avoid acts or omissions which [one] can reasonably foresee would be likely to injure [one’s] neighbour[s] … who are so closely and directly affected by [one’s] act that [one] ought reasonably to have them in contemplation as being so affected.15
Leaving these differences aside, the imposition of a duty of disclosure upon the assured is justified in light of the fact that the insurer is virtually required to take a commercial risk with which he is not familiar but about which the assured is in a position to know.16 The insurer has to rely on the assured for the requisite information without which the former could not calculate the risk and decide whether to accept the proposal (and if so, on what terms).17 The remedy of avoidance is deemed necessary to discourage the assured from making false claims.18
Nevertheless, it is questionable how this duty could be incorporated as a term of the insurance contract not yet in existence and, furthermore, how this term, if broken, would give rise to the remedy of avoidance rendering such a ‘contract’ non-existent at all. To establish this pre-contractual duty in the law of torts has also met with difficulty insofar as the remedy of avoidance was founded in equity.19 The better view appears to be that this duty is imposed either as a matter of law or as a contingent condition precedent to the enforceability of the resultant contract.20
Section 17 of the MIA applies to both the insurer and the assured; the doctrine of good faith ‘forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and from his
14 The UK Sale of Goods Act 1893, s. 62 (emphasis added). See also the UK Bills of Exchange Act 1882, s. 90. Some common law judges and commentators nonetheless regard ‘good faith’ as requiring both honesty and reasonable care; see, e.g., J. Carter and E. Peden, ‘Good faith in Australian contract law’, JCL 19, 2003, p. 155; H. Hunter, ‘The growing uncertainty about good faith in American contract law’, JCL 20, 2004, p. 50.
15 Donoghue v. Stevenson (1932) AC 562, p. 580, per Lord Atkin.
16 Container Transport International Inc. & Another v. Oceanus Mutual Underwriting Assn. (Bermuda) Ltd [1984] 1 Lloyd’s Rep. 476, p. 529, per Stephenson LJ.
17 See s. 18(2) of the MIA.
18 As to the justification for requiring the insurer to act uberrimae fidei, see Container Transport International, fn 16.
19 Nor could a ‘trust’ be inferred from such circumstances: Banque Keyser Ullman SA v. Skandia (UK) Insurance Co. Ltd [1988] 2 Lloyd’s Rep. 513, p. 550, per Slade LJ; [1990] 2 Lloyd’s Rep. 377, p. 383, per Lord Templeman.
20 Blackburn Low & Co. v. Vigors (1886) 17 Q.B.D. 553, p. 562, per Lord Esher (CA). See also William Pickersgill & Sons Ltd v. London & Provincial Marine & General Insurance Co. Ltd (1912) 3 K.B. 614, p. 621, per Hamilton J.
believing the contrary’.21 As noted in Container Transport International Inc. & Another v. Oceanus Mutual Underwriting Assn. (Bermuda) Ltd:
it is not necessary, even if it were possible to go into degrees of good faith, or the question what degree of good faith may apply to other contracts. It is enough that much more than an absence of bad faith is required of both parties to all contracts of insurance.22
In reality, however, litigation over s. 17 is predominately related to its breach by the assured vis-à-vis the insurer.23 More significantly, a breach of the statutory provision does not entitle the aggrieved party to damages24 unless it is also action-able as a misrepresentation or a contractual breach.25
Pre-contractual duty to disclose
Section 18(1) of the MIA reads:
Subject to the provisions of this section, 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.
Section 18 (3) relieves the assured from disclosing any of the following: (a) any circumstance which diminishes the risk; (b) any circumstance which is known or presumed to be known to the insurer; (c) any circumstance as to which information is waived by the insurer; and (d) any circumstance which it is super-fluous to disclose by reason of any express or implied warranty.
21 Carter v. Boehm, per Lord Mansfield. See also Drake Insurance plc v. Provident Insurance plc [2004] 1 Lloyd’s Rep. 268, p. 287, per Rix LJ.
22 [1984] 1 Lloyd’s Rep. 476, p. 525, per Stephenson LJ. As to the differences (if any) between good faith and utmost good faith, see S. Henchcliffe, ‘Insurance claims: fraud and the duty of good faith’, ILJ 8, 1997, p. 210; F. Hawke, ‘Utmost good faith: what does it really mean?’ ILJ 6(2), 1994, p. 91. For a discussion of the insurer’s duties, see Y. Baatz, ‘Utmost good faith in marine insurance contracts’ in M. Huybrechts et al. (eds), Marine Insurance, at the Turn of the Millennium (Antwerp: Intersentia, 1999), vol. 1, pp. 18–19; N. Rein, ‘Utmost Good Faith in Marine Insurance’, ILJ 10, 1999, 145, p. 160–1.
23 It is not advantageous for the assured to avoid the contract (leaving the risk uncovered) despite a breach of the contract by the insurer.
24 Skandia, fn 19 (concerning pre-contractual duties); The Good Luck [1989] 2 Lloyd’s Rep 238, pp. 263–5, per May LJ (reversed on different grounds (1992) 1 AC 233) (concerning post-contractual duties).
25 See op. cit., Sze and Choy, fn 11, ch. 6. See also the MIA, s. 91.
Where the insurance is effected for the assured by an agent, s. 19 requires the agent to disclose to the insurer:
every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to him … or which the assured is bound to disclose, unless it comes to his knowledge too late to communicate it to the agent.
In Container Transport International, Kerr LJ said: ‘The duty of disclosure as defined or circumscribed by ss. 18 and 19, is one aspect of the overriding duty of the utmost good faith mentioned in s. 17’.26
Section 20 adds that the insurer may avoid the contract if a material representation made by the assured or his agent to the insurer during the negotiations for the contract is untrue.27
Materiality
It is interesting to note, however, that, as far as the assured’s – or his agent’s – duty to disclose is concerned, s. 18(2) provides that ‘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’. Pursuant to s. 18(5), ‘materiality’ and ‘circumstance’ are respectively a question of fact to decide and inclusive of any communication made to, or information received by, the assured.
In Container Transport International, Parker LJ said:
[T]he test intended was one which could sensibly be answered in relation to prudent underwriters. It is possible to say that prudent underwriters in general would consider particular circumstance as bearing on the risk and exercising an influence on their judgment towards declining the risk or loading the premium. It is not possible to say, save in extreme cases, that the prudent underwriters in general would have acted differently, because there is no absolute standard by which they would have acted in the first place or as to the precise weight they would give to the undisclosed circumstance.28
26 [1984] 1 Lloyd’s Rep. 476, p. 492.
27 The duty imposed by s. 20 goes beyond the general duty of utmost good faith under s. 17. See Ionides & Chapeaurouge v. Pacific Fire & Marine Insurance Co. (1871) LR 6 QB 674, pp. 683–4, per Blackburn J; Anderson v. Pacific & Fire Insurance Co. Ltd (1872) LR 7 CP 65, p. 68, per Willes J.
28 [1984] 1 Lloyd’s Rep. 476, p. 511. The insurer need not have been induced to accept the risk or charge a different premium: p. 510.
Kerr LJ chose to explain ‘influence’, rather, in terms of an impact on the formation of the insurer’s opinion and his decision-making process over the matters under scrutiny.29
In Skandia, Slade LJ confined the duty of utmost good faith to the disclosure of ‘material’ facts and ruled that the breach of this duty was not rebutted by the absence of fraud or negligence.30
The vexed question of ‘materiality’ was raised again in Pan Atlantic Insurance Co. Ltd v. Pine Top Insurance Co. Ltd.31 According to Lord Goff, the statutory provision is to be construed according to its natural and ordinary meaning, the underlying obligations of good faith and the practicalities of the situation32 – so much so, that a circumstance may nonetheless be ‘material’ even though it would not have had a decisive effect on the prudent insurer’s conclusion had it been fully and accurately disclosed.33 Lord Mustill argued that, since ‘influence’ was not the same as ‘decisively influence’ and ‘influence on the mind’ did not mean ‘change of mind’, the material circumstance was relevant to the insurer in weighing up as opposed to taking the risk.34 Given that such an inquiry – as to what should have been disclosed vis-à-vis what were actually disclosed – is necessarily conducted ex post facto, his Lordship added:
[I]n all but the most obvious cases the ‘decisive influence’ test faces them with an almost impossible task. How can they tell whether the proper disclosure would turn the scale? By contrast, if all that they have to consider is whether the materials are such that a prudent underwriter would take them into account, the text is perfectly workable … [A]n assumption that the prudent underwriter would have written the risk at the premium actually agreed on the basis of the disclosure actually made … is impossible if the actual underwriter, through laziness, incompetence or a simple error of judgment has made a bargain which no prudent underwriter would have made, full disclosure or no full disclosure. This absurdity does not arise if the duty of disclosure embraces all materials which would enter into the making of the hypothetical decision, since this does not require the bargain actually made to be taken as the starting point.35
29 [1984] 1 Lloyd’s Rep. 476, p. 492. It need not be shown that the circumstance in question bears directly on the risk: see Rivaz v. Gerussi (1880) 6 QBD 222. For criticism of the ‘prudent insurer’ test, see A. Diamond, ‘The law of marine insurance – has it a future?’ (1986) LMCLQ 25, p. 30 et seq.; but see M. Kirby, ‘Is the doctrine of utmost good faith out of date?’ CMI 35th International Conference, Sydney, 1994, p. 16.
30 Banque Keyser Ullman SA v. Skandia (UK) Insurance Co. Ltd [1988] 2 Lloyd’s Rep. 513, p. 544.
31 [1994] 2 Lloyd’s Rep. 427.
32 [1994] 2 Lloyd’s Rep. 427, p. 431.
33 1994] 2 Lloyd’s Rep. 427, pp. 430 and 431.
34 [1994] 2 Lloyd’s Rep. 427, pp. 440–1. See also Lord Goff’sdictum, p. 431.
35 [1994] 2 Lloyd’s Rep. 427, p. 441.
Together with Lord Goff,36 Lord Slynn37 and Lord Lloyd,38 his Lordship rejected the ‘decisive influence’ test.39 By contrast, Lord Templeman believed that the judgement of a prudent insurer could not be said to be ‘influenced’ if the circumstance in question would not have affected acceptance of the risk or the amount of premium charged.40 Nevertheless, all members of the House agreed that the aggrieved party must have been induced by the non-disclosure.41
Knowledge
The insurer is entitled to take at face value the presentation of the risk by the assured. Nevertheless, the insurer is bound to make inquiries if the presentation arouses suspicion in the mind of a reasonable insurer that there are other circumstances which affect the presentation.42
Similarly, an assured is deemed to have knowledge of the circumstance notwithstanding that he has turned a blind eye to it and chosen not to make inquiries.43 Since he is also ‘deemed to know every circumstance which, in the ordinary course of business, ought to be known by him’ pursuant to s. 18(1), his ignorance of the materiality of the circumstance in question affords no excuse.44
The assured is responsible for the acts and intromissions of an agent who also owes a duty to disclose towards the insurer quite separately from the assured’s duty under s. 18.
By way of comparison, a material misrepresentation by the assured or his agent pursuant to section 20 – while similarly defined as influencing a prudent insurer’s judgement in fixing the premium or determining whether he will take the risk – may be related to a matter of fact or a matter of expectation or belief.45 However, as Lord Esher said, while the assured:
36 [1994] 2 Lloyd’s Rep. 427, p. 431.
37 [1994] 2 Lloyd’s Rep. 427, p. 454.
38 [1994] 2 Lloyd’s Rep. 427, p. 466.
39 For criticism of Pan Atlantic, see H. Bennett, The Law of Marine Insurance (Oxford: Clarendon Press, 1996), pp. 55–8
40 [1994] 2 Lloyd’s Rep. 427, pp. 430 and 466.
41 [1994] 2 Lloyd’s Rep. 427, p. 430, per Lord Templeman, pp. 430–1 per Lord Goff, p. 452–3 per Lord Mustill, pp. 465–6 per Lord Lloyd, p. 454, per Lord Slynn. On the question of inducement, see op. cit., Bennett, fn 39; S. Derrington, ‘The requirement of inducement and the concept of materiality in s. 24 of the Marine Insurance Act 1906’, ILJ 11, 2000, 236. Pan Atlantic has been followed in Australia: see, e.g., Akedian Co. Ltd v. Royal Insurance Australia Ltd & Another (1997) 148 ALR 480.
42 See, e.g., Wise (Underwriting Agency) Ltd v. Grupo Nacional Provincial SA [2004] 2 Lloyd’s Rep. 483, p. 507, per Longmore LJ.
43 Simner v. New India Assurance Co. Ltd (1995) LRLR 240, p. 253, per Judge Diamond, QC.
44 London Assurance v. Mansel (1879) 11 Ch.D. 363, pp. 368–9, per Jessell MR. See also Banque Keyser Ullman SA v. Skandia (UK) Insurance Co. Ltd [1988] 2 Lloyd’s Rep. 513, pp. 544–5, per Slade LJ.
45 S-s. 3.