Good Faith & Disclosure
Cases
March Cabaret Club and Casino Ltd v London Assurance
[1975] 1 Lloyd’s Rep 169
May J
Next, does that duty of disclosure of material facts or circum stances arise outside the contract or is it based, as [Counsel] contends, upon some theory of an implied term in the policy itself? This may be important in the present case because the icy does contain terms dealing with the same subject matter, namely the necessity to make full disclosure, and if, when properly construed, these cut down the basic duty set out in s 18 (1) of the 1906 Act, as [Counsel] argues, then,is not the duty limited to that contained in the properly construed express terms?
So far as I am aware there is no specific decision of this particular point. In Merchants’ and Manufacturers Insurance Co v Hunt ,3 Scott LJ4 dealt with the matter in this way:
‘The company appealed, submitting (inter alia) that the clause did not and could not bear any such meaning. [Counse]l for the two Hunts, did not expressly contend that it could, but answered with this argument. The duties of disclosing all, or of not misrepresenting any, material facts are not duties existing at common law or in equity outside the insurance contract; each of them is just an implied condition of the contract-a warranty in the insurance sense importing that full disclosure.has been.duly made, and that all the material representions_inducing the contract were true; with the result that the breach of either prevents the contract from becoming effective, and entitles the aggrieved party to avoid it. Being an implied term it will, said Counsel, necessarily be superseded by any express term covering the same ground as, or being inconsistent with, the implied term.’
That is a passage which is directly in point having regard to [Counsel’s] argument on this aspect of the matter. A little later, however, the learned Lord Justice continued:
‘I am not satisfied that this argument is sound in principle. I realize that there are several reported cases in which learned Judges have in the course of their judgments expressed an opinion that the duty of disclosure may be regarded as resting on an implied term, but I do not know of any case where the point has come up for actual decision. On principle, it seems plain that the equitable jurisdiction to avoid a contract for misrepresentation cannot rest on such a foundation; and I agree with what Luxmoore L.J says about that in his judgment, which I have had an opportunity of reading.
Even the Common Law duty of disclosure I find difficult to explain fully on the theory of its resting only on an implied term of the contract. If it did, it would not arise until the contract had been made; and then its sole operation would be to unmake the contract.
…
The basis of the rule requiring the disclosure of all material facts is in my opinion nowhere more simply stated than by Scrutton L.J in Roza,tes v Bdwen, where the learned Lord Justice said:
As the underwriter knows nothing and the man who comes to him to ask him to insure knows everything, it is the duty of the assured, the man who desires to have a policy, to make a full disclosure to the underwriters without being asked of all the material circumstances, because the underwriter knows nothing and the assured knows everything_ at is expressed by saying that it is a contract of the utmost goo faith-uberrima fides.’
Bearing in mind the basis of the rule, however, which is, as Scrutton L.J pointed out, the fact that there is a disparity in negotiating position between the intending assured and insurers, in my judgment the duty to disclose is not based on an implied term in the contract of insurance at all; it arises outside the contract ; it applies to all contracts uberrimae fidei and is not limited to insurance contracts; it also applies, for instance, to contracts of partnership, contracts of surety, certain family settlement contracts and other similar types of contractual relationship.
London General Omnibus Co Ltd v Holloway
[1911-13) ALL ER Rep 518
KENNEDY L.J
No class of case occurs, to my mind, in which our law regards mere non-disclosure as a ground for invalidating the contract, except in the case of insurance. That is an exception which the law has wisely made in deference to the plain exigencies of this particular and most important class of transaction. The person seeking to insure may fairly be presumed to know all the circumstances which materially affect the risk, and generally is, as to some of them, the only person who has the knowledge. The underwriter, whom he asks to take the risk, cannot as a rule know, and but rarely has either the time or the opportunity to learn by inquiry, circumstances which are or may be most material to the formation of his judgment as to the acceptance or rejection of the risk and as to the premium which he ought to require.
Joel v Law Union and Crown Insurance Co
(1908) 99 LT 712, CA
FLETCHER MOULTON L.J
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. I must not be misunder stood. Your opinion of the materiality of that knowledge is of no moment. 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. But the question always is-Was the knowledge you possessed such that you ought to have disclosed it? Let me take an example. I will suppose that a man has, as is the case with almost all of us, occasionally had a headache. It may be that a particular one of these headaches would have told a brain specialist of hidden mischief, but to the man it was an ordinary headache indistinguishable from the rest. Now, no reasonable man would deem it material to tell an insurance company of all the casual headaches he had had in his life, and if he knew no more as to this particular headache, there would be no breach of his duty toward the insurance compant in not disclosing it. He possessed no knowledge that it was incumbent on him to disclose, because he knew of nothing which a reasonable man would deem material or of a character to influence the insurers in their action. It was what he did not know which would have been of that character, but he cannot be held liable for non-disclosure in respect of facts which he did not know. Insurers are thus in the highly favourable position that they are entitled not only to bona fides, but also to full disclosure of all knowledge possessed by the applicant that is material to the risk.
Carter v Boehm
(1766) 3 Burr 1905
LORD MANSFIELD CJ )
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.
But either party may be innocently silent, as to grounds open to both, to exercise their judgment upon. Aliud est celare; aliud, tacere; neque enim id est celare quicquid reticeas; sed cum quod tuscias, id ignorare emolumenti tui causa velis eos, quorum intersit id scire.
This definition of concealment, restrained to the efficient motives and precise subject of any contract, will generally hold to make it void, in favour of the party misled by his ignorance of the thing concealed.
There are many matters as to which the insured may be innocently silent-he need not mention what the underwriter knows-Scientia utrinque par pares contrahentes facit.
An underwriter can not insist that the policy is void, because the insured did not tell him what he actually knew; what way soever he came to the knowledge.
The insured need not mention what the underwriter ought to know; what he takes upon himself the knowledge of; or what he waives being informed of.
The underwriter needs not be told what lessens the risque agreed and understood to be run by the express terms of the policy . He needs not to be told general topics of speculations as for instance-The underwriter is bound to know every cause which may occasion natural perils; as, the difficulty of the voyage-the kind of seasons-the probability of lightning. hurricanes, earthquakes, etc. He is bound to know every cause which may occasion political perils; from the ruptures of States from war, and the various operations of it. He is bound to know the probability of safety, from the continuance or return of peace; from the imbecility of the enemy, through the weakness of their counsels, or their want of strength, etc.
If an underwriter insures private ships of war, by sea and on shore, from ports to ports, and places to places, any where-he needs not be told the secret enterprises they are destined upon; because he knows some expedition must be in view; and, from the nature of nis contract, without being told, he waives the information. If he insures for three years, he needs not be told any circumstance to shew it may be over in two: or if he insures a voyage, with liberty of deviation, he needs not be told what tends to shew there will be no deviation.
Men argue differently, from natural phenomena, and political appearances: they have different capacities, different degrees of knowledge, and different intelligence. But the means of informa tion and judging are open to both: each professes to act from his own skill and sagacity; and therefore neither needs to com municate to the other.
The reason of the rule which obliges parties to disclose, is to prevent fraud, and to enco rage 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.
The question therefore must always be ‘whether there was, under all the circumstances at the time the policy was under written, a fair representation; or a concealment; fraudulent, if designed; or, though not designed, varying materially the object of the policy, and changing the risque understood to be run’.
Glicksman v Lancashire and General Assurance Co Ltd
(1925) 133 LT 688, CA8
SCRUTTON LJ
As to the concealment, two points were argued before him: (1) That it cannot be held that a fact was material unless somebody gave evidence of the materiality. That, in my view … is entirely contrary to the whole course of insurance litigation; it is so far contrary that it is frequently objected that it is not permissible to call otherpeople to say what they think is maierial for the Court on the nature of the facts. I entirely agree with Roche J that the nature of the facts may be su.ch,that-it.is not necessary to call anyone to say ‘This is material.’ If you go to insure a ship and prove that the proponent knew that, while he wanted to insure her for the month of January, in the month of January she was heavily damaged in a storm, it would, with deference to Counsel who has suggested the opposite, be ridiculous to call evidence to say, ‘This is a material fact to be known by the underwriter’: the fact speaks for itself.
Yorke v Yorkshire Insurance Co Ltd
[1918-19] All ER Rep 877
McCARDIE J
The view of the Courts as to expert evidence in insurance cases seems to have developed. In the days of Lord Mansfield such, evidence was apparently regarded as irrelevant: see eg Carter v Boehm.10 But the views of 150 years ago have been modified by the broader outlook of later Judges and by a clearer realisation of the ‘ utility of expert testimony as an aid to the administration of justice, and Carter v Boehm10 was a case of the insurance of a fort in Sumatra. But Lord Mansfield dealt with it on the same footing as a marine insurance. In marine insurance cases the law to-day is not as it apparently was in 1766. Expert evidence with respect to the materiality of a fact has been freely admitted in recent years by the experienced Judges who have administered and are now administqing justice in the Commercial Court. The practice I conceive is settled: I conceive that no sound distinction can be drawn between cases of marine insurance as distinguished from life, fire, or other heads of insurance business: see eg Macgillivray on Insurance at 315; Smith’s Leading Cases (notes, to Carter v Boehm,10 12th Edn, vol 1, pp 570 et seq). Expert evidence may frequently afford great assistance to the Court upon questions of novelty or doubt. If excluded it would deprive the Court of the power of ascertaining those considerations and views which a tribunal may well require to know and the insurance witness would be stricken with absolute silence upon matters of vital importance. Judges are always free to test and revise any form of expert testimony. It may be said, however, that in the marine insurance cases referred to the expert evidence has usually been given by those actually engaged in the occupation of insurers. I agree that this is so. 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. Seldom (if at all) do they personally see the proposer. They rely to a great extent on the reports and advice of 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.
Looker v Law Union and Rock Insurance Co Ltd
(1927) 137 LT 648
ACTON J
It is contended on behalf of the insurance company in the-first instance that the rule applicable in circumstances such as these is that the acceptance is made in reliance upon the continued truth of the representations made in the proposal, which it was agreed should form the basis of the contract of insurance, and in the belief that there has been no material change in the risk offered, and therefore, that if anything has happened materially to increase the risk between the proposal and the acceptance, the insurance company are not bo und, because that which they have made a condition of the contract going to the root of it has not been fulfilled. The authority for this is to be found in ‘anning v Farquharand Harrington v Pearl Life Assurance Co. It is also said that the position of the insurance company is materially strengthened by the fact that in this case their notice of 15 July 1926, in terms intimated to the proposer that any subsequent acceptance by them of premium and risk would be subject to the condition that the health of the life proposed should remain meanwhile unaffected. That it had not remained unaffected cannot be disputed. It is not indeed putting it too high to say that when the insurance company accepted the premium and the risk on 26 July, the assured was dying, and if the insurance company had known the facts, they would never have, entertained for a moment the notion of accepting the risk.
Stebbing v Liverpool and London and Globe Insurance Co Ltd
(1916-17) All ER Rep 248/
Lord Reading.:
Upon whom is the burden of proof of establishing that the statement or statements challenged is or are untrue? The answer to it clearly is: Upon the company, and it is for them to establish and if they have not satisfied the arbitrator that the statements are untrue, why then that defence fails. The test of it is the very simple proposition, which is an answer to so many of these questions which are raised, which may be expressed in these words: that the burden of proof lies at first on the party against whom judgment would be given if no evidence at all were adduced. The moment one realises that that is the test, nd assumes in this case the proof of the loss by the burglary, the policy put in evidence, and that is the claimant’s case, if no other evidence is given, it follows as a matter of course that the claimant would be entitled to recover. And if he is to be met by the defence that the statement is not true-that one of the statements is not true-then the burden is upon the defence-that is, the company-to establish that it is not true, and if they cannot establish it, then they fail in the defence.
Dawsons Ltd v Bonnin
Viscount Haldane
It is clear that the answer was textually inaccurate. I think that the words employed in the body of the policy can only be properly construed as having made its accuracy a condition. The result may be technical and harsh; but if the parties have so stipulated, we have no alternative, sitting as a court of justice, but to give effect to the words agreed on. Hard cases must not be allowed to make bad law. The proposal-in other words–the answers to the questions specifically put in it is made basic to the contract. It may well be that a mere slip, in a Christian name, for instance, would not be held to vitiate the answer given if the answer were really in substance true and unambiguous. Falsa demonstratio non nocet. But that is because the truth has been stated in effect within the intent shown by the language used. The mis-statement as to the times at which the vehicle would usually be garaged-can hardly be brought within this principle of interpretation in construing contracts. It was a specific insurance, based on a statement which is made foundational if the parties have chosen, however carelessly, to stipulate that it should be so. Both on principle and in the light of authorities such as those which I have already …. it appears to me that, when answers, including that in question, are declared to be the basis of the contract, this can only mean that their truth is made a condition exact fulfilment of which is rendered by stipulation foundational to its enforceability.
Newsbolme Bros v Road Transport and General Insurance Co Ltd
[1929] All ER Rep 442
Scrutton LJ
If the answers are untrue and he knows it, he is committing a fraud which prevents his knowledge being the knowledge of the insurance company. If the answers are untrue but he does not know it, I do not understand how he has any knowledgy which can be imputed to the insurance company. In any case, I have great difficulty in understanding how a man who has signed, without reading it, a document which he knows to be a proposal for insurance, and which contains statements in fact untrue, and a promise that they are true and the basis of the contract, can escape from the consequences of his negligence by saying that the person he asked to fill it up for him is the agent of the person to whom the proposal is addressed.
GREER LJ
I also take the view that notice to the agent whose duty was to obtain a signed proposal form and send it to the company, was not notice to the company of anything inconsistent with the signed proposal form, and that in filling up the form, whether he mistook the instructions of the insured, or whether he intentionally filled in something different from what he was told, he was not acting as the agent of the company, but as the agent for the insured.
Condogianis v Guardian Assurance Co Ltd
(1921) 125 LT 610
Lord Shaw
The principle of a fair and reasonable construction of the question must also be applied in the other direction, that is to say, there must also be a fair and reasonable construction of the answer given; and if on such a construction the answer is not true, although upon extreme literalism it may be correct, then the contract is equally avoided.
With these matters in view, what is a just and reasonable
construction of the words in the question: ‘Has proponent ever been a claimant on a fire insurance company? If so, state when and name of company.,
It is not to be wondered at that this was made the basis of the contract, because insurance companies might hesitate long before entering into a contract with an insured who had been formerly a laimant upon companies, and they would have been put upon their inquiry as to what these claims were and how they had been settled and what were the circumstances of these former tr nsactions. The importance of the question might be increased by the number of times in which such transactions had taken place. The argument of the appellant, however, was that it was sufficient to answer the question: ‘Has proponent ever been a claimant ….?If so state when and name of company’ by
answering in the singular and giving one occasion and one occasion alone. Accordingly, if, say, several years ago a proponent had been a claimant under an insurance policy, it would be sufficient for him to mention that fact and to exclude from mention the further fact that every year since that occasion he had also been a claimant upon insurance companies for fire losses. It appears to their Lordships quite plain that this would be no good answer to the question: ‘Has proponent ever been a claimant? If so, state when.’ In short, when that question is reasonably construed, it points to the insurer getting the benefit of what has been the record of the insured with regard to insurance claims. This was distinctly its intention and in their Lordships’ opinion is plainly its meaning. To exclude, however, from that record what might in the easily supposed case be all its most important items, however numerous these might be, and to answer the question in the singular, which again in the easily supposed case might be a colourless instance favourable to the claimant, would be to answer the question so as to misrepresent the true facts and situation and to be of the nature of a trap.
Austin v Zurich General Accident and Liability Insurance Co Ltd
(1944) 77 LIL Rep 409
TUCKER J
With regard to the alleged defective vision, the evidence showed that he wore ‘thick’ glasses. There was no evidence before me as to the significance of ‘thick’ glasses as distinct from any other glasses. Although Austin was not altogether convincing with regard to discrepancies in his evidence at the trial and at the inquest, in the absence of any contradictory testimony before me there was no material on which I could find that there was any defect in [the insured’s) vision when wearing glasses, or that the necessity for wearing them in any way affected his driving. The evidence was that he was a good shot and billiards player and that he drove without difficulty by day and night. It is to be·observed that the question is not, ‘Do you wear glasses?’ The company do not, therefore, regard the wearing of glasses in itself as a material question. It is well known that a high proportion of people use glasses for reading but not for long distance sight, and have perfect vision for driving purposes, yet in a sense their vision is defective. I cannot suppose that such people are required to answer ‘Yes’ to this question. Its meaning must be construed in relation to the circumstances in which it is put, and I think that when occurring in a proposal form for motor insurance, it is limited to defects in vision which in some degree affect the competence of the assured as a motor driver and have not been corrected by glasses or other means. I am therefore of opinion that the answer in this respect was not untrue.
Keeling v Pearl Assurance Co Ltd
(1923) 129 LT 573
Bailhache J
The first answer to which they object is this: The question is, the date of birth: and the date of birth is given as 28 November 1863. The place of birth is given as New Mills, which I understand is correct. Then the age next birthday is given as 48. Now, of course, it is obvious to anybody who does the simplest subtraction sum, that a person born in 1863 would not be 48, but would be 57, in 1920. There was no reason to suppose that time had stood still for Mr Harry Keeling, and it was obvious, therefore, that there was some mistake about his age, and it turns out that, in fact, 1863 is the wrong date of the birth, and that the age next birthday, instead of being 48, ought to be 49. The insurance company had that form before them, and they saw, on the face of it, that there was a mistake somewhere about the age. Obviously, it must have hit them in the eye the moment they had the proposal form. Yet, notwithstanding that, they chose to issue a policy: and if they chose to issue a policy on a proposal form which contained a mistake, obviously, on the face of it, without further enquiry, there is no ground, in my opinion, for vitiating the policy.
Roberts v Avon Insurance Co Ltd
[1956] 2 Lloyd’s Rep 240
Barry J.
The inference to be drawn from leaving blank the two lines provided for the purpose of stating any exception can, to any reasonable applicant and to any reasonable insurer, have only one meaning, namely, that no exception exists. It seems to me perfectly clear that any applicant for insurance, completing this form, would appreciate without any doubt or ambiguity that the insurers required particulars of any previous loss in respect of contingencies specified to be set out on the two blank lines left for that purpose, with the date, amount and the name of the insurers who were concerned in respect of each of those losses.
If that information is clearly required, it seems to me that the only inference, and the obvious inference, is that the applicant intended the
blank lines to represent what I think has been described as a negative answer. As this statement is in a declaration, the obvious inference to be drawn from the applicant leaving those lines blank is that there was, in\ fact, no exception to his categoric statement that he has never sustained any loss in respect of any of the contingencies specified.
Locker and Woolf Ltd v Western Australian Insurance Co Ltd
(1936) 54 LI L Rep 211
Slesser LJ
Now, a good deal of the argument which has been addressed to us with regard to the payments which were made before the knowledge of the motor car matter came to the minds of the respondent company does not seem to me to help the appellants here; that is to say, that the respondents, if they are to be said to have waived the conditions which justified them in repudiating the contract or elected to treat it as subsisting, are entitled to say that they did not know the full circumstances of the case; that whatever they knew, their information was not complete until they knew about the motor car; and that therefore the acts done by them with regard to allowing these goods which had been salved to be sold was not conclusive from any point of view before the time when they had full knowledge of the circumstances. There must be, in the first place, full knowledge of the circumstances, and, knowing the circumstances, the insurers must do some act which, apart from the policy, they are not entitled to do, and which can be justified only upon the footing that the policy is still in existence (Yorkshire Insurance Co v Craine).15 That means, I think, that almost coincidently with the information derived for the first time of the serious material non-disclosure of the refusal of insurance in the motor car matter the parties by agreement in writing agreed to
refer the differences which were the differences arising out of the policy to the arbitrator, and in that short period of time I find no material on which we are justified in coming to the conclusion that the respondent insurance company elected to treat the contract as subsisting or agreed to waive any conditions; indeed, quite the
contrary.
Economides v Commercial Union Assurance Co. plc
[1998] Lloyd’s Rep. IR 9
Court of Appeal
LORD JUSTICE SIMON BROWN
What then was meant by the appellant’s representation that, as at January 1991, he believed that the full contents value was £16,000? The judge below considered three possible meanings:
(i) That £16,000 was in fact the full value.
(ii) That the appellant honestly believed that £16,000 was the full value and had reasonable grounds for his belief.
(iii) That he honestly believed that £16,000 was the full value.
… In the result the issue on appeal is between (ii) and (iii): when making a representation such as this, is the assured stating merely that he honestly believes the accuracy of his valuation or is he going further and impliedly stating too that he has reasonable grounds for that belief?
That issue was, I should note, critical because whereas the judge appears to have accepted that ”looking at the matter from the plaintiff’s own subjec tive point of view [he] was entitled to accept the figure which his father put forward” – i.e. he honestly believed that £16,000 was the full contents value
– he concluded:
” it is clear that the plaintiff did not have reasonable grounds for the
representations that he made. Knowing as he did that his parents had in troduced into the flat a quantity of jewellery and silverware, it would have been necessary for him to make substantially more enquiries than he did make before he could be said to have reasonable grounds for his belief. It is not necessary to specify what those enquiries might have involved.”
In short, the judge below held that “commercial reality and common sense” required the appellant here as the representor to have objectively reasonable grounds for his belief; honesty alone was not enough …
I accept, of course, that, as in Smith v Land and House Property, what may at first blush appear to be a representation merely of expectation or belief can on analysis be seen in certain cases to be an assertion of a specific fact. In that event, the case is governed by sub-sections (3) and (4) rather than (5) of section 20. And I accept too, as already indicated, that there must be some basis for a representation of belief before it can be said to be made in good faith. But if what Steyn J was saying – which is not altogether easy to dis cern – was that all who propose insurance must have reasonable grounds for their (ex hypothesi honest) representations of belief, as was found to be re quired of the particular vendor in Brown v Raphael, I would respectfully disagree. In my judgment, the requirement is rather, as section 20(5) states, solely one of honesty.
There are practical and policy considerations too. What, would amount to reasonable grounds for belief in this sort of situation? What must a house holder seeking contents insurance do? Must he obtain professional valuations of all his goods and chattels? The judge below held that “it would have been necessary for him to make substantially more enquiries than he did make before he could be said to have reasonable grounds for his belief. It is not necessary to specify what those enquiries might have involved.” The problem with not specifying them, however, is that householders are left entirely un certain of the obligations put upon them and at risk of having insurers seek to avoid liability under the policies. There would be endless scope for dispute. In my judgment, if insurers wish to place upon their assured an obligation to carry out specific enquiries or otherwise take steps to provide objective justi fication for their valuations, they must spell out these requirements in the proposal form.
I would hold, therefore, that the sole obligation upon the appellant when he represented to the respondents on renewal that he believed the full con tents value to be £16,000 was that of honesty. That obligation the judge ap parently found him to have satisfied. Certainly, given that the appellant was at the time aged 21, given that the figure for the increase in cover was put forward by his father, and given that father was a retired senior police offi cer, inevitably better able than the appellant himself to put a valuation on the additional contents, there would seem to me every reason to accept the appellant’s honesty. In these circumstances, it is unnecessary to consider whether, as Mr Bartlett submits in the alternative, the appellant had in fact reasonable grounds for his belief, reasonable that is from an objective stand point. Suffice it to say that I found little merit in Ms Kinsler’s argument that the appellant should at the very least have insisted on examining all the ad ditional valuables for himself and have formed his own view upon their worth. That seems to me wholly unrealistic.
Non-Disclosure
The appellant formally admitted for the purpose of these proceedings below that:
“l. The following were material facts: (a) The full cost of replacing all the con tents of the plaintiffs premises as new (‘the sum insured’); (b) whether the to- tal value of … ‘valuables’ exceeded one-third of the sum insured. Those facts induced the defendant to enter into the contract on the terms agreed.”
During argument before us, however, it became apparent that what is really being said here is that the appellant was bound to disclose: (i) that the full cost of replacing the contents was substantially more than £16,000, and (ii) that the valuables were worth very considerably more than £5,333 (or, in deed, very substantially more than one-third of the actual total value of the contents). The judge below considered a number of authorities on non disclosure and various passages from Spencer Bower on Actionable Non Disclosure (2nd edition, 1990) and concluded:
“Mr Bartlett submits strongly that the onus on the defendants is to estab lish what he calls ‘Nelsonian blindness’ on the part of the plaintiff, that is a wilful shutting of the eyes to the truth. I am inclined to think that this puts the test rather too favourably to the plaintiff, but I am prepared to assume that that is the test which I ought to apply. In my judgment there was here a wilful shutting of the plaintiffs eyes to the reality of the situa tion. He had been informed, as I find, that a quantity of jewellery and sil verware had been introduced into the flat by his parents. In my judgment he closed his eyes as to the true nature and value of these items and this amounts to actionable non-disclosure. On any view, moreover, the plaintiff was possessed of knowledge of certain facts, namely the presence of jewel lery and silverware, which should have led him to make further enquiries, and such enquiries would in my view naturally and inevitably have led him to the conclusion that material facts had not been disclosed. Accord ingly, I am driven to the conclusion that the defendants are entitled to avoid the policy also on the ground of non-disclosure.”
That part of the judgment is to my mind open to criticism on a number of points. Let me start with the law. It seems to me that the governing principle is that to be found in section 18(1) of the 1906 Act:
“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.”
It is clearly established that an assured such as this appellant, effecting insur ance cover as a private individual and not “in the ordinary course of business”, must disclose only material facts known to him; he is not to have ascribed to him any form of deemed or constructive knowledge. As was said by Saville Ll in Group Josi Rev Wallbrook Insurance Co. [1996] 1 WLR 1152 at 1169:
“The distinction is expressly drawn between knowledge and deemed knowledge. The latter type of knowledge is then carefully circumscribed. To suggest that there is to be found in the section another and unex pressed type of deemed knowledge which is not so circumscribed seems to me simply to contradict the words used, and to destroy the very distinction that has been expressly drawn. To my mind ‘every material circumstance which is known to the assured’ means precisely what it says, and does not include circumstances that are notknown to the assured.”
And that, indeed, as I understand it, had earlier been the position at common law. In Blackburn Low & Co. v Thomas Vigors (1887) 12 App Cas 531, Lord MacNaghten said at page 543:
“… it would, in my opinion, be a dangerous extension of the doctrine of constructive notice to hold that persons who are themselves absolutely in nocent of any concealment or misrepresentation, and who have not wilfully shut their eyes or closed their ears to any means of information, are to be affected with the knowledge of matters which other persons may be mor ally though not legally bound to communicate to them.”
And as was said by Fletcher Moulton LJ in Joel v Law Union and Crown Insurance Company [1908] 2 KB 863 at 884:
“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.” ·
In short, I have not the least doubt that the sole obligation on an assured in the position of this appellant is one of honesty. Honesty, of course, requires, as Lord MacNaghten said in Blackburn Low, that the assured does not wilfully shut his eyes to the truth. But that, sometimes called Nelsonian blind ness – the deliberate putting of the telescope to the blind eye – is equivalent to knowledge, a very different thing from imputing knowledge of a fact to someone who is in truth ignorant of it. The test, accordingly, for non disclosure was in my judgment precisely the same as that for misrepresenta tion, that of honesty. And by the same token that the appellant was under no obligation to make further enquiries to establish reasonable grounds for his belief in the accuracy of his valuations, so too he was not required to enquire further into the facts so as to discharge his obligation to disclose all material facts known to him. Indeed the appellant’s case on non-disclosure seems to me a fortiori to his case on misrepresentation. The Association of British In surers’ Statement of General Insurance Practice states with regard to pro posal forms: “(d) Those matters which insurers have found generally to be material will be the subject of clear questions in proposal forms.”
Where, as here, material facts duly are dealt with by specific questions in the proposal form and no sustainable case of misrepresentation arises, it would be remarkable indeed if the policy could then be avoided on grounds of non-disclosure. What, then, of the judge’s conclusions of fact on this part of the case? I have, I confess, great difficulty in understanding how the judge concluded that “there was here a wilful shutting of the plaintiffs eyes to the reality of the situation”. That, as stated, is tantamount to a finding of dis honesty and yet that seems to me not merely unjustifiable on the facts but positively inconsistent with what I understand the judge to have found on the issue of misrepresentation.
As to the alternative basis on which the judge appears to have found the ground of non-disclosure made good, namely that the appellant’s knowledge of the presence of jewellery and silverware “should have led him to make further enquiries”, that seems to me to have been based in part on a passage from Spencer Bower and in part on the line of authority concerned with an assured’s medical condition when proposing life insurance …
There appears to be no support – certainly in insurance law – for Spencer Bower’s proposition which seems to me altogether too widely stated. And as for the medical cases, it is important to recognise that, in these, issues of fact and materiality tend to shade into each other, and whereas, of course, to avoid li ability the insurer must show that the assured knew of the facts, he does not have to establish knowledge of materiality. In short, the appellant’s knowledge in the present case merely of the presence of jewellery and silverware in the flat to my mind gave rise to no duty of disclosure beyond that subsumed in an honest estimate of the required increase in cover under the policy.
By way of footnote I wish to add this. The issue of non-disclosure has throughout been dealt with, as stated, upon the appellant’s concession as to materiality. Certain aspects of this concession have, however, made me uneasy. In the first place, I note these paragraphs in MacGillivray and Parking ton on Insurance Law (8th edition), at page 777:
“1730. Under-insurance. Under a non-marine policy of insurance the in sured can recover the whole amount of his loss up to the limit of the sum insured. He may, therefore, obtain insurance at a small premium by un derstating the value of the subject-matter insured, but nevertheless make recovery in a sum up to the amount insured, where there is a partial loss he may even be able to recover the full amount of his loss and suffer no penalty for being under-insured.
1731. It has therefore become the almost invariable practice for insurers to
declare that the policy is ‘subject to average’ or ‘subject to the under mentioned condition of average’ which means that, if the sum insured does not represent the value of the property insured at the time of the loss or damage, the insured is to be his own insurer for the requisite proportion of the insurance and must therefore bear a part of the loss accordingly. In Careers Ltd. v Cunard Steamship Co. where the plaintiff company ware housed goods with the defendant company at a fixed rental to include in surance against loss or damage by fire, Bailhache J held that the so-called pro-rata condition of average was so common in fire insurances on mer chandise that it must be implied as a term of the warehouse agreement. The average clause now occurs in almost all policies, except those relating to private dwelling-houses and household goods, and to buildings (and their contents) used wholly or mainly for religious worship.”
Ordinarily, therefore, it appears, under-insurance, so far from being regarded as material non-disclosure justifying the avoidance of the policy, results in stead in averaging, or indeed in full recovery without penalty. Why then should the position be so very different in the present case, not least given that the policy itself expressly envisages at least some degree of under insurance:
“If at the time of any loss or damage the cost of replacing all the contents as new is greater than the capital sum insured then any payment under the Home Contents section will be made after a deduction for any wear or depreciation.”
And that leads me to the second point. Just how substantial must be the extent of under-insurance (or the excess beyond one-third in the proportion of valuables to the total) before it is said, assuming always that the assured had knowledge of these facts, that the policy can be avoided on grounds of non-disclosure? None of these questions were addressed before us, nor indeed, having regard to my con clusions on the central issues, did they need to be. I raise them, however, because in other circumstances it seems to me that they are likely to have considerable importance and accordingly should not be lost sight of.
For the reasons given earlier, however, I would allow this appeal and en ter judgment for the appellant against the respondents in the sum of
£7,815.38 together with interest.
Callaghan and Hedges v Thompson & Others and Anderson Insurance Services Ltd.
[2000] Lloyd’s Rep. IR. 125
DAVID STEEL J
… Following that judgment the parties pleaded their case on waiver. The essence of the claimant’s pleaded case is encapsulated in their amended reply at paras: 3A and 3B:
“3A. The first defendant learnt of the first-named plaintiffs convictions … I
before 2 April 1990. On 2 April 1990 with knowledge of said conviction or convictions the first defendant made an interim payment of £25,000 to the
plaintiffs in respect of their claim for an indemnity for the loss and damage ,f
sustained for the reason of the fire. 3B. If as to which no admission were made the first defendants had been entitled to avoid the said contract of in surance by reason of the failure of the plaintiffs to disclose either or both convictions … the first defendant by reason of the matters set in para. 3A above waived such entitlement and affirmed the said contract of insurance.”
The defendants served a rejoinder to the effect that the payment on 2 April was made by the claimant’s own agents and in any event was the outcome of the authorisation given on 2 March and which could not be cancelled after 19 March which date was before any knowledge was obtained. In amplification of matters then pleaded in a surrejoinder, I allowed the claimants leave in the course of the hearing to run further or alternative cases to the effect that: “if Mansons were the claimants’ agents, the defendant’s failure to inform the claimants’ or its agents between the time of the meeting on the 21 March and the time that the cheque was despatched by Mansons on the 23 March that they were repudiating liability under the contract constituted, given the rea sonable period thus afforded, an election to affirm. Further or in the further alternative if Mansons were the claimants’ agents, the defendant’s failure to inform the claimants in the period from 23 March until 16 May of their in tention to avoid was an election to affirm.” …
Election by Failure to Notify
On the basis that Mansons were, as I found, agents of the insured, the claim ants sought to argue in the alternative that the defendant’s failure to notify the claimants before 23 March (or alternatively before 10 May) of their inten tion to avoid the policy constitutes an election to affirm it. For this purpose, reliance was placed on the decision in Simner v New India Assurance Com pany Ltd. [1995] LRLR 240 when HHJ Diamond considered an alternative case on affirmation in the following way:
“The next question, however, is whether if Mr Patel did not elect to affirm the contract when he signed the documents on 28 September he should be held to have elected at a later stage when he appreciated the effect of the documents and failed to countermand the endorsement. In my view the position is that, having made an unequivocal representation that the in formation placed before New India had been amended in the respects set out in the schedule and bordereaux, Mr Patel was obliged to retract that representation if he did not intend New India to be bound by it, once Mr Patel had appreciated the effect of the documents and had obtained knowledge of the facts given rise to the right to elect, I would hold, there fore that, once Mr Patel had obtained such knowledge and had failed within a reasonable time to countermand the endorsement, he must be held to be making a continuing representation on behalf of New India that the information material to the reinsurance was as set out in the schedule and bordereaux and that, by doing so, he elected not to exercise the right to avoid the contract on the basis of such information.”
This does not seem to me to have any analogous bearing on the present case. By definition, no unequivocal representation had been made by underwriters in the period following ascertainment of the conviction. There was, on this alter native case, no such representation to countermand or retract. The silence of the underwriters could only be construed as equivocal, particularly where there is no suggestion that there was any delay in verifying the facts of the convic tion: see Allied Marine Transport Ltd. v Vale do Rio Doce Navega<;ao SA (The Leonidas IJ’) [1985] 2 Lloyd’s Rep. 18; and Unisys International Services Ltd. v Eastern Counties Newspapers Ltd. [1991] 1 Lloyd’s Rep. 538.
These conclusions render it strictly unnecessary to consider the other is
sues in this case but since they were fully argued I will seek to do so.
Knowledge
It is, of course, common ground that an election whether to affirm or rescind a contract can only be irrevocable if the party concerned has knowledge of the facts and of the right thus afforded to elect: Peyman v Lanjani [1985] 1 Ch.
D. 457. It was argued by the defendant that, whilst they had news of the first claimant’s conviction on 21 March, they reasonably embarked on the task of verifying that news and that they reasonably waited until they had done so before electing to avoid. In this context I was referred to McCormick v Na tional Motor and Accident Insurance (1934) 49 Lloyd’s Rep. 362 in which Scrutton LJ said at page 365: “You are not bound the moment the statement is made to you to make up your mind at once; you are entitled to a reasonable time to consider – to a reasonable time to make enquiries”. It was submitted on the defendant’s behalf that the information provided by Brocklehurst on 21 March was of a character which cried out for verification. It came from a source which could not be revealed. It was unsupported by any admissible evidence. There was doubt whether the conviction was of a man called Cal laghan rather than O’Callaghan. In all it was submitted that immediate ac tion would have involved a risk of prejudice arising from undue haste in an area which really called for a mature and measured response. His submission immediately rubs up against the decision on the preliminary issue. It is per haps, on reflection, an example of where a preliminary issue in fact can store up difficulty if it is decided in a way which does not bring the proceedings to an end. As I understand the judgment of the Court cif Appeal, it was left open whether the underwriters were thereby shut out from raising further issues as to the degree of knowledge imparted on 21 January, which was raised so late in the day.
Given the grave nature of the information, its antiquity, the absence of material verifying it, I have come to the conclusion that the underwriters were entitled to a reasonable time to investigate and then decide whether to avoid or not. It is not suggested that the period up to their letter of 16 May was unreasonable for that purpose. I conclude that, however one categorises the degree of knowledge on 21 May, it was not such as to render any appar ent election in the form of distributing a previously authorised part payment as irrevocable.
Payment without Prejudice
The claimants contended that, although the report of THS recommending the second interim payment was scratched “WP”, this merely reflected the leading underwriter’s concern to keep open the issue of quantification as between rein statement and a cash settlement, liability having been admitted. In my judg ment, the defendants had not made an admission of liability. It is true that Mansons were invited to tell the adjusters “To proceed in the normal manner” in October and this was passed on as an instruction “To proceed to settlement” which in turn THS communicated to Harris as indicating that underwriters were “prepared to deal with this claim under the terms of the policy in force”. This latter phrase was consistent with an admission of liability but to the ex tent that it did it went further than Mr James had authorised as is apparent from Mr James’ note to the file of 15 January. In his telephone call of 28 Feb ruary, Mr James expressed his concern to Mansons as regards the fax saying “Proceed to settlement” following his meeting with THS.
Against that background, the notation of “WP” made by Mr James whilst at Mansons’ offices must be construed as a complete reservation of rights. Indeed, it must have been perceived as such given the absence of any suggestion in the correspondence thereafter or even in the pleadings that liability had been ad mitted by that stage. The authorisation of a payment without prejudice cannot, in my judgment, constitute an unequivocal election to affirm.
Awareness of Informed Choice
Even on the assumption that Mansons were the defendant’s agents, that at the time of the interim payment the defendants knew of the conviction and that they had had a reasonable time to verify and act upon it, it was the de fendant’s case that the fact (which is accepted by the claimants) that the claimants were unaware that the defendants were making an informed choice to affirm rather than avoid is fatal to the affirmation argument. The claimants challenge this proposition. It is convenient to quote from Mr Bai ley’s skeleton argument on this aspect:
“There are two separate concepts: election and affirmation. Election re quires knowledge before the choice can be made. Affirmation requires communication. The question of principle is whether affirmation requires the innocent party to communicate the fact that he has made an informed choice to treat the contract as alive (the informed choice) or whether it is sufficient that he communicates the fact he is treating the contract as alive (the choice i.e. the result of the choosing).”
The emphasis was thus put by the claimants on the proposition that the other party merely needed to know that the contract was alive and not that there had been an election not to treat it as terminated.
I am unable to accept the claimant’s submission. Approaching the matter without reference to the authorities, it seems to me that an unequivocal dem onstration of an intention to proceed with a contract can only be exhibited if the other party appreciates that a choice has been made. It would not for in stance constitute affirmation if a party learning of a misrepresentation justi fying avoidance decides simply in his own mind not to avoid and then be the author of a letter to the other party which is consistent with the contract be ing alive. That letter would not exhibit to the other party any election or choice at all. I recognise that this may permit, say, an underwriter to keep an entitlement to avoid up his sleeve. But as a practical matter, to do so would almost inevitably lead to an estoppel. Any potential injustice would thus be prevented; see Yukon Line Ltd. of Korea v Rendsburg Investments Corpora tion of Liberia [1996] 2 Lloyd’s Rep. 604 at page 608. Common sense suggests to me that only the realisation by the other party that an informed choice has been made could make the relevant act or statement unequivocal and thus “clear the air”. This approach seems to me to be entirely consistent with the authorities, starting with a decision of the House of Lords in Scarf v Jardine (1882) 7 App Cas 345:
“The principle, I take it, running through all the cases as to what is an election is this: where a party in his own mind has thought that he would choose one of two remedies, even though he has written it down on a memorandum or has indicated in some other way, that alone will not bind him; but so soon as he is not only determined to follow one of his remedies but has communicated it to the other side in such a way as to lead the op posite party to believe that he has made that choice, he has completed his election and can go no further; and whether he intended to or not, if he has done an unequivocal act – I mean act which would be justifiable if he had elected one way but would not be justifiable if he had elected the other way, the fact of his having done that unequivocal act to the knowledge of the persons concerned is an election.” …
It follows in my judgment that the challenge that the claimants make to the conclusions of law in this field of Mance J in Insurance Corporation of the Channel Island v The Royal Hotel supra fails. The relevant passage from the judgment reads as follows:
‘Where the circumstances justify an avoidance and the choice is to avoid, the requirement of an unequivocal communication creates no problem. The claim to avoid demonstrates of itself one of the same time awareness of the choice in its making. Where it is said there has been an election to affirm rather than to avoid, the position is more problematic. Is it sufficient for affirmation that there is knowledge and a communication by words or con duct for which, assuming such knowledge, demonstrates an unequivocal choice? Or must the communication itself or the surrounding circum stances demonstrate such knowledge to the other party? In principle, it seems to me that the latter approach is correct in the context of communi cation. The communication itself or the circumstances must demonstrate objectively or unequivocally that the party affirming is making an in formed choice.”
In my judgement that approach was correct and presents another basis upon which the claimant’s claim would inevitably fail in the present proceedings even if I am wrong on the other matters.
Manifest Shipping Co. Ltd. v Uni-Polaris Shipping Co. Ltd. & Others
(“The Star Sea”)
[2001] Lloyd’s Rep. IR 247 House of Lords
LORD CLYDE
… As regards the other chapter in the case, I consider that it also fails on the facts. Even if the appellants were correct in requiring fair dealing and disclosure at the stage of the litigation, I am not persuaded that the evidence supports the proposition that there was in fact any “culpable non-disclosure”, as it was termed, on the part of the insured. As regards the obligations in law of an insured at the stage of a disputed claim, I take the view that there is no duty upon the insured to make a full disclosure of his own case to the other side in a litigation. I see no practical justification for such an obligation at that stage. Unlike the initial stage when the insurer may rely very substan tially upon the openness of the insured in order to decide whether or not to agree to provide insurance cover, and if so at what level of premium, the in surer has open to him means of discovery of any facts which he requires to know for his defence to the claim. Moreover I have found no precedent to support the appellants’ proposition; if anything, the authority at least of MacGillivray on Insurance Law (9th edition, 1997), para. 19-59, points in the opposite direction. The idea of a requirement for full disclosure superseding the procedural controls for discovery in litigation is curious and unattractive, and one which would require to be soundly based in authority or principle.
What has caused me greater difficulty is the broad provision in s. 17, which appears to be unlimited in its scope. The expression “utmost good faith” appears to derive from the idea of uberrimae fidei, words which indeed appear in the side-note, but whose origin I have not been able to trace. The concept of uberrima /ides does not appear to have derived from civil law and it has been regarded as unnecessary in civilian systems (Prof. T.B. Smith, “A Short Commentary on the Law of Scotland:’ (1962), p. 836, quoting M.A. Mill ner “Fraudulent Non-Disclosure” (1957) 76 SALJ 177, pp. 188–9). Indeed more recently the suggestion has been advanced in the Court of Appeal in South Africa that the concept should be jettisoned (Mutual and Federal In surance Co. Ltd. v Oudtshoorn Municipality (1985) (1) SA 419, 433). Black stone’s Commentaries (4th edition, 1876), Vol. II, Ch. 30, pp. 412-413, states that the very essence of contracts of marine insurance “consists in observing the purest good faith and integrity”, but in Carter v Boehm (1766), 3 Burr 1905, at p. 1910, Lord Mansfield refers simply to “good faith”.
On the face of it, the comprehensive degree of disclosure which the phrase
implies and the absence of any limitation upon the period over which the obligation is to extend gives some support to the appellants’ contention. But if the view which I have preferred is correct and the highest degree of open ness is not required at the stage of a disputed claim, then the superficial meaning of s. 17 cannot be correct. One solution is to impose a limit upon the period of the relationship between the parties to which the statutory provi sion is meant to apply so that it would only apply to pre-contract negotia tions. That can be supported by the fact that the section is placed in a group of provisions dealing with disclosure and representation. The special provi sions which immediately follow s. 17 may embellish the general rule which applies at the period of formation, but not be exhaustive of it. But that solu tion now appears to be past praying for. In these circumstances, the alternative remains available of adopting a flexible construction of the concept of utmost good faith. The latter course was the one which the respondent has adopted and which I would accept.
Since, even after the contract is entered into, the relationship between the
parties should in any event be coloured by considerations of good faith, the point is in some respects academic. But once it is recognised that in a con tract of insurance, and indeed in certain other contracts, an element of good faith is to be observed, and that that element may impose certain duties par ticularly of disclosure between one party and the other, duties which may vary in their content and substance according to the circumstances, then a question may arise as to the utility of the concept of an utmost good faith or an uberrima /ides. In my view, the idea of good faith in the context of insur ance contracts reflects the degrees of openness required of the parties in the various stages of their relationship. It is not an absolute. The substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged. It is reasonable to expect a very high degree of openness at the stage of the formation of the contract, but there is no justifi cation for requiring that degree necessarily to continue once the contract has been made. I agree that the appeal should be dismissed.
LORD HOBHOUSE OF WOODBOROUGH
… The second defence was said to arise under s. 17 of the Act:
“Insurance is uberrimae fidei. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not ob served by either party, the contract may be avoided by the other party.”
The case of the defendants was that the assured was under a continuing duty of the utmost good faith to disclose to them any information material to the claim and which might affect their decision to pay or defend the claim. The defendants argued that this duty continued notwithstanding that litigation had started and had been broken by the assured’s (and their lawyer’s) failure to disclose certain facts material to the defence under s. 39(5). Accordingly, the defendants said, they were entitled to avoid the whole contract ab initio
– with retrospective effect – and therefore had a complete defence to the whole of the claim, both the CTL and the partial loss …
Section 17: The Legal Problems
Section 17 raises many questions. But only two of them are critical to the decision of the present appeal – the fraudulent claim question and the liti gation question. It is, however, necessary to discuss them in the context of a consideration of the problematic character of s. 17 which is overlaid by the
historical and pragmatic development of the relevant concept both before and since 1906 …
There are many judicial statements that the duty of good faith can continue after the contract has been entered into. The citations which I make during the course of this speech will demonstrate this. To take just one example for the moment, in Overseas Commodities v Style [1958) 1 Lloyd’s Rep. 546 at 559, McNair J referred to the obligation of good faith towards underwriters being an obligation which rests upon the assured “throughout the currency of the policy”. However, as will also become apparent from the citation, the con tent of the obligation to observe good faith has a different application and content in different situations. The duty of disclosure as defined by ss. 18 to 20 only applies until the contract is made.
Thirdly, both counsel accept and assert that the conclusion of the Court of Appeal in the Banque Keyser case is good law and that there is no remedy in damages for any want of good faith. Counsel also drew this conclusion from the second half of s. 17 – “may be avoided by the other party”. The sole remedy, they submitted, was avoidance. It follows from this that the principle relied upon by the defendants is not an implied term but is a principle of law which is sufficient to support a right to avoid the contract of insurance retrospectively. Having a contractual obligation of good faith in the performance of the contract presents no conceptual difficulty in itself. Such an obligation can arise from an implied or inferred contractual term. It is commonly the subject of an express term in certain types of contract such as partnership contracts.
Once parties are in a contractual relationship, the source of their obliga tions the one to the other is the contract (although the contract is not neces sarily exclusive and the relationship which comes into existence may of itself give rise to other liabilities, for example liabilities in tort). The primary rem edy for breach of contract is damages. But the consequences of breach of con tract are not confined to this. The contractual significance of the breach may go further. It may also amount to a breach of a contractual condition which will excuse or suspend the other party’s obligation to continue to perform the contract. It may be a repudiatory breach, or evidence a renunciation, which entitles the other party to terminate the contract and sue for damages. How ever, any such release only applies prospectively and does not affect already accrued rights (Bank of Boston Connecticut v European Grain and Shipping Ltd. [1989) AC 1056, [1989) 1 All ER 545). Ordinarily, the right to the in demnity accrues as soon as the loss has been suffered (Chandris v Argo In surance Co. Ltd. [1963) 2 Lloyd’s Rep. 65).
The right to avoid referred to in s. 17 is different. It applies retrospectively.
It enables the aggrieved party to rescind the contract ab initio. Thus, he totally nullifies the contract. Everything done under the contract is liable to be un done. If any adjustment of the parties’ financial positions is to take place, it is done under the law of restitution, not under the law of contract. This is appro priate where the cause, the want of good faith, has preceded and been material to the making of the contract. But, where the want of good faith first occurs later, it becomes anomalous and disproportionate that it should be so catego rised and entitle the aggrieved party to such an outcome. But this will be the effect of accepting the defendants’ argument. The result is effectively penal. Where a fully enforceable contract has been entered into insuring the assured, say, for a period of a year, the premium has been paid, a claim for a loss cov ered by the insurance has arisen and been paid, but later, towards the end of the period, the assured fails in some respect fully to discharge his duty of com plete good faith, the insurer is able not only to treat himself as discharged from further liability but can also undo all that has perfectly properly gone before. This cannot be reconciled with principle. No principle of this breadth is sup ported by any authority whether before or after the Act. It would be possible to draft a contractual term which would have such an effect but it would be an improbable term for the parties to agree to and difficult if not impossible to justify as an implied term. The failure may well be wholly immaterial to any thing that has gone before or will happen subsequently.
A coherent scheme can be achieved by distinguishing a lack of good faith which is material to the making of the contract itself (or some variation of it) and a lack of good faith during the performance of the contract which may prejudice the other party or cause him loss or destroy the continuing contrac tual relationship. The former derives from requirements of the law which pre-exist the contract and are not created by it, although they only become material because a contract has been entered into. The remedy is the right to elect to avoid the contract. The latter can derive from express or implied terms of the contract; it would be a contractual obligation arising from the contract and the remedies are the contractual remedies provided by the law of contract. This is no doubt why judges have on a number of occasions been led to attribute the post-contract application of the principle of good faith to an implied term.
The principle relied on by the defendants is a duty of good faith requiring the disclosure of information to the insurer. They submit that the obligation as stated in s. 17 continues throughout the relationship with the same con tent and consequences. Thus, they argue that any non-disclosure at any stage should be treated as a breach of the duty of good faith: it has the same essential content and gives rise to the same remedy – the right to avoid. In the pre-contract situation it is possible to provide criteria for deciding what information should be disclosed and what need not be. The criterion is mate riality to the acceptance of the risk proposed and the assessment of the pre mium. This is spelled out in the 1906 Act and was the subject of the Pine Top case. But when it comes to post-contract disclosure, the criterion becomes more elusive: to what does the information have to be material? Some in structive responses have been given. Where the contract is being varied, facts must be disclosed which are material to the additional risk being accepted by the variation. It is not necessary to disclose facts occurring, or discovered, since the original risk was accepted material to the acceptance and rating of that risk. Logic would suggest that such new information might be valuable to the underwriter. It might affect how hard a bargain he would drive in ex change for agreeing to the variation; it might be relevant to his reinsurance decisions. But it need not be disclosed. In Lishman v Northern Maritime In surance Co. (1875) LR 10 CP 179, at 182 Blackburn J said:
“… concealment of material facts known to the assured before effecting the insurance will avoid the policy, the principle being that with regard to insurance the utmost good faith must be observed. Suppose the policy were actually executed, and the parties agreed to add a memorandum after wards, altering the terms: if the alteration were such as to make the con tract more burdensome to the underwriters, and a fact known at that time to the assured were concealed which was material to the alteration, I should say the policy would be vitiated. But if the fact were quite immate rial to the alteration, and only material to the underwriter as being a fact which showed that he had made a bad bargain originally, and such as might tempt him, if it were possible, to get out of it, I should say that there would be no obligation to disclose it.”
Blackburn J is adopting a similar approach to that which he adopted in the leading case, Cory v Patton (1872) LR 7 QB 304 which concerned whether there was a duty to disclose adverse facts discovered between the time that the underwriter had accepted the risk by initialling the slip binding in hon our only, and the issue of the legally binding policy. Blackburn J said at pp. 308-9 that the underwriter cannot depart “from terms thus agreed on [in the slip] without a breach of faith”; and the assured need not disclose to the un derwriter “information which ought to have no effect on him, but would ex pose him to a temptation to break his contract heisnobtound to lead his
neighbour into temptation.” The duty of good faith is even-handed and is not to be used by the opposite party as an opportunity for himself acting in bad faith. The decision in Cory v Patton was endorsed by the 1906 Act. What Blackburn J said in Lishman was followed in many subsequent cases, for example, Niger Co. v Guardian Ass Co. (1922) 13 LlLR 75, particularly per Lord Buckmaster at p. 76-7; Iron Trade Mutual Insurance Co. Ltd. v Com pania De Seguros Imperio, Unreported 31 July 1990, Commercial Court; Bank of Nova Scotia v Hellenic War Risks Mutual Insurance Ass (Bermuda) Ltd. [1988] 1 Lloyd’s Rep. 514. In the Niger case an additional argument was advanced. The policy in that case was one which covered the assured for a number of years, but it included a cancellation clause which allowed the in surance company to cancel the policy. The risk turned out to be more onerous than had been expected because there was a tendency for considerable quan tities of goods to accumulate in the up-river warehouse from which they were to be dispatched. The insurance company sought to avoid the policy or resist a claim because this post-contract development of which the assured was awar’e had not then been disclosed by the assured to the insurance company. Obviously, the development was of interest to the insurance company and might have led it to exercise its right of cancellation. But the Court of Appeal ((1921) 6 LlLR 239, particularly per Bankes LJ at p. 245) and the House of Lords held that such facts need not be disclosed. (See also New Hampshire Insurance Co. v MGN [1997] LRLR 24.) A similar decision has been reached
in Australia, NSW Medical Defence Union v Transport Industries Insurance Co. (1985) 4 NSWLR 107.
These authorities show that there is a clear distinction to be made between the pre-contract duty of disclosure and any duty of disclosure which may exist after the contract has been made. It is not right to reason, as the defendants submitted that your Lordships should, from the existence of an extensive duty pre-contract positively to disclose all material facts to the con clusion that post-contract there is a similarly extensive obligation to disclose all facts which the insurer has an interest in knowing and which might affect his conduct. The courts have consistently set their face against allowing the assured’s duty of good faith to be used by the insurer as an instrument for enabling the insurer himself to act in bad faith. An inevitable consequence in the post-contract situation is that the remedy of avoidance of the contract is in practical terms wholly one-sided. It is a remedy of value to the insurer and, if the defendants’ argument is accepted, of disproportionate benefit to him; it enables him to escape retrospectively the liability to indemnify which he has previously and (on this hypothesis) validly undertaken. Save possibly for some types of reinsurance treaty, it is hard to think of circumstances where an assured will stand to benefit from the avoidance of the policy for something that has occurred after the contract has been entered into; the hypothesis of continuing dealings with each other will normally postulate some claim having been made by the assured under the policy …
In Litigation
The point here is whether the obligation of good faith and disclosure contin ues to apply unqualified once the parties are engaged in hostile litigation before the courts. There is no authority directly on this point. It was decided in favour of the owners by both courts below. There are, however, dicta in cases which show that the judges concerned contemplated that the obligation of good faith could continue to apply during litigation. Thus, by way of exam ple, Viscount Sumner in Lek v Mathews (sup) at p. 145 said in relation to an express clause that he was inclined to think that it would extend to false statements during the course of the trial. It is therefore right to consider what effect the commencement of legal proceedings has upon the relationship of the parties. Similarly some of the judgments in the ship’s papers cases treat the order for ship’s papers as an application of the obligation of good faith. Before the litigation starts, the parties’ relationship is purely contrac tual subject to the application of the general law. If one party has a right such as that given by s. 17 it derives from the contract itself or from the ap plication of the general law to the contractual relationship. These rights con tinue unimpaired unless one party has exercised a right of avoidance or termination. The insured has or may have a claim against the insurer. The insurer may have accepted the claim or may have rejected it. The insurer may have done so in a manner which evinces an intention not to be bound by the contract or, more probably, may simply be requiring to be satisfied that there is a valid claim covered by the policy. But the insured will either have or not have a cause of action against the insurer. Indeed, in relation to CTL cases, and the present case is such a case, the English doctrine of ademption makes the date of the issue of the writ the determinative date for deciding upon the validity of the notice of abandonment. (SS Blairmore Co. v Macredie [1898] AC 593) That is why it is normal for the assured to ask the under writer to put him in the same position as if a writ had been issued (Polurrian SS Co v Young (1913) 19 Com. Cas. 143).
When a writ is issued, the rights of the parties are crystallised. The func tion of the litigation is to ascertain what those rights are and grant the ap propriate remedy. The submission of the defendants in this case is that, notwithstanding this, one party’s conduct of the litigation can not only change that party’s substantive rights but do so retrospectively, avoiding the contract ab initio. It cannot be disputed that there are important changes in the parties’ relationship that come about when the litigation starts. There is no longer a community of interest. The parties are in dispute and their inter ests are opposed. Their relationship and rights are now governed by the rules of procedure and the orders which the court makes on the application of one or other party. The battle lines have been drawn and new remedies are available to the parties. The disclosure of documents and facts are provided for with appropriate sanctions; the orders are discretionary within the pa rameters laid down by the procedural rules. Certain immunities from disclo sure are conferred under the rules of privilege. If a party is not happy with his opponent’s response to his requests he can seek an order from the court. If a judgment has been obtained by perjured evidence remedies are available to the aggrieved party. The situation therefore changes significantly. There is no longer the need for the remedy of avoidance under s. 17; other more ap propriate remedies are available. The same points have been persuasively made by Callahan AJ sitting in the Supreme Court of Connecticut in Rego v Connecticut Insurance Placement Facility (1991) 593 A2d 491 at 497.
I recognise that it is possible for something to be done in the litigation which may amount to a contractual act; the delivery of pleadings and similar documents are a form of communication. Such communication can have a contractual significance which can and will still be given effect to. Thus it is possible by a pleading to repudiate a contract or accept a repudiation as ter minating the contract. Similarly, a claim or defence may affect the substan tive rights of a landlord and tenant inter se. But the acts and omissions of the assured relied upon by the defendants in the present case are not of that character. They are solely relevant as alleged failures to observe good faith under s. 17. The s. 17 principle is a principle of law and if its rationale no longer applies and if its operation, the conferment of a right of avoidance, ceases to make commercial or legal sense, then it should be treated as having been exhausted or at the least superseded by the rules of litigation. It will also very often be the case that by the time the litigation has started the cover has expired or its subject matter has ceased to exist so as to make the continuing relationship of insurer and insured no longer current and the ob servation of good faith only significant to the litigation.
I am therefore strongly of the view that once the parties are in litigation, it is the procedural rules which govern the extent of the disclosure which should be given in the litigation, not s. 17 as such, though s. 17 may influence the court in the exercise of its discretion. The cases upon ship’s papers, far from supporting the continuing application of the duty of good faith in truth support the opposite conclusion. As previously discussed, the fact that ordersfor ship’s papers were only made in marine insurance despite the fact that the principle of good faith applies to all insurance and the fact that the order was a matter of discretion, not of right, shows that it is a procedural remedy, not a matter of contract, although the principle of good faith clearly influ enced the attitude of the court to making such an order. But, most conclu sively, the fact that the remedy was to obtain an order from the court and not to avoid the contract shows both the limits of the principle and the change of relationship which comes about when the parties are in hostile litigation. Therefore this point must be decided against the defendants as well …
LORD SCOTT OF FOSCOTE
My Lords, there are two issues of some general importance that arise in this appeal. The first point arises under s. 17 of the Marine Insurance Act 1906: “17. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the con tract may be avoided by the other party.” Sections 18, 19 and 20 of the Act spell out in some detail the content of the duty of disclosure owed by the as sured to the insurer before the contract is concluded and the yardstick for assessing whether a representation made by the assured to the insurer is material and is true. It might have been possible at one time to treat s. 17 as merely an introduction to ss. 18, 19 and 20. But if that were ever possible, it is so no longer. The duty of utmost good faith has been held to apply where an assured is obliged under an existing policy to give notice of entry into a war risk zone (The Litsion Pride [1985] 1 Lloyd’s Rep. 437) and to the obliga tion of an assured to give notice when seeking to take advantage of a “held
covered” clause in an existing policy (Overseas Commodities Ltd. v Style [1958] 1 Lloyd’s Rep. 546; Liberian Insurance Agency Inc. v Masse [1977] 2 Lloyd’s Rep. 560). It has been held, also, to give rights of inspection under re insurance treaties (Phoenix General Insurance Co. of Greece SA v Halvanon Insurance Co. Ltd. (1986] 1 All ER 908, [1985] 2 Lloyd’s Rep. 599). And the s. 17 duty has repeatedly been held to be owing in the context of claims. A dis honest claim constitutes a breach by the assured of s. 17 and entitles the in surers to avoid the insurance contract …
It is accepted that the s. 17 duty of the utmost good faith continues to apply after the conclusion of the insurance contract. It does not follow, however, that the content is the same after the contract as before. Indeed it cannot be. Sections 18 to 20 prescribe the contents of the pre-contract duty in terms which are inapplicable thereafter. It is very possible for the duty that pre contract is owed by an assured to be broken by an act or omission which would not in ordinary language be described as a breach of good faith at all. Under s. 18(1) the assured is deemed to know, and is therefore under an obli gation to disclose, “every circumstance which, in the ordinary course of busi ness, ought to be known by him” (see also s. 19(a)). So an honest failure to disclose something of which the assured was in fact unaware may constitute a breach of duty. Consider also the concept of materiality. The duty to dis close extends to “every material circumstance” known to the assured (s. 18(1)) or to the assured’s agent (s. 19(a)). The test of what is material is an objective one. An honest belief by the assured, or the agent, that a particular circumstance is not material, or an honest oversight of the materiality of a particular circumstance, will not assist the assured if, objectively viewed, the circumstance was material. I need not, perhaps, labour the point that a breach of s. 18 ors. 19duty may arise notwithstanding the good faith of the assured. The addition of the adjective “utmost” does not affect the point.
It seems to me clear, therefore, that the content of the duty of “utmost good faith” post-contract must be examined afresh and is not coloured by the extent of the duty owed by the assured pre-contract. That this is so is demon strated also by authority. Cory v Patton (1872) 7 QB 304 establishes the gen eral proposition that the duty on the assured to disclose a fact material to the risk being undertaken by the insurer does not continue after the insured has
become bound by the insurance contract … !
These authorities make clear that the content of the duty of good faith
owed by an assured post-contract is not the same as the duty owed in the pre contract stage. So what is the content of the duty owed at the claim stage? It is, at least, that of honesty in the presentation of a claim. In Britton v Royal Insurance Co. (1866) 4F&F 905, 909 Willes J told a jury that:
“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.”
Views to the same effect were expressed in Orakpo v Barclays Bank Insur ance Services [1995] LRLR 443 and in Galloway v Guardian Royal Exchange (UK) Ltd. [1999] Lloyd’s Rep. IR 209. The Michael (Piermay Shipping Co. SA v Chester) [1979] 2 Lloyd’s Rep. 1, was a case in which a claim under a policy of marine insurance had been presented honestly. But after the claim had been presented the assured became aware, or had grounds to suspect, that the loss of the insured vessel had been caused not, as had been thought, by perils of the seas, but by scuttling. This information had not been passed on to the insurers. The insurers’ reliance on this non-disclosure to avoid the pol icy failed on the facts. The court was not prepared to find or infer that the claim, honestly presented, had subsequently been dishonestly maintained.
Roskill LJ dealt with this issue in the following passage, at p 22:
“As to the allegation of subsequently maintaining a fraudulent claim, Pier may and Mr Pierrakos are not to be found guilty of fraud merely because, with the wisdom of hindsight, they had information which might, if appreci ated at its true value, have led them to the truth at an earlier date. A plain tiff in litigation is not maintaining a fraudulent claim merely because during interlocutory proceedings he or his solicitors become aware of evidence which may militate against the correctness of the plaintiffs case and its likelihood of ultimate success. The relevant test must be honest belief.” …
I would, however, limit the duty owed by an insured in relation to a claim to a duty of honesty. If the duty derives from s. 17, nonetheless this limitation does not, in my opinion, involve a judicial re-writing of s. 17. On the contrary, it would be the creation out of s. 17 of a duty that could be broken notwith standing that the assured had acted throughout in good faith that would constitute a re-writing of the section. Unless the assured has acted in bad faith he cannot, in my opinion, be in breach of a duty of good faith, utmost or oth erwise. For these reasons, I agree with Tuckey J and the Court of Appeal in concluding that the insurers’ s. 17 claim cannot succeed …
Kls Mere-Scandia v Certain Lloyd’s Underwriters, Ocean Marine Insurance Co. Ltd. & Others
[2001] Lloyd’s Rep. IR. 802 Court of Appeal
LORD JUSTICE LONGMORE:
In this appeal from Aikens J. the court is concerned with the ambit of section 17 of the Marine Insurance Act 1906 which provides:
“A contract of marine insurance is a contract based upon the utmost good faith and, if the utmost good faith be not observed by either party, the con tract may be avoided by the other party.”
The extent to which this section applies once a contract of insurance has been concluded has never been authoritatively determined, but it has recently been considered by the House of Lords in Manifest Shipping Co Ltd v Uni Polaris Insurance Co (“The Star Sea”) [2001] 2 W.L.R. 170 in the context of a hull and machinery policy where the allegation was one of culpable non disclosure during the currency of the contract. The House held that culpable non-disclosure was insufficient to attract the drastic consequence of avoid ance provided by section 17. The result was that the insured shipowner could recover under the insurance policy despite such culpable non-disclosure and a consequent purported avoidance by the insurers.
The present case differs from The Star Sea in two important respects. In the first place, the contract was not a property insurance contract but a liabil ity insurance contract. The assured were ship repairers in Trinidad and have been found liable to the claimant shipowners under the ship repair contract. The assured have subsequently gone into liquidation and the claim is thus brought by the claimant shipowners as statutory transferees pursuant to the provisions of the Third Parties (Rights against Insurers) Act 1930 under which the insurers can avail themselves of any defence which was available against their assured … The second respect in which the present case importantly differs from The Star Sea is that the conduct of the assured about which the underwriters complain was fraudulent instead of merely culpable …
Approach
The scope of good faith obligations, once the contract has been concluded, has been the matter of some controversy, especially in recent years. Insurers’ enthusiasm for the doctrine appears to have begun in Piermay Shipping v n Chester (“The MichaeT’) [1979) 2 Lloyd’s Rep. 1 and the doctrine itself reached a high point in Black King Shipping v Massie (“The Litsion Pride”) [1985) 1 Lloyd’s Rep 437, since when there has been something of a retreat. In these circumstances it seems to me that an argument which, like Mr Hirst’s argument in the present case, seeks to start from some extra contractual principle and only, secondly, to consider the contractual position is in danger of starting the wrong way round. One can readily understand that in the more usual case of pre-contract lack of good faith, the contract subsequently made between the parties cannot be a satisfactory starting point; where, however, a contract has been made, it is somewhat perverse to apply to it principles of good faith which are traditionally applicable mainly in pre-contract situations. It is much more natural to start with the relevant contractual provisions and I shall, therefore, consider the contractual defence first.
The contractual defence
I have already set out the principal relevant terms of the ship repairers’ liabil ity insurance provisions. There is one other important term of the policy which expressly adverts to fraud in the context of the making of a fraudulent claim. That is the provision commonly found in property policies, (perhaps somewhat less often) in liability policies, and always to be found on the very first page of the familiar Lloyd’s J Form, as used in this case, in the following terms:
“If the assured shall make any claim knowing the same to be false and fraudulent, as regards amount or otherwise, the policy shall become void and all claims hereunder shall be forfeited.”
It is well recognised that, even if the policy did not have such an express term, the term expresses what would, in any event, be the law. I mention the clause now, in order to dismiss it from further consideration in the contrac tual context because the underwriters accept that they cannot rely on it in the present case. That is because no question of making a claim under a li ability policy arises until the liability of the assured is established (whether by agreement, judgment or arbitration award) see Post Office v Norwich Un ion [1967) 2 QB 363 and Bradley v Eagle Star Insurance [1989) AC 957. The liability of the insured in this case was not established until the judgment of Colman J given on 14th January 1997, while the fraud relied on by under writers occurred 4½ years earlier in June 1992. There can thus be no sugges tion that the assured has made a fraudulent claim or in any way forfeited the claim under the provisions of this express clause.
The presence of the clause is, however, of some significance since it is of ten said that oneof the accepted instances of the operation of the doctrine of good faith after the contract is made is that the whole policy will be avoided in the event of a fraudulent claim. This has been said to be a necessary and beneficial discipline in order to ensure that insurers are not exposed to wil fully exaggerated claims. Although some judges have said that, in the ab sence of any express terms, such a term would be implied into the policy, see Britton v Royal Insurance Co (1866) 4 F&F 905, 906 per Willes J and Orakpo v Barclays Insurance Services [1995] LRLR 443 per Hoffmann L.J., the better view now seems to be that both the obligation not to make a fraudulent claim and the inability to recover if a fraudulent claim is, in fact, made stem from a rule of law rather than any implied term, see The Star Sea paras. 62 and 66 at [2001) 2 W.L.R. 170, 191G-H and 193H per Lord Hobhouse. This rule of law may itself stem from the good faith obligation that exists between un derwriters and their assured and thus be a compelling example of the post contract application of section 17 of the Marine Insurance Act, see para. 102 at 205A per Lord Scott of Foscote. Even this is, however, not entirely clear since the judgments on which the rule of law is founded do not use the lan guage of avoidance (as does section 17) but the phrase “all benefit under the policy” or “all claim” on the policy, see para 64 at page 192E per Lord Hob house. No doubt, even if the obligation not to make fraudulent claims stems from good faith, the parties can, by contract, provide expressly for conse quences other than avoidance of the contract …
The judge rejected underwriters’ contractual defence even when put on the narrower basis of entitlement to defend the claim rather than a right to bring the entire contract to an end. He held that underwriters suffered no serious consequence in fact as a result of the assured’s fraudulent conduct either in relation to the jurisdiction issue or in relation to the issue of the assured’s liability to the shipowners. He held that if the forged letter had never been produced, English jurisdiction would have been maintained as it was in fact; he held further that, even if underwriters had continued to defend the claim, their defence could not have been prejudiced, depending as it did on the evi dence of the employees of the shiprepairers on the issue whether it was they or the employees of the shipowners who had been responsible for the failure to tighten the bolts of the repaired engine to the required tension. He did not accept the suggestion that the evidence of the employees of the insured would have been tainted by the dishonesty of the Baboolal brothers…. It follows that I agree with the judge that insurers’ contractual defence must fail. The question then arises whether insurers can achieve by statute what they can not achieve by contract.
Good faith defence
It is instructive to consider underwriters’ reliance on section 17 (the good faith and their main defence) against the contractual background and the failure of the contractual defence. They have stipulated that they must be kept fully advised; the status of that term enables them to treat a breach of that term as (1) a repudiation of the contract if the consequences of the breach are so serious as to show that their assured no longer intends to be bound or (2) as a defence to the claim if, as it appears at trial, the conse quence for insurers are sufficiently serious in fact.
Neither of these results is, however, sufficient for underwriters to succeed
in defeating the claim so they wish to rely on what Mr Hirst called the ‘over arching principle of good faith’ to enable them to avoid the entire contract and seek to be restored to the position they were in before any contract had been made. If one asks the question why, in general, underwriters should wish to avoid the contract rather than treat it as discharged (or use the breach as a defence to the claim) there can, as I see it, be only two answers; first that since the entire contract is to be unwound, they would be able to avoid liability for all other claims that may have accrued during the policy
year. That, so far as I am aware, is not a consideration in the present case. The second answer is that, in order to prove that the contract has been dis charged (or that there is a defence to the claim), they must show that the breach was sufficiently serious in itself or had such serious consequences that the parties can no longer be bound to each other (or that they have been seriously prejudiced in fact). According to Mr Hirst, none of this is necessary because, pursuant to section 17, underwriters can avoid the contract for bad faith, however trivial the act of bad faith may be and however unimportant the consequences to insurers. This is a proposition of great width and unsup ported by authority (save, perhaps, by analogy, by the fraudulent claims cases of which this case is not one). Mr Hirst, however, takes his stand on the wording of the statute. Adapting the words of Lord Phillimore in one of the fraudulent claims cases, Lek v Matthews (1927) 29 Lloyd’s Rep 141, 164 he submits it may be a dura lex, sed ita scripta est. It thus becomes necessary to consider section 17 of the Marine Insurance Act 1906, how it came to be enacted and how it has subsequently been interpreted.
The Marine Insurance Act 1906 was and is a codification of the law of marine insurance. The law as there stated is, in general, no different from that for other forms of insurance in so far as the duties in relation to good faith, disclosure and representations are concerned. Generally speaking again, the duties to disclose material matters and not to make material mis representations apply before the contract is concluded and do not continue after the contract is concluded. An insurer is not able to require disclosure of matters which show he has made a bad bargain. One question that has arisen is whether there is a continuing duty to disclose material matters, if the insurer is entitled to cancel the policy by serving a notice of cancellation. This court held in New Hampshire Insurance v MGN Ltd [1997] LRLR 24 that there was not. Staughton LJ gave the judgment of the court; he set out section 17 of the Act and the requirement in section 18(1) that the assured must disclose, before the contract is concluded, every material circumstance known to the assured. He then proceeded:
“A novice could be forgiven for thinking that the only duty of disclosure is by the insured and that it only applies before the contract is concluded (which would no doubt include the new contract which is made upon re newal). But the maxim that mention of one of two things excludes the other must be applied with caution when considering the draftsmanship of Sir Mackenzie Chalmers. His method of codification was, at any rate at times, to state the effect of rules decided by the Courts and not to pro nounce upon points which had not been decided.”
Staughton LJ then recorded a submission that section 18(1) was merely one example of the general duty that was placed upon both parties at all times by section 17 and said:
“We can see force in that argument. But it is questionable whether in prac tice the law has been treated in that way.”
I would respectfully echo that sentiment. In the light of this remark and the judge’s conclusion that the duty of good faith only applies post-contract if the insurer is invited to renew or vary his speculation or risk or if the insured is pursuing a claim under the policy, it is necessary to trace the development of this area of the law in a little detail. I do not intend a comprehensive survey and use the phrase “pre-contract good faith” in its usual sense and “post contract good faith” to indicate the requirement of good faith (as and when it exists) once the contract has been made and while it lasts.
Development of the law of post-contract good faith
(1) Fraudulent claims
The law about the making of fraudulent claims originally developed in fire insurance cases, see Levy v Baillie (1831) 7 Bing. 349; Goulstone v Royal In surance Co (1858) 1 F&F 276; Britton v Royal Insurance Co (1866) 4 F&F 905. The inclusion of some such clause as is now in Lloyd’s J Form has al ways been common; the same principle will apply as a matter of law, even in the absence of an express term. I have already observed that there is some debate whether the relevant principle of law is an example of the application of the good faith principle giving rise only to a right of avoidance or a sepa rate development of law. There is no evidence that Sir Mackenzie Chalmers had this line of authority in fire insurance cases in mind when he drafted section 17 of his marine insurance code. The concept, would in any event, be alien in a field, such as marine insurance, where most, if not all, policies, were “valued” policies. One of the important conclusions of the Star Sea was that when it came to making a claim, the duty of the insured was one of hon esty only. In any event the present case is not a case where the insured has made a claim at all, let alone a fraudulent claim.
(2) Variations to the risk
A duty of good faith arises when the assured (or indeed the insurer) seeks to vary the contractual risk. The right of avoidance only applies to the variation not to the original risk, Lishman v Northern Maritime Insurance Co (1875) LR 10 CP 179 and Iron Trade Mutual v Cia de Seguros [1991] 1 Re LR 213,
224 and The Star Sea para. 54 page 188D-F. There is no authority for a proposition that a fraudulent misrepresentation leading to a variation will avoid the original contract as well as the variation.
(3) Renewals
A duty of good faith exists when the insured seeks to renew the contract of insurance. That is a prospective right and if it is not observed by each party, the other party can avoid the contract. It is never suggested that, although the breach takes place during the currency of the earlier contract, the earlier contract is avoided as well as the renewal.
(4) “Held covered” cases
The requirement that an insurer hold the insured covered in certain circum stances has been held to require the exercise of good faith by the insured. To the extent that the result is a variation of the contract, eg because an addi tion premium has to be assessed, these cases are examples of (2) above; to the extent that they are only an exercise by the insured of rights which he has under the original contract they are somewhat puzzling; but, although it is settled that good faith must be observed, it is never suggested that lack of good faith in relation to a matter held covered by the policy avoids the whole contract of insurance.
(5) Insurer having right of cancellation
I have already said that the existence of such a right has been held not to give rise to the duty of good faith, New Hampshire v MGN [1997] LRLR, 24, 58-62, Issue K.
(6) Insurer asking for information during the policy
If the insurer has a right to information by virtue of an express or an implied term, there may be a duty of good faith in the giving of such information.Typically such requirements will be in liability policies and reinsurance contracts (which are, of course, only one form of liability insurance), see egPhoenix General Insurance Co. v Halvanon Insurance Co. Ltd. [1985] 2Lloyd’s Rep. 599. It is not usually suggested that breach of any such term gives rise to a right to avoid the contract rather than a claim to damages. To I. the extent that Alfred McAlpine v BAI Insurance [2000] 1 Lloyd’s Rep. 437 accepts that giving of information attracts obligations of good faith, it does not support any concept of avoidance in the absence of prejudice to under writers in connection with their ultimate liability for the claim. If there is no right in the insurer to be given information but he asks for information, no duty of good faith arises as such. The only duty of the insured will be not ma terially to misrepresent the facts in anything he does say to insurers. If he does make any such misrepresentation, the insurer will have ordinary com mon law remedies for any loss he has suffered, Iron Trade Mutual v Cia de Seguros [1991] 1 Re LR 213, 224.
(7) Other situations where good faith may be implied
Such other situations may arise under liability policies, particularly if the insurers decide to take over the insured’s defence to a claim. Interests of the insured and the insurers may not be the same but they will be required to act in good faith towards each other. If for example the limit of indemnity in cludes sums awarded by way of damages, interest and costs, insurers may be tempted to run up costs and exceed the policy limit to the detriment of the insured. The insured’s protection lies in the duty which the law imposes on the insurer to exercise his power to conduct the defence in good faith. In such circumstances Sir Thomas Bingham M.R. could not “for one instant accept … [the] suggestion that a breach of this duty, by an insurer, once a policy is in force, gives the assured no right other than rescission”, see Cox v Bankside [1995] 2 Lloyd’s Rep. 437, 462.
(8) Litigation
An important matter decided by The Star Sea is that the duty of good faith (whatever its precise context) is superseded, once the parties become engaged in litigation, by the rules of court contained in the Civil Procedure Rules. There had over the years arisen a view that the ancient rights of a marine insurer to obtain pre-defence discovery stemmed from the post-contract obli gation of good faith, but failure to comply with an order for ship’s papers never gave rise to a right to avoid the policy; so as Lord Hobhouse observed,in para. 60 of his speech, in relation to an insured’s obligation to submit to an I order for ship’s papers: “whatever it was, it was not the obligation referred to
in section 17”. There is a certain irony about this conclusion. When Sir Mackenzie Chalmers published the second and last edition of his Digest of the Law of the Marine Insurance (1903), on which the Act as ultimately passed was to be based, he included what is now section 17 without any ex planation of how (if at all) he envisaged any post-contract requirement of
good faith would work in practice. When he published the first edition of his work The Marine Insurance Act 1906 (1907), he added a note in relation to post-contract good faith, instancing the order of the court for ship’s papers as the example of the operation of post-contract good faith. Thus does the whirligig of time exercise its reversals.
It appears from this account of the development of post-contract good faith
principles that it is by no means in every case of non-observance of good faith by the insured that the insurer can avoid the contract. It is necessary to find some principle by which it is possible to decide whether, in the event of good faith not being observed by either party, the result is that the contract can be avoided.
Application to Fraud
Mr Hirst correctly emphasised that none of the examples of post-contract good faith considered in the above resume of the law were cases of dishonesty save for the fraudulent claims cases. They were not, therefore, in any way, inconsistent with his over-arching principle that any dishonesty on the part of the insured entitled the insurer to avoid the contract. His submission on the present state of the law was that, in the light of The Star Sea, the only application of section 17 post contract was to cases of dishonesty but that in such cases the full apparent rigour of section 17 should be applied. This sub mission could be said in itself to be a considerable gloss upon the statute but, Mr Hirst said, it is the position at which the law has arrived.
Before deciding whether Mr Hirst’s submission is correct, it is helpful to consider Lord Hobhouse’s initial approach to the law on fraudulent claims in para. 61 of his speech.
“… On ordinary contractual principles it would be expected that any ques tion as to what are the parties’ rights in relation to anything which has oc curred since the contract was made would be answered by construing the contract in accordance with its terms, both express and implied by law….. But it is also possible for principles drawn from the general law to apply to an existing contract – on the better view, frustration is an example of this as is the principle that a party should not be allowed to take advantage of his own unlawful act. It is such a principle upon which the [insurers] rely in the present case. As I have previously stated there are contractual remedies for breach of contract and repudiation which act prospectively and upon which the [insurers] do not rely. The potential is also there for the parties, if they so choose, to provide by their contract for remedies or consequences which would act retrospectively. All this shows that the courts should be cautious before extending to contractual relations principles of law which the parties could have themselves have incorporated into their contract if they had so chosen. The courts should likewise be prepared to examine the application of any such principle to the particular class of situation to see to what extent its application would reflect principles of public policy or the over-riding needs of justice. Where the application of the proposed principle would sim ply serve the interests of one party and do so in a disproportionate fashion, it
is right to question whether the principle has been correctly formulated or is )” being correctly applied and it is right to question whether the codifying statte from which the right contended for is said to be drawn is being correctly construed.”
With this admonition in mind, I return to section 17. It is the precursor of a number of sections which deal in terms with pre-contract non-disclosure of material facts and pre-contract misrepresentations. It must have been in tended by Parliament that avoidance by reason of post-contract matters should be subject at least to the same requirements as avoidance by reason of matters pre-contract. It is well recognised that, before a contract can be avoided for pre-contract non-disclosure or misrepresentation, the fact not disclosed or misrepresented must have been material for a prudent under writer to know when he was assessing the risk and must have induced the actual underwriter to write the risk. The requirement of materiality is em phasised in all three of the following sections of the 1906 Act and the re quirement of inducement is part of the general law which, though not adverted to specifically in the Act, is understood to apply to insurance law generally and marine insurance in particular, see Pan-Atlantic v Pine Top Insurance [1995] 1 AC 501. In my judgment these requirements which must exist before an underwriter can avoid for lack of good faith pre-contract must also apply, making due allowance for the change of context, where an under writer seeks to avoid for lack of good faith or fraud in relation to post contractual matters. In particular the requirement of inducement which ex ists for pre-contract lack of good faith must exist in an appropriate form be fore an underwriter can avoid the entire contract for post-contract lack of good faith. It is in this context that Lord Hobhouse’s admonition is particu larly relevant because, as he points out, the insurer already has his contrac tual remedies for breach of contract and repudiation. The insurer can treat the insured as being in repudiation of what will normally be an innominate term of the contract if there is a serious breach or there is a breach with seri ous consequences for the insurer. Avoidance ab initio is an even more ex treme form of contractual termination than an acceptance of repudiatory conduct and, for the extreme remedy of avoidance to be available, there must, in my view, be at least the same quality of conduct as would justify the in surer in accepting the insured’s conduct as a repudiation of the contract. It is only in this waythat the requirement of inducement for pre-contract conduct resulting in avoidance can be made to tally with post-contract conduct said to entitle the insurer to avoid the contract. It would not be just to the insured to enable the insurer to by-pass the rights and duties imposed on the parties by the contract in order to enable him to claim the disproportionate remedy of avoidance, with the result that he can avoid liability for all other claims un der the policy as well as the instant claim, without requiring that the conduct relied on be as serious as conduct which would be viewed as repudiatory. In this way the operation of section 17 post-contract has the appropriate sym metry to the operation of the section pre-contract.Support for this approach can be obtained from the resume of the post
contract situations of the operation of good faith particularly instances (6) and (7) which are probably the only true examples of good faith being re quired post-contract. (Instances (2) – (4), at any rate, are, as I say in para graph 31 below, more accurately examples of pre-contract good faith). It is in instances (6) and (7) that the requirements of good faith are equated to ordi nary remedies for breach of contract.
Mr Rainey submitted that another way of reaching a similar result had been anticipated by Rix J (as he then was) in Royal Boskalis Westminster N.V. v Mountain [1997] LRLR 523 on which Aikens J placed some reliance. In that case the insured shipowners had deliberately concealed from insurers the de tails of a “finalisation agreement” particularly the fact that clandestine pay ments had been made thereunder to the Iraqi government in breach of United Nations sanctions; the assured also deliberately misled insurers by saying that they had not been permitted to retain a copy of the “finalisation agreement”. The shipowners had been compelled to waive all their claims against the Iraqi Government and sued the insurers to recover the value of the waived claims pursuant to the sue and labour provisions of the 1906 Act. Rix J held that there was deliberate and culpable misrepresentation and non-disclosure by the shi powners but stopped short of saying that the shipowners had been fraudulent. He also held (page 592) that the insured were not making a fraudulent claim so that the fraudulent claim line of authority did not apply. He next doubted whether the duty of good faith was statutorily intended in the claims context to extend outside the context of fraudulent claims (page 597) but held that, if it did, the non-disclosure and misrepresentation must be ultimately legally rele vant to a defence which insurers had under the policy and that insurers must have been induced to change their position. For my part, I do not, on the facts of this case, derive direct assistance from Rix J’s cogent analysis on the facts of the case before him, because he deliberately abstained from any finding of fraud. I would nevertheless gratefully borrow the concept that the conduct of the assured which is relied on by underwriters must be causally relevant to underwriters’ ultimate liability or, at least, to some defence of underwriters before it can be permitted to avoid the policy. This is, I think, the same concept as that underwriters must be seriously prejudiced by the fraud complained of before the policy can be avoided.
I should lastly refer to what has been called the much-discussed decision in The Litsion Pride [1985] 1 Lloyd’s Rep. 437 where the assured did not inform underwriters that their vessel was about to go into an exclusion zone but con cocted a letter to their brokers two days after a casualty in that xclusion zone had occurred; this letter was falsely dated the day that the vessel entered the exclusion zone and informed the brokers and the underwriters that that was what the vessel was about to do. Owners’ brokers also wrote later false state ments in support of the claim. Hirst J held that the false letter was a fraud clearly connected to the claim and the later statements were made in the direct context of the claim. It is thus a case of making a fraudulent claim and to that extent was, with respect, good law but irrelevant to the present case. To the extent, however, that the case enunciates any wider obligations of post contract good faith in relation to merely culpable non-disclosure or misrepresentation, it has been finally and authoritatively disapproved in The Star Sea (see para. 71) and in the present case Mr Hirst rightly felt unable to place any specific reli ance on the decision of Hirst J in that case.
Conclusions on the law of post-contract good faith
I have already recorded Mr Hirst’s submission that, in spite of the restriction imposed by the decided cases on the operation of section 17 of the Act in cases where the assured has not acted fraudulently, section 17 still applies to all cases of fraudulent conduct on the part of the assured. Mr Rainey, by contrast, submitted that the duty of post-contract good faith Gustifying avoidance if not observed) should be confined (1) to cases (analogous to the pre-contract context) in which there was some subsequent change to the contractual position and (2) to cases of fraudulent claims. He did not enumerate the categories of case which would fall within (1) but they would at any rate include categories no (2)
– (4) set out in paragraph 22 of this judgment and, perhaps, be confined to them. One further possible category of case, at any rate in liability insurance cases, might be constituted by those cases in which the insurers have to decide whether to be responsible for defending a claim and do, in fact, agree to do so. In such a case a fraudulent misrepresentation which induces an insurer to de fend a claim (by appointing solicitors and agreeing to bear the expense of fight ing the claim) might well avoid the agreement that the claim be defended. There is, however, no obvious reason why the assured’s conduct should entitle the insurer to avoid the whole contract.
This submission was, in principle, accepted by Aikens J but there are, as it seems to me, two difficulties with it. The first is that the examples Mr Rainey gives of cases of bad faith leading to avoidance of the contract are not really examples of that at all; they are rather examples of pre-contract lack of good faith because they arise before variation, renewal or application of the “held covered” provision in the policy and avoid the variation, renewal or the application of the “held covered” provision, as the case may be, not the entire contract. As I have said in paragraph 11 it is by no means obvious that even the law of fraudulent claims either derives from or is truly to be treated as an example of post-contract lack of good faith leading to retrospective avoidance of the contract, as opposed to the “forfeiture of the benefit of the policy”.
The second difficulty with Mr Rainey’s submission is that it is not easy to fit within it those cases in which there is lack of good faith post-contract but in respect of which it seems to be accepted that no question of avoidance arises but only damages, whether or not accompanied by an acceptance of the insured’s conduct as repudiatory (para 22, categories (6) and (7)).
The difficulties inherent in this area of the law can be seen in successive editJ.ons of Professor Malcolm Clarke’s book, The Law of Insurance Contracts. If I may respectfully say so, his book, ever since its first publication, has been much the most perceptive and authoritative text book on the continuing duty of good faith. Chapter 27-1 is called “The Continuing Duty of Good Faith” and in paragraph 27-lA of his second edition (“The Nature of the Duty’) he stated:
“As regards insurance contracts, the duty of good faith continues through out the contractual relationship. In particular the duty of disclosure, most prominent prior to contract formation, revives whenever the insured has an express or implied duty to supply information to enable insurers 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 dis closure of the circumstances of the case’. The degree of disclosure, how ever, 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; a innocent misrepresentation or non-disclosure in the claim does not defeat a claim; there must be fraud … ”
This passage was approved by the Court of Appeal in The Star Sea [1997] 1 Lloyd’s Rep. 360, 372. In his 3rd edition, Professor Clarke felt it necessary to expand para. 27-lA considerably and introduce two new paragraphs 27-lAl relating to “The Time of Duty” and 27-1A2 relating to “The Level of Duty”. In the current loose-leaf edition of his work, he retains the two new sub paragraphs but considerably amplifies the body of the main paragraph (“The Nature of the Duty”). In the course of this modification he cites with approval Aikens J’s conclusion in the present case that the English cases have gone no further than saying that good faith operates post-contract only (a) when the insurer has been invited to renew or vary his speculation or risk or (b) where the insured is presenting or pursuing a claim on the policy. He then records without express approval what he calls the judge’s preferred view that the acts of the insured in the present case did not fall into the accepted category of ‘post contract’ good faith and that therefore the duty of good faith did not attach at all. This passage was, of course, written before the speeches of the House of Lords in The Star Sea became available.
Some authorities have concluded that the law is (or ought to be) that the
duty of utmost good faith is only applicable pre-contract and has no applica tion once the contract is concluded outside the context of fraudulent claims. That seems to have been the tentative view of Rix Jin Royal Boskalis [1997] LRLR 523, 587 (col. 1) and is certainly the view of Mr Howard Bennett of Nottingham University in his article entitled Mapping the doctrine of Utmost Good Faith in Insurance Contract Law [1999] LMCLQ 165. Lord Hobhouse (in paragraph 42 of his speech) in The Star Sea called this article valuable and penetrating but (I think) stopped short of endorsing this particular con clusion. Mr Hirst was able to point to Lord Hobhouse’s dismissal of under writers’ defence in that case on the basis that they had failed to obtain a finding of fraud and the comment (Para. 72 at page 196C.):
“Fraud has a fundamental impact upon the parties’ relationships and raises series public policy considerations.”
Mr Rainey pointed out that this was said in the context of fraudulent claims, where it is well accepted that the law has a disciplinary element in order to discourage the making of false and fraudulent claims. By contrast, such a disciplinary element is not to be expected in other areas of insurance law, see Pan-Atlantic v Pine Top [1995] AC 501, 549B-D. Despite Mr Rainey’s valid point on this particular dictum, I do not consider it is open to this court to decide that section 17 of the Act has no application after the formation of the contract (according to Lord Clyde this solution is “past praying for”, para. 6 of The Star Sea); nor do I think, in the light of the law set out in paragraph 22 above, that the operation of the section can be artificially limited to the two categories for which Mr Rainey contends and which Aikens J accepted viz (1) cases analogous to the pre-contract context and (2) fraudulent claims.
It seems to me that the solution to the problem must be found in the somewhat broader context of the appropriate remedy, as I have indicated in paragraph 26 above. Section 17 states that the remedy is the remedy of avoidance but does not lay down the situations in which avoidance is appropriate. It is, in my judgment, only appropriate to invoke the remedy of avoid ance in a post-contractual context in situations analogous to situations where the insurer has a right to terminate for breach. For this purpose (A) the fraud must be material in the sense that the fraud would have an effect on under writers’ ultimate liability as Rix J held in Royal Boskalis and (B) the gravity of the fraud or its consequences must be such as would enable the underwrit ers, if they wished to do so, to terminate for breach of contract. Often these considerations will amount to the same thing; a materially fraudulent breach of good faith, once the contract has been made, will usually entitle the insur ers to terminate the contract. Conversely, fraudulent conduct entitling insur ers to bring the contract to an end could only be material fraud. It is in this way that the law of post-contract good faith can be aligned with the insurers’ contractual remedies. The right to avoid the contract with retrospective effect is, therefore, only exercisable in circumstances where the innocent party would, in any event, be entitled to terminate the contract for breach.
The desirability of aligning the right to avoid with the right to terminate the contract for breach is self-evident. It is often observed that the right of avoidance is disproportionate (see the speech of Lord Hobhouse, paras. 61 and 72 at pages 191E and 196B). If the right to avoid in a post-contract context is exercisable only when the right to terminate for breach has arisen, the dispro portionate effect of the remedy will be considerably less and the extra advan tages given to insurers when they exercise a right of avoidance (eg non-liability for earlier claims) will be less offensive than they otherwise would be.
The requirement of materiality has, of course, always been required for avoidance for lack of pre-contract good faith. More significantly, it is also a requirement for the operation of the rule about fraudulent claims. The case of Goulstone v Royal Insurance Co (1858) 1 F&F 276 is instructive. The insured made a claim under a fire policy in the amount of £660 in respect of furni ture, linen and china. It emerged in evidence (1) that on the insured’s mar riage in 1846 there was a settlement of a quantity of furniture, (2) that in 1854 he had become insolvent and declared to his creditors that he had no furniture except that which belonged to his wife under the settlement and which was valued at £50 and (3) that the linen and china (which were not included in the settlement) had been furtively removed at the time of the insolvency. This concealment from the creditors was, of course, fraudulent; Chief Baron Pollock said to the jury that the plaintiffs interest was neverthe less legally insurable, whether or not the creditors ought to have the benefit of the insurance. He continued:
“But the question is whether the claim [viz the claim on insurers] was fraudulent i.e. whether it was wilfully false in any substantial respect; for instance, as to private furniture which was sworn to be worth only £50 in 1854 and has not since been added to.”
The Chief Baron is there drawing a distinction between the material and substantial fraud in the claim on underwriters in respect of the over valuation of the furniture and the immaterial fraud of concealing the linen and china from the creditors. Further authorities in support of the require ment of materiality are set out in para. 27-2B4 of the current loose-leaf edi tion of Professor Clarke’s work.
In the context of deliberate and culpable (but not fraudulent) post contract conduct, Rix J in Royal Boskalis said that a fact would only be mate rial if it had ultimate legal relevance to a defence under the policy [1997] LRLR 523, 589 col. 2 and Aikens J has adopted that as the appropriate test of materiality where fraud has been proved, see para. 76.
Aikens J expressed his conclusion as to the law in that and the following paragraph of his judgment. His view was that there was a continuing duty on the assured to refrain from a deliberate act or omission intended to deceive the insurer through either positive misrepresentation or concealment of ma terial facts and facts would only be material for the purpose if they had ulti mate legal relevance to a defence under the policy. I agree with the Judge’s conclusion summarised in this way save that I would also add (even if it is usually or invariably to state the same conclusion in different words) that the insurers cannot avoid the contract of insurance for such fraudulent conduct unless the conduct was such as to justify their terminating the contract in any event. If and in so far as Aikens J was intending to go further that this and say that the insurers’ defence of bad faith was inapplicable because no “good faith occasion” had arisen (and Professor Clarke thinks that this was the judge’s preferred view) I would not agree, since it seems to me that the duty not to be materially fraudulent does continue at all times after the con tract has been made.
To this extent, therefore, I would reject Mr Rainey’s submission that
there are only some occasions when the requirement of good faith exists post contract and accept Mr Hirst’s submission that the duty is a continuing one. If, however, I am wrong about that and there are defined categories of good faith arising post-contract, I would conclude that the giving of information, pursuant to an express or implied obligation to do so in the contract of insur ance, is an occasion when good faith should be exercised. Since, however, the giving of information is essentially an obligation stemming from contract, the remedy for the insured fraudulently misinforming the insurer must be com mensurate with the insurer’s remedies for breach of contract. The insurer will not, therefore, be able to avoid the contract of insurance with retrospec tive effect unless he can show that the fraud was relevant to his ultimate liability under the policy and was such as would entitle him to terminate the insurance contract …
Irish Cases
Aro Road and Land Vehicle Limited v. Insurance Corporation of Ireland
[1986] IESC 1; [1986] IR 403 (22nd July, 1986)
Supreme Court
Walsh J.
I have read the judgment about to be delivered by McCarthy J., and I agree with it.
Henchy J.
1. Aro Road and Land Vehicles Ltd. (“the insured company”) carried on business in Rathcoole, Co. Dublin. In July, 1981, it agreed to sell and deliver a quantity of vehicle cabs and engine parts to a firm called L.R. Plant, whose premises were at Maize, Co. Antrim. The insured company’s secretary, Miss Broe, telephoned the road freight section of Córas Iompair Eireann (“C.I.E.”) to arrange with them to transport the goods by road to the purchaser’s premises. She made the arrangement over the telephone with a Mr. Spelman. She told him what the goods were, she gave him the names and addresses of the consignor and consignee, and she estimated the value of the goods at £200,000. Mr. Spelman quoted transport charges at £2.00 per £1 ,000 worth of goods.
2. On 13th July, 1981, the insured company placed a firm order by telephone for the transport of the goods and it was made clear by Mr. Spelman that they would be carried at owner’s risk. Accordingly he suggested that they be insured, and offered to arrange the insurance. He had to hand blank insurance certificates from the Insurance Corporation of Ireland (“the insurers”), and (apparently without disclosing the identity of the insurers), read out over the telephone the extent of the insurance cover that would be provided, namely, “against the risks of fire and theft only, but including physical loss or damage directly resulting from collision or overturning of the carrying conveyance.”
3. Mr. Mansfield, the managing director of and principal shareholder in the insured company, reluctantly agreed to take out the proferred insurance. His reluctance was understandable because C.I.E. had previously carried goods for him by road to Northern Ireland and there had been no trouble.
4. Mr. Spelman, having arranged with the insured company for the payment of the transport charges and having agreed that the goods would be transported in one 40 ft. container and three 40 ft. tilts or flats, arranged with Miss Broe that a trailer would be sent by C.I.E. next day to start collecting the goods. Meanwhile the arrangement of the insurance was passed by Mr. Spelman to a Mr. McAdam, who was a road freight superintendent in C.I.E. He in turn passed the particulars to a firm of insurance brokers, who arranged the insurance with the insurers. The insurance was recorded by the issue of two insurance certificates by C.I.E., one dated 15th July, 1981, for £200,000 and another dated 16th July, 1981, for £50,000. Those certificates were issued and authenticated by the signature of an official in the road freight department of C.I.E. C.I.E. apparently had a master policy with the insurers covering such transport insurance, and the certificates state that the cover was to be subject to “the conditions and terms of the original policy.”
5. C.I.E. seem to have treated the insurance as having been effected on 15th July 1981. Apart from issuing the main certificate of insurance on that date, they also on that date issued an invoice and statement for £1,180 (including £400 in respect of insurance), and on the same date one of their representatives called to the premises of the insured company and collected a cheque for £1,180 to cover the insurance premium of £400 and £780 freight charges. While a further £100 was paid by the insured company on 31st August, 1981, in respect of additional cover, C.I.E. began to collect the goods on or about 15th July, 1981, for the purpose of transporting them to their destination in County Antrim.
6. From the foregoing account of the transactions that took place before C.I.E. began to transport the goods, the following facts appear to emerge:-
1. The insured company reluctantly took out insurance on the goods and only at the invitation of C.I.E.
2. Before the goods were transported the only information as to the terms of the insurance that was given to the insured company was as to the extent of the cover.
3. Before the goods were transported the relevant certificates were completed by C.I.E. as agents for the insurers.
4. Before the goods were transported the relevant certificates were not issued by C.I.E. to the insured company, nor was even the identity of the insurers made known to the insured company.
5. C.I.E. had been furnished with blank certificates of insurance by the insurers and apparently were empowered to effect them by countersignature.
6. C.I.E., with that power to act as agents for the insurers, did not deem it necessary to require any proposal form from the insured company or to make any inquiries save as to the names and addresses of the consignor and consignee and the nature and value of the goods.
7. C.I.E., as agents for the insurers, made it virtually impossible for the insured company to give the insurers the type of information they now say they were deprived of, for on the 15th July, 1981, as soon as they got the premium agreed by the insurers, they not only completed the main insurance certificate but demanded and were paid the premium payable in respect of that certificate.
7. The contract of insurance in this case must be held to have been concluded (subject to a later addendum) on the 15th July, 1981. It is well established that the duty of disclosure (where such duty applies) ceases to exist as soon as the contract is concluded: see Whitwell v. Autocar Fire and Accident Assurance Co. Ltd. (1927) 27 LI.L.Rep. 418 and Looker v. Law Union lnsurance [1928] 1 KB. 554.
8. The essential question, then, is whether the non-disclosure now relied on could have been made, or was expected to be made, before 15th July,1981.
9. C.I.E. proceeded to deliver by road the four loads of goods as arranged. Three of those loads safely reached their destination, but on 20th July 1981 the container was hijacked by a man with a pistol. It was set on fire and its contents destroyed. The insured company brought proceedings in the High Court claiming indemnity under the policy for the loss. The claim was contested on a variety of grounds, but at the end of the hearing the sole issue was whether the insurers were entitled to repudiate liability on the ground that, before the policy was effected, Mr. Mansfield, the managing director of and main shareholder in the insured company. had not disclosed that in 1962 he had been convicted of ten counts of receiving stolen motor parts and sentenced to twenty-one months imprisonment. It was established that the convictions and sentence took place and that they were not disclosed to the insurers, but it was not shown that Mr. Mansfield had anything to do with the malicious destruction near Newry of the container of goods. This defence was entirely a technical one under the law of insurance. It succeeded in the High Court. The judge, having heard expert evidence and having applied the test for the duty of disclosure laid down by this Court in Chariot Inns v. Assicurazioni Generali [1981] I R 199, held that the insurers were entitled to repudiate the policy on the ground of Mr. Mansfield’s failure to disclose the convictions and imprisonment that had befallen him nineteen years earlier.
10. I accept without question that it is a general principle of the law of insurance that a person seeking insurance, whether acting personally or through a limited company, is bound to disclose every circumstance within his knowledge which would have influenced the judgment of a reasonable and prudent insurer in fixing the premium or in deciding whether to take on the risk. Carroll J., while personally of opinion that Mr. Mansfield’s non-disclosure of his convictions and imprisonment was not material, deferred to the expert opinion given in the High Court (which she accepted and considered to transcend her personal opinion) that a reasonable and prudent underwriter would regard that matter as material and would have regarded its non-disclosure as a good reason for refusing to underwrite the risk. Accordingly, she held that the insurers were entitled to avoid the policies in question and to repudiate liability. On the assumption that full disclosure of all known material facts was obligatory, I consider that the judge’s conclusion could not be interfered with by this Court: see Northern Bank Finance v. Charlton [1979] IR. 149.
11. It emerged, however, in the course of the hearing of this appeal, that a particular aspect of the case was not adverted to, either in the pleadings or in the argument in the High Court. This was whether the circumstances of the case showed it to be an exception to the usual requirement of full disclosure. Normally, a departure in an appeal from the case as pleaded, or as argued in the court of trial, or as circumscribed by the notice of appeal, is not countenanced. However, in view of the trial judge’s expression of her personal opinion as to the effect of the evidence, and having regard to the technical nature of the defence and the general importance of this point in the law of insurance, I consider that this point should be entertained.
12. Generally speaking, contracts of insurance are contracts uberrime fidei, which means that utmost good faith must be shown by the person seeking the insurance. Not alone must that person answer to the best of his knowledge any question put to him in a proposal form, but, even when there is no proposal form, he is bound to divulge all matters within his knowledge which a reasonable and prudent insurer would consider material in deciding whether to underwrite the risk or to underwrite it on special terms.
13. That is the general rule. Like most general legal rules, however, it is subject to exceptions. For instance, the contract itself may expressly or by necessary implication exclude the requirement of full disclosure. It is for the parties to make their own bargain – subject to any relevant statutory requirements – and if the insurer shows himself to be prepared to underwrite the risk without requiring full disclosure, he cannot later avoid the contract and repudiate liability on the ground of non-disclosure.
14. An example of a contract of insurance which excludes full disclosure is where the circumstances are such as to preclude the possibility of full disclosure; or where the requirement of full disclosure would be so difficult, or so impractical, or so unreasonable, that the insurer must be held by his conduct to have ruled it out as a requirement. This is exemplified by many forms of what I may call “over-the-counter insurance”. Because this case is concerned only with fire and theft cover, I am addressing myself only to property insurance. Many concerns, such as airlines, shipping companies and travel agents – acting as agents for an insurance company and usually under the umbrella of a master policy – are prepared to insure travellers or consignors of goods in respect of luggage or of goods consigned, in circumstances in which full disclosure is neither asked for nor could reasonably be given effect to. The time factor, if nothing else, would rule out the requirement of full disclosure in many instances: an air traveller who buys insurance of his luggage in an airport just before boarding an aeroplane could not be expected to have time to make disclosure of all material circumstances. Insurance sold in that way obviously implies a willingness on the part of the insurer to provide the cover asked for without requiring disclosure of all material circumstances. The question in this case is whether this insurance, which the judge has held was entered into by Mr. Mansfield’s company in good faith and without any intention to defraud, was attended by circumstances which show that the insurers are precluded from claiming that full disclosure was a prerequisite of a valid contract of insurance.
15. Consider the relevant circumstances. Mr. Mansfield, through his company, was sold this insurance. He did not look for it. It was suggested by C.I.E. He was reluctant to take it out; he considered it a waste of money. C.I.E. as agents for the insurers arranged the rates and filled in the relevant certificates of insurance. Once that was done, C.I.E. were ready to transport the goods. They sought no further information from Mr. Mansfield and apparently deemed none necessary. Before collecting and transporting the goods, they did not furnish the certificates of insurance to Mr. Mansfield or his company. They did not even inform Mr. Mansfield or his company of the identity of the insurers. It is conceded by counsel for the insurers that if Mr. Mansfield was to make full disclosure he would have to make such inquiries as would bring the identity of the insurers to his knowledge – or alternatively to pass the relevant information to C.I.E. as their agents. C.I.E. as well as being the insurers’ agents, were to be the carriers of the goods insured. Everything points to the conclusion that when, as carriers of the goods, they got the information necessary for their purposes as carriers, and then arranged insurance of the goods during transit, the insurance was for all practical purposes concluded, so that no further information could have thereafter been asked for.
16. The circumstances of this case seem to me to show that C.I.E., acting as agents for the insurers, accepted this insurance without expecting or requiring disclosure of all relevant circumstances. The informal, almost perfunctory, way in which C.I.E. effected this insurance, their readiness to collect the premium and proceed to carry the goods to their destination as soon as they had ascertained the premium, showed a failure or unwillingness to give the insured company an opportunity to make full disclosure before the contract of insurance was concluded. The relevant circumstances indicate an indifference on the part of C.I.E. as agents for the insurers as to matters such as the personal circumstances of the managing director of the insured company.
17. It may well be the law that even in a case such as this certain types of information may not be knowingly withheld by the insured, but this case calls only for an answer to the question whether in the circumstances of the case an innocent non-disclosure of an incident in the past life of the managing director of the insured company entitled the insurers to avoid the policy. In my opinion it did not. Insurers who allow agents such as shippers, carriers, airlines, travel agents and the like to insure on their behalf goods being carried, and to sell that insurance to virtually all and sundry who ask for it, with minimal formality or inquiry, and with no indication that full disclosure is to be made of any matter which the insurers may ex post facto deem to be material, cannot he held to contract subject to a condition that the insured must furnish all material information.
18. I would allow the plaintiff’s appeal and remit the case to the High Court for the assessment of damages.
Griffin J.
19. I agree with the judgment of Henchy J.
Hederman J.
20. I agree with the judgment about to be delivered by McCarthy J.
McCarthy J.
21. The documentary evidence of the insurance effected is contained in two certificates which. save for date, insured value and an irrelevant detail, all in manuscript, are identical in form. They certify that the defendant “has insured the goods specified hereunder, under open policy, on behalf of Coras lompair Eireann and/or as agents” against risks, including the event which happened, “subject otherwise to the conditions and terms of the original policy.” The most obvious comment is that the certificate makes no reference to the plaintiff in this action. “The certificate represents and takes the place of the original policy and will, for the purpose of collecting any claims, be accepted as showing that the holder is entitled to the benefit of such policy to the extent set forth herein.” Unlike what I understand to be the ordinary course of the insurance business, there was no proposal form; such forms ordinarily provide that the proposal form shall be the basis of the contract. Here the insurance was arranged by Frank Spelman of C.I.E. who signed the quotation of the 15th July and provided the certificates duly completed from forms pre-signed on behalf of the Insurance Corporation of Ireland Ltd. Frank McAdam, road freight superintendent, arranged the insurance through the brokers, Coyle Hamilton Hamilton Phillips Ltd.; exactly how this was done is not clear. What is clear beyond doubt is that no proposal form was completed, no questions relevant to the risk, save as to value, were ever asked. James Mansfield, managing director and principal shareholder of the plaintiff company, the insured, had, in 1962, been convicted on ten counts of receiving stolen motor parts and sentenced to twenty-one months imprisonment. Not merely was the fact of these convictions not disclosed to the insurers; not merely did it not occur to Mr. Mansfield, a reluctant insured, to disclose them; they never occurred to him at all; they were a part of his past which he understandably preferred to forget. Although a great number of different matters were canvassed in the course of the trial, at the conclusion the sole issue was the right claimed by the insurers to repudiate liability on the ground of non-disclosure of these convictions, which, it is said, was a non-disclosure that a reasonable and prudent underwriter would regard as material and, therefore, on ground of moral hazard, a valid reason for refusing the risk. I think not.
22. Consideration of this appeal is not helped by the fact that the master policy, the open policy, was not produced in evidence. There was no evidence to suggest that between the l5th/l6th July and the 20th July (the day of the hijack) there was any communication passing to the insurers concerning this particular risk. Carroll J. considered that the convictions could not be material, particularly to the type of insurance where the risk only attached while the goods were in the custody of C.I.E. Nonetheless, accepting that Mr. Smart was expressing the view of a reasonable and prudent underwriter, she felt that the defendants had discharged the onus on them to prove a material non-disclosure; she felt obliged, so to speak, to suppress her own view of materiality in favour of that of Mr. Smart, once she assessed him to be a reasonable and prudent underwriter. Notwithstanding that she still held to her view that the convictions were not material, Carroll J. deferred to the view of Mr. Smart; in my judgment, she was incorrect in so doing, being herself the sole and final arbiter.
23. In my view, if the judgment of an insurer is such as to require disclosure of what he thinks is relevant but which a reasonable insured, if he thought of it at all, would not think relevant, then. in the absence of a question directed towards the disclosure of such a fact, the insurer, albeit prudent, cannot properly he held to be acting reasonably. A contract of insurance is a contract of the utmost good faith on both sides; the insured is bound ,to disclose every matter which might reasonably he thought to be material to the risk against which he is seeking indemnity; that test of reasonableness is an objective one not to be determined by the opinion of underwriter, broker or insurance agent, but by, and only by, the tribunal determining the issue. Whilst accepted standards of conduct and practice are of significance in determining issues of alleged professional negligence, they are not to be elevated into being an absolute shield against allegations of malpractice —see O’Donovan v. Cork County Council [1967] I.R. 173 and Roche v. Peilow [1985] I.R. 232. In disputes concerning professional competence, a profession is not to be permitted to be the final arbiter of standards of competence. In the instant case, the insurance profession is not to be permitted to dictate a binding definition of what is reasonable. The learned trial judge depended part of her judgment upon the decision of this Court in Chariot Inns v. Assicurazioni Generali [1981] IR 199. In his judgment, with which Henchy and Griffin JJ. agreed, Kenny J. stated at p. 225:-
“A contract of insurance requires the highest standard of accuracy, good faith, candour and disclosure by the insured when making a proposal for insurance to an insurance company. It has become usual for an insurance company to whom a proposal for insurance is made to ask the proposed insured to answer a number of questions. Any misstatement in the answers given, when they relate to a material matter affecting the insurance, entitles the insurance company to avoid the policy and to repudiate liability if the event insured against happens. But the correct answering of any questions asked is not the entire obligation of the person seeking insurance: he is bound, in addition, to disclose to the insurance company every matter which is material to the risk against which he is seeking indemnity.
What is to be regarded as material to the risk against which the insurance is sought? It is not what the person seeking insurance regards as material, nor is it what the insurance company regards as material. It is a matter or circumstance which would reasonably influence the judgment of a prudent insurer in deciding whether he would take the risk, and, if so, in determining the premium which he would demand. The standard by which materiality is to be determined is objective and not subjective. In the last resort the matter has to be determined by the court: the parties to the litigation may call experts in insurance matters as witnesses to give evidence of what they would have regarded as material, but the question of materiality is not to be determined by such witnesses.”
24. These observations were made in a case in which there was a proposal form, there were questions asked by the insurer and, as this Court held, there was a non-disclosure of a matter material to the risk. In the High Court (in Chariot Inns) Keane J., at p. 209, said:-
“The most widely accepted test of materiality in all forms of insurance on property and goods appears to be that set out in s. 18, sub-s. 2, of the Marine Insurance Act, 1906, which is in the following terms:-
‘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.’
25. That test has been frequently stated to be applicable to non-marine insurance as well: see Joel v. Law Union & Crown Insurance Co. and March Cabaret v. London Assurance. Another test has sometimes been proposed, i.e., the test of whether a reasonable man in the position of the assured and with knowledge of the facts in dispute ought to have realised that they were material to the risk. But this test has been confined normally in its application to cases of life, see MacGillivray & Parkington on Insurance Law (6th ed. – paras. 749, 750). It was not suggested by any of the parties as the appropriate test in the present case and, accordingly, I propose to apply the test set out in s. 18, sub—s. 2 of the Act of 1906.”
26. Kenny J. did not expressly advert to this proposition but it reflects the argument advanced by the plaintiff here touching on what the insured might consider relevant or material. Keane J., at p. 207, referred to the judgment of Fletcher Moulton L.J. in Joel v. Law Union & Crown Insurance Co. [1908] 2 KB 863 at p. 892. There it was said:-
“Over and above the two documents signed by the applicant, and in my opinion unaffected by them, there remained the common law obligation of disclosure of all knowledge possessed by the applicant material to the risk about to be undertaken by the company, such materiality being a matter to be judged of by the jury and not by the Court.”
27. The same Lord Justice, at p. 885, had some critical comments to make on the practices on the part of insurance offices of requiring that the accuracy of the answers to the proposal form should he the basis of the contract. I point to this so as to emphasise that Joel v. Law Union & Crown Insurance Co. [1908]2 KB. 863 was a case concerned with a proposal form and insurance effected on foot of it as was Chariot Inns [1981] I.R.199. This is not such a case, but the test remains one of the utmost good faith. Yet, how does one depart from such a standard if reasonably and genuinely one does not consider some fact material; how much the less does one depart from such a standard when the failure to disclose is entirely due to a failure of recollection? Where there is no spur to the memory, where there is no proposal form with its presumably relevant questions, how can a failure of recollection lessen the quality of good faith? Good faith is not raised in its standard by being described as the utmost good faith; good faith requires candour and disclosure, not, I think, accuracy in itself, but a genuine effort to achieve the same using all reasonably available sources, a factor well illustrated by Fletcher Moulton L.J.. at p. 885 of Joel. If the duty is one that requires disclosure by the insured of all material facts which are known to him, then it may well require an impossible level of performance. Is it reasonable of an underwriter to say:- “I expect disclosure of what I think is relevant or what I may think is relevant but which a reasonable proposer may not think of at all or, if he does, may not think is relevant?”. The classic authority is the judgment of Lord Mansfield in Carter v. Boehm (1766) 3 Burr. 1905 where, in terms free from exaggeration, he stated at p. 1911:-
“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.
The Question therefore must always be “Whether there was, under all the Circumstances at the time the Policy was underwritten, a fair Representation; or a Concealment; fraudulent, if designed; Or, though not designed, varying materially the Object of the Policy, and changing the Risque understood to be run.”
28. If the determination of what is material were to lie with the insurer alone I do not know how the average citizen is to know what goes on in the insurer’s mind, unless the insurer asks him by way of the questions in a proposal form or otherwise. I do not accept that he must seek out the proposed insurer and question him as to his reasonableness, his prudence, and what he considers material. The proposal form will ordinarily contain a wide ranging series of questions followed by an omnibus question as to any other matters that are material. In the instant case, if Mr. Mansfield had ever had the opportunity of completing a proposal form, which, due to the convenient arrangement made between the insurers and C.I.E., he did not, there is no reason to think that he would have recounted petty convictions of about 20 years before the time. For the reasons I have sought to illustrate, in my view, the learned trial judge failed correctly to apply the very stringent test; in my judgment, the insurers failed to discharge the onus of proof that lay on them.
29. There is a second ground upon which, also, in my view the plaintiff is entitled to succeed. Without detracting from what I have said in respect of the general law of insurance, in my judgment, that law is materially affected by over-the-counter insurance such as found in cases of the present kind, in other forms of transit and in personal travel, including holiday insurance. If no questions are asked of the insured, then, in the absence of fraud, the insurer is not entitled to repudiate on grounds of non-disclosure. Fraud might arise in such an instance as where an intending traveller has been told of imminent risk of death and then takes out life insurance in a slot machine at an airport. Otherwise, the insured need but answer correctly the questions asked; these questions must he limited in kind and number; if the insurer were to have the opportunity of denying or loading the insurance one purpose of the transaction would he defeated. Expedition is the hallmark of this form of insurance. Mr. Whelehan suggested that the whole basis of insurance could be seriously damaged if there was any weakening in the rigidity and, I must add, the severity, of the principle he sought to support. The force of such an argument as a proposition of law is matched by the improbability of the event.
30. Mr. Gleeson sought leave of the Court to argue as an alternative proposition that Chariot Inns [1981] IR 199 was wrongly decided in being an elaboration in a particular direction; that the reasonably prudent test is inherently unreasonable, biased and productive of unfairness, producing unjust results and, consequently, is not part of the common law. The issue of arguing this point was postponed until the main grounds of the appeal were determined; having regard to the outcome of the appeal, it is not necessary to elaborate further on the matter.
Kelleher v. Irish Life Assurance Company Ltd
[1988] IEHC 3 (16 December 1988)
TRANSCRIPT OF JUDGMENT DELIVERED BY THE HONOURABLE MR JUSTICE DECLAN COSTELLO ON 16TH DECEMBER 1988
The deceased, Dr Daniel Kelleher, was a Consultant Physician practising in Cork. He was married with two grown-up sons and at the time of his death was aged 57.
Sedgwick Dineen Consultants Limited operated a group life assurance scheme on behalf of the members of the Irish Medical Assocation. The insurers under the scheme were Irish Life Assurance PLC, the Defendants in this action.
A contract of insurance was entered into not long before Dr Kelleher’s death between the Defendants and Dr Kelleher’s wife, Mrs Hilda Kelleher, and it was entered into in the following circumstances:
An application form (which I will call “a general application form”) was sent by Sedgwick Dineen Consultants Limited to Dr Kelleher. It was signed by Dr Kelleher and also by Mrs Kelleher. Along with that form was sent a second form (which I will call “the special application form”). This form was signed by Dr Kelleher alone.- After these two documents were returned, a policy of assurance was issued on 10th October 1985, and it is this policy which is the subject matter of these proceedings. Under this policy the life of Dr Kelleher had been insured for £80,000. Dr Kelleher, in fact, died in tragic circumstances not long after the insurance was effected and Mrs Kelleher now makes a claim on foot of this policy.
It is necessary to refer in some detail to the policy and to the two proposal forms to which I have referred. It is stated in the policy that the policy was granted by Irish Life Assurance PLC and accepted by the proposer named in the schedule on the basis of the proposal made in writing and signed by the proposer. The only document signed by the proposer, that is to say, Mrs Ke lleher, was the general application form, and I am satisfied that the reference in the first paragraph of the policy to “the proposal” is a reference to the general application form.
The policy goes on to state: “The contract of assurance will consist of this policy… (reads) … and the proposal”., so that the Defendants are correct in their submission that the contract between the parties is to be found not just in the policy of assurance but also in the general application form to which I have referred.
The general application form contained on page 2 a series of questions which were required to be answered by aperson using the form in the normal course of events but these were explicitly excluded and crossed out for reasons which I will explain in a moment. However, at the end of the application form there is contained a declaration which was signed by Dr Kelleher and also by Mrs Kelleher. It is of some relevance to point out that this declaration was signed by Mrs Kelleher while she herself was in hospital but that it was read over to her by Dr Kelleher, so that both Mrs Kelleher and Dr Kelleher were fully aware of what the declaration contained. The declaration stated as follows:
“I/We the life to be assured … (reads). ..should be disclosed.” The last paragraph of the declaration reads: “It is hereby agreed… (reads). .shall be the basis of the contract of assurance.”
To my mind the reference to “any other declaration” has the effect of making the declaration contained in the special form form part of the basis of the contract of assurance. The special form was sent out because Sedgwick Dineen Consultants Limited had negotiated with Irish Life a special scheme of insurance, the main effect of which was to obviate the necessity for members of the IMA to produce medical evidence before a contract of insurance was entered into. In this form that was used was a form which was printed and which was apparently of use in a general way for pension plan schemes. On the back of the form there was typewritten script which was clearly inserted for the purposes of the special scheme with the IMA. One of the paragraphs was headed “Special Promotional Offer Benefit” and it was made clear from the special form that there would be life cover of £80,000 and disability benefit cover of £10,000 and that the life cover was to be made available free of medical evidence.
The declaration of health which Dr Kelleher signed was as follows: “I declare that I am actively at work… (reads) … to today’s date.” It seems to me that this declaration was correctly made. The evidence has not established that there was anything wrong with the facts so declared and I do not think that any right arises from any alleged breach of any of the statements made in that declaration.
However, whilst the situation as stated by Dr Kelleher in the declaration of health was true, there was nonetheless another aspect of the case to which I must now refer. Dr Kelleher had unfortunately suffered from cancer in the year 1981. He, an experienced and knowledgeable doctor, felt that he needed a check up and his doctor in Cork confirmed the bad news to him. Cancer of the prostate gland had been diagnosed and Dr Kelleher went to London to have treatment. He obtained radiation treatment in London for the cancer, which was successful. This radiation treatment apparently stopped the cancer and its spread but the effect of the treatment, unfortunately, was to cause radiation damage. This radiation damage has been made clear from the hospital records which have been produced and it has been referred to in the evidence of Dr Jago, evidence which I accept for the purpose of this judgment.
The Defendants’ case is that there were material facts not disclosed firstly, relating to the fact that Dr Kelleher had cancer in 1981 and, secondly, that he suffered from radiation damage which was continuing up to the time the declarations to which I have referred were made on 10th September 1985, and that their non-disclosure permits them to repudiate the policy. The Defendants rely on the breach of the terms of the declaration to which I have referred which is contained at the end of the general application form. They also rely on the conditions in the policy itself, conditions which are of course, part of the terms of the contract between the parties.
The first condition on which the Defendants rely is a different matter altogether to the question of non-disclosure. It is contained in clause 4 of the conditions which provides that, in the event of the death of the life assured by his own act within one year from the date of the commencement of the insurance, the Company shall not be made liable to make any payment under it.
The defence was raised that there was a breach of clause 4 of the contract in that the death of Dr Kelleher on 30th November 1985 was death by suicide. I accept the general principles in relation to this, aspect of the law as set out by Mr Justice O’Hanlon in The State (McKeown) v Scull y a986)ILRM 133. I am satisfied that the Court cannot presume suicide and that a claim that a person committed suicide must be strictly proved. The evidence does not satisfy me that Dr Kelleher killed himself. Therefore the result is, in my opinion, that this ground by which the Defendants claim to repudiate the contract fails.
I turn, then, to what I think is the Defendants’ main case: the nondisclosure of material facts which they claim occurred in this case. ,_„ As I stated, they rely not just on the terms of the declaration made in the general application form but also on clause 6 of the contract which provides:
“If any question contained in the proposal… (reads) … the Company shall be entitled to avoid the policy.”
What the Defendants claim is that there has been non-disclosure concerning the health of the life assured. I propose to approach the consideration of the issues raised on this aspect of the case by considering the obligation of the Plaintiff and also the obligation of the deceased at common law. Again, there is no conflict on this aspect. The general duty at common law is to disclose material facts, that is, facts which would affect the mind of a prudent insurer either in deciding to underwrite the risk at all or in fixing the premiums.
I think that the Defendants are correct in their contention that the two facts to which I have referred are material facts, that is to Bathe fact that Dr Kelleher had had cancer in 1981 and the fact that he received radiation treatment for it which caused radiation damage for which he had been treated up to as late as February 1985, were material facts as understood in the common law doctrine on this subject. I think that both these facts would have affected the mind of a prudent insurer, both as to whether or not a risk should be undertaken and, if it was, as to what premium should be paid.
What I now have to consider is the effect of the contract on the common law duty which Dr Kelleher and Mrs Kelleher had in the circumstances of this case. To my mind it is clear that the terms of the contract itself did not in any way reduce the duty which existed. The declaration at the end of the application form was, I think, made part of the contract between the parties and the statement “I/We understand that failure to disclose a material fact …(reads)…,r may constitute grounds for rejection of the claim.”, means that there was, because of the view I have taken of these two facts, a breach of the obligation contained in the declaration to disclose material facts.
Apart from that, there seems to me to have been an obligation imposed by the contract in relation to the disclosure of matters concerning the health of the life assured in clause 6, so that there is nothing in the contract by which it could be said that the duty at common law has been reduced or modified. That there was a contractual obligation arising from the contract of assurance is perfectly clear and the Defendants are entitled to avail of the terms of the contract.
It has been said, however, on behalf of the Plaintiff that there has been a waiver of the common law duty to which I have referred. It is said that this waiver arises from the fact that the general application form had deleted from page 2 all the questions which normally would be required to be answered and that, furthermore, the special application form contained a declaration of health which was an extremely limited one. It is urged that these two facts amounted to a waiver by Irish Life of the obligation to which I have referred. I cannot agree with this submission, however.
It seems to me to run counter to the clear wording of the declaration at the end of the general application form. I think it is quite clear to anybody reading the two documents that Irish Life were requiring a full disclosure of material facts and that there was no waiver of the obligation.On the contrary, in fact, there was an insistence on it by the two documents to which I have referred.
I think there may be a misunderstanding in the submissions that have been made to me as to the effect of the special promotional offer. The special promotional offer was obviating the necessity of producing medical evidence but it did not obviate the obligation to make full disclosure and this was, in fact, underlined in the other document which was sent to persons availing of the special scheme.
Finally, it has_ been suggested that the effect of the Supreme Court decision in Aro Road and Land Vehicles Ltd v The Insurance Corporation of Ireland (1986) IR 403 is that in this case full disclosure was not necessary.For the purpose of considering this submission I will assume that this decision covers life assurance cases and I will assume that it covers cases in which there have been proposals signed by the insured. But if the test is, as suggested on the Plaintiff’s behalf, that facts which are material and which must be disclosed are only those facts which an insured person himself would consider to be reasonable to disclose, then must hold that Dr Kelleher failed to pass the test as did the Plaintiff.
Both Dr Kelleher and the Plaintiff were aware of the medical history to which I have referred. I do not think either of them could have thought it reasonable not to disclose this medical history. If the test was one of reasonableness on the part of the insured person, think it was unreasonable for there not to have been disclosure of the fact that there had been cancer and radiation damage.
In these circumstances it seem to me there was no waiver by the Defendants of the obligation which was on the Plaintiff and on the person whose life was insured. There was no variation of the common law duty. There was a contractual duty to disclose which .r was stated in clear terms. In my view the breach of that contractual duty entitles the Defendants to repudiate liability.
In the particular circumstances of this case a fair order to make would be that both parties bear their own costs. In the normal way when a defendant raises a number of points and wins but only wins on one point, a defendant would still be entitled to costs. Once the allegation of suicide had been made I think the Plaintiff reasonably felt justified in going on with the case. This might have been the result if this allegation had not been made, so I think a fair order, is to provide that both parties bear their own costs in view of the fact that this serious allegation has not been established.
Chariot Inns v. Assicurazioni Generali
[1982] IEHC 1; [1981] IR 199; [1981] ILRM 173 (23rd January, 1982)
Henchy J.
I have read the judgment of Mr. Justice Kenny and I agree with it.
Griffin J.
I have read that judgment and agree with it.
Kenny J.
1. A contract of insurance requires the highest standard of accuracy, good faith, candour and disclosure by the insured when making a proposal for insurance to an insurance company. It has become usual for an insurance company to whom a proposal for insurance is made to ask the proposed insured to answer a number of questions. Any misstatement in the answers given, when they relate to a material matter affecting the insurance, entitles the insurance company to avoid the policy and to repudiate liability if the event insured against happens. But the correct answering of any questions asked is not the entire obligation of the person seeking insurance: he is bound, in addition, to disclose to the insurance company every matter which is material to the risk against which he is seeking indemnity.
2. What is to be regarded as material to the risk against which the insurance is sought? It is not what the person seeking insurance regards as material, nor is it what the insurance company regards as material. It is a matter or circumstance which would reasonably influence the judgment of a prudent insurer in deciding whether he would take the risk, and, if so, in determining the premium which he would demand. The standard by which materiality is to be determined is objective and not subjective. In the last resort the matter has to be determined by the court: the parties to the litigation may call experts in insurance matters as witnesses to give evidence of what they would have regarded as material, but the question of materiality is not to be determined by such witnesses.
3. The test of materiality which is generally accepted in all forms of insurance against risks when property of any kind is involved is stated in s. 18, sub-s. 2, of the Marine Insurance Act, 1906:-
“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.”
4. Although that test is stated in an Act which deals with marine insurance, it has been accepted as a correct guide to the law relating to insurance against damage to property or goods of all types.
5. The rule to determine the materiality of a fact which has not been disclosed to an insurer was expressed by MacKinnon L.J. with his customary pungency in Zurich General Accident and Liability Insurance v. Morrison [1942] 2 K.B. 53 at p.60 of the report:-
“Under the general law of insurance an insurer can avoid a policy if he proves that there has been misrepresentation or concealment of a material fact by the assured. What is material is that which would influence the mind of a prudent insurer in deciding whether to accept the risk or fix the premium, and if this be proved it is not necessary further to prove that the mind of the actual insurer was so affected. In other words, the assured could not rebut the claim to avoid the policy because of a material misrepresentation by a plea that the particular insurer concerned was so stupid, ignorant, or reckless, that he could not exercise the judgment of a prudent insurer and was in fact unaffected by anything the assured had represented or concealed.”
6. The statement of Samuels J. in Mayne Nickless Ltd. v. Pegler [1974] 1 N.S.W.L.R. 228 on the law relating to the materiality of facts not disclosed to insurers was approved and followed by the Judicial Committee of the Privy Council in Marene v. Greater Pacific Insurance [1976] 2 Lloyds’s Rep. 631 Samuels J.
said :-
“Accordingly, I do not think that it is generally open to examine what the insurer would in fact have done had he had the information not disclosed. The question is whether that information would have been relevant to the exercise of the insurer’s option to accept or reject the insurance proposed. It seems to me that the test of materiality is this: a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether he will accept the insurance, and if so, at what premium and on what conditions.”
7. In January, 1976, the plaintiff company bought licensed premises at Ranelagh, Dublin. The directors and shareholders of the plaintiff company were Mr. and Mrs. Wootton. The directors decided to run the premises as a public-house and also to have a cabaret entertainment. This made it necessary to build a larger room at the back. There were furnishings in the existing room at the back and, as the extension could not be built without removing them, the directors decided to store them at No. 82 Lower Leeson Street, Dublin. These premises were owned by Consolidated Investment Holdings Ltd. whose shares had been purchased by Mr. Wootton and his business partner, Mr. Mockler, but had been registered in the maiden names of their wives. Mr. Wootton and Mr. Mockler intended to use the Leeson Street premises as a hotel and discotheque and, as Mr. Wootton had been associated with a number of night clubs which had been prosecuted for breaches of the licensing laws, the directors expected considerable local opposition when their application for permission for a change of user was made, if it became known that Mr. Wootton or his wife were associated with Consolidated Investment.
8. The insurance brokers who acted for Mr. Wootton were the second defendants. Mr. Wootton had almost all his dealings with the defendant brokers through Mr. John Harte, an employee of theirs. The defendant brokers placed the insurance of the Leeson Street premises with the Sun Alliance and London Insurance Group and, in the policy, those premises were described and it was stated that the property was “at present unoccupied.” When the directors of the plaintiff company decided to store their furnishings in the Leeson Street premises, Mr. Harte advised them that further insurance cover on the furnishings was necessary. An endorsement on the policy in connection with the furnishings (valuing them at £15,000) was made. As the Leeson Street premises were unoccupied, they were broken into by squatters almost nightly between November, 1975, and the happening of a fire on the 19th April, 1976. The squatters lit fires and cooked there, but they left each morning before Mr. Wootton arrived.
9. The Leeson Street premises and furnishings of the plaintiff company, which Consolidated Investment held as bailees, were damaged badly in the fire. A claim for malicious damage was lodged with the local authority and it was compromised by an agreed award of £55,500. The plaintiff company was paid £8,000 by Consolidated Investments who forwarded a Sun Alliance cheque for that sum drawn in favour of the plaintiff company in respect of the furnishings. The claim by Consolidated Investment against Sun Alliance was handled by Corcoran Insurances Ltd. Mr. Mockler and Mr. Wootton were so dissatisfied with the type of cover which the defendant brokers had negotiated in connection with the Leeson Street premises that they had changed their brokers and had given their business to Corcoran Insurances in December, 1975.
10. When the plaintiffs bought the Ranelagh premises, they were insured with the General Accident Insurance Co. Ltd. and this policy was renewed subsequently. The principal in Corcoran Insurances advised Mr. Wootton that a different and wider insurance cover was advisable in respect of the Ranelagh premises but, when General Accident was asked to quote for this, that company increased by 50% the premium which it would require. Mr. Wootton was most reluctant to pay such a large increase and he decided to get his brokers to ask for tenders for the insurance. The first defendants, who are an Italian insurance company, are represented and carry on business in the Republic of Ireland through their agents, International Underwriters Ltd., and they sent in the lowest tender.
11. Mr. Harte had remained on friendly terms with Mr. Wootton and frequently called to his premises. The plaintiffs wanted cover against fire risk, employer’s liability, liability to the public and loss of profits. Separate proposal forms for each type of insurance were sent by the defendant insurers and Mr. Harte got these. On the 22nd February, 1978, Mr. Harte called to the plaintiffs’ premises in Ranelagh with these proposal forms; they were issued by International Underwriters. One form related to material damage. Mr. Harte asked the questions necessary to enable the answers to the questions to be filled in, and gave any other information required. It was not disputed by anyone during the trial that the handwriting in which the answers appeared was that of Mr. Harte. There was a discussion about the fire at the Leeson Street premises and Mr. Harte said that it was totally unnecessary to disclose this on the proposal forms because – as Mr. Wootton said – “we were dealing with a separate company and only had to show what was relevant to the Chariot Inn” (see transcript, 1st day – Q. 167). As there is a question in this case as to who were the brokers who negotiated the policy with the defendant insurers, it is important to note that Mr. Harte wrote “Coyle Hamilton” on the forms.
12. In the form dealing with material damage this appeared:- “Give claims experience for loss over the last five years (i.e. date, nature of loss, amount paid or outstanding. Brief details of how loss occurred). If none in any class say so.” The answer, written by Mr. Harte, was “None”. The defendant insurers subsequently issued policies to the plaintiffs in respect of the various types of liability for which the plaintiffs sought insurance cover, and in respect of indemnity against material loss.
13. On the 14th May, 1978, a serious fire occurred at the plaintiffs’ Ranelagh premises and it caused extensive damage there. In June, 1978, the defendant insurers repudiated liability because of the non-disclosure of the fire at the Leeson Street premises. From the time of the Ranelagh fire, the defendant insurers suspected that Mr. Wootton had set fire to the Ranelagh premises and, during the hearing of the case, they stated that they would not have raised the issue of non-disclosure if they had not suspected that this was a case of arson.
14. When the defendant insurers repudiated liability, the plaintiffs brought this action against them and claimed a declaration that the policy issued by the defendant insurers, and providing for indemnity against material losses, was valid. As against the defendant brokers, the plaintiffs claimed damages for breach of contract and for negligence. The defendant insurers pleaded, amongst other defences, that Mr. Wootton had set fire to the Ranelagh premises; they withdrew this plea only at the end of the plaintiffs’ case.
15. The trial judge accepted the evidence of Mr. Wootton in relation to the circumstances in which the proposal form was completed, and he held that Mr. Harte knew about the fire at the Leeson Street premises. Mr. Harte died suddenly on the 9th April, 1978, shortly before the fire occurred at the Ranelagh premises. The trial judge decided that the non-disclosure of the fire at Leeson Street, of the fact that the plaintiffs’ furnishings were stored at those premises, and of the plaintiffs’ receipt of £8,000 in respect of the damage to those furnishings, did not constitute a material matter which the plaintiffs were bound to disclose to the defendant insurers. Accordingly, he declared that the policy issued by the defendant insurers was valid, and he dismissed the plaintiffs’ claim against the brokers.
16. There has been a sustained attack on Mr. Wootton’s credibility and we have been invited to reverse the trial judge’s finding that the proposals for insurance were completed in the way Mr. Wootton described. Miss Keogh, Mr. Wootton’s secretary, was in the room when Mr. Wootton was being interviewed by Mr. Harte in connection with the completion of the proposal forms and her evidence supported Mr. Wootton’s testimony. The trial judge had the advantage of seeing and hearing the witnesses and, in these circumstances, I am not prepared to differ from his findings as to Mr. Wootton’s veracity. The question as to when an appellate court should reverse a finding by the trial judge as to the credibility of a witness was fully discussed by this Court in Northern Bank Finance v. Charlton [1979] I.R. 149
17. Three experts on insurance business gave evidence. Their unanimous view was that the fire at Leeson Street and the damage to the plaintiffs’ goods were matters that were material to the risk which the defendant insurers were asked to insure. Their opinions were not conclusive on this matter. The question whether any of these matters were material is essentially an inference from facts established by evidence.
18. The circumstance that Mr. Wootton was a director of the plaintiff company and of Consolidated Investment would not, of itself, make a fire on property owned by Consolidated Investment a fact which was material to the risk undertaken by the defendant insurers when they insured the plaintiff company against fire on its premises. However, I think that it was material to the insurance effected by the plaintiffs with the defendant insurers that goods belonging to the plaintiffs were damaged by fire in premises owned by Consolidated Investment. The answer to the query about claims made by the plaintiffs for loss over the previous five years was literally correct but, though the plaintiffs had no claim against Sun Alliance (who issued the policy in respect of the Leeson Street premises), the plaintiffs were paid by Sun Alliance the sum negotiated in respect of their stored furnishings. The circumstances in which the plaintiffs’ goods were stored in the Leeson Street premises and the fact that the plaintiffs ultimately got payment in respect of them were, in my view, matters which would reasonably have affected the judgment of a prudent insurer in deciding whether to take the risk or in fixing the premium, particularly as Mr. Wootton was a director of, and managed and controlled, the plaintiff company and Consolidated Investment.
19. It was contended strenuously by counsel for the defendant brokers that the onus of establishing that the matter not disclosed was material to the risk undertaken lay on the defendant insurers and that, in order to discharge this onus, the defendant insurers had to establish that the matter not disclosed did affect (and not merely might have affected) their judgment. I accept the first part of this proposition but not the second part. It is necessary to establish that the fact which was not disclosed would have reasonably affected the judgment of a prudent insurer if it had been disclosed. The second part of counsel’s proposition contains the error which MacKinnon L.J. condemned.
20. The plaintiffs and the defendant brokers placed strong reliance upon the renewal by General Accident of the insurance on the Ranelagh premises after that company had been informed of the fire at Leeson Street. The evidence on this matter is not very clear. Mr. Corcoran said that, when the policy relating to the Ranelagh premises was being renewed with the General Accident, he “surmised” that he told that company of the fire at Leeson Street. Mr. Shaw, an official of General Accident, recollected that Mr. Corcoran had informed him of the fire at Leeson Street and said that he had passed on the information to a senior official. The senior official did not give evidence and Mr. Shaw’s evidence did not establish when this information was given to him or the details which he was given. However, even if one assumes that Mr. Corcoran gave Mr. Shaw all the information about the Leeson Street fire which we now have, insurance companies may apply different considerations to taking new risks and renewing policies.
21. In my opinion, the plaintiffs’ action against the defendant insurers should have been dismissed. I think that the appeal of the defendant insurers should be allowed.
22. The defendant brokers were acting as insurance brokers for the plaintiffs at the time when the proposal for material damage was completed, and Mr. Harte was their employee. An insurance broker owes a contractual duty to his client to possess the skill and knowledge which he holds himself out to the public as having, and to exercise this in doing the clients’ business. He is also liable in tort if he fails to exercise that skill and knowledge. Mr. Harte (whom the trial judge accepted to have been an experienced, competent, and completely honest broker) should have known that the fire at Leeson Street and the subsequent payment of £8,000 to the plaintiffs were material to the risk which the defendant insurers were being requested to undertake. Therefore, the brokers are liable to the plaintiffs in both contract and tort.
23. The question of contributory negligence on the part of the plaintiffs was raised by counsel for the brokers but, understandably, it was not pressed. Having given the necessary facts in answer to questions put by the brokers’ representative, Mr. Harte (who read out the questions from the proposal form to Mr. Wootton, who wrote in the answers, and who was told about the fire in Leeson Street), the plaintiffs were entitled to rely on his skill and judgment; and so it could not be held that they were guilty of contributory negligence.
24. In my opinion, the plaintiffs are entitled to judgment against the defendant brokers for such damages as the plaintiffs have sustained by the brokers’ breach of contract or negligence. I think that the case should be remitted to the High Court for the assessment (by a judge alone) of the damages payable to the plaintiffs by the defendant brokers.