Underrimae fidei requires disclosure

The Marine Insurance Act 1906 enunciates in s.17 that ‘insurance is uberrimae fidei’. In the following sections [1] , it can be seen clearly that underrimae fidei requires disclosure. More specifically, the assured has the duty to supply every material circumstance which is known by him and ought to be known by him ‘in the ordinary course of businesses’. It is essential to a ‘prudent insurer’ to judge the rate of premium and whether he will take the risk. [2] However, disclosure in the Marine Insurance Act 1906 is often accused because it is considered to be too insurer-friendly. [3] For instance, the only remedy of non-disclosure that the insurer can avoid the contract no matter the non-disclosure is made by fraud, mistake, negligence or accident. [4] In addition, most of the insurance in marine insurance market are business insurance, which operated by brokers.

Moreover, the Law Commissions is working on the proposal to reform consumer insurance. In 2009, they have produced the Consumer Insurance (Disclose and Representations) Bill, which reformed the doctrine of utmost good faith, especially in disclosure and representation. According to this Bill, in consumer insurance, the pre-contract duty of disclosure is not as strict as Marine Insurance Act 1906 and the remedies are not the same.

Hence, whether it should be appropriate to make similar amendments in disclosure to the Marine Insurance Act 1906 becomes an arguable question. This essay will focus on discussing this issue. The two main aspects of this issue are the duty of disclosure of assureds and the remedies. This essay will discuss the two aspects separately. More exactly, it will firstly compare the Marine Insurance Act 1906 with the Consumer Insurance Bill in order to find out the differences. Secondly, it will analyze the reasons of reformation. Thirdly, both advantages and disadvantages of making amendments of the Marine Insurance Act 1906 will be discussed in order to analyze this issue sufficiently. Finally, the conclusion will be made according to the analysis above.

1. Pre-contractual disclosure obligation for the assured

1.1 The scope of disclosure obligation in both MIA 1906 and the Consumer Insurance Bill

According to s18 (1) of the Marine Insurance Act 1906, an assured should disclose ‘every material circumstance’ which is known to him. Moreover the assured is ‘deemed to know every circumstance which, in the ordinary course of business, ought to be known by him’. That is to say, an assured not only have the duty to disclose the information which is known to him, but also need to disclose the information which ought to be known by him in ordinary course of business. In London General Insurance Co Ltd v General Marine Underwriters Association Ltd [5] , the reinsured who was in a separate department for underwriting and reinsurance, failed to pass the casualty report to the claim department, thus the reinsurer failed to know the information. In the Court of Appeal, Lord Sterndale M.R stated that according to s 18(1) and (3) the reassured ought to know this casualty report in his ordinary course of business and his negligence led himself fail to disclose the information [6] . In addition, the similar circumstance can be seen also in the case Aiken v Stewart Wrightson Members Agency Ltd [7] .

Moreover, s20 (1) of the Marine Insurance Act 1906 says that ‘every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract’. That is to say, the assured must ensure that the material information he provides is true. If it is untrue, no matter whether the assured is innocent or not, the issuer can avoid the whole contract. Hence, in MIA 1906, disclosure is required to be full and true and does not need to consider the assured’s intention [8] .

In the Consumer Insurance (Disclose and Representations) Bill, the Law Commissions abolished the duty to volunteer information. Instead, it stated that ‘It is the duty of the consumer to take reasonable care not to make a misrepresentation to the insurer’. That is to say, the assured need not to disclose information without being asked by the insurer and his only need is to take reasonable care not to make misrepresentations. The reasons why the Law Commissions reformed this scope of disclosure are as follows: firstly, in consumer insurance, the assured is not professional and has ‘little knowledge of insurance law’. [9] Therefore, it is unfair to require the assured to disclose information fully and truly in every material circumstance because of his lack of professional knowledge of insurance. Secondly, the issuer may use the strict requirement for the assured frequently to refuse to pay or delay to pay when the losses occurred, which may lead the whole insurance market work slowly.

However, in the marine insurance market, the circumstances are not the same. Firstly, most of the assureds in marine insurance market are big companies not individuals, thus they have experience in this area. On the contrary, because of the complex risks in business area, the insurer usually rely on the information which disclosed by the assured. [10] Hence, it is no need to give them special protection. Secondly, in marine insurance market most of work is done by brokers, thus it is very hard to exam whether the assured acts reasonably. [11] Hence, Marine Insurance Act 1906 needs not to amend as the Consumer Insurance Bill in this article.

1.2 From ‘a prudent insurer’ to ‘a reasonable assured’

Under s.18 (2) of the Marine Insurance Act 1906, it says 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.’ And the case Pan Atlantic Insurance Co. Ltd. and Another v Pine Top Insurance Co [12] .ascertained that inducement test is needed in proving non-disclosure. That is to say, both materiality test and inducement test are required for the court to determine whether it is non-disclosure [13] . Moreover, the same test is required to determine whether it is misrepresentation [14] . More specifically, in order to prove non-disclose or misrepresentation, ‘the insurer is expected to show that he was actually induced to enter into the contract on the relevant terms as a result of non-disclosure or misrepresentation’ [15] , which can be considered as ‘a prudent insurer test’.

In addition, how to prove this test? Firstly, materiality is easier to prove because it is objective. For example, expert evidence can used to achieve this purpose. In the case North Star Shipping Ltd v Sphere Drake Insurance Plc, the judge at last believed that the evidence of the expert was convincing and he made judgment according to the expert evidence. [16] Besides, the opinion of other underwriters can also be adduced. [17] Secondly, inducement is subjective so that it is not easy to prove. The key point of inducement is to consider that whether a prudent insurer will take this risk at the same premium when there is non-disclosure or misrepresentation. Pan Atlantic Insurance Co. Ltd. and Another v Pine Top Insurance Co. is one of the leading cases in this circumstance. [18] What the underwriter actually think is very important to dealing with inducement.

As mentioned above, the Law Commissions stated in the Consumer Insurance Bill that the assured need to take reasonable care not to misrepresent information to the insurer. ‘The new test would focus on the question of what a reasonable assured in the circumstances would think was relevant to the insurer’ [19] . Therefore, this test in consumer insurance can be called ‘a reasonable assured test’. Moreover, the significant difference between the two tests is in materiality. The Law Commissions believe that the prudent insurer test is not suitable for consumer insurance. According to B. Soyer [20] , there are two reasons for the reformation: firstly, in the consumer insurance, it is usually very difficult for the assured to judge what a prudent issuer will think, so it may lead the assured to disclose too much information to the issuer, which will cause the increase of the processing information cost. Secondly, in practice, in a prudent issuer test, the issuer can easily find the expert evidence while it is not so easy for the assured. Moreover, the reasonable assured test has its own advantages: firstly, in the reasonable assured test, the assured can be more confident when select the information which need to be disclosed to the issuer because he need not to consider what a prudent issuer will think but only need to take reasonable care. Hence, the useless information provided to the issuer can be reduced and the cost of processing information will decrease too. Secondly, different assureds will be treated differently by the court, because different assureds have different levels of reasonable care. It is unfair to treat an individual assured without a broker the same as a big company assisted by professional brokers on the standard of reasonable care. [21] 

Furthermore, what does a reasonable assured required? More fundamentally, ‘whether or not a consumer has taken reasonable care not to make a misrepresentation is to be determined in the light of all the relevant circumstances.’ [22] More exactly, according to s 3 (2) of the Consumer Insurance (Disclosure and Representations) Bill, the following circumstances are vital: firstly, the whole environment of the target market and the type of the policy. Secondly, whether the issuer have explained the question to the assured. Thirdly, what kind of the question is and how the insurer explain it. Finally, whether the assured has a broker.

However, in marine insurance, the reasonable assured test has some disadvantages. Firstly, on one hand, as mentioned before, in current test, the court can judge the materiality according to the market condition, expert evidence and other underwriters’ opinion. Just like Limit No. 2 Ltd v Axa Versicherung AG, the judge considered the ‘prevailing market conditions’ and an expert’s evidence in order to make the judgment. [23] On the other hand, if the Marine Insurance Act 1906 adopt the reasonable assured test, it will be difficult for the court to find out expert evidence or other assured’s opinion to prove whether the assured is a reasonable assured because there is no particular market for the assured and every assured has specific circumstances. Secondly, the insurable value in marine insurance is usually very large, which makes the issuer take especial care to be more cautious. If a reasonable assured test is applied in marine insurance, the insurer may ask more specific questions in order to protect himself. Hence, if take a reasonable assured test, although a reasonable assured will not provide a great deal of useless information to the insurer, the information will not decrease. Accordingly, a reasonable assured test not necessarily can reduce the processing cost in marine insurance. Finally, some experienced assureds may abuse the reasonable assured test to pretend that they have taken reasonable care, which will be very difficult for the court to discover.

To sum up, although a reasonable assured test may suit the consumer insurance market, it will not bring too many benefits to the marine insurance market. On the contrary, it may cause some trouble. To maintain the prudent issuer test may be a reasonable choice.

2 Remedies

2.1 Remedies in the Marine Insurance Act 1906

Under s 18 (1) and 20 (1) of the Marine Insurance Act 1906, the only remedy of non-disclosure and misrepresentation is the insurer can avoid the whole contract. That is to say that ‘the remedy is that it adopts an all-or-nothing approach which may extract a penalty way out of proportion to the breach.’ [24] More exactly, the insurer needs not to consider whether the non-disclosure or misrepresentation is relevant to the loss [25] and whether the assured acts dishonestly, when he finds out the non-disclosure or misrepresentation. Accordingly, the remedy of non-disclosure and misrepresentation in the marine Insurance Act 1906 is ‘lack of range and flexibility’. [26] However, ‘the right to avoid may be lost either by an election to affirm the contract, or by reason of an estoppel.’ [27] 

2.2 Remedies in the Consumer Insurance (Disclosure and Representations) Bill

According to this Bill, the insurer can have a remedy against the assured unless only if he can prove that: firstly, the assured has made a qualifying misrepresentation. Secondly, the assured did not take reasonable care when made the misrepresentation. Finally, the insurer will not enter the contract or will not enter the same terms of the contract without this misrepresentation. [28] What is more, this Bill still confirmed what ‘qualifying misrepresentations’ are. More exactly, there are two kinds of qualifying misrepresentations: one is a deliberate or reckless misrepresentation and the other is a careless misrepresentation. [29] That is to say, qualifying misrepresentations, which can lead to the remedies, only include misrepresentations which were made by the assured because of their actual fault. If the innocent assured acts honestly and carefully, the insurer can not avoid the contract even if the assured made a misrepresentation. Hence, ‘the pre-contractual information duties of the assured will be subject to a due diligence standard so that only fraudulent or negligent misrepresentations should amount to breach of the duty’. [30] 

Furthermore, in the Schedule 1 of the Consumer Insurance Act, it stated clearly that the remedies are different between a deliberate or reckless misrepresentation and a careless misrepresentation. If the misrepresentation is a deliberate or reckless one, the insurer ‘may avoid the contract and refuse all claims, and need not return any of the premiums paid…’ [31] However, if the misrepresentation is a careless one, the insurer maybe can not avoid the contract. More exactly, the remedy caused by a careless misrepresentation can be considered as a proportional one. ‘A proportionate remedy in negligent non-disclosure and misrepresentation which aims to put the insurer into the position it would have been in had it known the true circumstances’. [32] 

Accordingly, comparing with the remedies of non-disclosure or misrepresentation in the Marine Insurance Act 1906, the remedies in the Consumer Insurance Bill have changed a lot. The key point of this reformation is that the Law Commissions changed the ‘all-or-nothing remedy’ to the ‘compensatory remedy’. Moreover, the Law Commissions solve the premiums problem when the assured breaches the duty of disclosure. [33] The main purpose to make this reformation is consumer protection.

2.3 Whether the Marine Insurance Act 1906 need to be amended.

As mentioned above, the remedies reformed a lot in the Consumer Insurance (Disclosure and Representations) Bill, thus it should be considered separately on different aspects about whether the MIA 1906 need to be amended.

Firstly, misrepresentations in the Bill are divided into three types: innocent ones, careless ones and deliberate or reckless ones. Only the last two types of misrepresentations can be considered as ‘qualifying ones’. On one hand, it is very necessary to treat innocent misrepresentations and guilty (include both deliberate/reckless and careless) misrepresentations differently, because it is unfair for the innocent assured to be liable when he does not know and has no possibility to know. As in the case Economides v Commercial Assurance Co. Plc, Simon Brown L.J. quoted Fletcher Moulton L.J.’s statement in Joel v. Law Union and Crown Insurance Co [34] that ‘The duty is a duty to disclose, and you cannot disclose what you do not know. The obligation to disclose, therefore, necessarily depends on the knowledge you possess.’ [35] That is to say, if the innocent assured fails to disclose some information, he is not liable. On the other hand, the Law Commotions also brought out a new concept: ‘qualifying misrepresentations’ which divided the guilty misrepresentations into deliberate or reckless ones and careless ones. This reformation may bring about some drawbacks. To begin with, in practice, it is very complex to tell a misrepresentation is a deliberate/reckless one or a careless one, and there almost no precedent in marine insurance. Hence, it may increase the uncertainty of the judgment and extend the process of the judgment.

Secondly, should the remedy be changed from ‘all-or-nothing remedy’ to the ‘compensatory remedy’? Although it seems to be fair for the assured in consumer insurance, it may not suitable for the marine insurance. The reasons are as follows: for one thing, almost all the remedies of breach of contract are compensatory remedies. However, remedies for non-disclosure or misrepresentation are remedies for breaching of utmost good faith. Moreover, as mentioned in the first paragraph: Marine Insurance Act 1906 enunciates in s.17 that ‘insurance is uberrimae fidei’, which shows that utmost good faith is the soul of marine insurance. Hence, if the remedies for breaching of utmost good faith are similar with the other remedies, the special position of utmost good faith in marine insurance may be confusing. For another thing, it is better not to limit the freedom of the contract. For instance, in Schedules 1 of the Consumer Insurance Bill, it enunciates detailed ownership of the premiums when one breaches the duty of disclosure carelessly.

To sum up, the Marine Insurance Act 1906 needs to amend that the assured are not liable if he makes a non-disclosure or misrepresentation innocently. However, it is not necessary to the guilty misrepresentations into deliberate or reckless ones and careless ones. Moreover, it is better to maintain the ‘all-or-nothing remedy’.

Conclusion

The Law Commissions made a great effort to protect the consumers’ right. It indeed achieved the goal in the consumer insurance market. However, in the marine insurance market, the circumstances are not always the same. Hence, not all reformation can be used in the Marine Insurance Act 1906. First of all, about the scope of disclosure obligation, the assured not only have the duty to disclose the information which is known to him, but also need to disclose the information which ought to be known by him in ordinary course of business. That is to say, the duty of volunteer information needs to be remained. Secondly, ‘a prudent insurer’ test is more suitable in marine insurance market than ‘a reasonable assured’ test. Last but not least, the problem of remedies is a complex one. It is reasonable that innocent breach of duty of disclosure is not liable. However, it is no need to classify a deliberate or reckless misrepresentation and a careless misrepresentation. What’s more, to maintain the ‘all-or-nothing remedy’ will be a good choice. That is to say, innocent assured is not liable and the insurer can not avoid the contract while a guilty assured can be considered to breach of the duty of disclosure and the remedy for the insurer is to avoid the contract.

Bibliography:

Books:

[1] Jonathan Gilman and Robert Merkin, Arould’s Law of Marine Insurance and Average, 7th edition (London: Sweet& Maxwell, 2008).

Cases:

[1] Aiken v Stewart Wrightson Members Agency Ltd, [1995] 2 Lloyd's Rep. 618.

[2]Container Transport International Inc. and Reliance Group Inc. v Oceanus Mutual Underwriting Association (Bermuda) Ltd. [1984] 1 Lloyd's Rep. 476

[3] Economides v Commercial Assurance Co. Plc. [1997] 3 W.L.R. 1066.

[4] Ionides and Chapeaurouge v The Pacific Fire and Marine Insurance Company, (1870-71) L.R. 6 Q.B. 674.

[5] Joel v. Law Union and Crown Insurance Co. [1908] 2 K.B. 863

[6] London General Insurance Co Ltd v General Marine Underwriters Association Ltd, [1921] 1 K.B.

[7] North Star Shipping Ltd v Sphere Drake Insurance Plc, [2006] 2 Lloyd's Rep. 183.

[8] Pan Atlantic Insurance Co. Ltd. and Another v Pine Top Insurance Co., [1994] 2 Lloyd's Rep. 427

Journals:

[1] B. Soyer, ‘Reforming pre-contractual information duties in business insurance contracts - one reform too many?’ (2009) J.B.L. 2009, 1

[2] 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) J.B.L. 5

[3] Wilde Sapte, ‘Material non-disclosure’ (1994), I.B.F.L. 13(4), 33-35.