Marine Insurance: Law and Practice




5.1 This chapter is concerned with six topics. The first is the role of “good faith” in the law of marine insurance. As has been argued fully elsewhere,1 there are several ways in which “good faith” or its opposite could influence the outcome of contractual relationships. However, despite a time-honoured, famous dictum by Lord Mansfield, possibly English law’s greatest commercial law judge,2 English commercial law has famously not accepted a general principle of good faith. Nonetheless, the idea has continued to have undue influence in English insurance law by virtue of the attractiveness of Lord Mansfield’s dictum and its enshrinement in the Marine Insurance Act 1906, section 17.3 Secondly, the Act contains the only known example of the supposed principle of good faith in English insurance law, and the main subject to be considered in this chapter, namely, the exceptional rule that the proposer negotiating a contract of marine insurance is under a positive duty to disclose information to the insurer. Thirdly, there are consequences for misrepresentations made during the negotiating process. Non-disclosure and misrepresentation differ to the extent that non-disclosure is concerned with a lack of good faith through inaction, whereas misrepresentation is arguably bad faith through action. However, the two subjects are both concerned with statements made or not made during the process for negotiating a contract, and are dealt with in the Act together with its statement on good faith generally, so are appropriately considered together here. 5.2 Fourthly, the question has arisen in recent years of the extent to which the principles applicable to pre-contractual negotiations should apply after the contract has been made. The courts have provided a mixed response, notably in cases of renegotiation, but have tended to reject the extension of the law on “good faith” to “post-contractual”4 situations. To that extent, these issues are more appropriately dealt with elsewhere than together with discussion of pre-contractual matters. However, in dealing with post-contractual matters, in particular with fraudulent claims, the Law Commissions have adopted an approach to reform linked to ideas of “good faith”. Given the context of the debate and the possibility that the Commissions may propose reforms that are enacted alongside an extension of good faith ideas into this area of commercial law (and indeed English commercial law generally), for the present it seems not inappropriate to deal with the relevant pre-contractual and post-contractual areas together in the same chapter. 5.3 The role of the Law Commissions is relevant for three reasons. First, as just seen, because of their possible effect on post-contractual situations. Secondly (and this is the fifth topic for this chapter), because the topics of disclosure and misrepresentation are currently under active consideration by the Law Commissions. And, thirdly (the sixth topic for this chapter), because the ostensible law on disclosure and misrepresentation, which has been subject to a good deal of criticism, has in the case of dealings between insurers and consumers been ameliorated by a less onerous regime operated in practice by insurers and the insurance Ombudsman5 and with regulatory intervention in the field of consumer insurance.6 Indeed, the alternative practical regime has functioned so well that legislative reform of this aspect of insurance law has in practice been unnecessary.7 It seems slightly bizarre, therefore, that the Law Commissions have seen fit to make it a priority to propose a non-urgent, though presumably non-controversial and therefore apparently easy, reform of this area of law in advance of, and without consideration of the relationship with, its future proposals on reform of insurance law generally. Nonetheless, a Consumer Insurance (Disclosure and Representations) Bill has been enacted.8 However, it is concerned primarily with non-marine insurance, and its eventual place within the Law Commissions’ overall scheme for reforming insurance law cannot be predicted with confidence. Consequently, it will not be considered in detail. Similarly, although reference will be made to the Law Commissions’ current views on reform of this area generally, the eventual form of their thinking, and whether and how it is given legal effect, remain for the present largely a matter for conjecture. 5.4 One of the most distinctive characteristics of insurance law, both marine and non-marine, is its highly developed regime of disclosure. The necessity for this doctrine is said to spring from the information asymmetry between the insurer and the would-be assured. The latter is seeking to transfer the risk (or part of the risk) of some uncertain and adverse event to the former. Accordingly it is traditionally said that the facts relevant to the risk are normally peculiarly within the knowledge of the would-be assured. Generally speaking, with regard to the particular incidents of event or property in respect of which cover is sought, this proposition is true. In contrast, some of the matters of which a competent insurer might wish to be aware before subscribing to a risk, and of which the courts have held him entitled to be aware, may not be entirely obvious to a would-be assured. 5.5 The matrix from which the modern doctrine of non-disclosure sprang was a judgment of the founding genius of much of English commercial and insurance law as long ago as 1766. In Carter v Boehm 9 Lord Mansfield’s philosophical underpinning was a broad principle of good faith in commercial transactions, which his Lordship did not intend to be a peculiar doctrine of insurance law. Nevertheless, English contract and commercial law developed differently, with no general principle of good faith in commercial dealings being recognised either in the formation or performance of contracts.10 The modern general law of contract recognises fraud and misrepresentation as factors which may vitiate the consent of the recipient of the statement to a resulting transaction, and provides for the unwinding or rescission of the contract at that party’s option. These principles are equally applicable to insurance contracts. 5.6 However, insurance doctrine has developed its own supplemental principles of non-disclosure premised on the information asymmetry between insurer and assured. In the two centuries from the seminal statement of principle of Lord Mansfield, the rules of non-disclosure in insurance have hardened into a detailed body of rules. Whilst in principle the disclosure regime is bilateral, in almost every recorded instance its burden falls upon the would-be assured. It is almost a trite observation that the resulting legal regime is too favourable in practice to the insurer. Critically, the criteria for what must be disclosed are modelled on a rational underwriter. Equally stringent from the perspective of would-be assureds is that it is irrelevant that a non-disclosure arose innocently or by mistake. Furthermore, the remedial consequence is a severe all-or-nothing entitlement of the insurer to set aside the resulting policy and refuse to meet any claims arising under it. There is no need for any connection between the non-disclosed matter and the risk which eventuates. As a result, non-disclosure in insurance law is perhaps the most criticised doctrine in English commercial law.11 Most recently, Lord Hobhouse in The Star Sea 12 observed:

“It is a striking feature of this branch of the law that other legal systems are increasingly discarding the more extreme features of the English law which allows an insurer to avoid liability on grounds which do not relate to the occurrence of the loss”.

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