The Doctrine of Utmost Good Faith under Common Law

Introduction

The doctrine of uberrima fides [1] is one of the most important doctrines of insurance law. In the field of Marine Insurance Law, the principle of ‘Utmost Good Faith’ has always been the crown. This doctrine was originated from the case of Carter v Boehm [2] and the doctrine developed under the common law through the subsequent cases till the codification of the Marine Insurance Act 1906. However, in English Law there are still some extant divergences with regard to the understanding of utmost good faith in practice, since the test is founded on a hypothetical situation and the scope of the statutory provision is still uncertain. Therefore, analysis of this doctrine is crucial for the study of Marine Insurance Law in the UK, which needs a study of the pre-existing Common Law describing the basis and courts’ approach, and also for remodeling the marine insurance law if needed.

What is insurance:

The primary function of insurance is risk transference and distribution. By effecting insurance, the insured transfers the risk of economic losses to the insurer, who in turn redistributes the risk through investment and reinsurance arrangements Contract of insurance is a contract under which one person (the insurer) is legally bound to pay a sum of money or its equivalent to another person (the insured), upon the happening of a specified event involving some element of uncertainty as to time or likelihood of occurrence, which affects the insured’s interest in the subject-matter of the insurance. [3] The insured is actually buying his “peace of mind”, the “invisible product”.

the definition of insurance in CPP implies a contractual relationship between the insurer and insured parties and therefore the identity of the recipient of the services at issue is relevant for the purposes of applying the exemption. Skandia had no relationship with the insured parties, since that was with its subsidiary, and therefore Skandia’s services did not constitute an insurance transaction.

Definition of Marine insurance

The contract of marine insurance is a special (insurance) contract of indemnity which protects against physical and other losses to moveable property and associated interests, as well as against liabilities occurring or arising during the course of a sea voyage. [4] S. 1 of MIA 1906: A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.

Contract of indemnity:

Lord Ellenborough mentioned in Brotherston v. Barber [5] :

“The great principle of the law of insurance is that it is a contract for indemnity. The underwriter does not stipulate, under any circumstances, to become the purchaser of the subject-matter insured; it is not supposed to be in his contemplation: he is to indemnify only.”

Ideally, the insured should be compensated only to the extent of his loss. In practice, however, this is not always easy to attain. Thus, a policy of insurance is not a perfect contract of indemnity [6] .

Types of Marine Insurance

There are various types of Marine Insurance:

Firstly, Hull insurance: insurance of the vessel with its gear.

Secondly, Cargo insurance: insurance of goods carried by sea.

Thirdly, Insurance against the liability of the carrier: protection and indemnity; compulsory insurance [7] ; voluntary insurance – liability for cargo.

Fourthly, Other types of marine insurance: e.g. freight, salvage expenses, general average contributions.

Origin of Doctrine of Good Faith

The common law doctrine of “good faith” in insurance contracts was originated in the 18th Century. Lord Mansfield is credited with first articulating this concept in Carter v Boehm [8] . The action was based upon a 12 months policy of insurance, taken out for the benefit of the governor of Fort Marlborough, George Carter, against the loss of Fort Marlborough on the island of Sumatra in the East Indies, by its being taken by a foreign enemy. The governor also had an insurable interest in goods, which he owned, which were kept at the fort. In fact, the event insured against occurred: the fort was taken, by Count D’Estaigne, during the policy period. The defendant underwriter, Mr Charles Boehm denied that underwriters were liable to indemnify the insured because of a fraud, as a result of the concealment (non-disclosure) of circumstances which ought to have been disclosed – particularly, the weakness of the fort, and the probability of it being attacked by the French.

The concealment should not have been done by the plaintiff, should have been disclosed everything which was matters in that insurance policy. If the insurer would have been known the fact, the situation could have been different. In support of the insurer’s defence, two letters from the governor were relied upon – one to his brother, his trustee, the plaintiff in the case and the second to the governor of the East India Company. The first letter to his brother indicated that the governor was more afraid than before that the French would attack. The governor speculated to his brother that the French had such an intention the previous year. They asserted that if the governor had disclosed what he knew or, what he ought to have known, he could not have obtained the insurance of the fort. Therefore, this was a fraudulent concealment and the underwriters were not liable.

Analysis of Carter v Boehm

The general position was that the special facts upon which the contingent chance is to be computed, like most commonly in the knowledge of the insured 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, and to induce him to estimate the risk, as if it did not exist. The keeping back of such circumstance is a fraud, and therefore, the insurance policy is void on the ground of the fraud and the principle of utmost good faith was introduced.

From the date of the origins of the doctrine, Lord Mansfield was careful to explain that the duty of good faith was reciprocal. He opined that an insurance policy would equally be void, against the underwriter, if he concealed the fact that he insured a ship on her voyage, which he privately knew to have arrived. In such a case, an action would lie by the insured, to recover the premium. Lord Mansfield went as far as to state that the governing principle of “good faith” is applicable to “all contracts and dealings” [9] .

English Court on Doctrine of Good Faith

Utmost good faith was not defined exhaustively, “it is enough that much more than an absence of bad faith is required of both parties to all contracts of insurance”. It is nevertheless clear, however, that the court was not prepared to countenance arguments that there were shades of utmost good faith. Similarly, in Banque Keyser Ullman SA v. Skandia (UK) Insurance Co. [1987] 1 Lloyd’s Rep. 69 at 93 (per Steyn J.): the duty is “not only to abstain from bad faith but to observe in a positive sense the utmost good faith”.

This appeared to Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary. Even so, during the 18th Century, the English Court placed limitations on the duty of disclosure. Lord Mansfield expressly pointed out that the insured need not mention what the underwriter knows or ought to know or, what he takes upon himself the knowledge of or, what he waives being informed of. Neither need the underwriter be told of what lessens the risk agreed and understood to be run by the express terms of the policy nor, to be told general topics of speculation; for example, the underwriter is bound to know every cause which may occasion natural perils such as the difficulty of the voyage, the types of weather; the probability of lightening, hurricanes, earthquakes which may occur or, political perils which may arise. In crystallising the duty of good faith, Lord Mansfield held that:

…“The reason of the rule which obliges parties to disclose 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” [10]

In consequence, it was clear that although the insured is under a duty to disclose material facts to the insurer, he need not disclose facts which the insurer knows or is deemed to know. This seems to be fair enough. From its earliest days, the duty of good faith in making insurance contracts was a mutual obligation. It contemplated an active process of disclosure and questioning between the insured and the insurer but, within sensible boundaries.

At the beginning of the 20th Century, the English Court was still saying that it:

…“is an essential condition of the policy of insurance that the underwriters shall be treated with good faith, not merely in reference to the inception of the risk, but in the steps taken to carry out the contract” (Boulton v Houlder Bros & Co) [11] .

With the codification of the Marine Insurance Act 1906, the principle found expression in ss 17 to 20: s 17 presents 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).

However, in English Law there are still some extant divergences with regard to the understanding of utmost good faith in practice, since the test is founded on a hypothetical situation and the scope of s 17 is still uncertain. A minimum standard that requires both the buyer and seller in a transaction to act honestly toward each other and not mislead or withhold critical information from one another. In the insurance market, the doctrine of utmost good faith requires that the party seeking insurance discloses all relevant personal information and the principle of utmost good faith is one of the key principles in marine insurance law.

Conclusion