Duty of disclosure in case law
If one was to consider risk, then the assumption that the insured knows more than the insurer stands valid by the duty of disclosure in case law. This may not hold so much nowadays where this assumption is shifting especially with easier access of data via IT and through knowledge and expertise in risk assessment. In these circumstances remedy has been blamed as not flexible and severe, even in weak borderline cases, where avoidance for non disclosure being the only remedy.
The case of Drake Insurance v Provident Insurance indicates the need for more flexibility. Lord Hobhouse's judgment in The Star Sea, was considered by Lord Justice Rix where the duty of good faith may be more flexible than only giving a party the right to avoid. His statement was:
“The courts have consistently set their face against allowing the assureds duty of good faith to be used by the insurer as an instrument for enabling himself to act in bad faith.”
Lord Hobhouse concluded in The Star Sea case that;
“Such authorities show that suitable caution should be exercised in making any extension to the existing law on non-disclosure and that the courts should be on their guard against the use of the principle of good faith to achieve results which are only questionably capable of being reconciled with the mutual character of the obligation of good faith.”
Lord Justice Rix discussed the need of balancing rights and wrongs as a process not being favoured by English Commercial Law, which merely concentrates in simple testing for certainty. He proposed that in those cases where remedy is unfair, the insurer's right to avoid should be limited by applying the doctrine of good faith. He also commented on proportionality as a concept, but on the basis of giving wider effect to the good faith doctrine seeing it as necessary by the wide spreading of consumer contracts. He said:
“In my opinion it would be consonant with these views that the doctrine of good faith should be capable of limiting the insurer's right to avoid in circumstances where that remedy, which has been described in recent years as draconian, would operate unfairly.”
The Drake case dealt with the non-disclosure of a speeding conviction as well as with confusion between insured and insurer of the proper classification of a previous accident which in actual fact was a no-fault accident. To that effect Lord Justice Rix commented on the entitlement of the insurer to exercise his right to avoid the policy for non-disclosure:
“If, however, the point were a live one, I would hazard the opinion that knowledge or shut-eye knowledge of the fact that the accident was a no
fault accident would have made it a matter of bad faith to avoid the policy.”
And also added:
“If it is right to allow that circumstances could arise where an insurer would not be in good faith by acting on a prima facie right to avoid for
non-disclosure, then the question would have to be faced as to the conceptual analysis whereby an exercise of a right to avoid could be invalidated by the insurer's bad faith. This is not an easy question.”
The general judicial recognition is that contract avoidance can operate badly against the insured if in breach of the duty of good faith. To make the law fairer on the insured, it is said that a less strict test of materiality should be adopted. In 1980 the Law Commission in its non-disclosure and breach of warranty report recommended that “ the test of materiality should be whether, in the opinion of the reasonable assured, a fact known to him would influence the judgment of a prudent insurer.” Similarly in Australia, the Insurance Contracts Act of 1984 introduced a similar test, whereby matters known by the assured must be disclosed, which either he has knowledge of their relevance in accepting the risk and its terms by the insurer, or which in the circumstances a reasonable assured would be expected to know as relevant in the said context. In cases of non-fraudulent non-disclosure, the insurer's liability is reduced to reflect agreement made under proper disclosure.
Reform And Harmonisation
The doctrine of utmost good faith has its positive and negative points in that it is the one feature that is shared among most contracts of insurance and that it lacks clear definition and is based in an Act that is outdated. However on the principle that there have been centuries of case law constantly defining and redefining its meaning there are enough legal norms derived by it to justify its retention. The Comité Maritime International (CMI) proposes harmonisation in the area of marine insurance. Its guidelines address the notion of good faith and propose some changes that are to “negate its negative effects”. Since the Law commission has already published its draft Bill on consumer insurance law, could the MIA be amended so as to fit with harmonising measures proposed by the CMI?
The Australian treasury has already conducted a comprehensive review of the MIA 1909 that led to the Insurance Contracts Act 1984 (ICA). The ICA reformed the area of consumer insurance law that included the duty of utmost good faith as an implied term in insurance contracts. The main changes that were made included the abolition of warranties, insurable interest and a shift of the burden on proof onto the assured. In S.54 of the ICA, an insurer may not refuse to pay claims in certain circumstances. S.54 states
(1) “Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act.”
(2) “Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.”
This extract shows that after implying the duty of utmost good faith into the contract, the section is framed in such a way not only to encompass ‘good faith' but also causation. At this point there appears to be some convergence between the Australian ICA and the “but for” type inducement test outlined in St Paul Fire. It appears that due to the convergence the argument for harmonisation is made stronger.
What can be drawn from the above is that there is a need to promote harmonisation in Marine Insurance law. The above analysis shows that the courts have tackled the issues and have by and large come to satisfactory conclusions. However we can not have one act that is essentially marine in nature, to apply to regular consumer insurance. In the interest of uniformity it would be better to separate consumer form Marine and Air Transport insurance. If the English legislature were to amend the MIA in respect of intermediaries and clarify the law on disclosure, it may help the system from working better and more efficiently.
This essay has attempted to address many of the issues faced by the doctrine of utmost good faith, which is one of the most important areas of Marine Insurance, but at the same time one of the most difficult to apply. The need for reforming has been made in the arguments above, but also by the maritime community and recognised by government. With regard to changes, these should be explicit, easier to apply, interpret and test. Changes with regard to representations as expectation or belief, the declaration of the utmost good faith as a fact of duty and if so whether it confers a cause of action, regulating information with regard to risk, testing materiality, constructive knowledge in disclosure, inclusion of intermediaries, precontractual representation, avoidance related to fiduciary and liability, should be examined as propositions to reform. Finally Australia and the question of harmonisation pressed by the CMI with regard to good faith, have also been taken into consideration.