UTMOST GOOD FAITH, DISCLOSURE AND REPRESENTATIONS
CHAPTER 6
UTMOST GOOD FAITH,
DISCLOSURE AND REPRESENTATIONS
INTRODUCTION
A contract of marine insurance is uberrimae fidei or, as enunciated in s 17 of the Marine Insurance Act, ‘a contract based upon the utmost good faith’. The notion of utmost good faith, the cardinal principle governing the marine insurance contract, is a well established doctrine derived from the celebrated case of Carter v Boehm (1766) 3 Burr 1905, decided long before the inception of the Act. With the codification of the law, the principle found expression in ss 17–20: in s 17 is presented the general duty to observe the utmost good faith, with the following sections introducing particular aspects of the doctrine, namely, the duty of the assured (s 18) and the broker (s 19) to disclose material circumstances, and to avoid making misrepresentations (s 20).
The obligations to disclose and to abstain from misrepresentations constitute the most significant manifestations of the duty to observe utmost good faith. Both ss 18 and 20 echo the rule that every ‘material circumstance’ must be disclosed to the insurer ‘before the contract is concluded’. Section 17, unlike ss 18, 19 and 20, does not specify when the duty of utmost good faith is to be observed. Whilst ss 18 and 19 spell out the duty of disclosure before the formation of the contract, the Act is silent about any such duty after the conclusion of the contract. For a long time, the overwhelming concern was, whether an assured was under any duty to disclose material information after the conclusion of the contract. The nature and scope of the duty to observe utmost good faith were thus called into question; in particular, whether a continuing duty of disclosure is embraced within s 17.
Hirst J (as he then was), in Black King Shipping Corporation v Massie, ‘Litsion Pride’ [1985] 1 Lloyd’s Rep 437, introduced a novel concept in the law when he extended the duty of disclosure to circumstances beyond the conclusion of the contract. Litsion Pride has made it patently clear that the duty of utmost good faith is not only overriding, going beyond the obligations set out in the following sections, but that it is also continuing. Hirst J also referred to the duty not to make fraudulent claims as a facet of the duty to observe utmost good faith. Recently, the approach of Hirst J found approval in a number of cases, the most notable of which is Bank of Nova Scotia v Hellenic Mutual War Risks Association, ‘Good Luck’ [1988] 1 Lloyd’s Rep 514; [1989] 2 Lloyd’s Rep 238; [1991] 2 Lloyd’s Rep 191, HL.
How the ‘materiality’ of a circumstance is to be judged has also generated controversy in recent years. Fortunately, the matter has now, after much debate, been finally resolved by the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep 427, HL. The House also clarified the law relating to the right of avoidance and has, in upholding the ‘actual inducement’ test, rejected the ‘decisive influence’ test.
The content and nature of the duty of utmost good faith under s 17, its extent and scope, and the legal effects of its breach, the law of disclosure under s 18, and of representation under s 20, will be examined in this chapter.
UTMOST GOOD FAITH
Nature of the duty
Section 17 of the Act declares that:
A contract of marine insurance is a contract based on utmost good faith, and if the utmost good faith be not observed by either party, the contract may be avoided by the other party.
A reciprocal duty
Section 17, by the use of the word ‘either’, has made it amply clear that the duty to observe utmost good faith operates on a bilateral basis. The Act reiterates the sentiments of Lord Mansfield, in Carter v Boehm (1766) 3 Burr 1905, where he used the example of an underwriter insuring a ship for a voyage which he privately knows has arrived. He said: [p 1909] ‘…Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain.’
Despite the early recognition that the duty is mutual, the underwriters, in Banque Financière de la Cité SA v Westgate Insurance Co Ltd,1 below, attempted to assert that the obligation of utmost good faith need only be observed by the assured, and not the insurer. Though a non-marine insurance case, the judgment is nonetheless relevant, in that it confirms the reciprocal nature of the duty.
Banque Financière de la Cité v Westgate Insurance Co Ltd [1987] 1 Lloyd’s Rep 69; [1988] 2 Lloyd’s Rep 513; [1990] 2 Lloyd’s Rep 377, HL
A group of banks agreed to advance money to four companies represented by a Mr Ballestero. As security for the loans, credit insurance policies were effected and gemstones deposited with the banks. The gemstones proved to be worthless and Mr Ballestero disappeared with the bank’s money. Since the policies contained a fraud exclusion clause, the banks were unable to claim on the credit insurances. However, they sought to recover on the grounds of breach of utmost good faith by the insurers in failing to disclose to the assured banks a fraud committed by a Mr Lee, an employee of the brokers.
Both the court of first instance and the Court of Appeal ruled that there was indeed a duty of utmost good faith owed by the insurers to disclose to the bank the fraud of their brokers, and found the underwriters in breach of that duty. In the House of Lords, the decision was reversed on other grounds; however, the mutuality of the duty was not challenged. Steyn J, at first instance, felt that:
Steyn J: [court of first instance, p 93] …The rationale of the rule imposing a duty of utmost good faith in the insured is that matters material to the risk are, generally, peculiarly in his knowledge. In so far as matters are peculiarly in the insurer’s knowledge, as in Lord Mansfield’s example of the arrived ship, principle and fairness required the imposition of a similar duty on the insurer. It is difficult to imagine a more retrograde step, subversive of the standing of our insurance law and our insurance markets, than a ruling today that the great judge erred in Carter v Boehm in stating that the principle of good faith rests on both parties. I unhesitatingly reject this contention.
Slade LJ: [Court of Appeal, p 544] …there is no doubt that the obligation to disclose material facts is a mutual one imposing reciprocal duties on insurer and insured. In case of marine insurance contracts, s 17 in effect so provides.
Notes
It has to be pointed out that the duty of utmost good faith is owed only between the assured and the insurer, that is, the original parties to the marine insurance contract. Thus, in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd, ‘Good Luck’ [1988] 1 Lloyd’s Rep 514,2 at first instance, it was held that no separate duty of utmost good faith existed between the insurers and the bank, who were the mortgagee and assignee of the policy of insurance. Hence, as the insurer did not, on the facts of the case, owe a duty of utmost good faith to the assured, it followed that no duty was owed to the assignee, since the assignee does not have any better rights than the assignor, who was, in this case, the assured.3
[p 547] …A different situation may arise where the assignee steps into the shoes of the assignor and takes over the conduct of the contract. Under those circumstances, where the assignor ceases to be the person dealing with the insurer, the duty of the utmost good faith has to be discharged by reference to the assignee. However, this was not the case here…For the reasons already given, I consider that the mere assignment was not enough to create such a duty.
An overriding and continuing duty
It is somewhat surprising that s 17, being a long founded doctrine, has not attracted the attention of the courts until very recently. The nature and full extent of the duty to observe utmost good faith under marine insurance only received judicial scrutiny in 1985, in Black King Shipping Corporation v Massie, ‘Litsion Pride’ [1985] 1 Lloyd’s Rep 437, below.
Given that the most significant manifestations of ubenimae fidei are non-disclosure and misrepresentations, fulfilment of the obligation of utmost good faith was, not unreasonably, for a long time perceived in terms of the duty to disclose and not to misrepresent. However, Litsion Pride has clarified that the duty of disclosure stems from the duty of utmost good faith, and not vice versa. The duty of utmost good faith is an independent and an overriding duty, with the ensuing sections on disclosure and representations providing mere illustrations of that duty.4 Section 17, being wider, is all-embracing, and could be described as the umbrella under which the law of non-disclosure and misrepresentation are enveloped. The case has also construed s 17 as having imposed on the parties a continuing duty to observe utmost good faith.
As much of the recent development of the law on utmost good faith has germinated from the Litsion Pride case, the judgment of Hirst J is cited in extenso below.
Black King Shipping Corporation v Massie, ‘Litsion Pride’ [1985] 1 Lloyd’s Rep 437
Litsion Pride was insured under a marine insurance policy which provided that, in the event of the vessel entering a number of specified areas, in particular, ports in the Gulf area during the war, notice was to be given to the underwriters ‘as soon as practicable’ and an additional premium was to be adjusted for the duration of the vessel’s stay in that area. On 2 August, Litsion Pride sailed into the Persian Gulf without declaring the voyage to the underwriters or paying the additional premium, as was obligatory under the terms of the policy. On 9 August, the vessel sank, having been struck by a missile. On 11 August, a telex was sent to the brokers by the shipowners informing them that a letter regarding the imminent entry of Litsion Pride into the Gulf had been written, but, by oversight, not sent. The letter was dated 2 August and did not reach the underwriters until after the casualty. The mortgagees, standing in the shoes of the owners, claimed under the policy, but the insurers declined payment on the grounds of breach of the duty of utmost good faith. The policy also contained a clause entitling the insurers to give 14 days’ notice of cancellation.
The court ruled in favour of the underwriters, finding on the evidence that the shipowners had sought to support their claim with fraudulent documents, such as the purportedly backdated letter of 2 August. In the view of Hirst J, there was a continuing duty of utmost good faith resting upon the assured, which continued beyond the formation of the contract.
Hirst J: [p 511] …I now state my conclusions on this very important point. In my judgment, the authorities in support of the proposition that the obligation of utmost good faith in general continues after the execution of the insurance contract are very powerful. First, there are the ships’ papers cases, which are decisions of the highest authority, and which, in my judgment, clearly found their decision on a general duty of utmost good faith… But, the ambit of authority goes much wider than ship’s papers (see, for example, the summing up of Willes J in the case of Britton v The Royal Insurance Co…)
The Style and Liberian cases are also, in my judgment, instances of the same doctrine. I have no doubt whatever that both McNair I and Donaldson J intended their references to utmost good faith in those cases to mean exactly what they said, and I reject Mr Kentridge’s argument [for the plaintiffs] that they are to be interpreted as connoting fraud. There was no finding of fraud in either case nor, as far as I can see, even any allegation of fraud, and the facts in both cases are fully consistent with non-fraudulent, though no doubt discreditable, non-disclosure.
Moreover, if the marked difference between pre- and post-contract duty which Mr Kentridge suggests applied, it is quite remarkable that s 17, which both parties accept covers both the pre- and post-contract duty, makes no differentiation between these two stages.
[p 512] …I consider that it is the better view in accordance with commercial good sense that the insured is required to notify any relevant information available from time to time, particularly since—as the evidence shows—this is a field where, during the course of a voyage, ETAs, destinations, etc, are quite likely to change as it proceeds. [Emphasis added.]
So far as claims are concerned, I consider that the general principle requiring utmost good faith must apply also.
[p 515] In my judgment, ‘avoidance’ in s 17 means avoidance ab initio. Certainly this is the case in relation to pre-contract avoidance…and I see no reason for putting a different meaning on the word in relation to post-contractual events.
[p 518] …I am prepared to hold that the duty not to make fraudulent claims and not to make claims in breach of the duty of utmost good faith is an implied term of the policy…
Notes
As can be seen from the above comments delivered by Hirst J, the duty to observe utmost good faith under s 17 is indeed comprehensive and powerful:
(a) first, the judge elaborated on the nature of the duty, namely, that s 17 is overriding and imposes a continuing duty on both parties to observe utmost good faith;
(b) secondly, the extent and scope of the duty is all-embracing, capable of covering a wide range of subjects, including a continuing duty of disclosure and a duty not to make fraudulent claims. Under the duty to observe utmost good faith, relevant information may have to be disclosed at the following points in time: at the time of the renewal of the policy; when considering cover for reinsurance; when a vessel intends to enter an additional premium area under a trading warranty; when tendering a change of voyage endorsement, and when required by a held covered clause and, possibly, a cancellation clause;
(c) thirdly, the matter of whether conduct which is less than fraudulent is covered by s 17 was also discussed. In this regard, the pointed question is, whether s 17 envisages inadvertent and innocent non-disclosure of relevant information. The question may also be framed as: whether conduct which is innocent, negligent, culpable and discreditable, but not sufficiently serious as to amount to fraud, will cause a breach of s 17;
(d) finally, the effects of a breach of s 17 on the particular claim and/or on the contract (policy) as a whole were also considered under the rule of avoidance. The right of an aggrieved party to sue for damages for a breach of s 17 is another relevant issue.
As each of these aspects of the duty of utmost good faith has been picked up in subsequent cases, it is necessary to examine them in depth.
The principle that s 17 is an overriding duty was actually formulated a year before Litsion Pride by the Court of Appeal in Container Transport International Inc and Reliance Group Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476, CA.5 Although the decision of the CTI case was much criticised, and finally overruled on the important points of materiality and inducement6 by Pan Atlantic Insurance Company Ltd v Pine Top Insurance Company Ltd [1994] 2 Lloyd’s Rep 427, HL, the comments made by the judges are, nevertheless, still of vital significance, in that they declare the independent nature of the duty of utmost good faith. As will be seen, all the judges in the CTI case were in agreement that there is an independent duty of utmost good faith.
Container Transport International Inc and Reliance Group Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1982] 2 Lloyd’s Rep 178; [1984] 1 Lloyd’s Rep 476, CA
CTI, a container leasing company, took out insurance with Crum and Forster covering a ‘Damage Protection Plan’ in respect of their containers. Crum and Forster were unhappy with the terms of the policy, and refused to renew the policy after its expiration. Seeking fresh cover, CTI approached CE Heath and Co and managed to obtain 100% cover, the majority of which was with syndicates at Lloyd’s; however, the Lloyd’s experience was no better, as they also refused to renew. Finally, the insurance was placed with Oceanus. When CTI put forward their claims for losses they had incurred, Oceanus refused to pay, and sought to avoid the policy, contending that CTI had presented an inaccurate claims record and that they had failed to disclose the refusal by previous underwriters to renew.
The Court of Appeal held that as there was both non-disclosure and misrepresentation, the underwriter was entitled to avoid the policy. Each of the judges took time to embellish the scope of s 17.
Kerr LJ: [p 492] …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.
Parker LJ: [p 512] …Finally, it is necessary to mention at this stage that the duty imposed by s 17 goes, in my judgment, further than merely to require fulfilment of the duties under the succeeding sections. If, for example, the insurer shows interest in circumstances which are not material within s 18, s 17 requires the assured to disclose them fully and fairly. Again, if the assured or his broker realised, in the course of negotiations, that the insurer had made a serious arithmetical mistake or was proceeding upon a mistake of fact with regard to past experience he would, under s 17, be obliged to draw attention to the matter. It would…be the plainest breach of the duty under s 17 not to do so.
Stephenson LJ: [p 525] …I also conclude that the special sections which follow s 17 must be read in the light of this leading section, and all their references to insurer and assured follow the imposition of the statutory duty of utmost good faith on each party.
A continuing duty
In the Litsion Pride case, Hirst J relied heavily on the earlier authorities of Overseas Commodities Ltd v Style [1958] 1 Lloyd’s Rep 546, and Liberian Insurance Agency v Mosse [1977] 2 Lloyd’s Rep 560, to support his proposition of a continuing duty to observe utmost good faith. Both these cases were concerned with the application of ‘held covered’ clause protection, under which cover was to be obtained only if the assured acted with the utmost good faith ‘throughout the currency of the policy’, as emphasised by McNair J [p 559] in Overseas Commodities Ltd v Style.7
The issue of a continuing duty of utmost good faith was also considered in the Good Luck case, below, by Hobhouse J in the court of first instance and May LJ in the Court of Appeal, but escaped the attention of the House of Lords.
Bank of Nova Scotia v Hellenic Mutual War Risks Association, ‘Good Luck’ [1988] 1 Lloyd’s Rep 514; [1989] 2 Lloyd’s Rep 238; [1991] 2 Lloyd’s Rep 191, HL
Good Luck was insured against war risks with the defendants’ club. Under the cover, it was provided, inter alia, that should the vessel enter an additional premium area (APA), prompt notice was to be given to the club. If no notice was given, the club would be entitled to reject any and all claims arising out of events occurring while the vessel was in an APA. The assured shipowners mortgaged Good Luck and assigned the policy to the mortgagee bank. The club were given notification of the assignment, and in a letter of undertaking they agreed to inform the bank if the insurance ceased. Good Luck entered into a charterparty to trade in the Gulf, an APA, but neither the bank nor the club was informed. Furthermore, when the club eventually became aware of the trading pattern of Good Luck, they took no steps to inform the bank. At the time, the shipowners were renegotiating their loans with the bank, the bank knew that Good Luck was trading in the Gulf, but had assumed that the shipowners were paying the additional premium, and on this basis they advanced more money. Good Luck was struck by a missile and became a constructive total loss. The club rejected the claim, because no notification had been given to them according to the terms of the cover. Subsequently, the bank, as assignee, sued the club, claiming, inter alia, breach of utmost good faith, because the club failed to disclose to them what they knew at any material time.
The court ruled that the club (the insurer) did not owe the bank a duty of utmost good faith. The letter of undertaking was not a contract of utmost good faith, it was an obligation. The only duty owed by the club was to the assured; there being no separate duty owed to the bank as assignee to the policy. As to the continuing duty of utmost good faith, the comments made by Hobhouse J were supported by May LJ in the Court of Appeal.
Hobhouse J: [court of first instance, pp 545–46] …Contracts of insurance are contracts of the utmost good faith. The obligation of the utmost good faith is one which arises normally in relation to the making of the contract. This is because that is the situation in which the duty is most usually relevant. But, as stated by Hirst J in the Litsion Pride case, the duty exists throughout the contract.
May LJ: [Court of Appeal, p 263] …We do not think it is necessary to question the decision of Hirst J in the Litsion Pride case so far as concerns his decision that the obligation of utmost good faith could continue after the contract was made with reference to such a matter as the fixing of the rate of additional premiums.
More recently, in the Court of Appeal, in Orakpo v Barclays Insurance Services and Another [1995] 1 Lloyd’s Rep 443, CA, the same principle was affirmed by Hoffman LJ, who said that: [p 452] ‘In principle, insurance is a contract of good faith. I do not see why the duty of good faith on the part of the assured should expire when the contract has been made.’
Scope of the duty to observe utmost good faith
Having determined that the duty to observe utmost good faith is a continuing one, the question is now left open as to the content and extent of that duty.
As was seen, Hirst J, in the Litsion Pride case, drew out two main limbs of the duty, namely, the duty to disclose relevant information, and the duty not to make fraudulent claims. Though the categories (and examples) set out are by no means exhaustive, they may be safely regarded as the fountain heads from which most, if not all, of the problems relating to the duty are likely to spring. The scope of the duty to observe utmost good faith is not only ongoing, but also extensive, capable of covering a wide range of events and situations. Thus, it would be a futile exercise to speculate the circumstances which may constitute a breach of that duty. The duty is ‘moulded to the moment’8 and, therefore, whether utmost good faith has or has not been observed is, in each case, a question of fact.
In so far as the insurer is concerned, it is noted that, though s 18 does not impose a duty of disclosure upon him, his duty of disclosure is, as the case of Banque Financière has demonstrated, derived from s 17.9
In summary, the assured’s duty of disclosure is governed by both ss 17 and 18, whilst that of the insurer is dedicated only by s 17, the duty to observe utmost good faith. For convenience, the insurer’s duty of disclosure under s 17 will be first discussed, to be followed by a study of the assured’s post-contractual duty of disclosure. The assured’s pre-contractual duty of disclosure under s 18 is separately discussed later.10
Reciprocal duty of disclosure under s 17
Scope of the insurer’s duty of disclosure
The extent of the insurer’s pre-contractual duty of disclosure came under scrutiny for the first time in Banque Financière [1988] 1 Lloyd’s Rep 513, CA; [1998] 2 Lloyd’s Rep 513, HL (the facts of which were cited in full earlier),11 where the issue was whether the insurer owed the bank a duty to disclose to them the fact that their (the bank’s) agent, a Mr Lee, was dishonest. The scope of the insurer’s duty was analysed by both Slade LJ, delivering the judgment of the entire Court of Appeal, and the members of the House of Lords.
Slade LJ: [Court of Appeal, p 544] …the principal debate in this court has concerned the proper test of materiality when the court is considering the duty of disclosure falling upon the insurer as opposed to the insured. Not surprisingly, counsel have been able to cite very little authority giving direct guidance on this point. The process of adapting the well established principles relating to the duty of the insured to the obverse case of the insurer is not wholly easy.
[p 545] …In our judgment, the duty falling upon the insurer must at least extend to disclosing all facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer…
Lord Bridge: [House of Lords, p 380] …in my opinion, that Mr Dungate’s failure to disclose to the banks the dishonesty of their agent, whatever may be said about it as a matter of business ethics, did not amount to the breach of any legal duty.
Lord Templeman: [p 383] …It would be strange if, in these circumstances, one party to a contract owed a duty in negligence to the other, to warn the other party of his suspicions of former misconduct by the agent of that other party…
[p 384] …No authority was cited for the proposition that a negotiating party owes a duty to disclose to the opposite party information that the agent of the opposite party had committed a breach of the duty he owed to his principal in an earlier transaction.
Lord Jauncey: [p 389] …What is said in this appeal is that when Dungate [representing the insurers] discovered in early June 1980 that Lee had issued fraudulent covers notes in January of that year he, as insurer, came under a duty to disclose this fact to the banks. I do not consider that the obligation of disclosure extends to such a matter.
…In the present case, the risk to be insured was the inability, otherwise than by reason of fraud, of Ballestero and his companies to repay the loan to the bank. Lee’s dishonesty neither increased nor decreased that risk. Indeed, it was irrelevant thereto. It follows that the obligation of disclosure incumbent upon Dungate, as the insurer, did not extend to telling the banks that their agent, Lee, was dishonest…it is clear that the scope of any such duty would not extend to the disclosure of facts which are not material to the risk insured.
Notes
The above case refers to the insurer’s pre-contractual duty of disclosure. For an illustration of his post-contractual duty of disclosure, reference may be made to the Good Luck case, discussed below, where the plaintiff (bank) was not the original assured, but the assignee of a policy.12
Scope of the assured’s post-contractual duty of disclosure
Given that s 17 is placed under the heading of ‘Disclosure and Representations’, one might be tempted to argue along the lines that, since the ensuing sections are applicable ‘before the contract is concluded’, s 17 must likewise be applicable only in a pre-contract situation. Indeed, there was some suggestion that there was no duty of disclosure owed beyond the formation of the contract.13 But, according to Hirst J in the Litsion Pride case, an assured is undoubtedly under a continuing duty to disclose relevant information even after the conclusion of the contract. However, it has to be stressed that this duty does not fall under the scope of the duty of disclosure as perceived in the pre-contractual stage covered by s 18, which is not in question here.
Apart from s 18, there is an overriding duty under s 17, that of uberrimae fidei, which embraces also the duty of disclosure of relevant information which comes to the knowledge of the parties, in particular, the assured, after the conclusion of the contract.14 Though the wording of s 17 does not explicitly provide for a continuing duty of disclosure, its wording is also not explicit enough to rule out the conception either. Whilst s 18 is clear as to the application of the duty of disclosure ‘before the contract is concluded’, s 17 imposes no such time constraints. This should not seem bizarre, as s 17 imposes a much broader duty, of a general nature: the view adopted both in the Litsion Pride case and the CTI case.
As s 17 was construed as having established an all-prevailing principle, rather than one of restricted application, the duty of post-contractual disclosure which emanates therefrom must also be given the same leeway. After all, the rationale for the duty of disclosure, according to Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905: [p 1911] ‘…is to prevent fraud, and to encourage good faith. It is adapted to such facts as vary the nature of the contract; which one privately knows, and the other is ignorant of, and has no reason to suspect.’
Later, in Leon v Casey [1932] 2 KB 576, CA, the same principle was reiterated by the Court of Appeal:
Scrutton LJ: [p 579] …insurance has always been regarded as a transaction requiring the utmost good faith between the parties in which the assured is bound to communicate to the insurer every material fact within his knowledge not only at the inception of the risk, but at every subsequent state while it continues, up to and including the time when he makes his claim…
In Good Luck [1988] 1 Lloyd’s Rep 514, Hobhouse J, in the court of first instance, drew our attention to the fact that the ground covered by the preand post-contractual duty of disclosure are distinct and separate.
Hobhouse J: [pp 545–46] …But, as stated by Hirst J in the Litsion Pride case, the duty exists throughout the contract. The defendants [the club] before me sought to argue on the basis of cases such as Niger Co Ltd v Guardian Assurance Co (1922) 13 LlL Rep 75, and the inclusion of the phrase ‘before the contract is concluded’ in s 18 of the Act, that there was no duty of disclosure after the contract was concluded. I consider that this argument is a confusion. There is no duty to disclose matters relevant to the making of the contract once the contract has been made; the time has then passed within which they must be disclosed. The later disclosure of later discovered facts would serve no useful purpose and, therefore, is not required. By contrast, there can be situations which arise subsequently where the duty of utmost good faith makes it necessary that there should be further disclosure, because the relevant facts are relevant to the later stages of the contract. The Litsion Pride case illustrates such a situation in relation to the making and prosecution of a claim.
Interestingly enough, in the recent case of New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24, CA, Staughton LJ expressed scepticism over the value of this post-contractual duty of disclosure. His reservation warned of the fact that the assured’s post-contractual duty of disclosure, embodied within the good faith principle under s 17, is, when compared with the pre-contractual duty of disclosure under s 18, somewhat limited in scope.
Staughton LJ: [p 58] …The question whether there is a continuing duty of disclosure in any other circumstances is of considerable importance. We are surprised that, in recent times, it has only been considered in one decision at first instance: Black King Shipping Corporation v Massie, ‘Litsion Pride’ [1985] 1 Lloyd’s Rep 437. However, the surprise is tempered when one realises that, in the ordinary way, disclosure would be of little or no benefit to the insurer during the currency of a policy. Unless it happens before the contract is made, or before renewal, or (perhaps) before a claim is paid, disclosure could only fill the insurer with foreboding that he has made a bad bargain, as a loss was likely to occur; he would have no right to cancel the contract of insurance on that account, although we suppose that he might be able to obtain reinsurance.
Disclosure of ‘relevant’ and ‘material’ information
Unlike s 18, there is no reference to ‘materiality’ in s 17; consequently, the assured might well be left in doubt as to the kind of information he is obliged to disclose under s 17. The key words in Hirst J’s judgment in Litsion Pride [1985] 1 Lloyd’s Rep 437 are ‘relevant’ and ‘material’. He did not, aside from citing illustrations, explain what is meant by ‘relevant’ information. However, he accepted counsel’s argument that: [p 511] ‘…by analogy with s 18(2) of the Act, that a circumstance is material, if it would influence the judgment of a prudent underwriter in making the relevant decision on the topic to which the misrepresentation or non-disclosure relates.’ Thus, the law of ‘materiality’ for pre-contractual disclosure, as laid down in s 18(2), should (it would appear) also be applied to post-contractual disclosure under s 17. Terms such as ‘relevant’ and ‘material’ are incapable of exact definition, for what may be relevant or material in one case may not be so in another. It is a flexible concept which has to be judged in accordance with ‘commercial good sense’, as Hirst J [p 512] has put it.
In the recent reinsurance case of Société Anonyme d’Intermédiaries Luxembourgeois v Farex Cie [1995] LRLR 116, CA, the facts of which are complex and need not be set out here, Hoffmann LJ observed that: [p 149] ‘… s 17 seems to be adequate to deal with cases of genuine bad faith without the need to extend the meaning of “material circumstances” beyond matters relevant to the actual contract of insurance.’ This statement seems to suggest that we need not bog ourselves down with rules of materiality, and that the guiding star is the wider good, old-fashioned principle of utmost good faith.
Appropriate to the moment or specific decision points
It is one thing to say that there is a continuing duty of disclosure of relevant information and another to say when it should arise and end. For a clear exposition of the rule as to when it would arise, reference should be made to Manifest Shipping and Co Ltd v Uni-Polaris Insurance Co Ltd and La Réunion Européenne, ‘Star Sea’ [1995] 1 Lloyd’s Rep 651; [1997] 1 Lloyd’s Rep 360, CA, the facts of which need not concern us here and will be cited later.15 In the Court of Appeal, Leggatt LJ gave his approval to a passage, which he has described as having correctly stated the law, from Clarke on the Law of Insurance Contracts, 2nd edn, 1994, London: LLP, p 708 which reads as follows:
[p 372] …As regards insurance contracts, the duty of good faith continues throughout the contractual relationship at a level appropriate to the moment In particular, the duty of disclosure, most prominent prior to contract, revives whenever the insured has an express or implied duty to supply information to enable the insurer to make a decision. Hence, it applies if cover is extended or renewed. It also applies when the insured claims insurance money; he must make ‘full disclosure of the circumstances of the case’ …the degree of disclosure, however, varies according to the phase in the relationship. It seems that the level of disclosure appropriate to a claim is different from that at the time of contract… [Emphasis added.]
In so far as the time factor is concerned, the key phrase is ‘appropriate to the moment’. Another writer, Schoenbaum, has most aptly described it as a duty which will arise at ‘specific decision points’.16 Similarly, Tuckey J, in the court of first instance in Star Sea [1995] 1 Lloyd’s Rep 651, p 667, referred to it as a continuing duty which is ‘moulded to the moment’, and Hobhouse J, in Good Luck [1988] 1 Lloyd’s Rep 514, observed that [p 545] ‘…there can be situations which arise subsequently where the duty of utmost good faith makes it necessary that there should be further disclosure because the relevant facts are relevant to the later stages of the contract’.
What is clear from the above is that the duty is a continuing one and, therefore, can arise at any time during the currency of the policy. But whether it has a life after the expiration of the policy, and for how long thereafter, is another matter altogether which needs to be discussed.17
To enable the insurer to make a decision
In terms of content—as to the nature of the information which needs to be disclosed—the criterion can be found in the key phrase ‘to enable the insurer to make a decision’. Information relating to extension and renewal of a policy, as pointed out by Clarke, will naturally have an effect on any evaluation to be made regarding the cover. In Litsion Pride [1985] 1 Lloyd’s Rep 437, Hirst J referred to various types of information which would appropriately trigger ‘the moment’ contemplated by Clarke.
Hirst J: [p 511] …it seems to me that there is a very close analogy with the position which arose in the Style and Liberian cases, where the duty was held to apply. The information is material because it is required to enable the underwriter to make a decision as to the rate of AP, as to facultative reinsurance, and…possibly even as to cancellation under the 14 day notice clause.
Later, in Banque Financière [1990] 2 Lloyd’s Rep 377, HL,18 an attempt, so it would appear, was made by Lord Jauncey to restrict the scope of the continuing duty of disclosure under s 17, as envisaged by Hirst J in Litsion Pride [1985] 1 Lloyd’s Rep 437, to the following events:
Lord Jauncey: [p 389] …There is, in general, no obligation to disclose supervening facts which come to the knowledge of either party after conclusion of the contract…subject always to such exceptional cases as a ship entering a war zone or an insured failing to disclose all facts relevant to a claim.
In Star Sea [1997] 1 Lloyd’s Rep 360, CA, Leggatt LJ, in the Court of Appeal, summarised the ‘decision’ test as thus:
Leggatt LJ: [p 370] …there is force in the argument that the scope of the duty of utmost good faith will alter according to whether underwriters have to make a decision under the policy or the assured decides to make a claim, and may also be affected according to the stage of the relationship at which the scope of the duty becomes material. There is no difference in principle as to the extent of disclosure required between entering into a policy and the renewal of it; in both cases, the scope of the duty of disclosure should be the same.
In the recent case of Fraser Shipping Ltd v Colton and Others [1997] 1 Lloyd’s Rep 586, the full facts of which were cited earlier,19 the issue of non-disclosure of relevant information relating to circumstances surrounding a change of voyage (or the change of destination of an insured voyage) was discussed. On this occasion, when the assured submitted their change of voyage endorsement, they had failed to disclose to their insurers material information, of which they (the assured) were in possession, concerning the hazardous conditions which the insured vessel was likely to encounter at the anchorage of the new destination of Huang Pu to which the vessel was subsequently sent. Potter LJ ruled, inter alia, that, in the circumstances of the case, there was a non-disclosure of material facts.
Potter LJ: [p 594] … (3) Was the change of voyage endorsement of 25 June 1993 vitiated by non-disclosure of material circumstances?
Materiality
The duty to disclose the circumstances material to the risk existed at the time the variation was concluded, that is, at the time the endorsement recording the agreement to the change of destination was recorded by the underwriters’ scratches…
A material circumstance within the meaning of s 18 of the MIA is one that, objectively assessed, would have an effect on the mind of a prudent insurer in estimating the risk proposed, without necessarily having a decisive influence on either his acceptance of that risk or the amount of premium demanded… Section 18(5) of the MIA provides that a ‘circumstance’ includes any communication made to or information received by the insured. That provision seems to me apt to apply to the content of information and communications received by and from the master of the tug and tow concerning the anchoring of the vessel, the weather and its possible impact on the tug and tow, and the master’s views on the future safety of the voyage as varied.
[p 595] …so far as the defendant underwriters were concerned, until the morning of 25 June 1993, the tug and tow the subject of the insurance were proceeding uneventfully to Shanghai. However, by 25 June, it was apparent to the master and the owners that the change of voyage to Huang Pu involved the vessel having to reduce its draught before it could proceed to its point of delivery, and that meanwhile it was obliged to wait at a hazardous outer anchorage under increasing threats from a typhoon, the precise path of which was unknown but which might well (as, in the event, it did) descend upon Huang Pu. The mounting concern of the master in the face of the difficulties which faced him is made clear by a series of telexes which it is not necessary to detail.
It seems to me that, so enumerated, the materiality of those facts to a prudent insurer speaks for itself, without need for the benefit of independent expert evidence…
Inducement
[p 596] …On the question of inducement…I consider they [the insurers] have discharged the burden of showing that they were induced to agree to the endorsement of the policy on 25 June 1993 by reason of the non-disclosure of the circumstances set out above. Mr Colton [one of the insurers] was clear that he would not have signed the endorsement as it stood.
[p 597] …that, if he [Mr Townsend, one of the insurers] had known of the relevant communications concerning the congestion at the anchorage, the bad weather, the tug master’s opinion, the various delays, and the fact that there had already been a collision, he would not have agreed to sign the endorsement.
I have no hesitation in holding that, because of the non-disclosure of the circumstances of which the underwriters complain, each of the underwriters was induced to scratch the endorsement on 25 June 1993 on the terms as presented and that the underwriters were entitled to avoid the policy, as varied by that endorsement, on the grounds of non-disclosure.
It is interesting to note that Potter LJ had, throughout his judgment, applied s 18 to the issue at hand, even though the question was, in fact, strictly one of post-contractual non-disclosure falling within the scope of the duty to observe utmost good faith under s 17, rather than pre-contractual non-disclosure under s 18. In this case, the failure to disclose the relevant information can only arise after the conclusion of the contract, as it relates to information pertaining to a change of voyage (and the held covered clause) which by its very nature can only occur after the attachment of the risk.20 Though not said in so many words, the judge was actually applying the rules on ‘materiality’ applicable in the case of pre-contractual non-disclosure to what was effectively a breach of the duty to disclosure under s 17.
Notes
Indeed, the range of information to be disclosed after the conclusion of the contract is rather extensive. Naturally, anxiety on the part of the assured is inevitable: uncertain as to the exact extent of his obligation, he may yet be faced with the threat of avoidance in the event of a breach of this duty. Though the duty may be perceived as awesome and menacing, English case law has, however, posited three main ‘specific decision points’ where the post-contractual duty of disclosure under s 17 will arise:
(a) when the policy is due for enlargement, extension or renewal;
(b) where disclosure is required either expressly or impliedly under a term in the policy, for example, a warranty, a held covered clause and a change of voyage endorsement; and
(c) when the assured is required to inform the insurer that he intends to enter an additional premium area.
Though the list is open-ended, allowing each case to be decided on its own facts, it should nevertheless be borne in mind that the limitation which the recent cases of New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24, CA, below, relating to the right of the insurer under a cancellation clause, and NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd [1985] 4 NSWL 107, relating to both cancellation and reinsurance (cited with approval by Staughton LJ in the former case), have placed on the scope of this continuing duty of disclosure.
Disclosure and the right to cancel
In the Litsion Pride case, Hirst J’s comment to the effect that the post-contractual duty of disclosure could apply ‘…possibly even as to cancellation under the 14 day notice clause’ was later capitalised on by counsel acting for the insurer in the New Hampshire case, below. Although the policy in question was non-marine, nevertheless, the judicial comments offered are pertinent as they referred to the ruling of the Litsion Pride case.
New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24, CA
MGN Ltd effected four ‘fidelity’ insurance policies underwritten by the New Hampshire Insurance Company to cover losses brought about by the dishonest or fraudulent acts of their employees. Following the death of Robert Maxwell, various companies in the Maxwell Group claimed under the policies in respect of losses incurred by those companies as a result of the dishonest and fraudulent acts of Robert Maxwell himself and his associates. The insurers denied liability on the basis, inter alia, that they, the insurers, could avoid the policies because the assureds were in breach of their duty of utmost good faith, in that there had been a continuing duty of disclosure imposed upon the assureds during the currency of the policies which had not been fulfilled.
Counsel for the insurers further argued, inter alia, that where there was a continuing cover (not limited in duration) subject to the right of the insurer to cancel on notice, that right could only be valuable and properly exercised if the insurer had full knowledge of the facts relevant to whether he should exercise it or allow the contract to continue.
The Court of Appeal, affirming the decision of Potter J, held that there was no continuing duty of disclosure during the currency of the insurance merely by reason of the insurers’ right to cancel. The legal position on this point was best summarised by Potter J; his perception of the ruling of Hirst J in the Litsion Pride case was expressed with commendable clarity.
Potter J: [court of first instance, p 48] …I do not think that Hirst J intended to state that the right of an insurer to terminate on notice would or could per se create an obligation of continuing disclosure upon the insured in respect of anything which might render the risk insured more hazardous or onerous since inception.
Thus, while I accept that the obligation of good faith as between insurer and insured is one which continues throughout the policy, in particular, in relation to the making of claims, it does not, in my view, apply so as to trigger positive obligations of disclosure of matters affecting the risk during the currency of the cover except in relation to some requirement, event or situation provided for in the policy to which the duty of good faith attaches. I do not consider that a simple right of termination on notice constitutes such event or situation.
Staughton LJ: [Court of Appeal, p 60] …the Litsion Pride case was concerned with an express obligation in the policy to supply information if trading in an excluded zone.
[p 61] …Whilst there are no doubt cases where a defence of non-disclosure is fully justified, there are also, in our experience, some where it is not. We should hesitate to enlarge the scope for oppression [by the underwriter against the assured] by establishing a duty to disclose throughout the period of a contract of insurance, merely because it contains (as is by no means uncommon) a right of cancellation for the insurer.
Notes
It can be seen from the above that the remarks made by Hirst J in the Litsion Pride case, in reference to the duty of disclosure vis a vis the right of cancellation, have to be read in their proper context. In the light of the New Hampshire case, it is fair to say that an insurer has no right to expect disclosure by the assured of any information which he (the insurer) may consider necessary or relevant to assist him in arriving at a determination of whether or not to exercise the right to cancel. With regard to the matter of reinsurance, it would appear, from the Australian case of NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd [1985] 4 NSWL 107, that the same principle applies: Rogers J was quick to point out that one should not neglect to note that: [p 112] ‘…in the Litsion Pride case, the duty to act in good faith [was] fastened on to an obligation contained in the policy requiring the insured to supply information.’
Duty not to make fraudulent claims
The duty not to make fraudulent claims—encompassed within the duty to observe utmost good faith referred to by Hirst J in the Litsion Pride case—is not a new-fangled idea. As early as 1858, Pollock CB, in Goulstone v Royal Insurance Company (1858) 1 F&F 276, p 279, described a fraudulent claim as one which is ‘wilfully false in any substantial respect’. In this case, the assured’s property was destroyed by fire. The assured submitted his claim to be more than £200, whereas, in earlier insolvency proceedings, the same property was declared to be of the value of £50. The court ruled in favour of the underwriter based on a finding on the facts that there was a fraudulent claim. Later, in Britton v Royal Insurance Company (1866) 4 F&F 905, below, the same subject was broached in relation to a fire insurance policy upon which a fraudulent claim was presented by the assured.
Britton v Royal Insurance Company (1866) 4 F&F 905
The case concerned a fire insurance policy upon household furniture, trade fixtures and stock-in-trade. When the assured’s property was destroyed by fire, the insurer declined payment, alleging both arson and fraud, in that the assured had set fire to his house, and had presented a claim which was greater than it actually was.
The court ruled in favour of the insurer, as there was a finding on the facts that the assured had made a fraudulent claim.
Willes J: [p 909] …The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained…It would be most dangerous to permit parties to practise such frauds, and then, notwithstanding their falsehood and fraud, to recover the real value of the goods consumed. And, if there is wilful falsehood and fraud in the claim, the insured forfeits all claim whatever upon the policy.
The above comments, uttered by Willes J, were approved by Hirst J in Litsion Pride [1985] 1 Lloyd’s Rep 437, the facts of which have already been cited.21
Hirst J: [p 512] …So far as claims are concerned, I consider that the general principle requiring utmost good faith must apply also. That was certainly the view of Willes J in his summing up in the case of Britton v Royal Insurance…