1. The doctrine of uberrimae fidei
Whereas under the general law of contract there is no positive duty of disclosure, contracts of insurance are a species of contracts uberrimae fidei (of utmost good faith).9 Consequently, both parties, ie the proposer and the insurers, are bound to disclose every material fact affecting the risk to the other before the contract is concluded.10 The duty of utmost good faith, in so far as it applies to contracts of insurance, was explained over two centuries ago by Lord Mansfield CJ in Carter v Boehm.11 The case concerned an insurance policy effected by the Governor of Sumatra, George Carter, against a French attack on Fort Marlborough. The insurers sought to avoid the contract when the insured claimed under the policy contending that he had failed to disclose the fort’s weakness and the likelihood of it being attacked by the French. Although the defence failed, Lord Mansfield took the opportunity to explore the scope of the duty of disclosure borne by proposers of insurance. He stated:
Insurance is a contract of speculation. The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured 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. … Although the suppression should happen through mistake, without any fraudulent intention, yet still the underwriter is deceived and the policy is void; because the risque run is really different from the risque understood and intended to be run at the time of the agreement. … Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact, and his believing the contrary.12
It is self-evident that the deliberate failure to disclose facts which misleads the insurer is a fraudulent concealment which renders the contract void for want of good faith. However, it is noteworthy that in this passage from his speech, Lord Mansfield went further by adding that even non-fraudulent suppression of material facts has the same result. The effect, therefore, is that a proposer bears a heavy burden of disclosure when completing a proposal form and when subsequently renewing the insurance contract. This is typically explained by virtue of the fact that insurers are wholly dependent upon the proposer providing full disclosure of all circumstances pertinent to the calculation of the risk underwritten by them.13
That said, it has, however, been questioned whether such an onerous duty on the insured was actually envisaged by Lord Mansfield. It has been convincingly argued that this celebrated passage from Lord Manfield’s speech has been taken out of context, with the result that, read in isolation from the rest of his speech in the case, and indeed his views expressed in subsequent cases, a far stricter duty than was intended by him has been wrongly fashioned by successive English courts.14 Professor Hasson contends that the effect of this ‘lop-sided’ reading of the judgment has been to distort the duty of disclosure so that it seems that the insurer’s role in the process is entirely passive. Yet, Lord Mansfield framed the duty in narrower terms so that the insured’s duty of disclosure arises only with respect to facts that the insured ‘privately knows, and the [insurer] is ignorant of, and has no reason to suspect’.15 On the facts of Carter v Boehm, Lord Mansfield was of the view that:
The underwriter knew the insurance was for the governor. He knew the governor must be acquainted with the state of the place. He knew the governor could not disclose it, consistently with his duty. He knew the governor, by insuring, apprehended, at least, the possibility of an attack. With this knowledge, without asking a question, he underwrote. By so doing, he took knowledge of the state of the place upon himself. It was a matter, as to which he might be informed in various ways: it was not a matter, within the private knowledge of the governor only.16
It is striking that throughout his judgments on the issue of non-disclosure, Lord Mansfield avoided the terminology of ‘utmost’ good faith. Yet section 17 of the Marine Insurance Act 1906, the preamble of which declares it to be a codifying statute,17 states that insurance is uberrimae fidei. It goes on to provide that a contract of insurance is a contract based upon the duty of utmost good faith which, if broken, entitles the other party to avoid the contract.18 Section 17 does not, therefore, precisely mirror the language of Lord Mansfield’s formulation which draws the distinction between deliberate concealment and misrepresentation (bad faith) and innocent (good faith) mistaken non-disclosure.19
2. The juridical roots of the duty of disclosure
Tracing the origins of the duty has given rise to much academic and judicial debate.20 The argument is pivoted upon whether the duty arises from some implied term of the contract,21 or is rooted in a fiduciary relationship of the parties,22 or whether it is based in some tortious duty. The issue is significant and extends beyond the boundaries of mere academic argument. For example, for the purposes of determining the relevant limitation period the question assumes immense practical importance.23 Also, a claim for a particular remedy is, of course, dependent upon whether the cause of action is legal or equitable.
Although the opportunity arose in Banque Financière de la Cité SA v Westgate Insurance Co Ltd 24 for the Court of Appeal and the House of Lords to subject the juridical basis of the disclosure requirement to thorough examination, the respective courts failed to grasp the nettle. Both the Court of Appeal and, by adoption, the House of Lords rejected the notion that the duty of disclosure arose from some implied contractual term. Both courts also refused to accept the point that the duty arose from some tortious obligation, preferring instead to attribute its roots to equity. Given that Lord Mansfield CJ presided over common law courts and, ironically, his civilian antecedence, this conclusion is open to challenge. Yet, in a recent pronouncement by the House of Lords on the issue, the court also attributed the duty to equitable foundations.25
It is apparent that the task of properly ascribing the source of the duty to be of utmost good faith is problematical. Only by extensive and authoritative judicial consideration of the issue will the theoretical basis of the duty be properly framed. The solution may well lie in holding that the respective parties to an insurance contract are so-called ‘fact-based’ fiduciaries whereby the fiduciary duties arise not by virtue of the particular status of the individual concerned (as with, for example, company directors and trustees) but out of the factual situation underlying the particular relationship.26 The model for this can be found in many jurisdictions in the United States where the received wisdom underlying the jurisprudence is that since both parties to an insurance contract have an advantage over the other so that there is, in effect, a mutual vulnerability, they must therefore stand in a fiduciary relationship.27 Transplanting this approach into English law would not present any insurmountable theoretical problems given that there are situations where the English courts are prepared to find a fiduciary relationship where the relation between two parties is founded upon trust.28 Indeed, recent English decisions have taken the view that the duty is equitable in nature.29
3. Determining the materiality of non-disclosed facts
In summary, the duty of utmost good faith requires the insured to disclose every material fact relating to the risk before the contract is concluded. It is settled that the duty applies to all classes of insurance, whether the contract is for fire, life, marine insurance or reinsurance.30 Further, the common law duty of disclosure as formulated by Lord Mansfield has been codified by the Marine Insurance Act 1906 section 18. Despite the title of the statute, this section is of general application in insurance law.31 Section18(1) provides:
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.
Whether or not a fact is one that should be known to the insured in the ordinary course of business is itself a question of fact.32 The purely innocent insured who fails to disclose a fact he has no reason to believe exists, and it is not one which ought to be known to him in the ordinary course of business, is not placed under a duty to investigate whether there are, indeed, any material facts in existence. The judges have long recognised that ‘you cannot disclose what you do not know’.33 Rejecting the argument that insureds should be under a duty to make extensive inquiries prior to concluding a contract of insurance, McNair J observed in Australia and New Zealand Bank Ltd v Colonial and Eagle Wharves Ltd 34 that:
To impose such an obligation upon the proposer is tantamount to holding that insurers only insure persons who conduct their business prudently, whereas it is commonplace that one of the purposes of insurance is to cover yourself against your own negligence or the negligence of your servant.35
The test for determining the materiality of any ‘circumstance’ is laid down by section 18(2), which 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.’36 The test of ‘prudent insurer’, or in other words, reasonable insurer or underwriter, is the objective yardstick against which the materiality of the non-disclosed fact is to be tested so that the view of the particular insurer is irrelevant.37 There have been attempts by the courts to modify this requirement by substituting the test of the reasonable insured’s opinion for that of the prudent insurer. For example, the approach adopted by Fletcher Moulton LJ in Joel v Law Union and Crown Insurance Co,38 when considering the measure of the insured’s duty of disclosure, proceeds on the basis that: ‘If a reasonable man would have recognised that the knowledge in question was material to disclose, it is no excuse that you did not recognise it.’39 But this approach has not been followed in more recent cases, the courts preferring to apply the literal words of the Act, namely the ‘judgment of a prudent insurer’.40
4. The consequences of non-disclosure
An insurer who seeks to rely upon non-disclosure when avoiding the policy bears the burden of proof to establish, on a balance of probabilities, that the insured failed to disclose the existence of a fact known to him when effecting the policy.41 The consequence of non-disclosure, whether at the time of the original proposal or upon the renewal of the insurance (other than a policy for life insurance which is presumed to be entire) is to render the insurance contract voidable,42 thereby entitling the insurer to avoid it ab initio. It has been said that non-disclosure ‘terminates the contract, puts the parties in statu quo ante and restores things, as between them, to the position in which they stood before the contract was entered into’.43 A cogent summary of the consequences of non-disclosure was provided by Lord Hobhouse in HIH Casualty and General Insurance Co v Chase Manhattan Bank:44
[I]t means that if an assured or his agent has failed to make full disclosure to the underwriter of all facts, which he knows or ought in the ordinary course of business to know, material to the risk, the underwriter can avoid the policy. In other words the policy becomes valueless to the assured. This negates the purpose of insurance which is to provide a secure and certain financial safeguard against losses caused by the insured risks. It makes the safeguard insecure.45
Any premium paid is returnable to the insured except in cases of fraud.46 In this regard section 84(3)(a) of the 1906 Act provides:
Where the policy is void, or is avoided by the insurer, as from the commencement of the risk, the premium is returnable, provided that there has been no fraud or illegality on the part of the assured.
Further, the court does not have discretion to vary the relief. In Brotherton v Aseguradora Colseguros SA (No 2),47 the Court of Appeal rejected the earlier reasoning of Colman J in Strive Shipping Corp v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express),48 to the effect that avoidance is an equitable remedy that is discretionary. Mance LJ explained that the right to avoid is a self-help remedy that can be exercised without the court’s authorisation. The judge stated that avoidance for non-disclosure or misrepresentation should be treated in the same way as rescission for misrepresentation under the general law of contract which is ‘by act of the innocent party operating independently of the court’.49
Marine insurance applies a forfeiture rule where the policy is avoided on the basis of the insured’s fraud. Thus, the insured forfeits the premium paid for the insurance.50 Whether or not this applies to non-marine insurance is less clear, the case law being inconsistent on this point. That said, it seems tenable to conclude that since insurance is a contract uberrimae fi dei, the forfeiture rule would also allow insurers to retain the premium where avoidance is exercised in a non-marine contract for fraudulent non-disclosure.51
The modern courts have consistently condemned the results which flow from the exercise of the avoidance remedy. To take just one example, in Kausar v Eagle Star Insurance Co Ltd,52 Staughton LJ remarked that:
Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered that the risk turns out to be a bad one; it leaves the insured without the protection which he thought he had contracted and paid for … I do consider there should be some restraint in the operation of the doctrine. Avoidance for honest non-disclosure should be confined to plain cases.53
However, the weight of the case law and the force of the 1906 Act inevitably present considerable hurdles to judicial intervention. Nevertheless, the subject of non-disclosure and the insurers’ avoidance remedy has not escaped the attention of law reform agencies, and it will be seen below that, in consumer cases, the duty of disclosure has been abolished so that avoidance is no longer possible on this ground. The avoidance remedy remains in place for commercial insurance, so that avoidance of the policy continues in that sphere to operate without regard to notions of fairness. In this regard, Rix LJ observed in Drake Insurance plc v Provident Insurance plc54 that: ‘On the whole English commercial law has not favoured the process of balancing rights and wrongs under a species of what I suppose would now be called a doctrine of proportionality. Instead it has sought for stricter and simpler tests and for certainty.’55
4.2 Proving materiality: the role of expert evidence
The prudent insurer’s judgment, assessed by the court on the basis of expert evidence of the particular type of insurance in question, is the pervasive test. The approach to be taken by the court towards expert evidence was considered by McCardie J in Yorke v Yorkshire Insurance Co Ltd,56 who said:
Expert evidence may frequently afford great assistance to the Court upon questions of novelty or doubt. …[but] Judges are always free to test and revise any form of expert testimony. It may be said, however, … in … marine insurance cases … expert evidence has usually been given by those actually engaged in the occupation of insurers. … But it must be pointed out that in questions of life insurance the matters at issue are usually physiological, medical, or neuropathic. The directors of insurance companies, however, are but rarely medical men. … The importance or otherwise of that which should be disclosed to a life insurance company may well be appreciated only by doctors or surgeons. Medical men may, therefore, often give a more useful opinion than the directors themselves as to what is or is not material and important.57
Expert evidence is therefore admitted to assist the court in its determination of the prudent insurer’s judgment, and not to decide the issue of whether or not a particular fact should have been disclosed by the insured. Such evidence is not conclusive. In Roselodge Ltd v Castle,58 the insurers rejected the claimant’s claim who, as diamond merchants, had insured diamonds against all risks. The insurers’ defence was founded upon non-disclosure in so far that, first, the principal director of the insured company had been convicted of bribing a police officer in 1946 and, second, that the insured’s sales manager had been convicted of smuggling diamonds into the United States in 1956. According to one of the expert witnesses called by the insurer, a person who stole apples when aged 17 is much more likely to steal diamonds at the age of 67 even if he had led a blameless life for 50 years, than someone who had led a totally blameless life. This did not convince McNair J who held that the 1946 conviction was not a material fact, it having ‘no direct relation to trading as a diamond merchant’.59 However, the judge did go on to hold that the 1956 smuggling conviction was a material fact.
Expert evidence is not always necessary. If the court can come to its own conclusions on materiality without the assistance of experts then it is free to do so.60
5. The duty of disclosure: defining the term ‘influence’ contained in section 18(2)
The Report of the Law Reform Committee observed that ‘it seems that a fact may be material to insurers … which would not necessarily appear to a proposer for insurance, however honest and careful, to be one which he ought to disclose’.61 While the Marine Insurance Act 1906 attempts to lay down the guiding principle governing materiality of facts, it does not address the critical issue of how to define the term ‘influence’ contained in section 18(2). Determining whether a particular circumstance influenced someone is a nebulous exercise for there is no absolute standard. Degrees of influence are limitless. It is clear that a fact will be regarded as material if it relates either to the physical hazard of the subject-matter of the insurance or to its moral hazard. For example, whether or not inflammable substances are stored in a building is obviously highly relevant to a proposal for fire insurance. Similarly, in car insurance non-standard modifications carried out to increase the vehicle’s performance will be considered pertinent to the assessment of risk. Thus, if an enthusiast removes the factory-fitted engine from his small family saloon car, and fits a supercharged model in its place, the premium payable will obviously be much greater to reflect the increased risk of accident. As will be seen, moral hazard centres on the circumstances surrounding the particular proposer and will include the proposer’s claims history, previous refusals of cover and criminal record.62
The question of ascribing some meaning to the term ‘influence’ received extensive consideration in Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd.63 Maintaining the balance firmly in favour of insurers, the Court of Appeal held that an insured is bound to disclose those material facts which might influence the judgment of a prudent insurer in deciding whether to accept the risk or in setting the premium. Kerr LJ stressed that ‘judgment’ as used in section 18(2) should be given its Oxford English Dictionary definition so as to be construed as meaning ‘the formation of an opinion’. Thus, to prove the materiality of an undisclosed circumstance, the particular insurer must satisfy the court on a balance of probability that the ‘judgment’ (in the sense of formation of opinion) of a prudent insurer might have been influenced if the circumstance in question had been disclosed. This approach was adopted by Steyn J in Highlands Insurance Co v Continental Insurance Co,64 to non-marine misrepresentations. Under this test, insurers are placed in a particularly strong position for it is not necessary to prove that the ‘influence’ was decisive. Nor, under this particular test, is it necessary for the actual insurer to prove that the misrepresentation or non-disclosure had induced the contract of insurance.65
At its simplest level, the duty of disclosure on a prospective insured is seemingly boundless since the parameters of the requirement of ‘influence’ were left open. At the extreme, the consequence is that all information (without necessarily taking into account what the reasonable insured considers relevant) will have to be disclosed on the basis that the prudent insurer might want to know it, even if, ultimately, it does not affect the insurer’s decision as to the risk.66 However, the Court of Appeal’s view in Container Transport International (CTI) that it had correctly interpreted precedent on this issue is open to question. In Mutual Life Insurance Co v Ontario Metal Products Co Ltd,67 Lord Salveson accepted the submission of the insurers counsel that ‘the test was whether, if the fact concealed had been disclosed, the insurers would have acted differently, … by declining the risk at the proposed premium’.68 Yet in CTI, the Court of Appeal distinguished this decision on the basis that the Privy Council was concerned with the interpretation of the phrase ‘material misrepresentation’ contained in an Ontario statute. However, the particular statute in question was a codification of the English law, and the Privy Council thought that there was no difference between the law in England and Ontario.69
The modern courts are taking a stricter approach towards the scope of the disclosure duty. For example, in Garnat Trading & Shipping (Singapore) PTE Ltd v Baominh Insurance Corp,70 Clarke J, agreeing with the proposition put forward by counsel for the claimants, observed that:
a minute disclosure of every material circumstance is not required. The assured complies with the duty if he discloses sufficient to call the attention of the underwriter to the relevant facts and matters in such a way that, if the latter desires further information, he can ask for it. A fair and accurate presentation of a summary of the material facts is sufficient if it would enable a prudent insurer to form a proper judgment, either on the presentation alone, or by asking questions if he was sufficiently put upon enquiry and wanted to know further details, whether to accept the proposal, and, if so, on what terms.71
Modern case law thus suggests that since the decision in CTI there has been a distinct shift in the judicial focus and that the attention of the judges is being channelled along several lines of investigation. For example, particular attention is being directed towards the requirement of inducement as a determinant of non-disclosure together with a wider-visioned approach being adopted towards the role of the insurer during the disclosure process.
6. The requirement of ‘inducement’
The opportunity for a complete and authoritative review of the duty of disclosure came before the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co.72 The issues were, first, should materiality be measured by reference to whether its ‘influence’ on the prudent insurer’s judgment was ‘decisive’, or should some lesser degree of impact be sufficient? Secondly, where there has been non-disclosure of a material fact, must it induce the actual insurer to enter into the contract?
With respect to the first issue, Lord Mustill (with whom Lords Goff and Slynn concurred) could see no good reason for departing from the principle formulated by Lord Mansfield in Carter v Boehm and which had guided insurance law for more than two hundred years. Lord Mustill stated: ‘I can see no room within [the principle] … for a more lenient test expressed solely by reference to the decisive effect which the circumstance would have on the mind of the prudent underwriter.’73 On the question of statutory interpretation, the majority view was that since Parliament had left the word ‘influence’ in section 18(2) unadorned by phrases such as decisively or conclusively, it must bear its ordinary meaning. His Lordship stated that:
this expression clearly denotes an effect on the thought processes of the insurer in weighing up the risk, quite different from words which might have been used but were not, such as ‘influencing the insurer to take the risk.74
The majority decision therefore was to reject the ‘decisive influence’ test, and in re affirming the Court of Appeal’s decision in CTI, the position remains that a circumstance is material and must be disclosed even though the prudent insurer, had he known of the fact, would have insured the risk on the same terms. On this issue, the insured thus remains in a highly vulnerable position.75 On the other hand, Lord Lloyd in a powerful dissent, agreed with the appellants’ submission that there should be a twofold test under which the insurer must show that a prudent insurer, if aware of the undisclosed fact, would either have declined the risk or charged a higher premium and that the actual insurer would have declined the risk or required a higher premium.76 The simplicity of the logic here clearly appealed to Lord Lloyd who stated:
But if the prudent insurer would have accepted the risk at the same premium and on the same terms, it must be because, so far as he is concerned, the risk is the same risk. How, as a matter of ordinary language, can a circumstance be described as material, when it would not have mattered to the prudent insurer whether the circumstance was disclosed or not?77
In his Lordship’s opinion, the appellants’ submission ‘does full justice to the language of section 18 of the 1906 Act. It is well defined, and easily applied. It does something to mitigate the harshness of the all-or-nothing approach which disfigures this branch of the law.’78
In relation to the second issue, the House of Lords unanimously held that the non-disclosure of a material fact, as with misrepresentation, must induce the particular insurer to enter into the contract.79 In reaching this conclusion, their Lordships were clearly influenced by the argument that the 1906 Act codified the common law, and given that inducement was a requirement under the general law which provides for rescission of a contract, the Act must be taken as having the same effect. Accordingly, Lord Mustill stated that:
I conclude that there is to be implied in the 1906 Act a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using ‘induced’ in the sense in which it is used in the general law of contract.80
The assimilation of non-disclosure with misrepresentation for the purposes of requiring inducement is curious. Inducement for the purposes of misrepresentation has always taken an active form; in other words, silence cannot, without more, constitute misrepresentation.81 However, Lord Mustill does admit that the proposition that non-disclosure must induce the contract may well involve the House in making new law.82 Clearly, it did.
Lord Goff, concurring, thought that the need to show inducement on the part of the actual insurer addresses the criticisms directed against the CTI decision. He reasoned that it was the absence of this requirement that prompted the call for the test of materiality to ‘be hardened into the decisive influence test’.83 It is suggested that practical considerations render this a hollow victory for the critics,84 and Lord Lloyd’s approach in favouring the ‘decisive influence’ test is to be preferred since it would provide an objective assessment of materiality. The costs involved in seeking disclosure of documents required for an insured to establish non-inducement are likely to be immense and will therefore stand as an effective deterrent against such claims, and the matter is made more difficult from the insured’s point of view by the adoption by Lord Mustill (vigorously opposed by Lord Lloyd) of a ‘presumption of inducement’, whereby proof of materiality by the insurer casts upon the insured the burden of proving that the insurer was not in fact induced by the non-disclosed fact. That said, whether or not a non-disclosed fact is material, is, as seen above,85 a question of law which will be decided in the light of expert evidence. If materiality is not established in the first place, inducement becomes a non sequitur. While the House recognised the iniquity of the test propounded by the Court of Appeal in CTI, Lord Mustill considered that the question of reform along the lines argued for by Pan Atlantic must be left to Parliament.
A line of cases immmediately after Pan Atlantic suggests that there was a lack of judicial consensus on the inducement requirement. For example, in Marc Rich & Co AG v Portman,86 Longmore J narrowed the scope of inducement so that it would only trigger where the insurers were unable, with good reason, to give evidence. The judge stressed that in cases where the court is in doubt, the defence of non-disclosure should fail because ‘[a]t the end of the day it is for the insurer to prove that the non-disclosure did induce the writing of the risk’.87 In Insurance Corporation of the Channel Islands v Royal Hotel Ltd,88 however, the presumption operated in favour of the insurers notwithstanding that they did not give direct evidence to substantiate inducement.89 But in Assicurazioni Generali SpA v Arab Insurance Group (BSC),90 the Court of Appeal took the view that although the non-disclosed or misrepresented fact need not be the sole inducement operating on the insurer,91 it must be effective in causing the actual insurer to enter into the contract. Significantly, the majority of the court followed earlier decisions to the effect that the insurer must give evidence as to his state of mind. This, therefore, gives the insured the opportunity to cross-examine the insurer with the view to demonstrating that he was not induced by the non-disclosed fact but would have entered into the contract on the same terms had there had been full disclosure of all material facts. Clarke LJ, perhaps intending to lay down settled principles, summarised the position thus:
1. In order to be entitled to avoid a contract of insurance or reinsurance, an insurer … must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.
2. There is no presumption of law that an insurer … is induced to enter in the contract by a material non-disclosure or misrepresentation.
3. The facts may, however, be such that it is to be inferred that the particular insurer … was so induced even in the absence from evidence from him.